SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
-------- ---------
Commission File Number 1-8519
CINCINNATI BELL INC.
Incorporated under the laws of the State of Ohio
201 East Fourth Street, Cincinnati, Ohio 45202
I.R.S. Employer Identification Number 31-1056105
Telephone - Area Code 513 397-9900
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X . No .
--- ---
At April 30, 1995, 66,195,237 Common Shares were outstanding
Form 10-Q Part I Cincinnati Bell Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
For the Three Months
Ended March 31,
-----------------------
1995 1994
-------- --------
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $331,817 $292,069
-------- --------
Costs and Expenses
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 168,818 153,426
Plant and building services. . . . . . . . . . . . . . . . . . . . . . 47,017 40,081
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 39,443 37,165
Taxes other than income taxes. . . . . . . . . . . . . . . . . . . . . 24,927 24,684
Special charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,000 --
-------- --------
Total Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . 412,205 255,356
-------- --------
Operating Income (Loss). . . . . . . . . . . . . . . . . . . . . . . (80,388) 36,713
Other Income (Expense) - Net . . . . . . . . . . . . . . . . . . . . . . 48 602
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,764 12,394
-------- --------
Income (Loss) Before Income Taxes and Cumulative
Effect of Accounting Change. . . . . . . . . . . . . . . . . . . . . . (93,104) 24,921
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33,509) 9,275
-------- --------
Income (Loss) Before Cumulative Effect of Accounting Change. . . . . . . (59,595) 15,646
Cumulative Effect of Accounting Change . . . . . . . . . . . . . . . . . -- (2,925)
-------- --------
Net Income (Loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . $(59,595) $ 12,721
-------- --------
-------- --------
Earnings (Loss) Per Common Share
Income (Loss) Before Cumulative Effect of Accounting Change. . . . . . $ (.90) $ .24
Cumulative Effect of Accounting Change . . . . . . . . . . . . . . . . -- (.04)
-------- --------
Net Income (Loss). . . . . . . . . . . . . . . . . . . . . . . . . . . (.90) .20
-------- --------
-------- --------
Dividends Declared per Common Share. . . . . . . . . . . . . . . . . . . $ .20 $ .20
-------- --------
-------- --------
Weighted Average Number of Common Shares Outstanding (000) . . . . . . . 66,046 65,083
Retained Earnings at Beginning of Period . . . . . . . . . . . . . . . . $246,568 $227,392
Add: Net Income (Loss). . . . . . . . . . . . . . . . . . . . . . . . (59,595) 12,721
Deduct: Common Dividends. . . . . . . . . . . . . . . . . . . . . . . 13,217 13,042
Pension Liability Adjustment . . . . . . . . . . . . . . . . -- 1,021
-------- --------
Retained Earnings at End of Period . . . . . . . . . . . . . . . . . . . $173,756 $226,050
-------- --------
-------- --------
See Notes to Financial Statements.
2
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
March 31, December 31,
1995 1994
---------- ----------
ASSETS
Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 91,241 $ 78,368
Receivables less allowances of $17,532 and $14,056 . . . . . . . . . . 224,185 246,122
Material and supplies. . . . . . . . . . . . . . . . . . . . . . . . . 15,161 15,988
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,860 29,180
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 35,455 28,984
---------- ----------
396,902 398,642
---------- ----------
Property, Plant and Equipment
Telephone plant. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,458,437 1,447,411
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . (571,558) (556,004)
---------- ----------
886,879 891,407
---------- ----------
Other property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279,878 279,355
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . (142,744) (134,587)
---------- ----------
137,134 144,768
---------- ----------
1,024,013 1,036,175
---------- ----------
Other Assets
Goodwill and other intangibles . . . . . . . . . . . . . . . . . . . . 204,229 197,425
Investments in unconsolidated entities . . . . . . . . . . . . . . . . 48,486 48,809
Deferred charges and other . . . . . . . . . . . . . . . . . . . . . . 40,951 42,397
---------- ----------
293,666 288,631
---------- ----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,714,581 $1,723,448
---------- ----------
---------- ----------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Debt maturing in one year. . . . . . . . . . . . . . . . . . . . . . . $ 70,395 $ 68,689
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . 144,586 179,658
Accrued disposal and restructuring costs . . . . . . . . . . . . . . . 36,084 11,076
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,037 61,054
Advanced billing and customers' deposits . . . . . . . . . . . . . . . 33,305 38,793
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . 32,527 24,067
---------- ----------
371,934 383,337
---------- ----------
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527,793 528,255
---------- ----------
Deferred Credits and Other Long-Term Liabilities
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 128,987 164,059
Unamortized investment tax credits . . . . . . . . . . . . . . . . . . 15,773 16,191
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . 188,540 79,204
---------- ----------
333,300 259,454
---------- ----------
Shareowners' Equity
Common shares-$1 par value; authorized shares-240,000,000. . . . . . . 66,083 65,948
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 241,733 239,507
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . 173,756 246,568
Foreign currency translation adjustment. . . . . . . . . . . . . . . . (18) 379
---------- ----------
481,554 552,402
---------- ----------
Total Liabilities and Shareowners' Equity. . . . . . . . . . . . . . . . $1,714,581 $1,723,448
---------- ----------
---------- ----------
See Notes to Financial Statements.
3
Form 10-Q Part I Cincinnati Bell Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
For the Three Months
Ended March 31,
-----------------------
1995 1994
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $(59,595) $ 12,721
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 39,443 37,165
Special charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,000 -
Cumulative effect of accounting change . . . . . . . . . . . . . . . . -- 4,500
Provision for loss on receivables. . . . . . . . . . . . . . . . . . . 4,408 1,649
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,354 3,366
Changes in assets and liabilities:
Decrease in receivables. . . . . . . . . . . . . . . . . . . . . . . . 11,481 2,434
Decrease (increase) in other current assets. . . . . . . . . . . . . . (852) 980
Decrease in accounts payable and accrued liabilities . . . . . . . . . (25,045) (16,594)
Decrease in accrued disposal and restructuring costs . . . . . . . . . (2,992) (4,553)
Increase (decrease) in other current liabilities . . . . . . . . . . . (3,058) 3,544
Increase (decrease) in deferred income taxes and unamortized
investment tax credits. . . . . . . . . . . . . . . . . . . . . . . . (41,961) 10,073
Decrease in other assets and liabilities-net . . . . . . . . . . . . . 652 384
-------- --------
Net cash provided by operating activities . . . . . . . . . . . . . . 57,835 55,669
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures-telephone plant . . . . . . . . . . . . . . . . . (21,397) (32,107)
Capital expenditures-other . . . . . . . . . . . . . . . . . . . . . . (3,605) (8,058)
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . (17,668) --
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,786 10,994
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . (33,884) (29,171)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in notes payable. . . . . . . . . . . . . . . . . . . . . . 1,728 (14,272)
Principal payments on long-term debt . . . . . . . . . . . . . . . . . (744) (2,908)
Proceeds from issuance of common shares. . . . . . . . . . . . . . . . 973 3,497
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,205) (12,999)
-------- --------
Net cash used in financing activities . . . . . . . . . . . . . . . . (11,248) (26,682)
-------- --------
Effect of exchange rate changes on cash and cash equivalents . . . . . . 170 134
-------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . 12,873 (50)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 78,368 8,668
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $ 91,241 $ 8,618
-------- --------
-------- --------
Cash paid for:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . . . $ 4,500 $ 4,005
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,158 $ 1,079
See Notes to Financial Statements.
4
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION - The consolidated financial statements of Cincinnati
Bell Inc. have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of
Management, include all adjustments necessary for a fair presentation of
the results of operations, financial position and cash flows for each
period shown. All adjustments are of a normal and recurring nature except
for those outlined in Notes (2), (3), (4) and (8). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules and regulations. Management
believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements
be read in conjunction with financial statements and notes thereto included
in the Company's 1994 Annual Report on Form 10-K.
The consolidated financial statements include the accounts of Cincinnati
Bell Inc. ("CBI") and its wholly owned subsidiaries (the "Company"). The
Company operates in three industry segments. The telephone operations
segment includes Cincinnati Bell Telephone Company ("CBT") which provides
telecommunications services and products. The information systems segment
includes Cincinnati Bell Information Systems Inc. ("CBIS") which provides
data processing services and software development services. The marketing
services segment includes MATRIXX Marketing Inc. ("MATRIXX") which provides
telephone marketing, research, fulfillment and database services.
(2) BUSINESS RESTRUCTURING - In the first quarter 1995, the Company approved a
restructuring plan for CBT and CBI. The restructuring plan will result in
the need for fewer people to operate the businesses. In all, CBT expected
to eliminate approximately 800 management and hourly positions. The
majority of the reduction in CBT's workforce is expected to result from an
offer of early retirement incentives to eligible employees. The retirement
incentive offer increases by five years each eligible employee's age and
years of service for purposes of calculating pension benefits. In
addition, retiring employees will receive an enhancement to their pensions
equal to two weeks pay for every year of service, but not to exceed one
year's pay.
Employee response to the early retirement offer and other financial
incentives being offered by CBT exceeded CBT's initial expectations. Over
1,300 employees have accepted the early retirement offer including
approximately 1,000 hourly employees. The Company can delay the retirement
date of the hourly employees over the next two years.
The Company recorded $132 million of special charges in the first quarter
1995 to reflect the cost of restructuring programs at CBT and CBI. The
charges reduced net income by $84.1 million or $1.27 per common share. The
programs include charges to be incurred for workforce reductions and for
other restructuring activities.
The charges included approximately $61 million primarily for pension
enhancements and $54 million of curtailment losses for postretirement
health care costs. Also included in the charges were $5 million for lease
termination costs, $5 million for vacation buyout and severance pay and the
remainder for other costs of the restructuring.
5
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
The pension and postretirement charges will not require cash outflows in
the near term. Some of the pension costs will be funded by the Company's
pension plans. Estimated cash outflows for 1995, 1996 and 1997 are $9
million, $11 million, $7 million, respectively. The principal use of the
cash outflow will be to pay the non-qualified portion of lump sum pension
distributions to employees retiring under this offer. CBT expects to
record non-cash settlement gains of approximately $9 million associated
with the lump sum pension distributions through March 1997.
(3) DISPOSAL AND RESTRUCTURING OF CBIS OPERATIONS - For the three months ended
March 31, 1995 a total of $3 million net was charged to the disposal and
restructuring reserve that was established in 1993. Charges to the reserve
required cash outlays of approximately $2.6 million. Included in the
charges are primarily costs for discontinued products and contingencies
related to businesses sold. The Company believes that the reserve of $8.1
million at March 31, 1995 is adequate to provide for estimated future costs
associated with a lease termination, discontinued products and
contingencies related to businesses sold.
(4) CINCINNATI BELL TELEPHONE COMPANY - The following summarized financial
information, in millions of dollars, is for the Company's consolidated
wholly owned subsidiary, Cincinnati Bell Telephone Company:
For the Three Months
Ended March 31,
---------------------
1995 1994
---------------------
Revenues. . . . . . . . . . . . . . . . . . . . . $153.3 $146.3
Costs and Expenses. . . . . . . . . . . . . . . . $249.6 $122.7
Income (Loss) Before Cumulative Effect
of Accounting Change. . . . . . . . . . . . . . $(63.2) $ 13.6
Cumulative Effect of Accounting
Change. . . . . . . . . . . . . . . . . . . . . $ -- $ (2.4)
Net Income (Loss) . . . . . . . . . . . . . . . . $(63.2) $ 11.2
Results for the three months ended March 31, 1995, include special charges
of $124 million for restructuring CBT's operations as described in note
(2). These charges reduced CBT's net income by $79.0 million or $1.20 per
common share.
Results for the three months ended March 31, 1994, include two significant
non-recurring charges. In 1994 the Company, including CBT, adopted SFAS
112, "Employers' Accounting for Postemployment Benefits", thereby reducing
CBT's net income by $2.4 million, net of a deferred tax benefit. In
addition, CBT recognized $2.5 million in incremental postretirement
expenses resulting from adjusting deferred amounts to a level that is
expected to be recovered in regulated rates. This adjustment reduced net
income by $1.6 million. CBT had received approval from the Public
Utilities Commission of Ohio ("PUCO") in 1993 to defer these incremental
postretirement expenses.
6
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
March 31, December 31,
1995 1994
----------- -----------
Current Assets. . . . . . . . . . . . . . . . $ 179.5 $ 187.9
Telephone Plant-Net . . . . . . . . . . . . . 896.3 901.6
Other Noncurrent Assets . . . . . . . . . . . 17.7 21.0
-------- --------
Total Assets. . . . . . . . . . . . . . . . . $1,093.5 $1,110.5
-------- --------
-------- --------
Current Liabilities . . . . . . . . . . . . . $ 135.3 $ 148.3
Noncurrent Liabilities. . . . . . . . . . . . 260.2 195.0
Long-Term Debt. . . . . . . . . . . . . . . . 312.3 312.3
Common Shareowner's Equity. . . . . . . . . . 385.7 454.9
-------- --------
Total Liabilities and Shareowner's Equity . . $1,093.5 $1,110.5
-------- --------
-------- --------
(5) CONTINGENCIES - The Company, which has a 45% interest in a cellular
partnership, is seeking to dissolve the partnership because of poor
performance. The Company has pursued this litigation to maximize the value
of this asset for the benefit of the shareholders. There are many possible
outcomes of this litigation. The potential impact of a settlement from the
lawsuit is an extremely broad range depending upon the form of distribution
and the amount of damages awarded. At this time, the Company is unable to
determine a range but the Company believes it will recover its $44 million
investment in the partnership.
(6) AT&T RELATIONSHIP - The Company derives significant revenues from AT&T and
its affiliates by providing network services, information management
systems, and marketing services. With the completion of the merger of AT&T
and McCaw Cellular Communications Inc. in the third quarter of 1994, the
Company's revenues from AT&T as combined with McCaw have increased when
compared to prior periods. Revenues (excluding network access charges)
from AT&T accounted for 21% of the Company's consolidated revenues and 49%
of the information systems segment's revenues for the three months ended
March 31, 1995.
(7) INTEREST RATE AND CURRENCY EXCHANGE SWAP - The Company has an interest rate
and foreign currency swap agreement in place to reduce the impact of
changes in interest rates and foreign currency exchange rates. The Company
accrues interest on a notional amount of 225 million French francs. The
approximate effective rate is such that net interest expense is based on
the interest cost implicit in the contract measured in French francs
(approximately 11%). Net amounts due to or from the counterparty are
reflected in interest expense in the periods in which they accrue. The net
effect of the swap for the first three months of 1995 and 1994 was to
increase expense by $1.2 million and $1.1 million, respectively. For the
first three months the swap also increased the Company's average interest
rate from 7.7% to 8.5% in 1995 and from 7.2% to 7.9% in 1994.
(8) ACQUISITION - In March 1995, CBIS acquired X International of Bristol,
England for cash and the acquisition was accounted for using the purchase
method. X International provides billing software development services for
telecommunications companies in Europe.
Incident to this acquisition, CBIS acquired the on-going software
development projects of X International. Of the purchase price, $2.5
million was allocated to these in-process research and development costs
and then written-off resulting in a non-recurring charge reducing net
income by approximately $1.5 million or $.02 per common share.
7
Form 10-Q Part I Cincinnati Bell Inc.
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
(9) BUSINESS SEGMENT INFORMATION - The Company operates primarily in three
industry segments, Telephone Operations, Information Systems and Marketing
Services. The Company's business segment information is as follows:
For the Three Months
Ended March 31,
-----------------------
Millions of Dollars 1995 1994
---------------------------------------------------------------------------
Revenues
Telephone Operations
Local Service $ 85.5 $ 77.9
Network Access 36.8 36.9
Long Distance 8.6 9.7
Other 22.4 21.8
-------- --------
Total 153.3 146.3
Information Systems 90.1 80.6
Marketing Services 70.6 50.6
Other 36.0 31.5
Intersegment Revenues (18.2) (16.9)
-------- --------
Total $ 331.8 $ 292.1
---------------------------------------------------------------------------
Intersegment Revenues
Telephone Operations $ 5.3 $ 5.9
Information Systems 11.0 9.9
Marketing Services 0.6 0.0
Other 1.3 1.1
-------- --------
Total $ 18.2 $ 16.9
---------------------------------------------------------------------------
Operating Income (Loss)
Telephone Operations $ (96.2) $ 23.6
Information Systems 8.0 4.0
Marketing Services 8.0 4.4
Other (0.2) 4.7
-------- --------
Total $ (80.4) $ 36.7
---------------------------------------------------------------------------
Assets
Telephone Operations $1,093.5 $1,091.0
Information Systems 242.7 292.4
Marketing Services 273.7 235.3
Other 104.7 36.5
-------- --------
Total $1,714.6 $1,655.2
---------------------------------------------------------------------------
Capital Additions
Telephone Operations $ 21.6 $ 34.0
Information Systems 8.0 11.7
Marketing Services 12.7 1.3
Other 0.6 2.2
-------- --------
Total $ 42.9 $ 49.2
---------------------------------------------------------------------------
Depreciation and Amortization
Telephone Operations $ 27.9 $ 26.9
Information Systems 7.1 6.3
Marketing Services 3.7 3.2
Other 0.7 0.8
-------- --------
Total $ 39.4 $ 37.2
---------------------------------------------------------------------------
Certain corporate administrative expenses have been allocated to segments
based upon the nature of the expense. Assets are those assets used in the
operations of the segment.
8
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONSOLIDATED
The Company's consolidated net loss for the first quarter 1995 was $59.6 million
compared with net income of $12.7 million in 1994. Loss per common share was
$.90 in the first quarter compared to earnings per common share of $.20 for the
first quarter of 1994. The results for the first quarter of 1995 included $132
million of special charges and a non-recurring charge of $2.5 million. The
special and non-recurring charges reduced net income by $85.6 million or $1.29
per common share.
Results for the first quarter of 1994 included a charge for the cumulative
effect of the adoption of the accounting standard for postemployment benefits
which reduced net income by $2.9 million or $.04 per common share.
The following discussion should be read in conjunction with the consolidated
financial statements and segment data. Results for interim periods may not be
indicative of the results for the full year.
BUSINESS RESTRUCTURING
During the first quarter of 1995, the Board of Directors approved a
restructuring plan for CBT and CBI. These actions resulted in $132 million of
pre-tax special charges being recorded in the first quarter of 1995. The
charges, principally related to pension enhancements and associated
postretirement health costs, are based on retirements and other costs of
employee separations.
The majority of the restructuring charges, $124 million, was recorded by CBT.
CBT announced in February, 1995 that it would eliminate approximately 800
management and hourly employees by 1997 through early retirement incentives.
CBT's plan was developed over the past year by its Business Transition Team and
involves the re-engineering of the telephone operations to streamline the
fundamental processes and work activities at CBT. Implementation of the plan is
expected to position CBT to better respond in an increasingly competitive
business environment.
CBT has reorganized its functions into 12 processes designed to streamline work
and put into place a management team responsible for the processes. Other
elements will be adopted over the next several years. CBT will develop
advanced information systems that will help to respond to changing expectations
of its customers. Costs in 1995 will increase to develop advanced information
systems, which are expected to be incurred prior to the release of many of the
employees from the workforce. CBT estimates that the restructuring, when fully
implemented in 1997, should result in a savings of approximately $50 million
from current projections of its annual operating expenses. The specific future
financial impacts on CBT's earnings are uncertain and will depend upon the
regulatory treatment of the restructuring charges and the related cost savings.
The remaining restructuring charges of $8 million were recorded by CBI. The
restructuring plan included early retirement incentives similar to CBT's as well
as voluntary separations.
9
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
TELEPHONE OPERATIONS
For the Three Months
Ended March 31, Change
-------------------- ------
(In millions) 1995 1994 Amount %
------ ------ ------ --
Revenues
Local service $ 85.5 $ 77.9 $ 7.6 10
Network access 36.8 36.9 (.1) --
Long distance 8.6 9.7 (1.1) (11)
Other 22.4 21.8 .6 3
------- ------- -------
Total $ 153.3 $ 146.3 $ 7.0 5
Costs and expenses
Special charges $ 124.0 $ -- $ 124.0 --
Operating expenses 125.5 122.7 2.8 2
------- ------- -------
$ 249.5 $ 122.7 $ 126.8
Access lines (000) 885 856 29 3
Minutes of Use (In millions)
Interstate 624 574 50 9
Intrastate 237 242 (5) (2)
Continued growth in access lines and new rates in Ohio effective in May 1994
accounted for $4.8 million of the first quarter increase in local service
revenues. The remainder of the increase of $2.8 million was primarily from
increased customer usage of central office features and directory assistance.
Network access revenues had decreases in Ohio intrastate carrier common line
rates that were offset by increases from settlements and higher end usage caused
by access line growth. Long distance revenues decreased from lower settlements
with interexchange carriers and independent companies. Other telephone
operations revenues increased from higher billing and collection services
provided.
Contract services for systems development increased $3.4 million. Depreciation
and amortization expenses increased $1 million as a result of the impact of rate
represcriptions in Ohio which became effective in July 1994. First quarter 1994
expenses include a nonrecurring charge for postretirement benefit costs which
had been deferred with regulatory approval. CBT expensed $2.5 million of the
deferred costs to adjust the deferred costs to a level expected to be recovered
in its new alternative regulation plan.
INFORMATION SYSTEMS
For the Three Months
Ended March 31, Change
-------------------- ------
(In millions) 1995 1994 Amount %
------ ------ ------ --
Revenues $ 90.1 $ 80.6 $ 9.5 12
Costs and expenses $ 82.1 $ 76.6 $ 5.5 7
Revenues from data processing and professional services increased $13.4 million
as a consequence of strong subscriber growth in the cellular industry somewhat
offset by lower net prices. Revenues from international clients for the
development of telecommunications solutions were $3.9 million lower in the first
three months of 1995 when compared to the same period in 1994. This resulted
from the substantial completion of a long-term contract and the timing of
revenue recognition under long-term contracts.
10
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
Costs and expenses increased primarily from increased data processing costs
related to the revenue growth for services provided to the cellular industry and
higher research and development expenses. Included in research and development
expenses is $2.5 million of non-recurring charges related to the expensing of
in-process research and development costs of X International which was acquired
in March 1995 (See Note 8 of Notes to Financial Statements). Sales and
marketing and general and administrative costs were lower in 1995 as the result
of workforce reductions.
MARKETING SERVICES
For the Three Months
Ended March 31, Change
-------------------- ------
(In millions) 1995 1994 Amount %
------ ------ ------ --
Revenues $ 70.6 $ 50.6 $ 20.0 40
Costs and expenses $ 62.6 $ 46.2 $ 16.4 35
Revenues increased $12.1 million from a large contract with a major provider of
satellite broadcast services which began in mid-1994. Revenues from inbound
services had a $2.5 million increase from services provided to AT&T. Revenues
from outbound services increased $2.6 million as a result of generating more net
business with existing customers. International revenues increased $1.5 million
from a new customer satisfaction program and additional business.
Costs and expenses increased at a lower rate than revenues in the first quarter
reflecting continuing cost management efforts. The increased costs and expenses
came primarily from labor costs for workforce additions, benefit costs and long
distance telephone costs of $8.9 million, $1.3 million and $1.7 million,
respectively. A significant portion of the increased labor costs were from the
satellite broadcast services contract mentioned above. General and
administrative expenses increased $2.9 million from expenses associated with
information systems and systems design. MATRIXX's international activities
continued to improve modestly toward break even.
OTHER
For the Three Months
Ended March 31, Change
-------------------- ------
(In millions) 1995 1994 Amount %
------ ------ ------ --
Revenues $ 36.0 $ 31.5 $ 4.5 14
Costs and expenses
Special charges $ 8.0 $ -- $ 8.0 --
Operating expenses 29.0 28.2 .8 3
------ ------ ------
$ 37.0 $ 28.2 $ 8.8 31
The revenue increase was principally the result of $3.1 million of higher sales
in the equipment supply business for computers, leased equipment and scrap
commodities. The remaining increase was due to continued improvement from sales
campaigns in the directory business and additional customers and higher usage in
the long distance re-selling business.
11
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
INTEREST EXPENSE
Interest expense for the first quarter 1995 was comparable with the first
quarter 1994. The interest related to the Company's swap agreement was $1.2
million for the first quarter 1995 and $1.1 million for the first quarter 1994.
The interest expense for the swap will continue to increase as interest is
accrued on the principal and unpaid interest costs. The accrued interest on the
French franc loan segment of the swap is 138 million French francs or $25.3
million at March 31, 1995. The Company has decided not to hedge the currency
risk associated with the accrued interest because the financial risk is
immaterial to the Company's financial position. The swap agreement increased
the Company's weighted average interest rate from 7.7% to 8.5% for the first
quarter 1995 as compared to an increase from 7.2% to 7.9% for the first quarter
1994.
INCOME TAXES
Lower income before taxes was the principal reason for the decrease in income
taxes. The Company's effective tax rate was 36.0% for the three months ended
March 31, 1995 and 37.2% for the three months ended March 31, 1994. The
effective tax rate, excluding the special and non-recurring charges, would have
been 37.1% for the three months ended March 31, 1995.
EFFECT OF CHANGES IN CURRENCY EXCHANGE RATES
Included in the Statements of Income for the three months ended March 31, 1995
are an offsetting currency transaction loss and gain. The currency transaction
loss relates to interest accrued on the Company's swap agreement. The currency
transaction gain relates to receivables on international contracts.
FINANCIAL CONDITION
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to finance its ongoing operating requirements, including
network expansion and modernization, business development and dividend programs.
The Company maintains adequate lines of credit with several institutions to
provide support for borrowings and general corporate purposes.
Cash provided by operating activities, which is the Company's primary source of
liquidity, was $57.8 million during the first quarter 1995, an increase of $2.1
million over the first quarter 1994. The surplus of cash provided over cash
used increased cash and cash equivalents. Cash was used to fund capital
expenditures, acquisitions and dividends. Cash proceeds from the issuance of
common shares was lower for the first three months 1995 compared to the first
three months 1994 by $2.5 million. This was the result of various employee
savings plans purchasing common shares on the open market rather than by new
issues of the Company's common shares.
The Company's most significant investing activity continued to be capital
expenditures which were $25 million during the three months ended March 31,
1995, a decrease of $15.2 million from the same three months in 1994. The
decrease reflects approximately $9 million fewer expenditures for digital
switching equipment at CBT which converted to the North American Numbering Plan
throughout 1994. Requirements for additional updating of facilities will be
continuously evaluated based on customer and market demand and engineering
economics. Capital expenditures for 1995 are expected to be approximately $140
million of which approximately $100 million is for CBT.
12
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
CBT could decide that in order to remain competitive in the future, it must
aggressively pursue a strategy of expanding its offerings beyond its traditional
business. Any capital spending increases would not be entirely incremental or
additive as reductions would be achieved in other areas. CBT may wish to enter
other businesses through investments and strategic alliances with established
companies in such businesses and through the development of such capabilities
internally. Such transactions could require substantial capital which could be
generated internally and from external sources.
Receivables at March 31, 1995 decreased $22 million from December 31, 1994
balances primarily as the result of the collection of receivables at CBT,
MATRIXX and CBIS. The collections of receivables at CBT and CBIS include
amounts from certain contracts. Accounts payable and accrued liabilities
decreased $35 million from December 31, 1994. The decrease was caused by
payments for the WATS acquisition contingency, employee-related costs and
software and hardware upgrades that were accrued for at December 31, 1994. Non-
current deferred income taxes were $35 million lower over the same comparable
period as a result of the tax benefit for the special charges related to the
restructuring program recorded in the first quarter 1995. Other long-term
liabilities increased principally from pension and postretirement liabilities as
a result of the business restructuring.
REGULATORY MATTERS
KENTUCKY FILING
During October 1994 CBT filed a proposal with the Public Service Commission of
Kentucky ("PSCK") for new regulated rates for telephone services provided to its
Kentucky customers. This proposal, if approved in its entirety, would result in
uniform rates for basic service in CBT's Kentucky and Ohio metropolitan service
areas and increase revenues by $3.4 million annually. An order from the PSCK is
expected in the second quarter 1995.
EFFECTS OF REGULATORY ACCOUNTING
CBT presently gives accounting recognition to the actions of regulators where
appropriate, as prescribed by SFAS 71, "Accounting for the Effects of Certain
Types of Regulation." Under SFAS 71, CBT records certain assets and liabilities
because of the actions of regulators. Amounts charged to operations for
depreciation expense reflect estimated useful lives and methods prescribed by
regulators rather than those that might otherwise apply to unregulated
enterprises. Typically, regulatory recovery periods are longer than the useful
lives that otherwise might be used. Criteria that could give rise to the
discontinuance of SFAS 71 include increasing competition, which would restrict
CBT's ability to establish prices to recover specific costs, and a significant
change in the manner in which rates are set by regulators from cost-based
regulation to another form of regulation. CBT periodically reviews these
criteria to ensure that continuing application of SFAS 71 is appropriate. If
CBT was required to discontinue the accounting prescribed in SFAS 71, there
would be a significant non-cash charge to operations. It is expected that the
minimum after-tax charge would be at least $60 million. The actual non-cash
charge could be much higher depending on many factors including CBT's business
strategy as well as judgments of both competitive impact and technology changes
at the time.
13
Form 10-Q Part I Cincinnati Bell Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont.)
COMPETITION
Cincinnati Bell operates businesses in several different markets. Each of the
businesses has fluctuations in revenues and operating earnings as the result of
the overall level, timing and terms of many contracts. There is also a business
risk that a customer will decide to perform services in-house or move its
business to a competitor if the services do not meet price and performance
standards. These circumstances may increase the variability of financial
results on a period to-period basis.
OUTLOOK
The Company's 1995 revenues may not grow at the same rate as in 1994 because
revenues generated from the WATS operations for 1994 and 1995 will be on a
comparable basis.
CBT's revenues are expected to increase but could be offset by a potential
decline in its customer base from increased competition. CBT is redesigning and
streamlining its processes and work activities to improve responsiveness to
customer needs, permit more rapid introduction of new products and services,
improve the quality of product and service offerings and reduce costs. With
disposal and restructuring activities substantially completed, CBIS expects to
improve operating margins and broaden its client base. CBIS will concentrate
heavily to build on its core business in the cellular market. The cellular
market will be the principal driver for CBIS's growth this year. The continued
trend in the outsourcing of telemarketing is important for MATRIXX's continued
growth. Continuing to add strategic clients and effectively integrating these
clients is expected to contribute to MATRIXX's profitability in 1995. The other
Company businesses expect to continue to grow by offering superior value,
quality and customer service.
The Company has general and specific risks that could effect trends in future
operating results. Some of the risks include international contracts,
sustaining the quality of customer service during downsizing and sustaining high
levels of revenues from certain customers.
The Company continues to review opportunities for acquisitions and divestitures
for all its businesses to enhance shareowner value.
14
Form 10-Q Part II Cincinnati Bell Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders of the Company held on April 17, 1995 the
shareholders elected three officers, ratified the Company's auditors and did not
approve two shareholder proposals. Phillip R. Cox was elected as a director
with 54,115,418 common shares voting for election and 2,579,507 common shares
voting against election. William A. Friedlander was elected as a director with
54,142,763 common shares voting for election and 2,552,162 common shares voting
against election. John T. LaMacchia was elected as a director with 52,105,795
common shares voting for election and 4,589,130 common shares voting against
election. Coopers & Lybrand L.L.P. was ratified as the Company's auditors with
54,705,508 common shares voting for ratification, 1,251,933 common shares voting
against ratification and 737,484 common shares abstaining. The first
shareholder proposal was for the Board of Directors to adopt and implement a
policy actively seeking a purchaser to acquire the Company. The proposal was
not approved with 41,085,783 common shares voting against the proposal,
7,229,585 common shares voting for the proposal, 1,589,719 common shares
abstaining and 6,789,838 broker non-votes. The second shareholder proposal was
that no further monetary benefits of any kind accrue to the corporation's
officers, over and above those already covenanted. The proposal was not
approved with 35,075,387 common shares voting against the proposal, 13,470,026
common shares voting for the proposal, 1,359,674 common shares abstaining and
6,789,838 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following are filed as Exhibits to Part I of this Form 10-Q:
Exhibit
Number
------
11 Computation of Earnings per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cincinnati Bell Inc.
Date May 12, 1995 /s/ Brian C. Henry
---------------- -------------------------------
Brian C. Henry
Executive Vice President and
Chief Financial Officer
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
for the quarterly period ended March 31, 1995
CINCINNATI BELL INC.
(Exact Name of Registrant as specified in its charter)
EXHIBITS
INDEX TO EXHIBITS
Filed Pursuant to Item 601 of Regulation S-K
Exhibit
No. Title of Exhibit Page
------- ----------------------------------------- ----
(11) Computation of Earnings per Common Share *
(27) Financial Data Schedule *