FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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.
An Ohio I.R.S. Employer
Corporation No. 31-1056105
201 East Fourth Street, Cincinnati, Ohio 45202
Telephone Number 513 397-9900
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Shares (par value $1.00 per share) New York Stock Exchange
Cincinnati Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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At February 28, 1997, there were 67,828,066 common shares outstanding.
At February 28, 1997, the aggregate market value of the voting shares owned
by non-affiliates was $4,185,888,832.
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's annual report to security holders for the
fiscal year ended December 31, 1996 (Parts I, II and IV)
(2) Portions of the registrant's definitive proxy statement dated March 12,
1997 issued in connection with the annual meeting of shareholders (Part
III)
TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 17
4. Submission of Matters to a Vote of the Security Holders . . . . . 18
PART II
5. Market for the Registrant's Common Equity and Related Security
Holder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 21
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 21
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . 21
8. Financial Statements and Supplementary Data . . . . . . . . . . . 21
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . . . . . . 21
PART III
10. Directors and Executive Officers of Registrant. . . . . . . . . . 21
11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 21
12. Security Ownership of Certain Beneficial Owners and Management. . 21
13. Certain Relationships and Related Transactions. . . . . . . . . . 21
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K . 22
See page 19 for "Executive Officers of the Registrant".
PART I
ITEM I. BUSINESS
GENERAL
The Company is a diversified telecommunications company with principal
businesses in three industry segments. The telephone operations segment,
Cincinnati Bell Telephone Company ("CBT"), provides local telephone exchange
services and products in the Greater Cincinnati area. The information systems
segment, Cincinnati Bell Information Systems Inc. ("CBIS"), provides and manages
customer-care and billing solutions for the communications and cable TV
industries. The teleservices segment, MATRIXX Marketing Inc. ("MATRIXX"),
provides a full range of outsourced marketing solutions to large corporations.
The Company's other businesses include: Cincinnati Bell Long Distance Inc.
("CBLD"), which provides resale long distance telecommunications services and
products as well as voice mail and paging services; Cincinnati Bell Directory
Inc. ("CBD"), which provides Yellow Pages and other directory products and
services, as well as information and advertising services; and companies having
interests in cellular mobile telephone service and in the marketing of computer
and telecommunications equipment.
The Company is incorporated under the laws of Ohio and has its principal
executive offices at 201 East Fourth Street, Cincinnati, Ohio 45202 (telephone
number (513) 397-9900).
STRATEGY
The three principal businesses and other interests of the Company are the
products of a focused strategy first initiated in 1983 to expand from a local
exchange telecommunications company into a broader, more diversified company
providing value-added customer-care services in high growth and converging
communications markets. By leveraging the combined knowledge, capabilities and
experience of its principal subsidiaries, the Company seeks to take advantage of
the opportunities arising from the growing communications market and from the
growing trend to outsource information services and teleservices. CBIS and
MATRIXX have unique insight into the customer-care requirements of their clients
because of the knowledge and expertise they have developed by servicing CBT, a
full-service telecommunications provider. The Company's ability to provide
unique insight into the customer-care requirements of outsourcing clients of
both CBIS and MATRIXX is enhanced by the knowledge and expertise developed by
servicing CBT, a full-service telecommunications provider.
In addition to the growth opportunities and synergies created by working
together, each business - CBT, CBIS and MATRIXX - has growth strategies in its
respective markets. CBT's strategy is to leverage off its well-regarded brand
name, excellent service record and tradition of quality as it markets bundled
communications, information and entertainment services. CBIS's strategy is to
utilize the scale of its data processing operations and its extensive industry
knowledge and experience to be the leading provider of customer-care and billing
services and network provisioning and management systems to the communications
industry. MATRIXX's strategy is to develop long-term strategic outsourcing
relationships for teleservices support of large clients in the
telecommunications, technology, financial services, consumer products and direct
response industries.
1
TELEPHONE OPERATIONS
Cincinnati Bell Telephone Company
GENERAL
CBT was founded as The City and Suburban Telegraph Association in 1873,
three years before the invention of the telephone. In 1878, CBT became the first
telephonic exchange in Ohio and the tenth in the nation.
CBT is the 14th largest local service telecommunications company in the
United States, based on its network access lines in service at the end of 1996.
In 1996, CBT provided 39% of the Company's revenue and 45% of its operating
income excluding special items, compared to 50% and 85%, respectively, in 1993.
CBT provides telecommunications services and products, mainly local
service, network access and toll telephone services, to business and residential
customers in most of the Cincinnati metropolitan area, including parts of
southwestern Ohio, six counties in northern Kentucky and parts of two counties
in southeastern Indiana. Approximately 98% of CBT's network access lines are in
one local calling area. The Cincinnati Bell Telephone brand name is well-known
among CBT's customers. CBT bundles a broad and increasing range of
communications-related products and services under that name.
CBT's service record is among the best in the industry. Based on reports
to the Federal Communications Commission ("FCC"), CBT receives fewer customer
reports of service trouble per line than do nearly all other large U.S.
telecommunications companies. In 1996 CBT averaged only 1.3 trouble reports per
100 customer lines per month. In 1995 (latest information available) comparable
RBOC rates ranged from 1.3 to 2.7. In the face of increased access line growth,
CBT has an exceptional record for keeping installation appointments and for
completing new service orders within five days.
Since the beginning of 1990, CBT has invested more than $745 million to
upgrade its plant and equipment with modern technology. Of its network access
lines, 91% are served by digital switches, 100% have ISDN capability and 100%
have Signaling System 7 capability, which supports enhanced features such as
Caller ID, Call Trace and Call Return.
During the first quarter of 1995, CBT launched initiatives to improve
service to its customers and reduce costs, resulting in a $124 million special
charge for restructuring. CBT continued to implement its restructuring plan in
1996. This plan will be completed early in 1997. While staff levels have been
reduced 19% over two years, during 1996, staff was reduced only 1% due to higher
business volumes and new marketing efforts.
BUSINESS
On December 31, 1996, CBT had approximately 944,000 network access lines in
service, an increase of 4.1% or 38,000 lines from December 31, 1995.
Approximately 70% of CBT's network access lines serve residential customers and
30% serve business customers. The growth in additional access lines to
residential customers has been particularly strong at CBT over the last several
years. These customers are adding lines for home offices, on-line services and
increased household telephone usage. In 1996, additional lines accounted for
more than 62% of residential lines added during the year. As of December 31,
1996, approximately 9% of CBT's residential customers had additional access
lines. CBT expects strong growth in additional lines to continue.
2
Approximately 91% of CBT's network access lines are served by digital
switches that facilitate the transmission of voice, video and data content
across CBT's network. CBT has approximately 1,300 miles of fiber optic cable
throughout the network which provides synchronized optical network technology to
eight business districts and customer specific applications as well as inter-
office connectivity and local loop applications.
CBT provides voice, data and video transmission, custom calling services
and billing services. In addition, CBT is a sales agent for certain products and
services of AT&T, Lucent Technologies and other companies as a full-service
provider of communications products and services to business customers. In
September 1996, CBT began selling and installing direct broadcast satellite
("DBS") services and equipment in its Cincinnati market under an agreement with
DIRECTV-Registered Trademark-, United States Satellite Broadcasting Co. and
certain DBS equipment vendors. In March 1996, CBT became one of the first local
exchange telephone companies in the nation to introduce an Internet access
service for its residential and small business customers. CBT also has
introduced high-capacity local area network interconnection services and ISDN
services. These new services demonstrate CBT's ability to innovate and adapt to
emerging trends in telecommunications.
Local services generated approximately 57% of CBT's revenues in 1996. The
increasingly competitive network access and toll services generated only 29% of
CBT's 1996 revenues, a smaller percentage than most of the nation's largest
local exchange telephone companies receive. The remainder of CBT's revenues come
from other communications services, including commissioned sales, maintenance
and repair services as well as billing services.
MARKET
CBT serves a 2,400 square-mile market encompassing most of the Greater
Cincinnati area, which had a total population of approximately 1.5 million in
1990, including 656,000 households. Its regional economy is strong and diverse,
including six locally headquartered Fortune 500 companies.
Several companies compete or are planning to compete with CBT through the
provision of local exchange, intraLATA long-distance, enhanced calling such as
voice messaging, customer premises maintenance and repair, wireless
communications, special access, public telephone and business communications
equipment sales and maintenance services. See "Competition."
OPPORTUNITIES
CBT plans to develop new products and services and market them in ways that
leverage its well-regarded brand name, large installed customer base, reputation
for service quality, communications industry knowledge and experience and
extensive knowledge of its customers' preferences. CBT also will pursue
co-branding opportunities and alliances with other service providers where
appropriate.
CBT will seek to increase its penetration of additional residential lines
within its service area. In addition, CBT has an opportunity to increase the
market penetration rate of higher margin enhanced services such as Caller ID,
Call Return, Call Block and 3-Way Calling.
Under the Company's strategy for pursuing opportunities for growth by
leveraging the strengths of all of its businesses, and under CBT's own strategy
to be a full-service provider of communications services, the Company has unique
strengths that could be effective in marketing a broad array of communications
services outside of CBT's existing service territory. The Company is exploring
such opportunities, both on its own or in partnership with other communications
services companies.
3
The Company was the successful bidder of a 10MHz license to offer PCS
service in the Greater Cincinnati area in an FCC-sponsored auction. It is
expected that the auction results will be finalized in the next few months.
Ameritech, as general partner of a limited partnership offering cellular service
in much of central and southeastern Ohio, including Greater Cincinnati, and in
which the Company is a 45% limited partner, has filed suit in Delaware Chancery
Court seeking to prevent the Company from offering PCS service directly or
through resale.
REGULATION
CBT's local exchange, network access and toll telephone operations are
regulated by the Public Utilities Commission of Ohio ("PUCO"), the Public
Service Commission of Kentucky ("PSCK") and the FCC with respect to rates,
services and other matters. (See the discussion under the caption "Cautionary
Statements".)
INFORMATION SYSTEMS
Cincinnati Bell Information Systems Inc.
GENERAL
CBIS was formed in 1983 to leverage the Company's knowledge and expertise
in data processing and billing for the telecommunications industry. CBIS
provides data processing services and software systems that generate billing
information and manage customer information for communications services
businesses. CBIS's customers are large corporations in the U.S. communications
industry. CBIS accounted for approximately 29% of the Company's 1996
consolidated revenues and 28% of its total operating income excluding special
items.
CBIS is the leading provider of billing and customer-care services to the
wireless telecommunications market in North America, which includes cellular and
the personal communications services ("PCS") businesses. Revenues and
subscribership in the cellular industry have been growing in excess of 30% per
year. CBIS's billing systems serve many of the top cellular carriers. They
generate bills for cellular telephone customers in 23 of the 25 largest U.S.
metropolitan areas. CBIS's service bureaus generated billing information for
monthly customer statements for approximately 30% of U.S. cellular subscribers
in 1996. CBIS's revenue from cellular clients increased from $144 million in
1993 to $315 million in 1996.
CBIS also provides billing and customer-care services to companies that
operate traditional wireline telecommunications networks, including CBT. It
develops network management systems for communications companies and customer-
care and billing systems for cable television systems operators in the U.S. and
Europe. CBIS's systems also support the provision of telephone services by cable
television system operators in the U.S. and in Europe. CBIS recently began to
offer service bureau billing services to the cable television industry.
In 1996, CBIS acquired International Computer Systems, Inc., an
international provider of wireline customer-care and billing solutions, from
WorldCom, Inc. It also acquired Swift Management Services, a distributor of
CBIS's integrated cable telephony billing systems in Europe. In December 1995,
CBIS acquired ISD, a developer of billing systems for the cable television
industry. In March 1995, CBIS acquired X International, an information
technology company located in Bristol, England that provides customer-care and
billing software for telecommunications companies that use the Global System for
Mobile Communications ("GSM") standard.
CBIS's headquarters are in Cincinnati, Ohio. It has major operations in
Ohio, Florida, Illinois, Georgia and Virginia. It also has operations in the
United Kingdom, Switzerland and The Netherlands.
4
BUSINESS
CBIS serves clients principally by processing data and creating bills using
proprietary software. CBIS provides and manages billing systems in service
bureaus where its experience result in significant cost and service advantages
for clients. These advantages include predictable costs, information management
expertise, access to advanced technology without capital expense, and reliance
on a provider focused on billing.
CBIS's data processing services are carried out in its data centers in
Cincinnati and Orlando. It uses information from communications service
providers to calculate and generate bills for the usage of communications
services, generally on a monthly cycle. CBIS strives to provide state-of-the-art
systems and facilities that provide reliability and responsiveness. CBIS's
systems select the correct plan for each customer from the thousands of pricing
plans provided by its clients. These systems generate information for more than
12 million bills per month, including approximately 700,000 bills generated for
CBT. CBIS's computers process over 356 million transactions, including
transactions for CBT, per month. CBIS's revenue from this business is determined
in large part by the number of bills it produces and the number of accounts it
manages.
In the wireless industry, pricing plans are complex and change frequently.
Customers of CBIS's clients frequently change service plans and service
providers. Additionally, companies in the wireless industry are growing rapidly.
CBIS's ability to manage this change and growth successfully is an important
factor in its success.
CBIS also updates pricing plans and customer records for its clients and
makes customer information available to clients on-line, helping these clients
better manage their relationships with their telecommunications customers. CBIS
typically is compensated at an hourly rate for these and other consulting
services.
Most of CBIS's services are provided under contracts for terms of two to
ten years, certain of which may be terminated at specified times on prior
written notice. CBIS's four largest clients, other than CBT, are AT&T, 360
DEG. Communications, Dutch PTT and Ameritech Corporation, which collectively
accounted for approximately 67% of CBIS's 1996 revenues. Several multi-year
contracts cover essentially all of CBIS's relationships with AT&T businesses,
including its contract with AT&T Wireless and CMT Partners for the provision
of wireless customer-care and billing services through 2001. In 1996, CBIS
signed contract extensions with Comcast Cellular and with 360 DEG.
Communications. CBIS's contract with Comcast Cellular was extended to 2003
and its contract with 360 DEG. Communications was extended to 2006. Other
CBIS customers include selected cable television systems owned by Time Warner
Inc. and Cox Communications, Inc., and the public telecommunications services
providers in Switzerland and The Netherlands. Some clients, including all of
CBIS's cable television clients at year-end, have purchased CBIS software to
operate in their own data centers. CBIS recently introduced service bureau
billing as an option for its cable television clients.
CBIS's systems development and support are dependent on its ability to
attract and retain its professional staff. There can be no assurance that CBIS's
labor costs will not increase in the future.
MARKETS
An industry study and CBIS's own analysis estimate that the domestic market
for billing and customer-care services used by the communications industry was
greater than $6 billion in 1996. This figure includes the estimated cost of
customer-care and billing services used by wireless, wireline and cable
television services providers, including services they provide to themselves.
5
The cellular industry's subscriber base was approximately 43 million at the
end of 1996. At the end of 1996, CBIS's data centers generated billing
information for more than 12 million monthly customer statements for cellular
subscribers. Billing and customer-care for cellular and cellular-related
telecommunications services in North America accounted for more than 66% of
CBIS's 1996 total revenue.
OPPORTUNITIES
Increased competition in the communications industry should increase the
opportunities for CBIS. One such opportunity, PCS, uses digital technologies to
increase the range of features, service quality and operating efficiency of
mobile communications services.
CBIS recently entered into contracts to provide customer-care and billing
services to three of the largest potential providers of PCS services in the
United States based on both issued and projected license awards. In March 1996,
PrimeCo Personal Communications L.P. ("PrimeCo"), a wireless partnership among
AirTouch, Bell Atlantic Corporation, NYNEX Corporation and U S West Media Group,
announced it had chosen CBIS to be its exclusive customer-care and billing
solutions provider. PrimeCo owns PCS licenses covering approximately 57 million
net POPs (potential customers adjusted for equity ownership) and is ranked as
the third largest owner of PCS A and B block licenses. In July 1996, CBIS signed
an exclusive customer-care and billing contract with Sprint PCS, a wireless
partnership among Sprint Corporation, Tele-Communications, Inc. ("TCI"), Comcast
Cellular and Cox Communications, Inc. Sprint PCS owns PCS licenses covering
approximately 195 million net POPs and is the largest owner of PCS A and B block
licenses. Additionally, CBIS has an agreement with AT&T to provide customer-care
and billing services to AT&T for PCS services. AT&T Wireless owns PCS licenses
covering approximately 114 million net POPs and is the second largest owner of
PCS A and B block licenses.
These new PCS contracts, coupled with CBIS's cellular billing contracts,
position CBIS to be a leading provider of customer-care and billing services to
a much broader wireless services industry if its clients are successful in PCS
and other wireless services businesses.
In March 1996, CBIS also announced a five-year contract with AT&T to
provide billing, data processing, software development and professional
consulting services. The contract relates to AT&T's proposed reentry into the
local telephone market as either a reseller or facilities-based provider of
local exchange services. AT&T is registering to offer these services throughout
the United States and is negotiating for resale agreements with selected LECs.
As with PCS, the benefits to CBIS from the contract will depend in part upon the
success of AT&T in meeting its objectives in this new venture.
On September 19, 1996, CBIS signed a three-year contract with a unit of
TCI, the largest cable television operator in the U.S. based on total
subscribers, to provide customer-care and billing services in support of TCI's
planned offering of telephone services to its cable television customers. CBIS's
data center will provide rating (bill calculation), service order entry and bill
finishing services to TCI.
TELESERVICES
MATRIXX Marketing Inc.
GENERAL
Based on annual revenues, MATRIXX is the largest independent provider of
outsourced teleservices. MATRIXX provides a full range of customer service,
sales support and teleservices solutions to major companies in its targeted
industries. In 1996, MATRIXX accounted for
6
approximately 22% of the Company's consolidated revenue and 16% of total
operating income excluding special items.
MATRIXX principally focuses on developing long-term, strategic outsourcing
relationships with large clients in the communications, technology, financial
services, consumer products and direct response industries. MATRIXX focuses on
clients in these industries because of the complexity of the services required,
the anticipated growth of their businesses and their continuing need for
customer service support. Often, the level of support these companies require
and the close relationships they build with MATRIXX lead to higher returns
versus short-term campaign programs. For example, MATRIXX built a team of sales
account managers who are the dedicated sales channel to a consumer products
company's retail and wholesale accounts. MATRIXX's team manages the company's
day-to-day relationships with those accounts. This extension of the company's
sales organization allows for more frequent customer contact at a lower cost.
The dedicated team also assists the company in its marketing efforts through
database management, product movement reports and market trends analysis.
Many MATRIXX employees who answer inbound customer service calls are
dedicated to serving a single client. Employees supporting DIRECTV-Registered
Trademark- satellite entertainment services, for example, answer calls to
initiate service or to provide information about programming options, billing
and technical aspects of the service, including installing customers' own
satellite dishes. For other clients, MATRIXX provides technical help-desk
support for computer products and services, and responds to customer inquiries
submitted via the Internet.
MATRIXX operates 19 domestic and 2 international call centers with
approximately 7,000 available workstations and more than 14,000 customer-care
representatives, including full-time and part-time employees.
MATRIXX is headquartered in Cincinnati. It operates domestic call centers
in Ohio, Utah, Colorado, Arizona, Wisconsin, Nebraska, Florida and Texas and
international call centers in Paris, France and Newcastle, England.
BUSINESS
MATRIXX provides two categories of teleservices. Traditional services offer
large shared capacities for large sales campaigns and major direct response
programs. Outsourced dedicated services require dedicated agents to handle a
specific company's more complex needs for customer service, technical help-desk
support and sales account management. Other services are interactive voice
response, Internet E-mail response, research, database management and
fulfillment. Based on 1996 revenues, approximately 70% of MATRIXX's business
involved responding to inbound calls. MATRIXX considers its industry focus and
differentiation of service offerings to be its competitive strengths.
Dedicated customer-care representative teams and call centers support large
teleservices programs for clients. Many of these centers are linked to provide
optimal call routing, capacity matching and redundancy in order to best meet the
needs of the client. MATRIXX has advanced information systems, including
proprietary software, and integrated telephone systems to effectively meet
client expectations. MATRIXX customer-care representatives receive initial
training and on-the-job support to develop calling skills and knowledge of
clients' products and services. MATRIXX's services are very labor intensive.
Service quality depends in part on its ability to minimize personnel turnover.
MATRIXX also competes for qualified personnel with other employers in their
geographic markets. There can be no assurance that MATRIXX will be able to hire
and retain a sufficient number of qualified personnel in a cost-efficient manner
to support continued growth and maintain profitability.
7
MATRIXX's client base primarily includes large companies in the
telecommunications, technology, financial services, consumer products and direct
response industries. MATRIXX's largest customers in 1996 were AT&T, DIRECTV-
Registered Trademark- and American Express Company, which collectively accounted
for approximately 44% of 1996 revenues.
MARKET
Teleservices include consumer and business telephone-based customer service
and sales programs. Historically, companies maintained such customer-care
functions in-house because they believed that a direct relationship with the
customer was good business policy and because there were few outsourcing
alternatives. As the size and complexity of these functions have grown,
increasing numbers of companies have chosen to outsource some or all of these
activities in order to focus on their core businesses, reduce costs and improve
operational efficiency. Teleservices companies such as MATRIXX often can provide
these services with higher quality and less cost, creating a competitive
advantage for MATRIXX's clients. In addition, teleservices companies often can
provide a client with current, detailed information about its customers and
their purchasing decisions.
According to a Strategic Telemedia Study, the U.S. agency market for
outsourced teleservices, including automated services, was over $6 billion in
1995. In addition, industry sources suggest that a considerably larger volume of
teleservices was managed and operated internally, through dedicated in-house
call centers. MATRIXX believes that corporations will outsource an increasingly
larger percentage of such teleservices, further fueling the growth of the
outsourced market.
MATRIXX segments the market for teleservices into traditional and
outsourced dedicated programs. Traditional programs involve shared agents who
handle shorter campaign-oriented calls. Outsourced dedicated programs involve
agents who handle larger and more complex calls for long-term clients thereby
providing added value. MATRIXX entered the technical help-desk market through
its acquisition of Software Support, Inc. in November 1996. MATRIXX entered the
interactive and voice response market through its acquisition of certain assets
of Scherers Communications, Inc. in August 1996. Many programs now include an
automated and interactive voice response component in addition to live agents.
The principal drivers of MATRIXX's overall market growth are expected to be
the increasing use of targeted marketing strategies by companies, the
effectiveness of programs that involve frequent one-on-one contact as a means of
enhancing customer loyalty and the lower cost of sales and marketing over the
phone compared to other customer service methods. Additionally, as companies
seek to achieve greater strategic focus and operating efficiency, a greater
percentage are expected to seek to outsource telephone-based customer-care
services and sales coverage programs. The Company believes that MATRIXX is well-
positioned to capture significant amounts of this business because of its
marketing expertise and technological resources ability to deal with
increasingly complex customer interactions.
OPPORTUNITIES
MATRIXX believes that the growth of teleservices as a communications medium
and the trend to outsource customer service, technical help-desk and sales
coverage programs offer significant opportunities to grow its business.
Companies now realize that they can improve customer service and increase sales
while reducing costs. In addition, MATRIXX has developed services for other
subsidiaries of the Company that it can market to other clients. For example,
MATRIXX and CBT worked together to develop MATRIXX's help desk support service
for CBT's new FUSE-Registered Trademark- Internet access service, a support
service MATRIXX is offering to other third-party clients. CBIS is also
collaborating with MATRIXX to provide data processing services and enhanced
8
customer management software as well as jointly offering end-to-end value-added
solutions to communications providers.
MATRIXX believes that its expertise in the telecommunications, technology,
financial service, consumer products and direct response industries are a
competitive advantage for developing relationships with large corporations in
those industries. In addition, MATRIXX believes its scale and expertise in
inbound calling provide it with an advantage in winning new business from
companies currently relying on in-house telephone marketing service operations.
MATRIXX will actively seek out opportunities to expand its product
offerings and client base through internal development and strategic
acquisitions.
REGULATION
Various federal and state legislative initiatives have been enacted to
regulate outbound teleservices, especially calls to consumers. Since MATRIXX
concentrates on inbound service and outbound business-to-business teleservices,
MATRIXX does not believe that such legislation adversely affects its business
presently. However, there can be no assurance that future legislation will not
restrict MATRIXX's ability to conduct its business.
OTHER BUSINESSES
CBLD resells long distance telecommunications services and products as well
as voice mail and paging services to residential and business customers mainly
in Ohio and several adjoining states. Its principal market focus is small- and
medium-sized businesses, particularly businesses with two to twenty business
access lines in service. CBLD augments its high-quality long-distance services
with calling plans, network features and enhanced calling services to create
customized packages of communications services for its clients. CBLD's resale
activities are conducted pursuant to the regulatory requirements of state
utility commissions. Although no material regulatory developments are pending,
any such developments could have an effect on CBLD's resale activities.
CBD provides Yellow Pages and other directory products and services as well
as related information and advertising services. Its principal products are a
White Pages directory and nine Yellow Pages directories. CBD continually
evaluates new product offerings in both the print and emerging electronic
categories of distribution.
Cincinnati Bell Supply ("Supply") markets computer and telecommunications
equipment. Its principal market is the secondary market for used and surplus
telecommunications systems, including AT&T-brand systems.
The Company also owns a 45% limited partnership interest in a cellular
telephone service business that covers much of central and southwestern Ohio,
northern Kentucky and small portions of southeastern Indiana. The Company's
proportionate share of this cellular market represents approximately 2.3 million
POPs. See Item 3. "Legal Proceedings".
COMPETITION
CINCINNATI BELL TELEPHONE COMPANY
CBT is currently the sole provider of basic local switched wireline
telecommunications services in its market. Competitors include providers of
special access services, wireless communication services, enhanced calling
services such as voice messaging services and providers of business
communications equipment and services.
9
Evolving technology, the preferences of consumers and policy makers, and
the convergence of other industries with the telecommunications industry are
causes for increasing competition in the telecommunications industry. The range
of communications services, the equipment available to provide and access such
services and the number of competitors offering such services continue to
increase. That increase expands the means by which CBT's network may be
bypassed. Furthermore, recently enacted legislative and regulatory initiatives
and additional regulatory developments that are expected in the near future are
likely to encourage and accelerate the development of competition in all
segments of the telecommunications industry by removing legal barriers to
competition across segments of that industry. These initiatives and developments
could make it more difficult for CBT to maintain current revenue and profit
levels.
In the future, CBT expects to compete with other providers of local
exchange telecommunications service and communications-based entertainment and
information services. Local exchange telecommunications competitors will include
other major local exchange telecommunications companies, wireless services
providers, interexchange carriers, competitive local exchange carriers and
others. Time Warner Communications of Ohio, L.P. and Communications Buying
Group, Inc. are the only other companies currently certified to offer switched
local exchange service in CBT's Greater Cincinnati market.
CINCINNATI BELL INFORMATION SYSTEMS INC.
Competition in the information services market is based primarily on
product quality, performance, price and the quality of client service. CBIS's
competitors include firms as large and larger than CBIS as well as potential
competitors from other markets similar to those served by CBIS. Major
competitors of CBIS include Alltel Corporation, American Management Systems
Inc., Andersen Consulting Group and EDS Systems Corp. Niche players or new
entrants could capture a segment of the information services market by
developing new systems or services that could impact CBIS's market potential.
CBIS's clients and potential clients are generally large companies with
substantial resources and the capability to provide needed services for
themselves rather than outsourcing such services. Faced with increasing
competition, there can be no assurance that CBIS can grow at the same rate as in
the past.
CBIS believes that it provides superior service because of its knowledge of
the communications industry, its technology, its information systems
capabilities and resources, and its attention to client needs. As
communications customer care and billing becomes more complex, communications
providers are increasingly considering customer billing services as an
opportunity to differentiate themselves from competitive service providers. CBIS
believes that its ability to maintain a leadership position in the technological
development of billing systems will be critical to providing its clients with
competitively priced, high-quality services.
MATRIXX MARKETING INC.
The teleservices industry in which MATRIXX competes is extremely
competitive and highly fragmented. MATRIXX competes with the in-house
teleservices operations of its current and potential clients, other large
teleservices companies such as APAC Teleservices, Inc., AT&T American Transtech,
ITI Marketing Services Inc., Precision Response Corporation, SITEL Corporation,
TeleTech Holdings, Inc., West Teleservices Corporation and numerous smaller
companies. MATRIXX also competes with alternative marketing media such as
television, radio and direct mail advertising. MATRIXX differentiates itself
from competitors based on its size and scale, selective industry and client
focus, financial and technical resources and business reputation.
MATRIXX believes that the principal competitive factors in the teleservices
industry are service quality, sales and marketing skills, price, technological
expertise and customized solutions. The competitive marketplace could begin to
place pressure on MATRIXX's ability to achieve its
10
goals. There can be no assurance that MATRIXX will be able to achieve the growth
and financial results that it has had in the past several years.
OTHER BUSINESSES
The Company's other businesses face intense competition in their markets,
principally from larger companies. They primarily seek to differentiate
themselves by providing existing customers with superior service and by focusing
on niche markets and opportunities to develop and market customized packages of
services. CBLD's competitors include interexchange carriers and selected local
telecommunications services companies. CBD's competitors are directory services
companies, newspapers and other media advertising services providers in its
region. Supply's competitors include vendors of new and used communications and
computer equipment, operating regionally and across the nation.
11
CAPITAL ADDITIONS
The Company has been making large expenditures for construction of
telephone plant and investments in its existing subsidiaries and new businesses.
As a result of these expenditures, the Company expects to be able to introduce
new products and services, respond to competitive challenges and increase its
operating efficiency and productivity.
The following is a summary of capital additions for the years 1992 through
1996:
Dollars in Millions
-------------------------------------------------------------------------
Investments in
Telephone Plant Existing Subsidiaries Total Capital
Construction and New Businesses Additions
------------ ------------------ ----------
1996 $ 101.4 $ 119.4 $ 220.8
1995 $ 90.3 $ 76.5 $ 166.8
1994 $ 112.8 $ 43.4 $ 156.2
1993 $ 111.6 $ 123.8 $ 235.4
1992 $ 95.0 $ 45.1 $ 140.1
The total investment in telephone plant increased from approximately $1,366
million at December 31, 1991, to approximately $1,572 million at December 31,
1996, after giving effect to retirements but before deducting accumulated
depreciation at either date.
Capital additions in 1997 by the Company and its subsidiaries are
anticipated to be approximately $215 million, with $120 million designated for
telephone plant.
EMPLOYEES
At December 31, 1996, the Company and its subsidiaries had approximately
19,700 employees. CBT and CBIS had approximately 2,000 employees covered under
collective bargaining agreements with the Communications Workers of America,
which is affiliated with the AFL-CIO. The collective bargaining agreements
expire in May 1999 as to CBT and September 1999 as to CBIS.
BUSINESS SEGMENT INFORMATION
The amounts of revenues, operating income, assets, capital additions,
depreciation and amortization attributable to each of the business segments of
the Company for the year ended December 31, 1996, are set forth in the table
relating to business segment information in Note 18 of the Notes to Financial
Statements in the Company's annual report to security holders, and such table is
incorporated herein by reference.
CAUTIONARY STATEMENTS
The Company wishes to take advantage of the "safe harbor" provisions
included in the Private Securities Litigation Reform Act of 1995. To that end,
except for certain historical information, the Business sections (Item 1) and
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 7) contain forward-looking statements, including statements
concerning regulatory and competitive factors, the development and introduction
of new
12
products and services and the development of customer strategies to improve the
Company's financial position and results of operations. These statements
involve a number of risks and uncertainties. The Company cautions readers that
any forward-looking statements made by the Company herein and in future reports
and statements are not guarantees of future performance and that actual results
may differ materially from those in forward-looking statements as a result of
various factors including, but not limited to, the following factors set forth
below.
REGULATORY AND COMPETITIVE TRENDS REGARDING TELEPHONE OPERATIONS
Recently enacted and future legislative and regulatory initiatives will
have an impact on CBT and other incumbent local exchange carriers ("LECs"),
including the Regional Bell Operating Companies ("RBOCs") and other independent
telephone companies. The extent of that impact will not be known until the
initiatives are fully implemented. The basic thrust of these initiatives is to
encourage and accelerate the development of competition in the
telecommunications industry by removing legal barriers to competition across
major segments of that industry. Under the initiatives, companies that today are
limited to one or more of those segments, including local exchange, long
distance, wireless, cable television and information services, could enter the
other segments to compete with the incumbent providers and other new entrants.
FEDERAL - Today's technology makes it possible to interconnect facilities
of competing telecommunications carriers and to provide the service offerings of
multiple competitors through the network facilities of one or more incumbents.
The Telecommunications Act of 1996 (the "Act") passed in February 1996 requires
incumbent LECs like CBT to interconnect with the networks of other service
providers, unbundle certain network elements and make them available to
competing providers at wholesale rates. Additionally, the Act requires the
removal of other perceived barriers to competitive entry by alternative
providers of local exchange services. Although the Act clearly states these
mandates, it does so in general terms and leaves the implementation of these
mandates to the FCC and the state regulatory agencies.
On August 8, 1996, the FCC issued an order establishing regulations to
implement the "local competition" provisions of the Act. These regulations
essentially establish parameters under which a LEC must allow other
telecommunications carriers to interconnect with its network, including the
compensation that a LEC would receive for terminating calls originating from the
networks of the other carriers. The FCC's regulations also establish parameters
under which LECs must unbundle network elements and offer them to other
telecommunications carriers. The prices for interconnection and unbundled
elements either are to be negotiated between the parties (and approved by the
relevant state commission) or, if the parties fail to reach an agreement, the
rates are to be set by the relevant state commission based on guidelines
established by the Act and implemented by the FCC. Under the Act, these rates
must be based on the cost of providing the interconnection or unbundled
elements, be nondiscriminatory and include a reasonable profit. The FCC has
determined that the prices for these unbundled elements and interconnection are
to be based on a methodology governed by forward-looking, long-run incremental
costs. The Act also requires LECs to offer to other telecommunications carriers,
at wholesale rates, any retail telecommunications service offered by the LEC to
end-users. The FCC has determined that the wholesale rates are to be based on
the LEC's retail rates, less the costs avoided by the LEC in offering its
services for resale.
CBT and several other LECs believe the FCC's regulations with respect to
interconnection, unbundling and resale unlawfully exceed the requirements of the
Act. Accordingly, they have sought review of the FCC's order in the United
States Court of Appeals. The primary objections raised by CBT and the other LECs
are that the pricing rules and standards for interconnection, unbundling and
resale, and the rules allowing interconnecting carriers to rebundle unbundled
elements and services, will not provide the LECs with adequate compensation. On
October 15, 1996, the United States Court of Appeals for the Eighth Circuit
stayed the effectiveness of the portions of the FCC
13
order establishing the pricing standards. A petition to vacate the Eighth
Circuit's stay of these rules has been denied by the United States Supreme
Court. As a result of the stay, these rules are suspended, pending a final
decision on the merits of the petition for review of these rules. Oral argument
of the appeal was held in St. Louis on January 17, 1997. The Court of Appeals
has not yet issued a decision in this case. The FCC regulations requiring LECs
to negotiate with new entrants, unbundle and resell still exist; however,
pending a decision on the appeal, pricing will be determined by private
negotiations as approved by state regulatory authorities or by state
arbitrations.
If the FCC's order were implemented as written, and if CBT were unable to
obtain waivers to certain requirements or to replace its lost revenues, the
Company believes that the result would have a material adverse impact on its
revenues and earnings. The material impact would result from the elimination of
certain revenues designed to subsidize residential telephone service and
increased costs to develop or modify systems to allow number portability and
interconnection. CBT also believes that implementation of the FCC order would
significantly enhance the position of its competitors, which would have an
additional adverse impact on CBT's revenues and earnings from operations within
its territory.
The outcome of three separate, but related, FCC proceedings could be
significant for CBT. In the first of these proceedings, the FCC will be
implementing a universal service funding mechanism based on recommendations
developed by a joint board made up of state and federal regulators. In the
second of these proceedings, the FCC will be reforming the current access charge
regime, which could result in an additional reduction in revenues. In the third,
the FCC will be implementing regulations that may require certain LECs to share
their infrastructure, technology, information and facilities with certain
smaller telecommunications service providers.
OHIO - The PUCO recently adopted a set of local service guidelines that
largely mirror the requirements of the Act and the FCC regulations discussed
above. In addition, the PUCO has issued orders granting Time Warner
Communications of Ohio, L.P., Communications of Ohio, L.P. and Communications
Buying Group, Inc. certificates of public convenience and necessity to provide
local exchange service in CBT's operating territory. Other entities have been
granted certificates to provide basic local exchange service in Ohio, although
not in CBT's operating territory.
On November 7, 1996, in response to the request of CBT, and others, for
rehearing, the PUCO reissued the guidelines for local competition in Ohio. On
January 6, 1997, CBT and two other local exchange carriers filed appeals with
the Ohio Supreme Court challenging the legality of certain of the PUCO's local
competition guidelines. Since the PUCO's guidelines largely mirror the FCC's
rules, CBT's appeal raised many of the same issues that are currently pending
before the Eighth Circuit Court of Appeals. The Company believes that CBT will
face increased competition under the PUCO's local competition guidelines, which
may have a material adverse effect on its operating results. To date, seven
entities have requested interconnection discussions with CBT.
KENTUCKY - On September 26, 1996, the PSCK issued its rules for local
competition in Kentucky. A major portion of the rules outlines the PSCK's
perspective regarding universal service and the development of a universal
service fund intended to keep residential rates within the state affordable. The
rules established a workshop process to review universal service funding. The
rules also established an interim resale discount of 17% for most LECs including
CBT pending the submission of company-specific cost studies supporting a smaller
discount. The PSCK did not, however, adopt detailed rules for interconnection.
CBT is reviewing the rules to determine their impact, but the adopted rules are
likely to lead to increased competition for CBT in Kentucky and may have an
adverse effect on its operating results.
In addition to seeking appellate review of the FCC's rules and the PUCO's
guidelines, CBT recently made two filings with the PUCO which, if approved, may
mitigate the impact on CBT. The
14
first of these filings was a petition for suspension/modification of certain of
the requirements imposed by the FCC and PUCO. Section 251 (f)(2) of the
Telecommunications Act of 1996 allows local exchange carriers serving fewer than
2% of the nation's access lines to seek suspension or modification of the Act's
local competition provisions by filing a petition with their state commissions.
CBT filed its petition with the PUCO on December 9, 1996. The PUCO has not yet
issued a decision. The second filing, made by CBT on December 30, 1996, was
CBT's notice of intent to seek approval of a new alternative regulation plan.
CBT filed its proposed new alternative regulation plan with the PUCO on
January 29, 1997. If approved, the new alternative regulation plan would allow
CBT to rebalance its current rate structure, significantly reducing the implicit
subsidies contained in the Company's current rates. The new alternative
regulation plan also would give CBT greater pricing flexibility to respond more
effectively to competitive market forces.
CUSTOMER CONCENTRATION
MATRIXX, CBIS and CBT rely on several significant customers for a large
percentage of their respective revenues. Their relationships with customers are
typically based on written contracts with a set term; however, such contracts
may contain provisions that allow a customer at any time to terminate the
relationship prior to the end of the contract term. In the case of MATRIXX,
three customers represented 44% of its 1996 revenues. In the case of CBIS, its
four largest customers, other than CBT, collectively represented approximately
67% of its 1996 revenues. Each of the Company's major subsidiaries derives
significant revenues from AT&T and its affiliates by providing network services,
billing and customer care systems and telephone marketing services. During 1996,
revenues from AT&T accounted for 25% of the Company's consolidated revenues
under various independent contracts with one or more of its subsidiaries. Thus,
the loss of one or more significant customers could have a material adverse
effect on the Company's operating results.
In February 1997, CBT and AT&T announced that they had signed a memorandum
of understanding to extend their strategic relationship for the marketing and
provisioning of telecommunications services in the Cincinnati area. Significant
work remains to turn the understanding into a multi-year contract satisfactory
to CBT. This agreement does not involve AT&T's relationship with the Company's
other subsidiaries.
CUSTOMER AND INDUSTRY SUCCESS
The revenues generated by MATRIXX and CBIS are dependent on the success of
their customers. If their customers are not successful, the amount of business
that such customers outsource will be diminished. Several of MATRIXX's and
CBIS's current customers participate in emerging industries. The extent to which
products marketed by such customers (e.g., PCS) will be successful is not yet
known. Thus, although CBIS and MATRIXX have signed contracts to provide services
to such customers, there can be no assurance that the level of revenues to be
received from such contracts will meet expectations.
Each of the business segments in which the Company's subsidiaries conduct
their business has grown significantly in the last several years. To the extent
that growth in these industry segments declines, such decline could adversely
affect the growth rate of each subsidiary's business. In addition, the
possibility of continued growth in these segments could be affected by the
development of new products that provide alternatives to the product offerings
of the Company, and by a change in the trend of businesses generally to
outsource functions unrelated to their core capabilities.
RAPIDLY CHANGING TECHNOLOGY
The telecommunications industry is subject to rapid and significant changes
in technology. The Company's businesses are highly dependent on its computer,
telecommunications and software
15
systems. The Company's failure to maintain the superiority of its technological
capabilities or to respond effectively to technological changes could have an
adverse effect on its business, results of operations or financial condition.
The Company's future success also will be highly dependent upon its ability to
enhance existing services and introduce new services or products to respond to
changing technological developments. There can be no assurance that the Company
can successfully develop and bring to market any new services or products in a
timely manner, that such services or products will be commercially successful or
that competitors' technologies or services will not render the Company's
products or services noncompetitive or obsolete.
POTENTIAL VOLATILITY OF STOCK PRICE
The trading price of the Company's common shares is subject to fluctuations
in response to the Company's operating profits, announcements of new contract
awards or new products by the Company and its subsidiaries or their competitors,
general conditions in the market, changes in earnings estimates by analysts,
failure to meet the revenues or earnings estimates of analysts or other events
or factors. The public stock markets have experienced price and trading volume
volatility in recent months. This volatility has significantly affected the
market prices of securities of many companies for reasons frequently unrelated
to the operating performance of the specific companies. The market price for the
common shares has been highly volatile. Future announcements concerning the
Company, its subsidiaries or their competition, including the results of
technological innovations, new products, government regulations, litigation or
public concern with respect to the Company or its subsidiaries and other factors
including those described above, may have a significant impact on the market
price of the common shares.
Salomon Inc. has sold 4,000,000 of its 6 1/4% Exchangeable Notes Due
February 1, 2001 (the "DECS"). At maturity, the DECS will be mandatorily
exchanged by Salomon Inc. into common shares of the Company (or, at Salomon
Inc.'s option, cash with equal value) at the rate specified in the prospectus
for the offering of the DECS.
It is not possible to predict accurately how or whether any market that
develops for the DECS will influence the market for the Company's common shares.
For example, the price of the common shares could become more volatile and could
be depressed by investors' anticipation of the potential distribution into the
market, upon the maturity of the DECS, of the 4,000,000 common shares which may
be delivered by Waslic Company II upon the maturity of the DECS (currently
constituting approximately 5.9% of the outstanding common shares). The price of
the common shares could also be affected by possible sales of common shares by
investors who view the DECS as a more attractive means of equity participation
in the Company and by hedging or arbitrage trading activity that may develop
involving the DECS and the common shares.
The Company has paid consecutive cash dividends on its common shares since
1879. The payment of future dividends will depend upon future earnings, the
financial condition of the Company and other factors.
16
ITEM 2. PROPERTIES
The property of the Company is principally telephone plant which does not
lend itself to description by character and location of principal units. Other
property of the Company is principally computer equipment, computer software,
furniture and fixtures.
The gross investment in telephone plant and other property, in millions of
dollars, at December 31, 1996 was as follows:
Telephone Plant
Land, buildings and leasehold improvement $192.8
Central office equipment 600.2
Connecting lines (not on customer premises) 630.2
Station equipment 30.7
Furniture, fixtures, vehicles and other 103.4
Telephone plant under construction 14.4
--------
Total telephone plant 1,571.7
--------
Other Property
Information systems 197.4
Teleservices 100.1
Other 23.6
--------
Total other property 321.1
--------
Total $1,892.8
--------
--------
Substantially all of the installations of central office equipment and
garages are located in buildings owned by CBT situated on land which it owns.
Some CBT business and administrative offices are in rented quarters, some of
which are included in capitalized leases.
On March 20, 1996, the Company sold to a third party a 112,000 square foot
building in Erlanger, Kentucky, which was a training and education facility.
CBIS, MATRIXX and other Company subsidiaries lease office space in various
cities on commercially reasonable terms. Upon the expiration or termination of
any such leases, these companies could obtain comparable office space. During
the second quarter of 1996, CBIS moved into a new leased office building and
data center in Orlando, Florida. The office building has 125,000 square feet and
a separate building for the data center has 66,000 square feet. CBIS also leases
some of the computer hardware, computer software and office equipment necessary
to conduct its business pursuant to short term leases, some of which are
capitalized leases.
ITEM 3. LEGAL PROCEEDINGS
None, except as described below.
Cincinnati Bell Cellular Systems Company ("CBCSC") is a limited partner in
a partnership (of which Ameritech Mobile Phone Service of Cincinnati, Inc. is
the general partner) which provides cellular mobile telephone service in the
Greater Cincinnati, Dayton and Columbus areas. The partnership operates in a
9,500 square mile area that contains a population of approximately five million
people. On February 23, 1994, CBCSC filed an action in the Court of Chancery of
the State of Delaware for New Castle County in which CBCSC sought a dissolution
of the limited partnership, the appointment of a liquidating trustee and damages
against the general partner because of poor
17
performance. On October 20, 1995, CBCSC filed a motion for summary judgment on
certain counts and Ameritech filed a Motion for Summary Judgment on another
count.
On September 3, 1996, the Court denied the Company's motion for summary
judgment and granted the general partner's motion for summary judgment. The
Company appealed that ruling to the Delaware Supreme Court. In February 1997,
the Delaware Supreme Court affirmed the lower court ruling which denied the
Company's motion to dissolve the partnership. CINCINNATI BELL CELLULAR SYSTEMS
COMPANY V. AMERITECH MOBILE PHONE SERVICE OF CINCINNATI, INC., ET AL.
In November 1996, the cellular partnership sued the Company seeking a
declaratory judgment that the Company be denied the opportunity to provide PCS
services and be required to withdraw from the partnership. After the Company
was the successful bidder for a PCS license, the partnership's general partner
wrote a letter to the Company contending that event constituted a withdrawal of
the Company from the partnership and amended its lawsuit to seek a declaratory
judgment that the Company had withdrawn from the partnership. The Company
believes that none of its actions conflict with its partnership interest and
that it continues to be a limited partner in good standing in the partnership.
The matter is before the Delaware Chancery Court. CINCINNATI SMSA LIMITED
PARTNERSHIP V. CINCINNATI BELL CELLULAR SYSTEMS COMPANY. The Company's share of
partnership income was $11.6 million in 1996 and its investment at December 31,
1996, was $54.4 million. The future earnings of the partnership and the ability
of the Company to realize the market value of its investment are uncertain.
On October 4, 1995, the Department of Agriculture filed a claim for
approximately $4 million allegedly representing damages incurred as a result of
a latent defect in the work that CBIS performed under Task 1A of a Task Order
Contract with the Department of Agriculture. The Company is in the process of
appealing this claim to the Court of Federal Claims. Related to this claim, on
January 16, 1996, DynCorp pursuant to the provisions of a Stock Purchase
Agreement dated October 31, 1994, and as amended May 30, 1995, in which DynCorp
purchased 100% of the outstanding capital stock of CBIS Federal Inc., filed
demand for arbitration under the procedures of the American Arbitration
Association. DynCorp's demand for arbitration seeks damages and other relief as
follows: $2.5 million for monies withheld by the United States Government on
certain Department of Agriculture task order contracts, a declaration that CBIS
must indemnify DynCorp for additional claims or losses on certain government
contracts, an award of $5 million in punitive damages, and fees and expenses
relating to the arbitration proceedings. The arbitration concluded that CBIS
did not owe DynCorp any damages but that CBIS was responsible for DynCorp's fees
and expenses in defense of the Department of Agriculture's claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this report.
18
EXECUTIVE OFFICERS OF THE REGISTRANT (DURING 1996).
The names, ages and positions of the executive officers of the Company are
as follows:
Name Age Title
- ---- --- -----
(as of 3/31/97)
Charles S. Mechem, Jr. (a,b) 66 Chairman of the Board
John T. LaMacchia (a,b) 55 President and Chief Executive
Officer
James F. Orr (a) 51 Chief Operating Officer
William D. Baskett III 57 General Counsel and Chief Legal
Officer
Brian C. Henry 40 Executive Vice President and
Chief Financial Officer
David S. Gergacz (c) 48 Executive Vice President of the
Company and President and Chief
Executive Officer of CBT
Robert J. Marino 50 President and Chief Executive
Officer of CBIS
David F. Dougherty 40 President and Chief Executive
Officer of MATRIXX
Barbara J. Stonebraker 52 Senior Vice President of CBT
William H. Zimmer III 43 Secretary and Treasurer
(a) Member of the Board of Directors
(b) Member of the Executive Committee
(c) Served as Executive Vice President of the Company and President and Chief
Executive Officer of CBT until October 17, 1996.
Officers are elected annually but are removable at the discretion of the Board
of Directors.
19
CHARLES S. MECHEM, JR., Chairman of the Board of the Company since April 22,
1996; Commissioner Emeritus, Ladies Professional Golf Association ("LPGA");
Commissioner of the LPGA, 1991 - 1995; Chairman of the United States Shoe
Corporation, 1993 - 1995; Chairman and CEO of Taft Broadcasting Corporation,
1967 - 1990. Director of AGCO, Mead Corporation, Ohio National Life Insurance
Company, J.M. Smucker Company, Star Bank Corp. and its subsidiary, Star Bank,
N.A.
JOHN T. LAMACCHIA, President and Chief Executive Officer of the Company since
October 1, 1993; President of the Company since January 1, 1988; Chairman of CBT
since November 1993; Chief Operating Officer of the Company, 1988 - September
30, 1993; Chairman of CBIS, October 1988 - September 15, 1996. Director of The
Kroger Company and Burlington Resources Inc.
JAMES F. ORR, Chief Operating Officer of the Company and Chairman of CBIS since
September 16, 1996; Executive Vice President of the Company and President and
Chief Executive Officer of CBIS, 1995 - 1996; Chief Operating Officer of CBIS,
February 4, 1994 - December 31, 1994; President and Chief Executive Officer of
MATRIXX 1993 - 1994; Vice President-Market Development, 1989 - 1992.
WILLIAM D. BASKETT III, General Counsel and Chief Legal Officer of the Company
since July 1993; Partner of Frost & Jacobs since 1970.
BRIAN C. HENRY, Executive Vice President and Chief Financial Officer of the
Company since March 29, 1993; Vice President and Chief Financial Officer of
Mentor Graphics, February 1986 - March 28, 1993.
DAVID S. GERGACZ, Executive Vice President of the Company August 1, 1995 -
October 17, 1996; President and Chief Executive Officer of CBT, August 1, 1995 -
October 17, 1996. President and Chief Executive Officer of Rogers
Communications/Cantel, 1993 - 1995; President and Chief Executive Officer of
Boston Technology 1991 - 1993; President and Chief Operating Officer of Network
Systems Division of U.S. Sprint, 1988 - 1991.
ROBERT J. MARINO, President and Chief Executive Officer of CBIS since September
17, 1996; Chief Operating Officer of CBIS, October 2, 1995 - September 17, 1996;
President - Northeast Region of Nextel, November 1993 - September 1995;
President of Houston Cellular Telephone Company, November 1990 - October 1993.
DAVID F. DOUGHERTY, President and Chief Executive Officer of MATRIXX since
January 1, 1995; Senior Vice President and Chief Operating Officer U.S.
Operations, 1993 - 1994; President of the Consumer Division, 1991 - 1992.
BARBARA J. STONEBRAKER, Senior Vice President of CBT since 1990.
WILLIAM H. ZIMMER III, Secretary and Treasurer of the Company since August 1,
1991; Secretary and Assistant Treasurer of the Company, December 1, 1988 -
July 31, 1991.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
Cincinnati Bell Inc. (symbol: CSN) common shares are listed on the New York
Stock Exchange and on the Cincinnati Stock Exchange. As of February 28, 1997,
there were approximately 17,256 holders of record of the 67,828,066 outstanding
Common Shares of the Company. The high and low sales prices and dividends
declared per common share each quarter for the last two fiscal years are listed
below:
Quarter 1st 2nd 3rd 4th
- ------------------------------------------------------------------------------
1996 High $ 53 $ 57 3/4 $ 53 3/4 $ 61 5/8
Low $ 31 3/4 $ 46 7.8 $ 45 3/8 $ 46 1/4
Dividend Declared $ .20 $ .20 $ .20 $ .20
1995 High $ 22 1/8 $ 26 1/4 $ 28 1/8 $ 35 1/4
Low $ 16 7/8 $ 20 7/8 $ 24 3/4 $ 26 1/8
Dividend Declared $ .20 $ .20 $ .20 $ .20
ITEMS 6 THROUGH 8.
The Selected Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Financial Statements and
Supplementary Data required by these items are included in the registrant's
annual report to security holders for the fiscal year ended December 31, 1996,
included in Exhibit 13 and are incorporated herein by reference pursuant to
General Instruction G(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disagreements with accountants on any accounting or financial disclosure
or auditing scope or procedure occurred during the period covered by this
report.
PART III
ITEMS 10 THROUGH 13.
Information regarding executive officers required by Item 401 of Regulation
S-K is furnished in a separate disclosure in Part I of this report under the
caption "Executive Officers of the Registrant" since the registrant did not
furnish such information in its definitive proxy statement prepared in
accordance with Schedule 14A.
The other information required by these items is included in the
registrant's definitive proxy statement dated March 12, 1997, in the first
paragraph on page 2, the accompanying notes on page 2 and the Section 16 (a)
paragraph on page 2, the information under "Election of Directors" on pages 6
and 7, the information under "Share Ownership of Directors and Officers" on
page 5, the
21
information under "Executive Compensation" on page 17 through 22. The foregoing
is incorporated herein by reference pursuant to General Instruction G(3).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report: Page
----
(1) Consolidated Financial Statements:
Report of Management . . . . . . . . . . . . . . . . . . . . . *
Report of Independent Accountants. . . . . . . . . . . . . . . *
Consolidated Statements of Income. . . . . . . . . . . . . . . *
Consolidated Statements of Common Shareowners' Equity. . . . . *
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . *
Consolidated Statements of Cash Flows. . . . . . . . . . . . . *
Notes to Financial Statements. . . . . . . . . . . . . . . . . *
(2) Financial Statement Schedules:
Report of Independent Accountants. . . . . . . . . . . . . . . 29
II - Valuation and Qualifying Accounts. . . . . . . . . . . . 30
Financial statements and financial statement schedules other than that
listed above have been omitted because the required information is
contained in the financial statements and notes thereto, or because such
schedules are not required or applicable.
...............
* Incorporated herein by reference to the appropriate portions of the
registrant's annual report to security holders for the fiscal year ended
December 31, 1996. (See Part II)
22
(3) Exhibits
Exhibits identified in parenthesis below, on file with the Securities and
Exchange Commission ("SEC"), are incorporated herein by reference as exhibits
hereto.
Exhibit
Number
- ------
(3)(a) Amended Articles of Incorporation effective November 9,
1989. (Exhibit (3)(a) to Form 10-K for 1989, File No.
1-8519).
(3)(b) Amended Regulations of the registrant. (Exhibit 3.2 to
Registration Statement No. 2-96054).
(4)(a) Provisions of the Amended Articles of Incorporation and
the Amended Regulations of the registrant which define the
rights of holders of Common Shares and the Preferred
Shares are incorporated by reference to such Amended
Articles filed as Exhibit (3)(a) hereto and such Amended
Regulations filed as Exhibit (3)(b) hereto.
(4)(c)(i) Indenture dated December 15, 1992, between Cincinnati Bell
Inc., Issuer, and The Bank of New York, Trustee, in
connection with $100,000,000 of Cincinnati Bell Inc. 6.70%
Notes Due December 15, 1997. A copy of this Indenture is
not being filed because it is similar in all material
respects to the Indenture filed as Exhibit (4)(c)(ii) to
Form 10-K for 1992, File No. 1-8519.
Indenture dated July 1, 1993, between Cincinnati Bell
Inc., Issuer, and The Bank of New York, Trustee, in
connection with $50,000,000 of Cincinnati Bell, Inc.
7 1/4% Notes Due June 15, 2023. Exhibit 4-A to Form 8-K,
date of report July 12, 1993, File No. 1-8519.
(4)(c)(ii) Indenture dated August 1, 1962, between Cincinnati Bell
Telephone Company and Bank of New York, Trustee (formerly,
The Central Trust Company was trustee), in connection with
$20,000,000 of Cincinnati Bell Telephone Company Forty
Year 4 3/8% Debentures, Due August 1, 2002. (Exhibit
4(c)(iii) to Form 10-K for 1992, File No. 1-8519).
Indenture dated August 1, 1971, between Cincinnati Bell
Telephone Company and Bank of New York, Trustee (formerly
The Fifth Third Bank was trustee), in connection with
$50,000,000 of Cincinnati Bell Telephone Company Forty
Year 7 3/8% Debentures, Due August 1, 2011. A copy of
this Indenture is not being filed because it is similar in
all material respects to the Indenture filed as Exhibit
(4)(c)(ii) above.
(4)(c)(iii) Indenture dated as of October 27, 1993, among Cincinnati
Bell Telephone Company, as Issuer, Cincinnati Bell Inc.,
as Guarantor, and The Bank of New York, as Trustee.
(Exhibit 4-A to Form 8-K, date of report October 27, 1993,
File No. 1-8519).
23
(4)(c)(iv) No other instrument which defines the rights of holders of
long term debt of the registrant is filed herewith
pursuant to Regulation S-K, Item 601(b)(4)(iii)(A).
Pursuant to this regulation, the registrant hereby agrees
to furnish a copy of any such instrument to the SEC upon
request.
(10)(ii)(B) Agreement Establishing Cincinnati SMSA Limited Partnership
between Advanced Mobile Phone Service, Inc. and Cincinnati
Bell Inc. executed on December 9, 1982. (Exhibit (10)(k)
to Registration Statement No. 2-82253).
(10)(iii)(A)(1)(i)* Short Term Incentive Plan of Cincinnati Bell Inc., as
amended January 1, 1995. (Exhibit (10)(iii)(A)(1)(i) to
Form 10-K for 1995, File No. 1-8519).
(10)(iii)(A)(2)* Cincinnati Bell Inc. Deferred Compensation Plan for
Non-Employee Directors, as amended July 1, 1983. (Exhibit
(10)(iii)(A)(3) to Form 10-K for 1986, File No. 1-8519).
10(iii)(A)(2)(i)* Cincinnati Bell Inc. Deferred Compensation Plan for
Outside Directors, as adopted effective December 31, 1996.
(10)(iii)(A)(3)* Cincinnati Bell Inc. Pension Program, as amended effective
November 4, 1991. (Exhibit (10)(iii)(A)(4)(ii) to Form
10-K for 1994, File No. 1-8519).
(10)(iii)(A)(4)* Cincinnati Bell Inc. 1988 Incentive Award Deferral Plan,
as amended effective November 11, 1988. (Exhibit
(10)(iii)(A)(5) to Form 10-K for 1988, File No. 1-8519).
(10)(iii)(A)(5)(i)* Cincinnati Bell Inc. Senior Management Incentive Award
Deferral Plan, as amended January 1, 1984. (Exhibit
(10)(iii)(A)(6) to Form 10-K for 1986, File No. 1-8519).
(10)(iii)(A)(5)(ii)* Amendment to Cincinnati Bell Senior Management Incentive
Award Deferral Plan (effective December 5, 1988). (Exhibit
(10)(iii)(A)(6)(ii) to Form 10-K for 1988, File No.
1-8519).
(10)(iii)(A)(6)* Executive Employment Agreement dated December 1, 1987,
between the Company and John T. LaMacchia. (Exhibit
(10)(iii)(A)(10) to Form 10-K for 1987, File No. 1-8519).
(10)(iii)(A)(7)* Employment Agreement dated October 1, 1995, between
Cincinnati Bell Information Systems Inc. and Robert J.
Marino.
(10)(iii)(A)(8)* Employment Agreement dated January 29, 1996, between the
Company and John J. Mueller.
(10)(iii)(A)(9)* Employment Agreement dated as of January 1, 1995, between
the Company and Barry L. Nelson. (Exhibit
(10)(iii)(A)(10) to Form 10-K for 1995, File No. 1-8519).
24
(10)(iii)(A)(10)* Employment Agreement dated as of January 1, 1995, between
the Company and David F. Dougherty. (Exhibit
(10)(iii)(A)(11) to Form 10-K for 1995, File No. 1-8519).
(10)(iii)(A)(11)* Amendment to Employment Agreement dated as of January 1,
1995, between the Company and David F. Dougherty. (Exhibit
(10)(iii)(A)(12) to Form 10-K for 1995, File No. 1-8519).
(10)(iii)(A)(12)* Executive Employment Agreement dated as of March 29, 1993,
between the Company and Brian C. Henry. (Exhibit
(10)(iii)(A)(14) to Form 10-K for 1993, File No. 1-8519).
(10)(iii)(A)(13)(i)* Employment Agreement dated as of August 19, 1994, between
the Company and James F. Orr. (Exhibit
(10)(iii)(A)(17)(i) to Form 10-K for 1994, File No.
1-8519).
(10)(iii)(A)(14)* Amendment to Employment Agreement dated as of October 31,
1994, between the Company and James F. Orr. (Exhibit
(10)(iii)(A)(17)(ii) to Form 10-K for 1994, File No.
1-8519).
(10)(iii)(A)(15)* Employment Agreement dated as of December 30, 1994,
between Cincinnati Bell Telephone Company and Barbara J.
Stonebraker. (Exhibit (10)(iii)(A)(18) to Form 10-K for
1994, File No. 1-8519).
(10)(iii)(A)(16)* Employment Agreement dated August 1, 1996, between the
Company and Thomas P. Mehnert.
(10)(iii)(A)(16)(i)* Cincinnati Bell Inc. Executive Deferred Compensation Plan.
(Exhibit (10)(iii)(A)(17) to Form 10-K for 1993, File No.
1-8519).
(10)(iii)(A)(16)(ii)* Amendment to Cincinnati Bell Inc. Executive Deferred
Compensation Plan effective January 1, 1994. (Exhibit
(10)(iii)(A)(20)(ii) to Form 10-K for 1994, File No.
1-8519).
(10)(iii)(A)(17)(i)* Cincinnati Bell Inc. 1988 Long Term Incentive Plan.
(Exhibit (10)(iii)(A)(12)(i) to Form 10-K for 1988, File
No. 1-8519).
(10)(iii)(A)(17)(ii)* Amendment to Cincinnati Bell Inc. 1988 Long Term Incentive
Plan effective December 5, 1988. (Exhibit
(10)(iii)(A)(12)(ii) to Form 10-K for 1988, File No.
1-8519).
(10)(iii)(A)(18)* Cincinnati Bell Inc. 1988 Stock Option Plan for
Non-Employee Directors. (Exhibit (10) (iii)(A)(13) to
Form 10-K for 1988, File No. 1-8519).
(10)(iii)(A)(19)* Cincinnati Bell Inc. 1989 Stock Option Plan. (Exhibit
(10)(iii)(A)(14) to Form 10-K for 1989, File No. 1-8519).
(10)(iii)(A)(20)* Cincinnati Bell Inc. Retirement Plan for Outside
Directors. (Exhibit (10)(iii)(A)(21) to Form 10-K for
1993, File No. 1-8519).
(10)(iii)(A)(21)* MATRIXX Marketing Inc. Executive Deferred Compensation
Plan.
25
(10(iii)(A)(21)(i)* Amendment to MATRIXX Marketing Inc. Executive Deferred
Compensation Plan (effective May 1, 1994).
(10)(iii)(A)(21)(ii)* Amendment to MATRIXX Marketing Inc. Executive Deferred
Compensation Plan (effective May 4, 1996).
(11) Computation of Earnings (Loss) per Common Share.
(12) Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends.
(13) Portions of the Cincinnati Bell Inc. annual report to
security holders for the fiscal year ended December 31,
1996, as incorporated by reference including the Selected
Financial Data, Report of Management, Report of
Independent Accountants, Management's Discussion and
Analysis and Consolidated Financial Statements.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Accountants.
(24) Powers of Attorney.
(27) Financial Data Schedules.
(99)(a) Annual Report on Form 11-K for the Cincinnati Bell Inc.
Retirement Savings Plan for the year 1996 will be filed by
amendment on or before June 30, 1997.
(99)(b) Annual Report on Form 11-K for the Cincinnati Bell Inc.
Savings and Security Plan for the year 1996 will be filed
by amendment on or before June 30, 1997.
(99)(c) Annual Report on Form 11-K for the MATRIXX Marketing Inc.
Profit Sharing/401(k) Plan for the year 1996 will be filed
by amendment on or before June 30, 1997.
(99)(d) Annual Report on Form 11-K for the CBIS Retirement and
Savings Plan for the year 1996 will be filed by amendment
on or before June 30, 1997.
...............
* Management contract or compensatory plan required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K.
The Company will furnish, without charge, to a security holder upon
request, a copy of the documents, portions of which are incorporated by
reference (Annual Report to security holders and proxy statement), and will
furnish any other exhibit at cost.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
26
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
March 27, 1997 By /s/ Brian C. Henry
-----------------------------------------
Brian C. Henry
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
Principal Executive Officer;
President, Chief Executive
JOHN T. LAMACCHIA* Officer and Director
- -------------------------
John T. LaMacchia
Principal Accounting and
Financial Officer; Executive
Vice President and
BRIAN C. HENRY* Chief Financial Officer
- -------------------------
Brian C. Henry
JOHN F. BARRETT* Director
- -------------------------
John F. Barrett
PHILLIP R. COX* Director
- -------------------------
Phillip R. Cox
WILLIAM A. FRIEDLANDER* Director
- -------------------------
William A. Friedlander
ROGER L. HOWE* Director
- -------------------------
Roger L. Howe
ROBERT P. HUMMEL, M.D.* Director
- -------------------------
Robert P. Hummel, M.D.
JAMES D. KIGGEN* Director
- -------------------------
James D. Kiggen
27
Signature Title Date
- --------- ----- ----
CHARLES S. MECHEM, JR.* Chairman of the Board
- ------------------------- and Director
Charles S. Mechem, Jr.
MARY D. NELSON* Director
- -------------------------
Mary D. Nelson
JAMES F. ORR* Director
- -------------------------
James F. Orr
BRIAN H. ROWE* Director
- -------------------------
Brian H. Rowe
DAVID B. SHARROCK* Director
- -------------------------
David B. Sharrock
*By /s/ Brian C. Henry March 27, 1997
---------------------
Brian C. Henry
as attorney-in-fact and on his behalf
as Executive Vice President and
Chief Financial Officer
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners of
Cincinnati Bell Inc.
Our report on the consolidated financial statements of Cincinnati Bell Inc. has
been incorporated by reference in this Form 10-K from page 27 of the 1996 annual
report of Cincinnati Bell Inc. In connection with our audits of such
consolidated financial statements, we have also audited the related financial
statement schedule on page 30 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Cincinnati, Ohio
February 14, 1997
29
Schedule II
CINCINNATI BELL INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(Millions of Dollars)
- --------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------
Additions Deductions
--------------------- ----------
(1) (2)
Balance at Charged Balance
Beginning Charged to to Other At End
Description of Period Expenses Accounts of Period
- --------------------------------------------------------------------------------
Year 1996. . . . . . $ 14.7 $ 9.0 $ 4.7 (a) $ 16.7 (b) $11.7
Year 1995. . . . . . $ 14.1 $ 8.5 $ 5.3 (a) $ 13.2 (b) $14.7
Year 1994. . . . . . $ 14.0 $ 11.1 $ 3.0 (a) $ 14.0 (b) $14.1
- ---------------
(a) Primarily includes amounts previously written off which were credited
directly to this account when recovered and an allocation of the purchase
price for receivables purchased from Interexchange Carriers.
(b) Primarily includes amounts written off as uncollectible.
30