(13)
CINCINNATI BELL INC
SELECTED FINANCIAL AND OPERATING DATA
MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Revenues $1,573.7 $1,336.1 $1,228.2 $1,096.2 $1,101.4 $1,064.7
Costs and expenses excluding special items 1,291.9 1,110.7 1,057.1 982.0 990.8 920.0
-------- -------- -------- -------- -------- --------
Operating income excluding special items 281.8 225.4 171.1 114.2 110.6 144.7
Special items (a) (24.7) 178.7 5.7 132.9 19.4 26.8
-------- -------- -------- -------- -------- --------
Operating income (loss) 306.5 46.7 165.4 (18.7) 91.2 117.9
Other income (expense), net 12.1 (13.5) 1.7 9.4 10.9 4.2
Interest expense (a) 33.9 52.8 49.5 45.8 46.2 52.8
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary charges and cumulative
effect of change in accounting principle 284.7 (19.6) 117.6 (55.1) 55.9 69.3
Income taxes 99.7 5.7 42.1 1.7 17.0 26.6
Extraordinary charges and cumulative
effect of change in accounting principle - (7.0) (2.9) - (3.7) -
-------- -------- -------- -------- -------- --------
Net income (loss) 185.0 (32.3) 72.6 (56.8) 35.2 42.7
Preferred dividend requirements - - - 2.2 4.3 4.3
-------- -------- -------- -------- -------- --------
Income (loss) applicable to
common shares $ 185.0 $ (32.3) $ 72.6 $ (59.0) $ 30.9 $ 38.4
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Earnings (loss) per common share $ 2.70 $ (.49) $ 1.11 $ (.93) $ .50 $ .63
Dividends declared per common share $ .80 $ .80 $ .80 $ .80 $ .80 $ .80
Weighted average common shares (000) 68,589 66,271 65,443 63,296 61,914 61,334
FINANCIAL POSITION
Total assets $1,695.5 $1,591.7 $1,723.4 $1,664.1 $1,632.5 $1,743.1
Long-term debt $ 279.5 $ 386.8 $ 528.3 $ 522.9 $ 350.1 $ 445.2
Total debt $ 503.7 $ 512.9 $ 597.0 $ 634.9 $ 543.0 $ 618.1
Preferred shares $ - $ - $ - $ - $ 60.0 $ 60.0
Common shareowners' equity $ 634.4 $ 478.1 $ 552.4 $ 515.6 $ 568.9 $ 581.6
OTHER DATA
Total capital additions (including acquisitions) $ 220.8 $ 166.8 $ 156.2 $ 235.4 $ 140.1 $ 193.3
Telephone plant construction $ 101.4 $ 90.3 $ 112.8 $ 111.6 $ 95.0 $ 115.9
Network access lines (000) 944 906 877 848 827 808
Access minutes of use (millions)
Interstate 2,744 2,536 2,336 2,132 1,985 1,852
Intrastate 963 956 932 888 836 793
Market price per share
High $ 61.625 $ 35.250 $ 20.125 $ 24.375 $ 20.875 $ 25.375
Low $ 31.750 $ 16.875 $ 15.375 $ 16.125 $ 15.375 $ 17.875
Close $ 61.625 $ 34.750 $ 17.000 $ 18.000 $ 17.125 $ 19.375
(a) For special items see Note 2 of Notes to Financial Statements.
16
CINCINNATI BELL
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Cincinnati Bell Inc. (the Company) is a diversified communications 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 telephone marketing solutions to large corporations.
The Company's long distance, directory services, and equipment supply businesses
are included with corporate operations in other businesses. The Company owns a
minority interest in a partnership that provides cellular service primarily in
southwestern Ohio.
The following discussion and the related consolidated financial statements
and accompanying notes contain certain forward-looking statements that involve
potential risks and uncertainties. The Company's future results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed herein.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to review or update these forward-looking statements or to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
CONSOLIDATED OVERVIEW
The Company's strategy is to be a leader in growing communication-related
markets that utilize its unique expertise in customer care, billing, outsourced
teleservices, and local exchange services. By leveraging the combined knowledge,
capabilities and experience of its subsidiaries, the Company seeks to take
advantage of the opportunities arising in the changing communications market and
the growing trend of outsourcing.
During 1996, the Company made investments to grow its subsidiaries'
existing operations and provide new capabilities. CBIS completed its initial
release of Precedent 2000 and opened a new data center outside of Orlando,
Florida; MATRIXX opened two new call centers and added 2,300 workstations; and
CBT invested over $100 million in telephone plant to accommodate record access
line growth and provide new advanced services.
The Company completed several acquisitions in 1996. CBIS acquired
International Computer Systems, Inc. (ICS), an international wireline billing
provider, and Swift Management Services (Swift), a distributor of CBIS's
integrated cable telephony billing systems in Europe. MATRIXX acquired Software
Support, Inc (SSI), a provider of outsourced technical help-desk applications,
and certain of the assets of Scherers Communications, Inc. (Scherers), a
provider of interactive voice response services.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Revenues reached a record $11,573.7 million in 1996, up 18% from 1995. CBIS
and MATRIXX produced 81% of the revenue growth, and collectively represented 51%
of consolidated revenues for the year. Costs and expenses excluding special
items were $1,291.9 million, a 16% increase over 1995. Operating income
excluding special items increased to $281.8 million, a 17.9% margin, up from
$225.4 million, a 16.9% margin in 1995. Each of the Company's three principal
segments improved its operating performance in the year.
Special items (see Note 2 of Notes to Financial Statements) resulted in a
net credit of $27.2 million in 1996 compared to charges of $208.0 million in
1995. Special items increased net income $17.4 million or $0.26 per share in
1996 and decreased net income by $146.5 million or $2.21 per share in 1995.
Reported net income was $185.0 million or @2.70 per share in 1996 compared
to a net loss of $32.3 million or $0.49 per share in 1995. Excluding special
items in both years, net income increased 47% to $167.6 million from $114.2
million and earnings per share were $2.44 compared to $1.72.
1995 COMPARED TO 1994
Revenues increased 9% in 1995 to $1,336.1 million. Approximately 71% of the
growth was produced by CBIS and MATRIXX. Operating costs and expenses excluding
special items increased 5% to $1,110.7 million. Operating income excluding
special items increased 32% to $225.4 million.
Special items were $208.0 million in 1995 compared to $5.7 million in 1994
(see Note 2 of Notes to Financial Statements). The special items in 1995 were
primarily attributable to CBT's restructuring plan, a goodwill impairment
writedown and debt restructuring.
The Company reported a net loss of $32.3 million or $0.49 per share in 1995
compared to net income of $72.6 million or $1.11 per share in 1994. Excluding
special items, net income was $114.2 million or $1.72 per share in 1995 versus
$79.2 million or $1.21 per share in 1994.
17
TELEPHONE OPERATIONS
CBT's strategy is to be the leading full-service provider of communications
services and products in the Greater Cincinnati marketplace. To that end, during
1996 CBT introduced Fuse, an Internet access service. CBT also became an agent
for DIRECTV's satellite television service. These new marketing initiatives are
in the early stage of development and did not materially increase revenues in
1996.
[GRAPH]
During 1996, CBT expanded its marketing of existing services through
increased advertising campaigns and the introduction of PhoneGear, the
merchandising of services through retail distributors.
CBT continued implementation of its restructuring plan announced in the
first quarter of 1995. This plan will be completed early in 1997. While staff
levels have been reduced 19% over two years, during 1996 staff was reduced only
1% due to higher business volumes and new marketing efforts.
In February 1997, CBT announced that it had entered into a memorandum of
understanding with AT&T to extend its relationship for marketing communications
services in Cincinnati. Also in February, CBT and Lucent Technologies signed a
multi-year agreement under which CBT will continue to market Lucent's business
communications systems to its business customers.
% Change % Change
($ IN MILLIONS) 1996 1995 96 vs 95 1994 95 vs 94
- -------------------------------------------------------------------------------
Revenues
Local service $370.6 $352.6 5 $329.3 7
Network access 161.9 142.6 14 141.0 1
Long distance 27.9 33.5 (17) 37.2 (10)
Other 90.4 95.7 (6) 92.2 4
------ ------ ------
Total 650.8 624.4 4 599.7 4
Costs and expenses 523.6 508.7 3 496.6 2
Special items (28.5) 121.7 - 3.6 -
------ ------ ------
Total 495.1 630.4 (21) 500.2 26
Operating income (loss) $155.7 $ (6.0) - $ 99.5 -
Excluding special items:
Operating income $127.2 $115.7 10 $103.1 12
Operating margin 19.5% 18.5% 17.2%
1996 COMPARED TO 1995
REVENUES
Total revenues were $650.8 million in 1996, a 4% increase over 1995. Local
service revenues increased 5% to $370.6 million. Access lines grew 4.1% due to
strong demand for business lines and higher installations of second residential
lines. Increased penetration of enhanced services, such as Caller ID, and full
year of new Kentucky rates also contributed to the revenue gain.
Network access revenues increased 14% to $161.9 million. More than half the
growth was due to increased network minutes of use, access line growth and
special access revenues, with the remainder resulting from adjustments to
overearnings liabilities.
Long distance revenues decreased $5.6 million to $27.9 million in 1996,
primarily as a result of expanding the local service areas in northern Kentucky
in November 1995. Other revenues decreased 6% to $90.4 million primarily due to
a lower level of billing and collection services and an increase in the
provision for uncollectible accounts.
COSTS AND EXPENSES
Costs and expenses excluding special items were up 3% to $523.6 million in
1996. Payroll-related expenses were unchanged. Savings from employee departures
under the 1995 retirement offer were offset by cost increases due to strong
access line growth, inclement weather, the desire to maintain customer service
levels, and adding employees with different skills. Expenses for contract labor,
consulting, and data processing increased as a result of ongoing business and
process improvements. Advertising costs and depreciation expenses increased
slightly. Lower costs from facilities consolidation and a 1995 Ohio property tax
law change decreased operating expenses.
Special items (see Note 2 of Notes to Financial Statements) reduced
operating expenses by $28.5 million. The credit was mostly due to pension
settlement gains, and, to a lesser extent, the reversal of real estate
restructuring liabilities.
1995 COMPARED TO 1994
REVENUES
Revenues increased 4% to $624.4 million. Growth in access lines, a full
year's effect of the Ohio rate plan and new rates in Kentucky effective May 1995
produced most of the growth. The remaining increase was primarily from increased
penetration of enhanced custom calling services and directory assistance.
Network access revenues increased 1% to $142.6 million from access line
growth and increased minutes of use, as well as lower support payments to the
National Exchange Carrier Association. Long distance revenues decreased $3.7
million to $33.5 million because of lower settlements with interexchange
carriers and independent companies. Other revenues increased 4% to $95.7 million
primarily from growth in customer premises equipment repairs, payphone agent
services, voice mail, and billing and collection services.
COSTS AND EXPENSES
Costs and expenses excluding special items increased 2% to $508.7 million.
Contract services, systems development, business restructuring activities, and
depreciation and amortization all were higher. Right-to-use fees were lower from
fewer switch conversions and network software upgrades than in 1994.
Special items were $121.7 million in 1995. The charges resulted primarily
from a business restructuring.
INFORMATION SYSTEMS
CBIS's strategy is to provide customer-care and billing services and
solutions to the communications industry. CBIS seeks to enter into long-term
outsourced contracts that share in the success and growth of its clients. It
targets wireless, wireline, cable TV, and other convergent service providers,
domestic and international. Additionally, CBIS develops network management
systems for large international communications companies.
CBIS's systems enable its clients to manage their customer relationships
through a range of turnkey applications. Accordingly, CBIS has made, and expects
to continue making, significant investments in the development of software and
data centers. CBIS also anticipates making significant investments to broaden
its services to include data warehousing and analytics that improve acquisition,
retention, and revenue growth for its clients. The viability of these new
applications and CBIS's ability to recover its investment therein are uncertain.
[GRAPH]
CBIS believes that its expertise in the domestic wireless industry will
assist its expansion into international markets and into the cable TV industry.
During 1996, CBIS migrated its Florida data center to a new state-of-the-
art facility north of Orlando, Florida. CBIS announced contract extensions with
several existing clients and was awarded contracts with new clients in the
emerging PCS field. Two of these clients implemented CBIS's initial release of
Precedent 2000, a flexible system based on a client-server architecture. Also
during 1996, CBIS remedied difficulties on a large international contract, and
introduced a service bureau offering to the cable TV industry that led to its
first client for this service in 1997. The acquisitions of ICS and Swift
expanded CBIS's wireline and cable telephony billing presence in Europe.
% Change % Change
($ IN MILLIONS) 1996 1995 96 vs 95 1994 95 vs 94
- -------------------------------------------------------------------------------
Revenues $479.8 $373.9 28 $343.8 9
Costs and expenses 401.3 327.9 22 316.7 4
Special items 3.0 7.5 (60) - -
------ ------ ------
Total 404.3 335.4 21 316.7 6
Operating income $ 75.5 $ 38.5 96 $ 27.1 42
Excluding special items:
Operating income $ 78.5 $ 46.0 71 $ 27.1 70
Operating margin 16.4% 12.3% 7.9%
1996 COMPARED TO 1995
REVENUES
Revenues increased 28% to $479.8 million for the year. Data processing
revenues increased from the growth in cellular subscribers partially offset by
lower volume on a long distance credit card contract. Professional and
consulting revenues increased $37 million from a combination of additional work
from existing customers, new PCS clients, and revenues of Information Systems
Development Partnership (ISD), a cable TV billing software company acquired in
the fourth quarter of 1995. Revenues of ISD were also responsible for a higher
level of computer hardware sales in 1996 than 1995. In 1996, international
revenues increased $21 million due primarily to improved performance on one
contract. This contract produced higher-than-average margins for the year. The
revenues and contribution margin of this contract were recognized at a lower
level in 1995 due to contract uncertainties. The acquisitions of ISD in late
1995, and ICS and Swift in 1996, increased revenues by $27 million in 1996.
COSTS AND EXPENSES
Costs and expenses excluding special items increased 22% to $401.3 million
in 1996. Direct costs of providing services represented the majority of the
increase from increased headcount, the new data center, and other expenses
associated with a higher level of business volume. Research and development
costs increased $23.8 million to approximately 12% of revenues as completion of
the initial release of Precedent 2000 required higher development activity.
Other expenses increased $9.6 million. The $3.0 million of special items in 1996
was the result of the expensing of in-process research and development
associated with the acquisitions of ICS and Swift.
CONTRACTS
In 1996, several new contracts were announced. Two new contracts were for
customer care and billing with prominent PCS companies in the United States. A
third new contract was signed to support AT&T's re-entry into the local
telephone market. These contracts produced minor amounts of revenue in 1996.
Future revenues will be based on the success of these clients in adding
customers. In the case of AT&T's re-entry into the local telephone market, the
pace of regulatory change will affect CBIS's revenues from this contract.
CBIS's clients also extended several existing contracts in 1996. A contract
extension through 2001 with a provision for further extension through 2003 was
signed with AT&T Wireless Services. A contract extension through 2003 was signed
with Comcast Cellular Corporation, and an extension through the year 2006 was
signed with 360 DEG. Communications Company.
All of these contracts provide customer-care and billing services on a
service bureau basis. The ultimate value and profitability of these contracts
hinge on several factors: the ability to provide cost-effective solutions; the
ability to
19
maintain and grow the systems as CBIS's clients increase the penetration of
their markets; and the client's market success. During all of these
activities, the current needs of its clients must also continue to be
satisfied with the service and value.
One client, representing approximately 5% of CBIS's 1996 revenues, may
transition to another provider of billing services during 1998.
1995 COMPARED TO 1994
REVENUES
Revenues increased 9% to $373.9 million compared to the prior year. Data
processing revenues increased $43 million due to higher levels of cellular
subscribers. Professional and consulting revenues increased due to a higher
level of enhancements to systems. International revenues declined $25 million in
1995 from the delayed delivery of a contract and the completion of a second
contract.
COSTS AND EXPENSES
Costs and expenses excluding special items increased 4% to $327.9 million.
Most of the increase was for the development of Precedent 2000. Increased
depreciation and amortization, due to additional software amortization, was
offset by lower general and administrative expenses.
Special items of $7.5 million were for the expensing of in-process research
and development associated with the acquisitions of ISD and X International.
TELESERVICES
MATRIXX is a leading provider of outsourced telephone marketing services.
MATRIXX's strategy is to offer a full range of customer service, sales support,
and telephone marketing solutions to major companies in its targeted industries.
MATRIXX focuses on developing long-term relationships in the communications,
technology, financial services, consumer products and direct response
industries. MATRIXX segments its services into traditional and outsourced
programs. Traditional services involve large shared capacities for significant
sales campaigns and direct response programs. Outsourced services require
dedicated agents to handle a specific company's more complex customer service
and sales account management needs.
[GRAPH]
During 1996, MATRIXX expanded its capabilities through the acquisitions of
SSI, a provider of outsourced technical help-desk applications, and a provider
of interactive voice response services. In 1996, MATRIXX's three largest clients
extended their contracts. MATRIXX also expanded its DIRECTV dedicated call
center near Cincinnati and opened a new dedicated call center in Orem, Utah.
There were approximately 14,000 MATRIXX employees at December 31, 1996, an
increase of 4,200 employees from December 31, 1995.
% Change % Change
($ IN MILLIONS) 1996 1995 96 vs 95 1994 95 vs 94
- -------------------------------------------------------------------------------
Revenues $367.1 $271.1 35 $226.1 20
Costs and expenses 321.5 238.8 35 203.5 17
Special items 2.0 39.6 - - -
------ ------ ------
Total 323.5 278.4 16 203.5 37
Operating income (loss) $ 43.7 $(7.3) - $ 22.6 -
Excluding special items:
Operating income $ 45.7 $ 32.3 41 $ 22.6 43
Operating margin 12.4% 11.9% 10.0%
1996 COMPARED TO 1995
REVENUES
Teleservices revenues grew 35% to $367.1 million in 1996. MATRIXX
experienced good revenue growth throughout its business. The outsourced
dedicated segment produced $71 million of the revenue increase due to strong
growth from DIRECTV and MATRIXX's telecommunications and technology clients. The
traditional services and international operations each increased revenues.
Acquisitions produced $6 million of revenues in 1996.
COSTS AND EXPENSES
Costs and expenses excluding special items grew at the same rate as
revenues in 1996. Personnel expenses increased at a higher rate than revenues,
reflecting some wage pressure in certain labor markets. Telecommunications
expense, a significant expense of the teleservices industry, grew slower than
revenues. Facility costs and depreciation expense were higher in 1996 reflecting
expansion in the business.
MATRIXX's special items consist of $2.0 million of in-process research
and development costs that were expensed in connection with acquisitions in
1996.
1995 COMPARED TO 1994
REVENUES
Teleservices revenues increased 20% to $271.1 million from growth in
outsourced dedicated services and traditional services. Outsourced dedicated
services accounted for most of the increase due to the expansion of business
with DIRECTV and sales to firms in the communications, technology, and
financial services industries.
20
COSTS AND EXPENSES
Costs and expenses excluding special items increased at a lower rate than
revenues. Cost control efforts among production and staff reduced variable and
administrative costs as a percentage of revenues. Direct personnel expenses
increased at a lower rate than revenues. Telephone expenses and information
systems and systems design costs comprised most of the remaining increase.
In 1995, MATRIXX incurred $39 million of special charges related to the
impairment of goodwill of its operations in France.
OTHER BUSINESSES
% Change % Change
($ IN MILLIONS) 1996 1995 96 vs 95 1994 95 vs 94
- -------------------------------------------------------------------------------
Revenues $154.9 $136.6 13 $129.6 5
Costs and expenses 128.0 107.6 19 115.4 (7)
Special items (1.2) 9.9 - 2.1 -
------ ------ ------
Total 126.8 117.5 8 117.5 -
Operating income $ 28.1 $ 19.1 47 $ 12.1 58
Excluding special items:
Operating income $ 26.9 $ 29.0 (7) $ 14.2 104
Operating margin 17.4% 21.2% 11.0%
1996 COMPARED TO 1995
REVENUES
Revenues increased 13% from growth in directory sales, higher levels of
long distance traffic and an increase in computer sales. Offsetting the
increases were price discounts in the long distance business and a lower level
of highly profitable copper scrap sales in the supply business.
COSTS AND EXPENSES
Costs and expenses increased 19% primarily from direct costs associated
with sales. Other expense increases resulted from additional sales personnel and
corporate costs. Increased corporate costs were the main factor in reduced
margins. 1996 special items were pension settlement gains.
1995 COMPARED TO 1994
REVENUES
Higher sales of used telecommunications equipment, copper scrap and
directory advertising accounted for the increase in revenues.
COSTS AND EXPENSES
Costs and expenses decreased due to lower network costs in the long
distance business, a reduction in Ohio personal property taxes, and a lower
level of provisions for inventory losses in the supply business.
Special items of $9.9 million were recorded in 1995 primarily for pension
enhancements and associated postretirement health benefits related to employees
accepting the early retirement incentives.
OTHER INCOME (EXPENSE), NET
% Change % Change
($ IN MILLIONS) 1996 1995 96 vs 95 1994 95 vs 94
- ------------------------------------------------------------------------------
$12.1 $(13.5) - $1.7 -
1996 COMPARED TO 1995
Several non-recurring items contributed to the $25.6 million increase in
other income (expense), net. In 1995, the Company incurred a $13.3 million
charge to terminate its interest rate and currency swap agreement, and
recognized a $5 million writedown in the carrying cost of certain real estate.
Additionally, in 1996, income from joint ventures net of litigation fees
increased $3.4 million.
1995 COMPARED TO 1994
Other income (expense), net decreased as the result of the non-recurring
items described in the preceding paragraph and contributions to the Company's
foundation. Partially offsetting the increased costs was $5.4 million of higher
interest income from temporary cash investments and $5.6 million of increased
income from joint ventures.
INTEREST EXPENSE
% Change % Change
($ IN MILLIONS) 1996 1995 96 vs 95 1994 95 vs 94
- ------------------------------------------------------------------------------
$33.9 $52.8 (36) $49.5 7
1996 COMPARED TO 1995
The retirement of high cost long-term debt in late 1995 and in early 1996
resulted in reductions of $17.8 million in interest expense. Additionally, CBT
reversed $2.5 million of accrued interest expense in the third quarter of 1996
related to overearnings liabilities. The weighted average interest rate
decreased from 8.5% to 7.0%. Average debt outstanding decreased from $599
million to $510 million during the same time period.
1995 COMPARED TO 1994
A combination of higher interest rates on short-term borrowings, additional
amounts accrued for FCC overearnings orders and unfavorable exchange rates with
the swap agreement were the principal causes of the $3.3 million increase in
interest expense.
21
- -------------------------------------------------------------------------------
INCOME TAXES
% Change % Change
($ IN MILLIONS) 1996 1995 96 vs 95 1994 95 vs 94
- -------------------------------------------------------------------------------
Income taxes $99.7 $5.7 -- $42.1 (86)
Effective tax rate 35.0% 29.3% 35.7%
Effective tax rate
excluding special items 34.9% 35.6% 35.8%
1996 COMPARED TO 1995 AND 1995 COMPARED TO 1994
Excluding special items, the effective tax rate did not change
significantly in 1996 or 1995. See Note 3 of Notes to Financial Statements
for a reconciliation of the effective tax rate.
FINANCIAL CONDITION
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
Management believes that the Company has adequate resources available to
finance its ongoing requirements. 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 $252.0 million in 1996. Capital expenditures were
$156.2 million, up $40.9 million from 1995. Most of the increase was for a
new data center, expansion of teleservice facilities, the replacement of
telephone switches and an increase in access lines in service. The sale of
the Company's training center in northern Kentucky was the principal source
of cash flow from dispositions of assets. Capital expenditures for 1997 are
currently estimated to be $215 million excluding acquisitions.
[GRAPH]
Other investing activities included payments of $62.7 million for
acquisitions. The primary reason for the increase in common shares issued
during 1996 was the exercise of stock options for 751,000 common shares by
Cincinnati Bell employees.
BALANCE SHEET
Receivables increased $48.3 million for the year principally from the
revenue growth at CBIS and MATRIXX. Payables and other current liabilities
decreased $39.1 million during the year primarily from settlements of
overearnings liabilities, remaining purchase-price payments for ISD being
made, and a lower balance of accrued property taxes due to law changes. Other
long-term liabilities decreased $37.1 million with the major cause being the
recognition of settlement gains as a reduction of pension liabilities.
CAPITALIZATION
During 1996 and 1995, the Company restructured its debt by retiring
long-term debt and terminating its swap agreement. The debt to capitalization
ratio was reduced to 44.3% at December 3, 1996, from 51.8% at December 31,
1995.
In December 1996, $100 million of 6.7% notes due in December 1997 were
classified as a current maturity. The Company intends to either refinance
the notes in part or redeem the debt with cash from internally generated
funds.
In January 1997, Duff & Phelps upgraded the Company's senior unsecured
debt to A and its commercial paper rating to D-1. Duff & Phelps has
reaffirmed CBT's senior unsecured debt at AA-. Moody's Investor Service and
Standard and Poor's rate the Company's senior unsecured debt at A3 and A-,
respectively, and commercial paper at P-2 and A-2, respectively. The ratings
of CBT's unsecured debt by the same two agencies are Aa3 and AA-,
respectively.
OTHER INFORMATION
New three-year contracts between CBT and the Communications Workers of
America (CWA) and CBIS and the CWA were approved in the second and third
quarters of 1996. The contracts include pay increase of 10.5% over the
three-year period 1996-1999 with bonus incentives based on service and/or
financial performance. The contracts also address job security and benefit
issues, while providing additional flexibility in the pension plans for
hourly employees.
22
REGULATORY MATTERS
TELECOMMUNICATIONS COMPETITION
Recently enacted and future legislative and regulatory initiatives will
have an impact on CBT and other local exchange carriers (LECs). The extent of
that impact will not be known until the initiatives are fully implemented. The
basic thrust of these initiatives is to encourage competition in the
communications industry by removing legal barriers to market entry.
FEDERAL -- The Telecommunications Act of 1996 (the Act) enacted in
February 1996 requires incumbent LECs like CBT to interconnect with the
networks of other service providers, unbundle certain network elements and
make retail telecommunications services available to competing providers at
wholesale rates. The Act leaves the implementation of these mandates to the
Federal Communications Commission (FCC) and state regulatory agencies.
On August 8, 1996, the FCC issued an order establishing regulations to
implement the "local competition" provisions of the Act. CBT and several
other LECs believe the FCC's regulations with respect to interconnection,
unbundling and resale are inconsistent with the requirements of the Act.
Accordingly, they sought review of the FCC's order in the United States Court
of Appeals. On October 15, 1996, the United States Court of Appeals for the
Eighth Circuit stayed the effectiveness of portions of the FCC order,
including the FCC's pricing standards. The Court of Appeals has not yet
issued a final decision in this case. The FCC regulations requiring LECs to
negotiate interconnection agreements with new entrants, unbundle their
networks and resell retail telecommunications services, have not been stayed.
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 is sustained by the courts, and if CBT is unable to
obtain waivers of certain regulations, CBT may see erosion of certain revenues
designed to subsidize residential telephone service, and may incur increased
costs to provide number portability and interconnection. These events could
have a material adverse financial impact on CBT. CBT also believes the FCC
order significantly enhances the position of its competitors.
The outcome of three separate, but related, FCC proceedings could be
significant for CBT. In the first of these proceedings, the FCC will be
considering universal service 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 change 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 Public Utilities Commission of Ohio (PUCO) recently adopted
a set of local service guidelines that largely mirror the requirements of the
Act and the FCC regulations discussed above. The guidelines mandate
interconnection, unbundling of network elements, the resale of retail
telecommunications services, and the implementation of number portability.
Rates, terms and conditions for these requirements are to be established
through negotiation and/or arbitration. CBT has filed an appeal of the local
service guidelines with the Ohio Supreme Court.
On December 9, 1996, CBT filed a petition with the PUCO requesting a
temporary suspension of certain of the Act's requirements and certain of the
PUCO's local service guidelines. CBT's filing includes a request for
temporary relief from certain federal and state mandates that detail how LECs
must interconnect their networks with, and make their facilities available
to, interconnectors. CBT's petition was filed pursuant to a provision of the
Act which permits local exchange carriers serving fewer than 2% of the
nation's access lines to petition their state commissions for suspension and/or
modification of the Act's local competition provisions. The PUCO has not yet
issued a decision on this petition.
As of December 31, 1996, the PUCO had granted certificates to provide
basic local exchange service in CBT's operating territory to Communications
Buying Group (CBG) and Time Warner Communications of Ohio, L.P. (TWCO). CBT
believes the PUCO exceeded its statutory authority by granting CBG and TWCO
certificates and filed appeals of the decisions with the Ohio Supreme Court.
In addition, on January 16, 1997, the PUCO rendered a decision authorizing
seven providers to file tariffs no later than March 3, 1997, and granted
authority to provide local service upon approval of appropriate
interconnection agreements. Three other applications to provide local
exchange service in CBT's territory are pending. Applicants with approved
tariffs include ICG, MFS, A.R.C. Networks, Sprint, LCI, Cable and Wireless
Inc. and Winstar Wireless of Ohio, Inc.
As of December 31, 1996, seven carriers have officially requested to
begin interconnection negotiations with CBT: AirTouch Cellular, Intermedia
Communications, ICG, MCI, Ameritech Cellular, Sprint, and Nextel
Communications. Once officially notified, CBT has 135 days to reach agreement
with each party before arbitration can be requested from the PUCO. The
135-day periods began to expire in January 1997.
23
KENTUCKY -- On September 26, 1996, the Public Service Commission of
Kentucky (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 LEC's, 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.
ALTERNATIVE REGULATION
On February 5, 1997, CBT filed an alternative regulation plan with the
PUCO seeking to gradually rebalance its rates. Upon the plan's approval,
residence rates will increase and business rates decrease, although the total
effect of the change could be spread over two years. Since the PUCO had not
yet ruled on CBT's petition for a temporary suspension as of the date CBT's
alternative regulation application was filed, CBT incorporated many of the
requests contained in its pending petition for suspension into its
alternative regulation application.
OPTIONAL INCENTIVE REGULATION
CBT began to operate under an optional incentive regulation plan for
interstate services in January 1994. Every two years CBT compares actual
return with the authorized rate of return, currently 11.25%. Rate changes and
new services can be made on a 14-day notice without cost support if CBT sets
rates no higher than a geographically adjacent LEC that operates under price
cap regulation. This allows CBT to be more responsive to customers and the
market.
DEPRECIATION RATE CHANGE
The FCC is required by the Communications Act of 1934 to prescribe the
depreciation rates used to compute depreciation expense for communications
common carriers. It is the FCC's practice to review and revise CBT's
depreciation rates every three years, in conjunction with the PUCO and the
PSCK. CBT's next scheduled triennial depreciation represcription is in 1997.
It is possible that depreciation expense will increase as a result of these
discussions.
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." Criteria that would give rise to the
discontinuance of SFAS 71's applicability include (1) increasing competition
that restricts CBT's ability to establish prices to recover specific costs,
and (2) a significant change in the manner in which rates are set by
regulators from cost-based regulation to another form of regulation.
At the present time, CBT believes that, based on its current competitive
and regulatory environment, the application of SFAS 71 remains appropriate.
However, competitive, legislative and regulatory uncertainties require
CBT to regularly review these criteria. In the event CBT determines that it no
longer meets the criteria for following SFAS 71, CBT could recognize an
extraordinary non-cash charge of up to $300 million. This would include the
elimination of regulatory assets and liabilities, and adjusting the carrying
amount of telephone plant to the extent it is not recoverable in future
revenues. CBT's estimate of the embedded regulatory assets due to the under
depreciation of plant assets, as a result of the regulatory process
prescribing depreciation lives for regulatory purposes longer than economic
lives, is approximately $170 million. Asset lives used for future
depreciation expense would likely be shorter than those approved by
regulators.
24
BUSINESS OUTLOOK
All of the Company's markets are becoming more competitive as technological
change quickens and regulatory barriers recede. This may increase the future
variability of the Company's financial results.
TELEPHONE OPERATIONS
The local exchange business is becoming increasingly competitive.
Competitive local exchange carriers, alternative access providers, cable TV
providers and wireless providers all intend to compete for segments of the local
exchange business. CBT's competitors have substantial capital and resources,
and may not face the same regulatory constraints as CBT. Some of these
competitors may resell the services of CBT, and may be willing to make
significant financial concessions to enter CBT's markets.
Some competitors will be national in scale and may be able to offer lower
prices than CBT. Also, some industry participants have expressed plans to offer
a bundle of communications services. These competitors may be willing to offer
the local exchange component of their bundle at a loss in order to preserve
profits of their core business.
In addition to competition, CBT faces changing regulation. Both federal
and state regulatory agencies are interested in promoting greater competition in
the local exchange business. The mandated costs that CBT must incur to open the
market, such as interconnection and local number portability, may be
significant.
In anticipation of these changes, CBT continues to streamline its processes
to improve responsiveness to customer needs, introduce new products and
services, expand distribution channels, improve quality and reduce costs. In
addition, CBT will continue to upgrade its network, offer new services, and
develop new technologies and merchandising relationships, as sound business
judgment dictates. CBT has constructed optical fiber rings in the metropolitan
Cincinnati area to improve services for business customers. It has also
broadened its service offering to include serving as an agent for direct
broadcast satellite television service and providing Internet access.
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.
INFORMATION SYSTEMS
CBIS is a leading provider of customer-care and billing services and
solutions to the communications industry in North America. CBIS also develops
network management systems for large international telephone companies, and
provides customer-care and billing systems to cable TV providers.
The wireless industry has been growing in excess of 25% per year in terms
of subscribers. Forecasts expect the introduction of PCS to help continue this
growth, although perhaps at lower levels. Over the past few years, CBIS has
grown with the wireless market. CBIS's future growth is dependent on its
clients' success in gaining and retaining customers in an increasingly
competitive marketplace.
CBIS relies on several significant clients for a large percentage of
revenue. In 1996, CBIS's top four clients, excluding CBT, accounted for 67% of
CBIS's revenues. While CBIS maintains multi-year contracts for its services,
several contracts contain provisions that allow a client to terminate the
relationship at any time prior to the end of the contract term. The dependence
on few clients can cause pricing pressure. Additionally, it is possible that a
client may desire to bring its customer-care and billing functions in-house.
Consolidation in the industry could cause CBIS to lose a large client. The loss
of a large client could result in a material reduction in CBIS's revenues and
profits.
CBIS's leadership in the U.S. wireless market requires significant
continued investment in software development. In late 1996, CBIS implemented
its initial release of Precedent 2000, a flexible system based on a client-
server architecture. Precedent 2000 has not been in production long and will
need significant enhancements in order to meet client expectations.
CBIS also develops network management systems for international
communications companies. These systems and contracts are large and complex,
often requiring the development of unique solutions. The profitability of these
contracts is difficult to forecast and can be volatile.
25
TELESERVICES
The continued growth at MATRIXX has primarily been driven by expansion of
existing relationships, the addition of new customers, and the acquisition of
businesses and new capabilities. MATRIXX continues to increase the range of
services it offers, having added technical help desk, Internet services and
interactive voice response during the year.
During 1996, several of MATRIXX's competitors became publicly traded
companies through initial public stock offerings. These competitors have gained
access to capital to facilitate their growth and make acquisitions. The
addition of well-financed competitors could cause pricing and profitability
pressures in the industry as well as increase the variability of MATRIXX's
financial results.
MATRIXX's business relies on access to labor. A shortage of available
labor, or the need to increase labor rates, could have a significant impact on
MATRIXX's financial performance.
MATRIXX's top three clients, accounting for 44% of 1996 MATRIXX revenues,
entered into multi-year contracts during 1996. However, the contracts are able
to be terminated prior to the end of the contract term and the loss of a large
client would materially impact MATRIXX's revenues and profits.
OTHER
The Company's other businesses also face competition from businesses
offering similar products and services. These businesses are meeting their
competition by addressing the needs of their customers, and offering superior
value, quality and service.
The Company, which has a 45% interest in a cellular partnership, has been
seeking to dissolve the partnership because of recent changes in the structure
of the telecommunications industry, including the enactment of the
Telecommunications Act of 1996. These changes have positioned the partnership
in direct competition with its two major partners, including the Company,
creating irreconcilable conflicts of interest among them.
In February 1997, the Delaware Supreme Court affirmed a lower court ruling
which denied the Company's motion to dissolve the partnership. 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.
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. 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.
The Company utilizes software and related technologies throughout its
businesses that will be affected by the date change in the year 2000. An
internal study is currently under way to determine the full scope and related
costs to insure that the Company's systems continue to meet its internal needs
and those of its customers. The Company will begin to incur expenses in 1997 to
resolve this issue. These expenses may be significant and may continue through
the year 1999.
The Company does not believe that inflation has had a material effect on
its results of operations. However, there can be no assurance that the
Company's businesses will not be affected by inflation in the future.
The Company's foreign operations are subject to the risk of fluctuation in
currency exchange rates and to exchange controls. The Company cannot predict
the extent to which such controls and fluctuations in currency exchange rates
may affect its operations in the future. See Note 18 of Notes to Financial
Statements for the revenues and identifiable assets of foreign operations.
The Company continues to review opportunities for acquisitions and
divestitures for all its businesses to enhance shareowner value.
26
CINCINNATI BELL INC
REPORTS OF MANAGEMENT AND
INDEPENDENT ACCOUNTANTS
REPORT OF MANAGEMENT
The management of Cincinnati Bell Inc. is responsible for the information
and representations contained in this Annual Report. Management believes that
the financial statements have been prepared in accordance with generally
accepted accounting principles and that the other information in the Annual
Report is consistent with those statements. In preparing the financial
statements, management is required to include amounts based on estimates and
judgments that it believes are reasonable under the circumstances.
In meeting its responsibility for the reliability of the financial
statements, management maintains a system of internal accounting controls, which
is continually reviewed and evaluated. Our internal auditors monitor compliance
with it in connection with their program of internal audits. However, there are
inherent limitations that should be recognized in considering the assurances
provided by any system of internal accounting controls. The concept of
reasonable assurance recognizes that the costs of a system of internal
accounting controls should not exceed, in management's judgment, the benefits
to be derived. Management believes that its system provides reasonable
assurance that assets are safeguarded and that transactions are properly
recorded and executed in accordance with management's authorization, that the
recorded accountability for assets is compared with the existing assets at
reasonable intervals, and that appropriate action is taken with respect to any
differences. Management also seeks to assure the objectivity and integrity of
its financial data by the careful selection of its managers, by organization
arrangements that provide an appropriate division of responsibility, and by
communications programs aimed at assuring that its policies, standards and
managerial authorities are understood throughout the organization.
The financial statements have been audited by Coopers & Lybrand L.L.P.,
independent accountants. Their audit was conducted in accordance with generally
accepted auditing standards.
The Audit Committee of the Board of Directors (see page 45), which is
composed of three directors who are not employees, meets periodically with
management, the internal auditors and Coopers & Lybrand L.L.P. to review their
performance and responsibilities and to discuss auditing, internal accounting
controls and financial reporting matters. Both the internal auditors and the
independent accountants periodically meet alone with the Audit Committee and
have access to the Audit Committee at any time.
/s/ Brian C. Henry
BRIAN C. HENRY
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners of Cincinnati Bell Inc.
We have audited the accompanying consolidated balance sheets of Cincinnati
Bell Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, common shareowners' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cincinnati Bell
Inc. and subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 2 of Notes to Financial Statements, the Company
changed its method of accounting for postemployment benefits in 1994.
/s/ Coopers & Lybrand L.L.P.
Cincinnati. Ohio
February 14, 1997
27
CINCINNATI BELL INC
CONSOLIDATED STATEMENTS OF INCOME
MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
REVENUES $ 1,573.7 $1,336.1 $ 1,228.2
- --------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Costs of products and services 850.3 705.2 656.3
Selling, general and administrative 273.8 250.8 246.7
Depreciation and amortization 172.8 162.2 154.1
Special charges (credits) (29.7) 171.2 5.7
--------- -------- ---------
Total costs and expenses 1,267.2 1,289.4 1,062.8
--------- -------- ---------
OPERATING INCOME 306.5 46.7 165.4
- --------------------------------------------------------------------------------------------------------------------
Other Income (Expense), net 12.1 (13.5) 1.7
Interest Expense 33.9 52.8 49.5
--------- -------- ---------
Income (Loss) Before Income Taxes, Extraordinary Charge
and Cumulative Effect of Change in Accounting Principle 284.7 (19.6) 117.6
Income Taxes 99.7 5.7 42.1
--------- -------- ---------
Income (Loss) Before Extraordinary Charge and
Cumulative Effect of Change in Accounting Principle 185.0 (25.3) 75.5
Extraordinary Charge - (7.0) -
Cumulative Effect of Change in Accounting Principle - - (2.9)
--------- -------- ---------
NET INCOME (LOSS) $ 185.0 $ (32.3) $ 72.6
--------- -------- ---------
--------- -------- ---------
- --------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE
Income (Loss) Before Extraordinary Charge and
Cumulative Effect of Change in Accounting Principle $ 2.70 $ (.38) $ 1.15
Extraordinary Charge - (.11) -
Cumulative Effect of Change in Accounting Principle - - (.04)
--------- -------- ---------
Net Income (Loss) $ 2.70 $ (.49) $ 1.11
--------- -------- ---------
--------- -------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
INCLUDING EQUIVALENTS (000) 68,589 66,271 65,443
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
28
CINCINNATI BELL INC
CONSOLIDATED BALANCE SHEETS
MILLIONS OF DOLLARS at December 31 1996 1995
- --------------------------------------------------------------------------------
A S S E T S
CURRENT ASSETS
Cash and cash equivalents $ 2.0 $ 2.9
Receivables, less allowances of $11.7 and $14.7 315.0 266.7
Material and supplies 17.3 10.5
Deferred income taxes 15.4 25.4
Prepaid expenses and other current assets 40.9 35.9
-------- --------
Total current assets 390.6 341.4
PROPERTY, PLANT AND EQUIPMENT, NET 985.8 993.9
GOODWILL AND OTHER INTANGIBLES 205.1 172.3
INVESTMENTS IN UNCONSOLIDATED ENTITIES 61.3 53.4
DEFERRED CHARGES AND OTHER ASSETS 28.1 30.7
-------- --------
TOTAL ASSETS $1,670.9 $1,591.7
-------- --------
-------- --------
- --------------------------------------------------------------------------------
L I A B I L I T I E S A N D S H A R E O W N E R S' E Q U I T Y
CURRENT LIABILITIES
Debt maturing within one year $ 224.2 $ 126.1
Payables and other current liabilities 288.1 327.2
-------- --------
Total current liabilities 512.3 453.3
LONG-TERM DEBT 279.5 386.8
DEFERRED INCOME TAXES 119.6 111.3
OTHER LONG-TERM LIABILITIES 125.1 162.2
-------- --------
Total liabilities 1,036.5 1,113.6
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREOWNERS' EQUITY
Common shares 67.6 66.7
Additional paid-in capital 280.6 256.1
Retained earnings 288.5 157.1
Currency translation adjustments (2.3) (1.8)
-------- --------
Total shareowners' equity 634.4 478.1
-------- --------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $1,670.9 $1,591.7
-------- --------
-------- --------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
29
CINCINNATI BELL INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
MILLIONS OF DOLLARS Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 185.0 $ (32.3) $ 72.6
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 172.8 162.2 154.1
Special charges (credits) (29.7) 171.2 5.7
Provision for loss on receivables 9.0 8.5 11.1
Charge for purchased research and development 5.0 7.5 -
Cumulative effect of accounting change - - 4.5
Other, net .1 6.6 9.3
Change in assets and liabilities net of effects from acquisitions
and disposals:
Increase in receivables (45.6) (34.1) (33.0)
Decrease (increase) in other current assets (1.4) (1.1) 6.3
Increase (decrease) in accounts payable and accrued liabilities (35.9) (1.4) 8.9
Increase (decrease) in other current liabilities (13.5) (11.2) 31.7
Increase (decrease) in deferred income taxes and unamortized
investment tax credits 6.4 (50.5) (4.1)
Decrease (increase) in other assets and liabilities, net (.2) 7.3 4.2
Decrease in assets and liabilities from termination of swap agreement - (36.6) -
--------- -------- ---------
Net cash provided by operating activities 252.0 196.1 271.3
--------- -------- ---------
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - telephone plant (99.3) (89.7) (110.5)
Capital expenditures - other (56.9) (25.6) (36.2)
Acquisitions, net of cash acquired (62.7) (31.4) -
Dispositions of assets 12.7 - 27.0
Other, net (4.9) 5.4 2.5
--------- -------- ---------
Net cash used in investing activities (211.1) (141.3) (117.2)
--------- -------- ---------
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt - 21.9 -
Repayment of long-term debt (90.9) (78.4) (1.5)
Net increase (decrease) in short-term debt 79.1 (29.9) (45.9)
Issuance of common shares 23.7 9.1 15.3
Dividends paid (53.7) (53.0) (52.3)
--------- -------- ---------
Net cash used in financing activities (41.8) (130.3) (84.4)
--------- -------- ---------
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (.9) (75.5) 69.7
Cash and cash equivalents at beginning of year 2.9 78.4 8.7
--------- -------- ---------
Cash and cash equivalents at end of year $2.0 $ 2.9 $78.4
--------- -------- ---------
--------- -------- ---------
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
30
CINCINNATI BELL INC.
CONSOLIDATED STATEMENTS OF COMMON
SHAREOWNERS' EQUITY
Common Shareowners Equity
-----------------------------------------------------------------
Common
Additional Currency Shares
Common Paid-In Retained Translation Outstanding
MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS Total Shares Capital Earnings Adjustments (millions)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1994 $515.6 $ 65.0 $223.2 $227.4 $ - 65.0
Shares issued under
shareowner and employee plans 17.2 .9 16.3 - - .9
Net income 72.6 - - 72.6 - -
Pension liability adjustment (1.0) - - (1.0) - -
Currency translation adjustments .4 - - - .4 -
Dividends on common shares
$.80 per share (52.4) - - (52.4) - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 $552.4 $ 65.9 $239.5 $246.6 $ .4 65.9
Shares issued under
shareowner and employee plans 14.5 .7 13.9 (.1) - .7
Other shares issued 2.8 .1 2.7 - - -
Net loss (32.3) - - (32.3) - -
Pension liability adjustment (4.0) - - (4.0) - -
Currency translation adjustments (2.2) - - - (2.2) -
Dividends on common shares
$.80 per share (53.1) - - (53.1) - -
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $478.1 $ 66.7 $256.1 $157.1 $(1.8) 66.7
Shares issued under
shareowner and employee plans 25.7 .9 24.5 .3 - .9
Net income 185.0 - - 185.0 - -
Currency translation adjustments (.5) - - - (.5) -
Dividends on common shares
$.80 per share (53.9) - - (53.9) - -
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $634.4 $ 67.6 $280.6 $288.5 $(2.3) 67.6
------ ------ ------ ------ ------ ----
------ ------ ------ ------ ------ ----
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
CINCINNATI BELL INC.
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
CONSOLIDATION -- The consolidated financial statements include the accounts
of Cincinnati Bell Inc. and its wholly owned subsidiaries (the Company). The
Company is a diversified communications 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 telephone marketing solutions to large
corporations. The information systems and teleservices segments have minor
international operations, primarily in Europe. The Other category includes the
Company's businesses which provide long distance, directory services and
communications equipment. All significant intercompany transactions and
balances have been eliminated in consolidation. Certain prior year amounts
have been reclassified to conform with the current year's presentation.
USE OF ESTIMATES -- Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported. Actual results
could differ from those estimates.
REGULATORY ACCOUNTING -- CBT follows the accounting under the provisions of
Statement of Financial Accounting Standards (SFAS) 71, "Accounting for the
Effects of Certain Types of Regulation." This accounting reflects the rate
actions of regulators in the financial statements. The rate actions can
provide reasonable assurance of the existence of an asset, reduce or
eliminate the value of an asset, impose a liability, or eliminate a liability
previously imposed. The most significant impact from the rate actions is on
depreciation because regulatory recovery periods used for telephone plant are
longer than the useful lives that might otherwise be used. The Company
continually reviews the applicability of SFAS 71 based on developments in its
current regulatory and competitive environment. In the event CBT determines
that it no longer meets the criteria for following SFAS 71, CBT could
recognize an extraordinary non-cash charge of an amount that would be
material. This would include the elimination of regulatory assets and
liabilities, and adjusting the carrying amount of telephone plant to the
extent it is not recoverable in future revenues. CBT's estimate of the
embedded regulatory assets due to the under depreciation of plant assets, as
a result of the regulatory process prescribing depreciation lives for
regulatory purposes longer than economic lives, is approximately $170
million. Asset lives used for future depreciation expense would likely be
shorter than those approved by regulators. The accounting under the provisions
of SFAS 71 results in non-plant regulatory assets of $10.2 million and
regulatory liabilities of $22.1 million as described in Note 3.
CASH EQUIVALENTS -- Cash equivalents consist of short-term highly liquid
investments with original maturities of three months or less.
MATERIAL AND SUPPLIES -- New and reusable material, related to the
regulated telephone operations, are carried at average original cost, or
specific costs for large items. Nonreusable material is carried at estimated
salvage value.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated
at original cost.
The Company's provision for depreciation of telephone plant is determined
on a straight-line basis using the whole life and remaining life methods.
Depreciation expense also includes amortization of certain classes of
telephone plant and identified depreciation reserve deficiencies over periods
allowed by regulatory authorities. Provision for depreciation of other
property is based on the straight-line method over the estimated useful life.
Telephone plant is retired at its original cost, net of cost of removal
and salvage, and is charged to accumulated depreciation.
SOFTWARE DEVELOPMENT COSTS -- Research and development expenditures are
charged to expense as incurred. The development costs of software to be
marketed are charged to expense until technological feasibility is
established. After that time, the remaining software development costs are
capitalized and recorded in property, plant and equipment. Amortization of
the capitalized amounts is computed on a product-by-product basis using the
straight-line method over the remaining estimated economic life of the
product, generally not exceeding four years.
GOODWILL AND OTHER INTANGIBLES -- Goodwill resulting from the purchase of
businesses and other intangibles are recorded at cost and amortized on a
straight-line basis over periods ranging from 5 to 40 years. Goodwill and
other intangibles are evaluated periodically as events or circumstances
indicate a possible inability to recover their carrying amount. Such
evaluation is based on various analyses, including cash flow and
profitability projections that incorporate, as applicable, the impact on
existing company businesses. The analyses necessarily involve significant
management judgment to evaluate the capacity of an acquired business to
perform within projections. If future expected undiscounted cash flows are
insufficient to recover the carrying amount of the asset, then an impairment
loss is recognized.
-32-
REVENUE RECOGNITION -- Local telephone service revenues are generally
billed monthly in advance and are recognized when services are provided.
Information systems revenues consist of data processing revenue recognized as
services are performed. On certain long-term systems development contracts,
the percentage of completion method is used to recognize revenues. Because
the percentage of completion method requires estimates of costs to complete
contracts, it is possible that estimated costs to complete contracts will be
revised in the near term. Revenues from software maintenance agreements are
deferred and are recognized over the maintenance period. Software licensing
revenues are recognized when delivery of the software occurs if the Company
does not have to provide additional significant service under the contract.
Billed but unearned revenues are deferred. All other revenues are recognized
when the services are performed regardless of the period in which they are
billed.
INCOME TAXES -- The provision for income taxes consists of an amount for
taxes currently payable and a provision for tax consequences deferred to
future periods based on the liability method. For financial statement
purposes, deferred investment tax credits are being amortized as a reduction
of the provision for income taxes over the estimated useful lives of the
related property, plant and equipment.
EARNINGS PER COMMON SHARE -- Earnings per common share are calculated by
using the weighted average number of common shares outstanding including
stock equivalents.
STOCK-BASED COMPENSATION -- Compensation cost is measured under the
intrinsic value method. Pro forma disclosures of net income and earnings per
share are presented as if the fair value method had been applied.
CURRENCY TRANSLATION -- Assets and liabilities of foreign operations,
where the functional currency is the local currency, are translated to U.S.
dollars at year-end exchange rates. The related currency translation
adjustments are reflected as cumulative translation adjustments, a separate
component of shareowners' equity. Revenue and expenses are translated at
average rates of exchange prevailing during the year.
FINANCIAL INSTRUMENTS -- The Company manages certain portions of its
foreign currency and interest rate fluctuations through a small number of
instruments but does not engage in foreign currency speculation. Generally,
foreign currency instruments and forwards are valued relative to the
period-ending spot rate. Gains and losses applicable to those instruments are
recorded to income currently with the exception of amounts related to foreign
currency instruments that have been designated as a hedge of a net investment
in a foreign subsidiary. Hedge results of a net investment in a foreign
subsidiary are excluded from income and recorded as adjustments to
shareowners' equity until the related subsidiary is sold or liquidated. The
interest elements of these foreign instruments are recognized to income
ratably over the life of the contract. The interest rate differential to be
paid or received on interest rate differential to be paid or received on
interest rate swap agreements and related foreign currency transaction gains
and losses are accrued as interest rates change and are recognized as an
adjustment of interest expense.
2. SPECIAL ITEMS
1996
SPECIAL CHARGES (CREDITS)
In the first quarter of 1995, the Company approved a restructuring plan for
CBT and CBI. The restructuring plan resulted in the need for fewer people to
operate the business. More than 1,300 employees accepted the early retirement
offer and at December 31, 1996, approximately 350 management and 950 hourly
employees had left the Company. The remaining employees who accepted the offer
will leave the Company no later than March 31, 1997.
During 1996, the Company recorded $27.4 million of non-cash pension
settlement gains and reversed $2.3 million of the restructuring liability
which increased net income by $18.9 million or $.28 per share. Cash
expenditures of $3.2 million for vacation buyouts, severance and real estate
costs and the above restructuring liability reversal reduced the liability to
$8.7 million at year end. The liability reversal was the result of
better-than-expected utilization of leased real estate. The Company expects
to recognize approximately $20 million of additional settlement gains in the
first half of 1997.
In December 1993, the Company announced a restructuring plan for CBIS. At
December 31, 1996, the balance of the 1993 CBIS restructuring and disposal
liability was $2.6 million. Charges for discontinued products and
contingencies of businesses sold reduced the reserve by $3.7 million during
1996.
NON-RECURRING ITEMS
Costs and expenses include $5.0 million of in-process
research and development costs which were expensed in connection with
acquisitions. This reduced net income by $3.1 million or $.05 per share.
Interest expense reflects a reversal of $2.5 million of accrued interest
by CBT related to overearnings liabilities. As a result, net income increased
$1.6 million or $.02 per share (see Note 17).
1995
SPECIAL CHARGES
During 1995, the Company recorded special charges of $131.6 million, net of
settlement gains, to reflect the cost of the CBT and CBI restructuring plan. The
charges included $58 million for pension enhancements, $54 million of
curtailment losses for postretirement health care costs, $7 million for lease
termination costs, $4 million for vacation buyouts and severance pay and the
remainder for other costs. The charges reduced net income by approximately
$84 million or $1.26 per share.
During 1995, cash payments of $7.7 million were applied to the
restructuring liability, including $4 million for the non-qualified portion
of lump-sum pension distributions and $3.4 million for vacation buyouts and
severance.
In December 1995, the Company recognized an impairment loss of $39 million
resulting from the writedown of goodwill related to the Company's French
telephone marketing businesses (see Note 7).
-33-
NON-RECURRING ITEMS
Costs and expenses include $7.5 million of in-process research and
development costs which were expensed in connection with CBIS acquisitions.
This reduced net income by $4.6 million or $.07 per share (see Note 6).
Other income (expense), net includes a charge to reduce to market value
real estate held for sale, which decreased net income by $3.3 million or $.05
per share. Also included is a charge resulting from termination of the
Company's interest rate and currency swap agreement, which was used to hedge
its investment in MATRIXX's French operations, reducing net income by $8.5
million or $.13 per share (see Note 10).
EXTRAORDINARY CHARGE
In December 1995, the Company retired, at a premium, $75 million of 9.1%
notes through redemption and partial insubstance defeasance. A portion of the
debt was redeemed by cash payments of $56.4 million, including accrued
interest. In addition, U.S. government securities totaling $21.3 million were
placed in a trust and their use irrevocably restricted to satisfy the
remaining principal balance of $18.6 million and interest payments thereon.
Available cash was used to finance the transaction. The cost of the
retirement reduced net income by $7 million or $.11 per share.
1994
SPECIAL CHARGES
In December 1994, certain senior managers left CBT through a voluntary
separation incentive program. The cost of this offer, including estimated
curtailment losses from the Company's non-qualified pension program,
partially offset by a reduction in the CBIS restructuring and disposal
liability established in 1993, was $5.7 million and reduced net income by
$3.7 million or $.06 per share.
ACCOUNTING CHANGE
Effective January 1, 1994, the Company adopted SFAS 112, "Employers'
Accounting for Post-employment Benefits." SFAS 112 required the accrual of
the obligation for benefits provided to former or inactive employees, their
beneficiaries and covered dependents after employment, but before retirement.
These benefits include workers compensation, disability benefits and health
care coverage for a limited time. The Company previously expensed these costs
as they were paid. The cumulative effect of this accounting change reduced
net income by $2.9 million or $.04 per share.
3. INCOME TAXES
The components of income tax expense are as follows:
MILLIONS OF DOLLARS Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------
Current:
Federal $80.6 $ 49.7 $47.2
Foreign .5 .2 (.2)
State and local 6.0 6.1 3.7
----- ------ -----
Total current 87.1 56.0 50.7
Deferred 14.9 (49.0) (4.5)
Investment tax credits (1.9) (1.3) (3.2)
Adjustment of valuation allowance
related to net capital losses (.4) -- (.9)
----- ------ -----
Total $99.7 $ 5.7 $42.1
----- ------ -----
----- ------ -----
The components of the Company's deferred tax assets and liabilities are
as follows:
MILLIONS OF DOLLARS at December 31 1996 1995
- -------------------------------------------------------------------------------
Deferred tax asset:
Restructuring charges $ 3.2 $ 6.7
Employee benefits 23.0 32.7
Unamortized investment tax credit 7.0 8.0
Loss carryforwards 26.7 28.6
Accrued liabilities 3.0 9.2
Other 19.0 21.3
------ ------
81.9 106.5
Valuation allowance (21.7) (22.7)
------ ------
Net deferred tax asset 60.2 83.8
------ ------
Deferred tax liability:
Depreciation and amortization 144.2 148.2
Basis differences on items previously
flowed through to ratepayers 10.2 12.2
Other 3.8 3.4
------ ------
Total deferred tax liability 158.2 163.8
------ ------
Net deferred tax liability $ 98.0 $ 80.0
------ ------
------ ------
34
The following is a reconciliation of the statutory federal income tax rate
with the effective tax rate for each year:
1996 1995 1994
- -------------------------------------------------------------------------------
U.S. federal statutory rate 35.0% (35.0)% 35.0%
Insurance cash surrender value (.2) (2.3) (.2)
Plant basis differences, net of
depreciation .4 6.2 1.1
Rate differential on reversing
temporary differences (.4) (8.9) (1.4)
Amortization and writedown of
intangible assets .6 78.8 1.6
State and local income taxes, net of
federal income tax benefit 1.5 13.5 2.9
Investment and research tax credits (1.4) (18.6) (4.0)
Taxes related to prior years -- 3.8 .6
Other differences (.5) (8.2) .1
----- ------ -----
Effective rate 35.0% 29.3% 35.7%
----- ------ -----
----- ------ -----
At December 31, 1996 and 1995, the liability for income taxes includes
approximately $10.2 million and $12.2 million, respectively, representing the
cumulative amount of income taxes on temporary differences which were
previously flowed through to ratepayers. CBT also recorded a corresponding
regulatory asset for these items, representing amounts which will be
recovered through the ratemaking process, which is recorded in other assets.
These deferrals have been increased for the tax effect of the future revenue
requirement and will be amortized over the lives of the related depreciable
assets concurrently with their recovery in rates.
In addition, other long-term liabilities include a regulatory liability
at December 31, 1996 and 1995, of approximately $22.1 million and $26.1
million, respectively, a substantial portion of which represents the excess
deferred taxes on depreciable assets, resulting primarily from the reduction
in the statutory federal income tax rate from 46% to 35%. This amount will be
amortized over the lives of the related depreciable assets in accordance with
the average rate assumption method required by the Tax Reform Act of 1986.
The regulatory liability also includes an amount associated with unamortized
investment tax credits, which will be amortized in the same manner as the
underlying investment tax credits. These regulatory liabilities have been
increased to reflect future revenue requirement levels.
The Company had net operating loss carryforwards applicable to foreign
subsidiaries at December 31, 1996 and 1995, of approximately $15.3 million
and $17.6 million, respectively. Utilization of the foreign carryforwards is
dependent upon future earnings of each subsidiary with foreign carryforwards
expiring 1997 through 2003. Management believes it is more likely than not
that all of the deferred tax assets applicable to net operating loss
carryforwards of foreign subsidiaries will be realized. However, the amount
considered realizable could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced. The Company
had U.S. capital loss carryforwards at December 31, 1996 and 1995, of
approximately $62.0 million and $64.9 million, respectively. Utilization of
these capital losses is dependent upon the generation of future capital gains
with the carryforwards expiring in 1998 through 2000 and, accordingly, a
valuation allowance has been established for the related deferred tax asset.
4. RETIREMENT PLANS
PENSIONS
The Company sponsors three noncontributory defined benefit pension plans:
one for eligible management employees, one for nonmanagement employees and
one supplementary, nonqualified, unfunded plan for certain senior managers.
The pension benefit formula for the management plan is a cash balance plan
where the pension benefit is determined by a combination of compensation
based credits and annual guaranteed interest credits. As a result of the 1996
collective bargaining, effective January 1, 1997, the nonmanagement pension
plan changed the method of calculating the defined benefit payable at
retirement date to a cash balance benefit. The pension benefit is determined
by a combination of service and job classification based credits and annual
interest credits. Benefits for the supplementary plan are based on years of
service and eligible pay.
Funding of the management and nonmanagement plans is achieved through
contributions made to an irrevocable trust fund. The contributions are
determined using the aggregate cost method.
The Company uses the projected unit credit cost method for determining
pension cost for financial reporting purposes and accounts for certain
benefits provided under early retirement packages discussed in Note 2 as a
special termination benefit.
Pension cost includes the following components:
MILLIONS OF DOLLARS Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------
Service cost (benefits earned
during the period) $ 7.2 $ 6.9 $ 12.4
Interest cost on projected
benefit obligation 35.3 48.9 39.9
Actual return on plan assets (147.1) (185.6) 10.5
Amortization and deferrals - net 112.6 131.5 (63.2)
Special termination benefits - 58.8 -
Curtailment loss - 4.9 4.1
Settlement gains (27.4) (5.9) -
----- ------ -----
Pension cost (income) $(19.4) $ 59.5 $ 3.7
----- ------ -----
----- ------ -----
35
The following table sets forth the plans' funded status:
MILLIONS OF DOLLARS at December 31 1996 1995
- -------------------------------------------------------------------------------
Actuarial present value of accumulated
benefit obligation including vested
benefits of $518.8 million and
$574.4 million, respectively $ 549.9 $ 688.3
------- -------
------- -------
Plan assets at fair value (primarily listed
stocks, bonds and real estate, including
$43.0 million and $120.1 million,
respectively, in common shares of
Cincinnati Bell Inc.) $698.6 $ 698.9
Actuarial present value of projected
benefit obligation (587.3) (709.0)
------- -------
Plan assets over (under) projected
benefit obligation 111.3 (10.1)
Unrecognized prior service cost 21.9 30.9
Unrecognized transition asset (25.8) (36.1)
Unrecognized net gain (114.6) (18.0)
Recognition of minimum liability (6.7) (7.8)
------- -------
Accrued pension liability $ (13.9) $ (41.1)
------- -------
------- -------
In 1996, settlement gains of $27.4 million were recognized by the Company
with a corresponding reduction in the pension liability. In 1995, the Company
recognized approximately $58 million of special termination benefits in
connection with the 1995 restructuring (see Note 2).
The Company used the following rates in determining the actuarial present
value of the projected benefit obligation and pension cost for the three
pension plans:
At December 31 1996 1995 1994
- -------------------------------------------------------------------------------
Discount rate - projected
benefit obligation 7.25% 7.00% 8.25%
Future compensation growth rate 4.00% 4.00% 4.00%
Expected long-term rate of
return on plan assets 8.25% 8.25% 8.25%
SAVINGS PLANS
The Company sponsors several defined contribution plans covering
substantially all employees. The Company's contributions to the plans are
based on matching a portion of the employee contributions or on a percentage
of employee earnings or net income for the year. Total Company contributions
to the defined contribution plans were $9.4 million, $10.9 million and $8.4
million for 1996, 1995 and 1994, respectively.
5. EMPLOYEE POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care and group life insurance benefits for
its employees if they retire with a service pension.
The Company funds its group life insurance benefits through Retirement
Funding Accounts (RFAs) and funds health care benefits using Voluntary
Employee Benefit Association (VEBA) trusts. It is the Company's practice to
fund amounts as deemed appropriate from time to time. Contributions are
subject to IRS limitations developed using the aggregate cost method. The
associated plan assets are primarily equity securities and fixed income
investments.
The components of postretirement benefit cost are as follows:
MILLIONS OF DOLLARS Year Ended December 31 1996 1995
- -------------------------------------------------------------------------------
Service cost (benefits earned during the period) $ 1.8 $ 1.6
Interest cost on accumulated postretirement
benefit obligation 15.6 15.2
Actual return on plan assets (5.7) (4.7)
Amortization and deferrals - net 5.3 5.5
Curtailment loss -- 53.8
------- -------
Postretirement benefit cost $17.0 $71.4
------- -------
------- -------
The funded status of the plans is:
MILLIONS OF DOLLARS at December 31 1996 1995
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
Retirees and dependents $191.6 $201.4
Fully eligible active participants 6.6 7.4
Other active participants 29.1 26.4
------- ------
227.3 235.2
Plan assets at fair value (95.1) (74.9)
------- ------
Accumulated postretirement benefit obligation
in excess of plan assets 132.2 160.3
Unrecognized prior service cost (3.3) (2.8)
Unrecognized transition obligation (82.4) (87.5)
Unrecognized net gain 5.2 (14.9)
------- ------
Accrued postretirement benefit cost $ 51.7 $ 55.1
------- ------
------- ------
The transition obligation is being amortized over twenty years. The
curtailment loss in 1995 was a result of the business restructuring.
The accumulated postretirement benefit obligation and plan assets amounts
at December 31, 1996 and 1995, include $1.5 million and $1.1 million,
respectively, for group life insurance benefits.
36
The Company used the following rates in determining the actuarial present
value of the accumulated postretirement benefit obligation (APBO) and
postretirement benefit costs:
At December 31 1996 1995
- ---------------------------------------------------------------------------
Discount rate - APBO 7.25% 7.00%
Expected long-term rate of return for VEBA assets 8.25% 8.25%
Expected long-term rate of return for RFA assets 8.00% 8.00%
The assumed health care cost trend rate used to measure the postretirement
health benefit obligation at December 31, 1996, was 6.6% and is assumed to
decrease gradually to 4.3% by the year 2005. A one percentage point increase in
the assumed health care cost trend rate would have increased the aggregate of
the service and interest cost components of 1996 postretirement health benefits
by approximately $.7 million, and would increase the accumulated postretirement
benefit obligation as of December 31, 1996, by approximately $9.1 million.
6. SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs, net of accumulated amortization,
consist of the following:
MILLIONS OF DOLLARS 1996 1995 1994
- ---------------------------------------------------------------------------
Balance - beginning of year $ 18.8 $ 30.1 $ 35.1
Additions - - 5.5
Amortization (9.3) (11.3) (10.5)
------ ------ ------
Balance - end of year $ 9.5 $ 18.8 $ 30.1
------ ------ ------
------ ------ ------
Amortization of capitalized software cost is included in depreciation and
amortization expense. Product development costs were $60.4 million in 1996,
and $39.0 million and $22.1 million in 1995 and 1994, respectively.
In connection with acquisitions in 1996 and 1995, $5.0 million and $7.5
million, respectively, of the purchase price was allocated to in-process
research and development and charged to product development costs at the time of
the acquisition. As of the date of the acquisitions, the Company concluded that
the in-process technology had no alternative future use and had not reached
technological feasibility.
7. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles, net of accumulated amortization, consist of
the following:
MILLIONS OF DOLLARS 1996 1995
- ---------------------------------------------------------------------------
Balance - beginning of year $172.3 $197.4
Additions 45.0 24.4
Writedown - (39.0)
Amortization (11.8) (8.8)
Other (.4) (1.7)
------ ------
Balance - end of year $205.1 $172.3
------ ------
------ ------
Accumulated amortization - end of year $ 98.4 $ 89.2
Additions to goodwill in 1996 and 1995 were the result of business
acquisitions that were accounted for using the purchase method of accounting.
The purchase contracts of certain 1996 acquisitions contain provisions that
could increase the related purchase price by up to $20 million if certain
conditions are met. Any increases in the purchase price will be recorded as
goodwill.
In December 1995, the Company recognized a goodwill impairment charge of
$39 million, with no associated tax benefit, that reduced net income by $39
million or $.59 per share. The goodwill was related to the 1990 acquisition of
two French telephone marketing businesses. The impairment was recognized
because it became apparent in late 1995 that the French business would not
likely meet plans required to sustain the recorded goodwill.
8. DEBT MATURING WITHIN ONE YEAR AND LINES OF CREDIT
Debt maturing within one year consists of the following:
MILLIONS OF DOLLARS at December 31 1996 1995 1994
- ---------------------------------------------------------------------------
Short-Term Debt
Commercial paper $ 30.0 $ - $ 65.8
Bank notes 85.0 35.9 -
Current maturities of long-term debt 109.2 90.2 2.9
------ ------ ------
Total $224.2 $126.1 $ 68.7
------ ------ ------
------ ------ ------
Weighted average interest rates on
short-term debt 5.5% 5.9% 6.2%
Average balances of short-term debt and related interest rates for the last
three years are as follows:
MILLIONS OF DOLLARS 1996 1995 1994
- ---------------------------------------------------------------------------
Average amounts of short-term debt
outstanding during the year* $113.5 $ 66.1 $ 69.5
Weighted average interest rate
during the year** 5.6% 6.1% 4.2%
Maximum amounts of short-term debt
at any month-end during the year $140.0 $ 71.1 $100.2
* Amounts represent the average daily face amount of notes.
** Weighted average interest rates are computed by dividing the daily average
face amount of notes into the aggregate related interest expense.
37
At December 31, 1996, the Company had approximately $118 million of unused
bank lines of credit, which are available to provide support for commercial
paper borrowings. These lines of credit are available for general corporate
purposes. There are no material compensating balances or commitment fee
agreements under these credit arrangements.
9. LONG-TERM DEBT
Long-term debt is as follows:
MILLIONS OF DOLLARS at December 31 1996 1995
- ---------------------------------------------------------------------------
Debentures/Notes
Year of Maturity Interest Rate %
1996 7.300 $ - $ 40.0
1997 6.700 100.0 100.0
1999 8.625 - 40.0
2002 4.375 20.0 20.0
2003 6.240 20.0 20.0
2005 6.330 20.0 20.0
2011 7.375 50.0 50.0
2023 7.250 50.0 50.0
2023 7.180-7.270 80.0 80.0
------ ------
340.0 420.0
Capital leases and other 48.7 57.0
------ ------
388.7 477.0
Current maturities (109.2) (90.2)
------ ------
Total $279.5 $386.8
------ ------
------ ------
At December 31, 1996, $100 million of 6.7% notes due in December 1997 were
classified as a current maturity.
In December 1995, CBT called for redemption $40 million of 7.3% notes due
1996 and $40 million of 8 5/8% notes due 1999. The redemption was accomplished
in January 1996 by issuing short-term debt. The cost of the redemption was
minimal.
10. TERMINATION OF INTEREST RATE AND CURRENCY SWAP AGREEMENT
In December 1995, the Company terminated an interest rate and currency
swap agreement that was entered into in 1990 to hedge the Company's investment
in a French subsidiary of MATRIXX. The agreement effectively converted $41.7
million of the Company's short-term variable rate borrowings to long-term French
franc fixed-interest-rate debt due in the year 2000. Net effective interest
expense accrued at approximately 11%. Currency gains and losses were reflected
in the currency adjustment in the shareowners' equity.
The net effect of the swap for the years ended December 31, 1995 and 1994,
was to increase interest expense by $5.1 million and and $4.5 million,
respectively. The swap also increased the Company's weighted average interest
rate from 7.7% to 8.5% in 1995 and from 7.4% to 8.2% in 1994. Under the terms
of the agreement, the Company paid additional termination costs of $13.3 million
in 1995. The termination costs were recorded in other income (expense), net.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents, and short-term debt, consisting of commercial
paper and short-term notes payable - the carrying amount approximates fair value
because of the short time to maturity of those instruments.
Long-term debt - the fair value is estimated based on year-end closing
market prices of the Company's debt and of similar liabilities. The carrying
amounts at December 31, 1996 and 1995, were approximately $353.9 million and
$441.9 million, respectively. The estimated fair values at December 31, 1996
and 1995, were $351.3 million and $448.4 million, respectively.
38
12. COMMON AND PREFERRED SHARES
COMMON SHARES
The Company is authorized to issue up to 240 million common shares. Par
value of the common shares is $1 per share. At December 31, 1996 and 1995,
there were 67.6 million and 66.7 million common shares outstanding,
respectively.
On February 3, 1997, the Company's Board of Directors approved a two-for-
one split of the Company's common shares payable to shareowners of record May 2,
1997. The split will not affect the total dollar amount of common shareowners'
equity.
COMMON SHARE PURCHASE RIGHTS PLAN
In 1986, the Company adopted a Share Purchase Rights plan. Under the plan,
shareholders received, in connection with each common share owned, the right to
purchase one one-hundredth of a Series A Preferred Share at an exercise price of
$125, subject to adjustment. The rights expired on November 5, 1996.
PREFERRED SHARES
The Company is authorized to issue up to 4 million voting preferred shares
and 1 million nonvoting preferred shares. At December 31, 1996 and 1995, there
were no preferred shares outstanding.
13. STOCK-BASED COMPENSATION PLANS
The Company has three plans which allow for the granting of stock options
and other stock-based awards to officers, directors and certain key employees.
The options are granted at no less than market value of the stock at the grant
date. Generally, stock options have a ten-year term and vest within three years
of grant. There were no stock appreciation rights granted or outstanding during
the three year period ended December 31, 1996.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans.
If the Company had elected to recognize compensation cost for the plans based on
the fair value at the grant dates for awards under those plans consistent with
the method prescribed by SFAS No. 123, net income (loss) and earnings (loss) per
share would have been changed to the pro forma amounts indicated below:
MILLIONS OF DOLLARS
EXCEPT PER SHARE AMOUNTS Year Ended December 31 1996 1995
- ---------------------------------------------------------------------------
Net income (loss) As reported $185.0 $ (32.3)
Pro forma $183.1 $ (33.5)
Earnings (loss)
per share As reported $ 2.70 $ (.49)
Pro forma $ 2.66 $ (.50)
The pro forma effect on net income for 1996 and 1995 is not representative
of the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1995.
The fair value of Cincinnati Bell Inc. stock options used to compute pro
forma net income and earnings per share disclosures is the estimated present
value at grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions:
1996 1995
- ---------------------------------------------------------------------------
Expected dividend yield 3.5% 4.7%
Expected volatility 29.2% 22.9%
Risk-free interest rate 5.5% 7.5%
Expected holding period - years 4 4
39
Presented below is a summary of the status of the Cincinnati Bell Inc.
stock options and the related transactions for the years ended December 31:
SHARES IN THOUSANDS 1996 1995 1994
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------- ----------------- -----------------
Outstanding - beginning of year 2,897 2,779 2,533 $20.72
Granted 1,060 $40.41 1,017 $18.79 845 17.90
Exercised (751) 18.91 (389) 18.62 - -
Canceled (218) 27.45 (510) 23.02 (599) 19.87
----- ----- -----
Outstanding - end of year 2,988 26.27 2,897 19.27 2,779 20.04
----- ----- -----
----- ----- -----
Options exercisable at year end 1,685 1,921 1,684
Options available for future grant 4,081 4,306 4,382
Weighted average fair value of
options granted during year $9.20
The following table summarizes the status of Cincinnati Bell Inc.'s
stock options outstanding and exercisable at December 31, 1996:
Options Options
SHARES IN THOUSANDS Outstanding Exercisable
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life in Years Price Shares Price
- ----------------------- --------------------------------- ------------------
$12.00 to $24.31 1,914 6.4 $18.71 1,617 $19.02
$24.56 to $48.13 781 8.8 33.45 56 35.38
$48.38 to $59.94 293 9.9 56.56 12 49.41
----- -----
$12.00 to $59.94 2,988 7.4 26.27 1,685 19.78
----- -----
----- -----
Restricted stock awards during 1996, 1995 and 1994 were 50,000 shares,
229,000 shares and 72,000 shares, respectively. The weighted average market
value of the shares on the grant date were $40.41, $25.03 and $16.68,
respectively. Restricted stock awards vest over time, generally one to five
years.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
14. LEASE COMMITMENTS
The Company leases certain facilities and equipment used in its operations.
Total rental expenses amounted to approximately $82.9 million, $69.3 million
and $71.7 million in 1996, 1995 and 1994, respectively.
At December 31, 1996, the aggregate minimum rental commitments under
noncancelable leases for the periods shown are as follows:
Operating Capital
MILLIONS OF DOLLARS Leases Leases
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
1997 $ 72.2 $ 7.7
1998 61.2 7.2
1999 42.6 4.7
2000 31.2 4.6
2001 17.4 4.6
Thereafter 56.2 50.2
------ -----
Total $280.8 79.0
------
------
Amount representing interest 44.3
-----
Present value of net minimum lease payments $34.7
-----
-----
Capital lease obligations incurred were approximately $2.1 million,
$2.3 million and $7.3 million in 1996, 1995 and 1994, respectively.
40
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
All adjustments necessary for a fair statement of income for each period
have been included.
MILLIONS OF DOLLARS
EXCEPT PER SHARE AMOUNTS 1st 2nd 3rd 4th Total
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996
REVENUES $362.1 $376.0 $403.2 $432.4 $1,573.7
OPERATING INCOME $ 72.6 $ 74.5 $ 74.9 $ 84.5 $ 306.5
NET INCOME $ 41.7 $ 44.8 $ 46.9 $ 51.6 $ 185.0
EARNINGS PER SHARE $ 0.62 $ 0.65 $ 0.68 $ 0.75 $ 2.70
- --------------------------------------------------------------------------------
1995
Revenues $331.8 $334.1 $327.0 $343.2 $1,336.1
Operating Income (Loss) $(80.4) $ 56.3 $ 57.1 $ 13.7 $ 46.7
Income (Loss) Before
Extraordinary Charge $(59.5) $ 27.0 $ 28.7 $(21.5) $ (25.3)
Net Income (Loss) $(59.5) $ 27.0 $ 28.7 $(28.5) $ (32.3)
Earnings (Loss)
Per Share $(0.90) $ 0.41 $ 0.43 $(0.43) $ (0.49)
- --------------------------------------------------------------------------------
In 1996, net income increased by $3.5 million or $.05 per share per
quarter for the first three quarters and $6.9 million or $.10 per share in
the fourth quarter for settlement gains resulting from lump sum pension
distributions to employees under the 1995 business restructuring offer. In
addition to the settlement gains, a reversal of restructuring liabilities in
the fourth quarter increased net income $1.5 million or $.02 per share. Also
in the fourth quarter, expensing of acquired research and development
decreased net income by $1.8 million or $.02 per share.
Net income for the third quarter 1996 increased by $1.6 million or $.02
per share primarily as a result of a reversal of accrued interest expense
related to overearnings liabilities. The increase was partially offset by a
decrease in net income of $1.3 million or $.02 per share from the expensing
of acquired in-process research and development.
Net income for the fourth quarter 1995 was reduced by $61 million or
$.92 per share primarily as a result of several special items during the
quarter. These items include the expensing of acquired research and
development, a goodwill impairment loss, charges for the termination of an
interest rate and currency swap agreement, the reduction to market value of
certain real estate held for sale and an extraordinary charge for early
extinguishment of debt.
Net income for the first quarter of 1995 was reduced by $84.1 million or
$1.27 per share for special charges as a result of a business restructuring
at CBT and CBI and $1.5 million or $.02 per share for the expensing of
acquired in-process research and development.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16. ADDITIONAL FINANCIAL INFORMATION
Income Statement
MILLIONS OF DOLLARS Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Taxes other than income taxes:
Property $33.3 $36.9 $39.1
Gross receipts 17.8 21.0 19.4
Payroll-related 42.2 35.0 33.6
Other 1.7 .8 .7
----- ----- -----
Total $95.0 $93.7 $92.8
----- ----- -----
----- ----- -----
Interest expense:
Long-term debt $29.1 $47.0 $46.2
Short-term debt 6.3 4.1 2.9
Other (1.5) 1.7 .4
----- ----- -----
Total $33.9 $52.8 $49.5
----- ----- -----
----- ----- -----
Balance Sheet
MILLIONS OF DOLLARS at December 31 1996 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Property, Plant and Equipment, net:
Telephone plant $1,571.7 $1,503.4
Accumulated depreciation (716.5) (634.9)
-------- --------
Net telephone plant 855.2 868.5
Other property and equipment 321.1 282.5
Accumulated depreciation (190.5) (157.1)
-------- --------
Total $ 985.8 $ 993.9
-------- --------
-------- --------
Payable and other current liabilities:
Accounts payable and accrued liabilities $ 176.2 $ 201.2
Accrued taxes 37.9 48.0
Advance billing and customers' deposits 39.8 40.5
Other current liabilities 34.2 37.5
-------- --------
Total $ 288.1 $ 327.2
-------- --------
-------- --------
Statement of Cash Flows
MILLIONS OF DOLLARS Year Ended December 31 1996 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cash paid for:
Interest (net of amount capitalized) $37.3 $46.8
Income taxes $87.9 $61.6
41
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
17. CINCINNATI BELL TELEPHONE COMPANY
The following summarized financial information is for the Company's
consolidated wholly owned subsidiary, Cincinnati Bell Telephone Company:
Income Statement
MILLIONS OF DOLLARS Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Revenues $650.8 $624.4 $599.7
Costs and expenses $495.1 $630.4 $500.2
Net income (loss) $ 92.6 $(11.3) $ 54.8
Balance Sheet
MILLION OF DOLLARS at December 31 1996 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Current assets $ 135.6 $ 197.1
Telephone plant-net 855.2 880.5
Other noncurrent assets 14.7 17.5
-------- --------
Total assets $1,005.5 $1,095.1
-------- --------
-------- --------
Current liabilities $ 154.3 $ 219.3
Noncurrent liabilities 179.1 204.3
Long-term debt 221.5 233.9
Shareowner's equity 450.6 437.6
-------- --------
Total liabilities and shareowner's equity $1,005.5 $1,095.1
-------- --------
-------- --------
Results for 1996 include $28.5 million of settlement gains resulting
from lump sum pension distributions to retiring employees and the reversal of
restructuring liabilities for the 1995 business restructuring. These items
increased net income by $18.2 million. In addition, a reversal of $2.5
million of accrued interest expense related to overearnings liabilities
increased net income by $1.6 million.
Results for 1995 include $121.7 million of special charges for
restructuring operations which reduced net income by $77.5 million.
Results for 1994 include $3.6 million of special charges related to a
voluntary separation incentive program for certain senior managers. These
charges reduced net income by $2.3 million. Also in 1994, net income was
reduced $2.4 million for a change in accounting for employee postemployment
benefits (SFAS 112).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
18. BUSINESS SEGMENT INFORMATION
The Company's segment information is as follows:
MILLIONS OF DOLLARS Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Revenues
Telephone Operations $ 650.8 $ 624.4 $ 599.7
Information Systems 479.8 373.9 343.8
Teleservices 367.1 271.1 226.1
Other 154.5 133.9 127.2
Corporate .4 2.7 2.4
Intersegment (78.9) (69.9) (71.0)
-------- -------- --------
Total $1,573.7 $1,336.1 $1,228.2
-------- -------- --------
-------- -------- --------
Intersegment Revenues
Telephone Operations $ 23.5 $ 23.0 $ 23.6
Information Systems 45.3 39.4 40.5
Teleservices 4.2 2.5 2.1
Other 5.6 2.3 2.4
Corporate .3 2.7 2.4
-------- -------- --------
Total $ 78.9 $ 69.9 $ 71.0
-------- -------- --------
-------- -------- --------
OPERATING INCOME (LOSS) AS REPORTED
Telephone Operations $ 155.7 $ (6.0) $ 99.5
Information Systems 75.5 38.5 27.1
Teleservices 43.7 (7.3) 22.6
Other 32.0 29.6 20.2
Corporate and Eliminations (.4) (8.1) (4.0)
-------- -------- --------
Total $ 306.5 $ 46.7 $ 165.4
-------- -------- --------
-------- -------- --------
OPERATING INCOME (LOSS)
EXCLUDING SPECIAL ITEMS
Telephone Operations $ 127.2 $ 115.7 $ 103.1
Information Systems 78.5 46.0 27.1
Teleservices 45.7 32.3 22.6
Other 32.0 29.6 20.2
Corporate and Eliminations (1.6) 1.8 (1.9)
-------- -------- --------
Total $ 281.8 $ 225.4 $ 171.1
-------- -------- --------
-------- -------- --------
Assets
Telephone Operations $1,005.5 $1,095.1 $1,113.3
Information Systems 270.2 268.2 246.4
Teleservices 299.5 235.6 262.7
Other 51.3 38.5 39.5
Corporate and Eliminations 44.4 (45.7) 61.5
-------- -------- --------
Total $1,670.9 $1,591.7 $1,723.4
-------- -------- --------
-------- -------- --------
Capital Additions (including
acquisitions)
Telephone Operations $ 101.4 $ 90.3 $ 112.8
Information Systems 43.5 47.0 20.2
Teleservices 70.9 27.0 11.7
Other and Corporate 5.0 2.5 11.5
-------- -------- --------
Total $ 220.8 $ 166.8 $ 156.2
-------- -------- --------
-------- -------- --------
Depreciation and Amortization
Telephone Operations $ 116.6 $ 113.0 $ 110.6
Information Systems 32.2 30.3 26.4
Teleservices 19.6 15.6 13.6
Other and Corporate 4.4 3.3 3.5
-------- -------- --------
Total $ 172.8 $ 162.2 $ 154.1
-------- -------- --------
-------- -------- --------
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.
42
Capital additions include $55.9 million and $46.4 million of
acquisitions in 1996 and 1995, respectively.
Revenues from foreign sources and assets denominated in foreign
currencies at December 31, 1996, were 6% and 5%, respectively, of
consolidated totals.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
19. MAJOR CUSTOMER
Each of the Company's major subsidiaries derives significant revenues
from AT&T and its affiliates (AT&T) by providing network services,
customer-care and billing systems, and teleservices. Revenues from AT&T,
including network access revenues, were 25%, 26% and 23% of the Company's
consolidated revenues for 1996, 1995 and 1994, respectively.
In February 1997, CBT and AT&T announced that they intend to extend
their strategic relationship for the marketing and provisioning of
telecommunications services in the Cincinnati area. The companies have
agreed in principle and jointly executed a memorandum of understanding to
continue to work together toward a multi-year agreement on the basis of
mutual benefit. Significant work remains to turn the understanding into a
contract satisfactory to CBT. This agreement does not involve AT&T's
relationship with the Company's other subsidiaries.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
20. CONTINGENCIES
The Company, which has a 45% interest in a cellular partnership, has
been seeking to dissolve the partnership because of recent changes in the
structure of the telecommunications industry, including the enactment of the
Telecommunications Act of 1996. These changes have positioned the
partnership in direct competition with its two major partners, including the
Company, creating irreconcilable conflict of interest among them.
In February 1997, the Delaware Supreme Court affirmed a lower court
ruling which denied the Company's motion to dissolve the partnership. 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.
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. 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.
The Company is from time to time subject to routine complaints
incidental to the business. The Company believes that the results of any
complaints and proceedings will not have a materially adverse effect on the
Company's financial condition.