SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES
Date of Report (Date of earliest event reported) March 3, 1998
CINCINNATI BELL INC.
(Exact name of registrant as specified in its charter)
Ohio 1-8519 31-1056105
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
201 East Fourth Street, Cincinnati, Ohio 45202
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (513) 397-9900
N/A
(Former name or former address, if changed since last report)
Item 7. Financial Statements
(a) Financial statements:
Financial statements of AT&T Solutions Customer Care
(Transtech) for the years ended December 31, 1997, 1996
and 1995.
(b) Pro Forma financial information:
Unaudited Pro Forma Condensed Consolidated Financial
Statements for Cincinnati Bell Inc. See "Index to
Unaudited Pro Forma Condensed Consolidated Financial
Statements," on page F-13.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: May 15, 1998
Cincinnati Bell Inc.
By: /s/ Brian C. Henry
----------------------
Brian C. Henry
Executive Vice President and
Chief Financial Officer
2
AT&T SOLUTIONS CUSTOMER CARE
REPORT ON AUDITS OF FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996 AND
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PAGES
Report of Independent Accountants F-2
Financial Statements:
Balance Sheets F-3
Statements of Income F-4
Statements of Changes in Shareowner's Investment F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
to
F-12
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowner and Board of Directors of
American Transtech Inc., doing business as
AT&T Solutions Customer Care:
We have audited the accompanying balance sheets of AT&T Solutions Customer Care
as of December 31, 1997 and 1996, and the related statements of income, changes
in shareowner's investment, and cash flows for each of the three years in the
period ended December 31, 1997. 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 financial position of AT&T Solutions Customer Care as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
AT&T Solutions Customer Care has a significant number of transactions with AT&T
and other AT&T subsidiaries, as discussed in Notes 2, 6 and 11.
/s/ Coopers & Lybrand L.L.P.
Jacksonville, Florida
May 1, 1998
F-2
AT&T SOLUTIONS CUSTOMER CARE
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARES)
ASSETS 1997 1996
Current assets:
Cash $ - $ -
Accounts receivable trade, net of allowance
for doubtful accounts of $563 and $300 39,370 24,841
Amounts due from AT&T and AT&T subsidiaries, net 24,096 31,990
Prepaid expenses and other receivables 2,208 3,025
Deferred income taxes 789 4,930
-------- --------
Total current assets 66,463 64,786
Property and equipment, net 87,211 85,481
-------- --------
$153,674 $150,267
-------- --------
-------- --------
LIABILITIES AND SHAREOWNER'S INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities $ 33,225 $ 24,271
Accrued payroll and related benefits 17,039 10,883
Cash overdrafts 8,690 10,047
Obligations under capital leases, current portion 190 -
-------- --------
Total current liabilities 59,144 45,201
Deferred income taxes 16,903 14,649
Obligations under capital leases, less current
portion 2,563 -
-------- --------
Total liabilities 78,610 59,850
-------- --------
Shareowner's investment:
Common stock, $1 par value; 1,000 shares
authorized,issued and outstanding 1 1
Additional paid-in capital 51,850 51,850
Retained earnings 24,113 37,979
Cumulative translation adjustments (900) 587
-------- --------
Total shareowner's investment 75,064 90,417
-------- --------
Total liabilities and shareowner's investment $153,674 $150,267
-------- --------
-------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-3
AT&T SOLUTIONS CUSTOMER CARE
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1997 1996 1995
Operating revenue $402,371 $347,583 $333,799
Operating expenses:
Costs of services 285,015 232,464 228,784
Selling, general and administrative 71,095 67,174 65,142
Depreciation and amortization 7,875 9,449 11,878
Restructuring charge - - 22,265
-------- -------- --------
Total operating expenses 363,985 309,087 328,069
-------- -------- --------
Operating income 38,386 38,496 5,730
-------- -------- --------
Other income (expense):
Interest expense (159) - -
Net other expense/income 1,105 2,876 459
-------- -------- --------
Other income (expense) 946 2,876 459
-------- -------- --------
Income before income taxes 39,332 41,372 6,189
Provision for income taxes 15,198 16,044 2,479
-------- -------- --------
Net income $ 24,134 $ 25,328 $ 3,710
-------- -------- --------
-------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-4
AT&T SOLUTIONS CUSTOMER CARE
STATEMENTS OF CHANGES IN SHAREOWNER'S INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
TOTAL
CURRENCY SHARE-
ADDITIONAL TRANSLATION OWNER'S
COMMON PAID-IN RETAINED ADJUST- INVEST-
STOCK CAPITAL EARNINGS MENTS MENT
Balance, December 31, 1994 $ 1 $ 51,850 $ 39,741 $ $ 91,592
Dividends declared and paid - - (21,300) - (21,300)
Net income - - 3,710 - 3,710
---- -------- -------- ------- --------
Balance, December 31, 1995 1 51,850 22,151 - 74,002
Dividends declared and paid - - (9,500) - (9,500)
Accumulated translation adjustment - - - 587 587
Net income - - 25,328 - 25,328
---- -------- -------- ------- --------
Balance, December 31, 1996 1 51,850 37,979 587 90,417
Dividends declared and paid - - (38,000) - (38,000)
Accumulated translation adjustment - - - (1,487) (1,487)
Net income - - 24,134 - 24,134
---- -------- -------- ------- --------
Balance, December 31, 1997 $ 1 $ 51,850 $ 24,113 $ (900) $ 75,064
---- -------- -------- ------- --------
---- -------- -------- ------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-5
AT&T SOLUTIONS CUSTOMER CARE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1997 1996 1995
Cash flow from operating activities:
Net income $ 24,134 $ 25,328 $ 3,710
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,875 9,449 11,878
Business restructuring reserve for fixed assets - - 11,500
Provision for doubtful accounts 263 (5) 201
Change in assets and liabilities:
Accounts receivable (14,793) 12,952 (15,439)
Transfers from AT&T, net 7,894 (6,093) 11,381
Prepaid expenses and other receivables 816 (331) 3,182
Accounts payable and accrued liabilities 8,954 (383) 7,437
Payroll and accrued benefits 6,156 (17,532) 6,525
Deferred income taxes 6,395 11,375 (2,887)
-------- -------- --------
Total adjustments 23,560 9,432 33,778
-------- -------- --------
Net cash provided by operating activities 47,694 34,760 37,488
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (6,581) (37,937) (11,433)
Decrease in long-term note receivables - 2,043 334
-------- -------- --------
Net cash used in investing activities (6,581) (35,894) (11,099)
-------- -------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations (269) - -
Cash overdrafts (1,357) 10,047 -
Dividends paid (38,000) (9,500) (21,300)
-------- -------- --------
Net cash used in financing activities (39,626) 547 (21,300)
-------- -------- --------
Effect of exchange rate changes on cash (1,487) 587 -
Net increase in cash and cash equivalents - - 5,089
Cash and cash equivalents, beginning of year - - (5,089)
-------- -------- --------
Cash and cash equivalents, end of year $ - $ - $ -
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 105 $ - $ -
-------- -------- --------
-------- -------- --------
NON CASH INVESTING ACTIVITIES:
During 1997, Solutions entered into capital lease arrangements totaling $3,022.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-6
AT&T SOLUTIONS CUSTOMER CARE
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION:
AT&T Solutions Customer Care (Solutions) is the customer care business of
American Telephone and Telegraph Company (AT&T) that includes American
Transtech, Inc. (Transtech), a wholly owned subsidiary of AT&T, and the
Canadian customer care business of AT&T. Solutions provides customer care
and employee care teleservices to AT&T and other Global 2000 companies.
These financial statements consist of the accounts of Transtech and the
assets, liabilities and operations of the Canadian customer care business
of AT&T.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION - The financial statements reflect the financial
position, results of operations, changes in shareowner's investment and
cash flows of Solutions, as if Solutions were a separate entity for all
periods presented. The financial statements have been prepared using the
historical basis in the assets and liabilities and historical results of
operations related to Solutions.
AT&T uses a centralized approach to cash management and the financing of
its operations. As a result, cash and cash equivalents and debt were not
allocated to Solutions in the financial statements. Solution's financing
requirements are represented by cash transactions with AT&T and are
reflected in the "Amounts due from AT&T" account. Assets and liabilities
of AT&T relating to certain employee benefits have not been allocated to
Solutions. However, AT&T charges Solutions, and other AT&T subsidiaries,
their allocated share of the annual expenses related to these employee
benefits. Activity in the Amounts due from AT&T account relates to net cash
flows of Solutions as well as changes in the assets and liabilities not
allocated to Solutions.
General corporate overhead related to AT&T's corporate headquarters and
common support functions has been allocated to Solutions, to the extent
such amounts are applicable to Solutions, based on the ratio of Solutions
external costs and expenses to AT&T s external costs and expenses.
Management believes these allocations are reasonable. However, the costs of
these services charged to Solutions are not necessarily indicative of the
costs that would have been incurred if Solutions had performed these
functions as a stand-alone entity.
The financial information included herein may not necessarily reflect the
financial position, results of operations, changes in shareowner's
investment and cash flows of Solutions in the future or amounts that would
have been reported had it been a separate, stand-alone entity during the
periods presented.
CASH - Solutions places its cash with what it believes to be high credit
quality institutions. At times, such deposits may be in excess of the
Federal Deposit Insurance Corporation limit.
F-7
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION - Solutions recognizes revenue as services are
performed.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost, less
accumulated depreciation and amortization. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets.
Maintenance and repair costs are expensed as incurred. Equipment under
capital leases is recorded at the present value of minimum lease payments.
Amortization is calculated on a straight-line basis over the lease term.
For property and equipment retired or sold, the gain or loss is recognized
in other income.
USE OF ESTIMATES - The 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.
INCOME TAXES - Deferred tax liabilities and assets are determined based on
the difference between the financial statement carrying amounts and tax
basis of assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences reverse. A deferred tax valuation
allowance is established if it is more likely than not that all or a
portion of Solutions deferred tax assets will not be realized.
DIVIDEND POLICY - Dividend amounts may be reduced to preserve or build up a
retained earnings level of 5% of total equity. Regular dividends are
declared and payable within 45 days of the end of the corresponding net
income reporting period. In general, dividend payments will be made
annually, based on annual actual net income. However, if the annual
budgeted net income exceeds a threshold of $200, dividend payments that
year will be made quarterly, based on quarterly actual net income.
SOFTWARE DEVELOPMENT COSTS - Research and development expenditures are
charged to expense as incurred. Development costs of software are
capitalized and recorded in property 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. At December 31, 1997 and 1996
the cost of capitalized software was $6,273 and $6,273, respectively.
Accumulated amortization was $5,234 and $4,196 as of December 31, 1997 and
1996, respectively.
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. Translation adjustments are accumulated
and reflected as a separate component of shareowner's investment. Revenue
and expenses are translated monthly using the exchange rate on the last day
of the month.
F-8
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. INCOME TAXES:
Deferred income tax liabilities represent federal and state income taxes
the Company expects to pay in future periods. Similarly, deferred tax
assets are recorded for expected reductions in income taxes payable in
future periods. Deferred income taxes arise because of differences in the
book and tax bases of certain assets and liabilities, primarily the
allowance for credit losses.
The following table shows the principal reasons for the difference between
the effective tax rate and the United States federal statutory income tax
rate (in thousands):
1997 1996 1995
Federal income tax at statutory rate of 35% $13,766 $14,480 $ 2,166
State income taxes, net of federal income tax effect 1,363 1,434 215
Other 69 130 98
------- ------- -------
$15,198 $16,044 $ 2,479
------- ------- -------
------- ------- -------
Effective income tax rate 39% 39% 40%
------- ------- -------
------- ------- -------
The provision for income taxes consists of the following (in thousands):
1997 1996 1995
Currently payable:
Federal $ 7,582 $ 4,023 $ 4,622
State 1,220 647 744
------- ------- -------
8,802 4,670 5,366
Deferred federal and state provision 6,396 11,374 (2,887)
------- ------- -------
Provision for income taxes $15,198 $16,044 $ 2,479
------- ------- -------
------- ------- -------
The amounts of the net deferred tax assets and liabilities at December 31
are as follows (in thousands):
1997 1996
Allowance and reserves $ (789) $(4,930)
Property and equipment 16,903 14,649
------- -------
Deferred income tax liabilities, net $16,114 $9,719
------- -------
------- -------
The Company's operations are included in AT&T's consolidated tax return.
under a tax-sharing arrangement between AT&T and its affiliates, the amount
of tax due AT&T is based on the contribution each company makes to AT&T's
consolidated taxable income as if it was a stand-alone company. the current
liability is netted against amounts due from AT&T.
A valuation allowance against deferred tax assets must be recorded if,
based on available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized. no valuation allowance has
been recorded as of December 31, 1997 and 1996.
F-9
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY AND EQUIPMENT:
Details of property and equipment at December 31 are as follows (in
thousands):
1997 1996
Machinery, electronic and other equipment $106,321 $ 99,720
Computer software development cost 6,273 6,273
Furniture and fixtures 20,069 19,226
Land and improvements 4,670 4,670
Buildings and leasehold improvements 47,229 45,070
-------- --------
184,562 174,959
Less: accumulated depreciation and amortization (97,351) (89,478)
-------- --------
Property and equipment, net $ 87,211 $ 85,481
-------- --------
-------- --------
5. LEASE COMMITMENTS:
Solutions leases certain facilities and equipment used in its operations
under noncancelable leases which expire at various dates through December
31, 2008.
Solutions also leases its office building in Jacksonville, Florida; Ft.
Lauderdale, Florida; Tucson, Arizona; San Jose, California; Jacksonville,
North Carolina; Chattanooga, Tennessee; Lubbock, Texas; Killeen, Texas;
Willowdale, Ontario Canada; and Nova Scotia, Canada, under noncancelable
operating leases expiring through December 31, 2008.
At December 31, 1997, the total minimum rental commitments under
noncancelable leases were as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
1998 $ 447 $ 11,854
1999 447 12,453
2000 447 10,574
2001 447 7,728
2002 447 6,734
Thereafter 2,016 22,296
------- --------
Total minimum lease payments 4,251 $ 71,639
--------
--------
Amounts representing interest (1,498)
-------
Present value of net minimum lease payment $ 2,753
-------
-------
Total rental expense recorded under noncancelable operating leases was
$18,376, $15,580 and $13,891 in 1997, 1996 and 1995, respectively. Total
lease payments made under capital lease obligations were approximately
$269, $0 and $0 in 1997, 1996 and 1995, respectively.
F-10
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. TRANSACTIONS WITH AT&T AND AT&T Subsidiaries:
AT&T and AT&T subsidiaries provided approximately 69%, 71% and 74% in 1997,
1996 and 1995, respectively, of Solutions' total operating revenues
primarily through customer care and employee care teleservices. Allocated
operating expenses to Solutions from AT&T and AT&T subsidiaries were
approximately 7%, 7%, and 3% of total operating expenses in 1997, 1996 and
1995, respectively. Those allocated operating expenses were for
telecommunication services, property management and office rental, employee
benefits and purchasing services.
7. CONTINGENCIES:
With respect to lawsuits, proceedings and other claims pending at year-end,
it is the opinion of management, based upon the advice of counsel, that
after final disposition, any monetary liability or financial impact to
Solutions beyond that provided at year-end would not be material to its
financial position or results of operations.
8. SALE OF AT&T SOLUTIONS CUSTOMER CARE:
Effective March 3, 1998, AT&T sold all of the shares of Solutions to
MATRIXX Marketing, Inc. (MATRIXX), a subsidiary of Cincinnati Bell, Inc.
9. EMPLOYEE BENEFIT PLANS:
The following employee benefit plans represent the plans sponsored by AT&T
at December 31, 1997:
PENSION PLAN - The Company's employees participate in a noncontributory
defined benefit pension plan sponsored by AT&T. Benefits for management
employees are principally based on career-average pay while benefits for
occupational employees are not directly related to pay. Pension
contributions are principally determined using the aggregate cost method
and are primarily made to trust funds held for the sole benefit of plan
participants. The Company is allocated its portion of the expense annually.
Information regarding the portion of the plan attributable to the Company
is not available.
SAVINGS PLANS - The Company, through AT&T, sponsors savings plans for the
majority of employees. The plans allow employees to contribute a portion of
their pretax and/or after-tax income in accordance with specified
guidelines. AT&T matches a percentage of the employee contributions up to
certain limits. The Company is allocated its portion of the expense
annually. Information regarding the portion of the plan attributable to the
Company is not available.
F-11
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. EMPLOYEE BENEFIT PLANS, CONTINUED:
POSTRETIREMENT BENEFITS - The Company, through AT&T, provides
postretirement benefits including health care benefits, life insurance
coverage and telephone concessions for certain of its employees. The
Company is allocated its portion of the expense annually. Information
regarding the portion of the plan attributable to the Company is not
available.
POSTEMPLOYMENT BENEFITS - The Company, through AT&T, provides estimated
future postemployment benefits, including separation payments, during the
years employees are working and accumulating these benefits, and for
disability payments when the disabilities occur for certain of its
employees. AT&T has recognized an accumulated liability, however, the
Company is allocated its portion of the expense annually.
10. BUSINESS RESTRUCTURING:
In the fourth quarter of 1995, AT&T approved a restructuring plan for
Solutions. The restructuring plan resulted in the reorganization of
management functions at certain operating divisions and facilities.
Solutions recorded a special charge which reduced net income by $22,300.
The charge included $11,500 in non-cash property and equipment write-downs
related to certain operating facilities and $10,800 in severance pay under
existing severance plans. All charges were paid during 1996.
11. AMOUNTS DUE FROM AT&T:
The amounts due from AT&T for the years 1997, 1996 and 1995 are as follows:
1997 1996 1995
Inter entity revenues $ 288,107 $ 267,541 $ 250,440
Inter entity expenses (38,670) (43,783) (57,842)
Income taxes due to parent (18,838) (10,035) (5,366)
Net cash received (206,503) (181,733) (161,335)
--------- --------- ---------
$ 24,096 $ 31,990 $ 25,897
--------- --------- ---------
--------- --------- ---------
F-12
CINCINNATI BELL INC.
INDEX TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pages
Overview of the Unaudited Pro Forma Condensed Consolidated Financial
Statements F-14
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1997 F-15
Unaudited Pro Forma Condensed Consolidated Statement of Income for the
year ended December 31, 1997 F-16
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements F-17
F-13
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR CINCINNATI BELL INC.
The following unaudited pro forma condensed consolidated financial statements
of Cincinnati Bell Inc. (the Company) give effect to the acquisition of AT&T
Solutions Customer Care (Transtech). The unaudited pro forma financial
statements are filed by way of an amendment to the Company's Current Report
on Form 8-K filed on March 17, 1998, which describes the acquisition of
Transtech.
The unaudited pro forma condensed consolidated statement of income for the
year ended December 31, 1997 reflects the audited historical statements of
income for the Company and the audited historical statements of income of
Transtech for the year then ended as if the acquisition occurred on January
1, 1997. The unaudited pro forma condensed balance sheet at December 31,
1997 reflects the audited historical balance sheet of the Company and the
audited historical balance sheet of Transtech as if the acquisition had
occurred on December 31, 1997.
The unaudited pro forma condensed consolidated financial statements are a
presentation of the historical results with accounting and other adjustments.
The unaudited pro forma condensed financial statements (i) do not reflect the
effects of any anticipated changes to be made by the Company to its
historical operations; (ii) are presented for informational purposes only;
and (iii) should not be construed to be indicating the results of operations
or the financial position of the Company that actually would have occurred
had the acquisition of Transtech been consummated as of the date indicated,
or the results of operations or the financial position of the Company in the
future.
The unaudited pro forma condensed consolidated financial statements reflect
the acquisition using the purchase method of accounting. The acquired assets
and liabilities of Transtech are stated at values representing the allocation
of the purchase price based upon the estimated fair market values at the date
of acquisition. The unaudited pro forma financial statements also reflect
the amortization of goodwill and other intangibles resulting from the
acquisition as well as the financing of, and interest expense related to, the
acquisition.
The following unaudited pro forma condensed consolidated financial statements
and accompanying notes are qualified in their entirety by reference to, and
should be read in conjunction with, the Company's Management's Discussion and
Analysis of Financial Condition and Results of Operations included in its
Annual Report on Form 10-K for the year ended December 31, 1997, and the
audited financial statements of Transtech as of and the year ended December
31, 1997, which are included within this filing.
F-14
CINCINNATI BELL INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(Millions of Dollars)
Historical Historical Pro Forma
Cincinnati Bell Inc. Transtech Adjustments Pro Forma
-------------------- --------- ----------- ---------
ASSETS
Current Assets
Cash and cash equivalents $ 9.9 $ 9.9
Receivables, net 350.8 $ 63.5 $ (20.2)(5) 394.1
Deferred income taxes 24.6 .8 (.8)(6) 24.6
Prepaid and other current assets 64.7 2.2 66.9
-------- -------- -------- ---------
Total current assets 450.0 66.5 (21.0) 495.5
Property, plant and equipment, net 703.2 87.2 24.4(1) 814.8
Goodwill and intangibles, net 195.0 494.0(1) 689.0
Investments in unconsolidated entities 77.6 77.6
Deferred charges and other assets 72.9 16.2(3) 89.1
-------- -------- -------- ---------
Total Assets $1,498.7 $ 153.7 $ 513.6 $ 2,166.0
-------- -------- -------- ---------
-------- -------- -------- ---------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Debt maturing in one year $ 190.6 $ .2 $ 632.0(4) $ 822.8
Payables and other current liabilities 344.3 59.0 403.3
-------- -------- -------- ---------
Total current liabilities 534.9 59.2 632.0 1,226.1
Long-term debt 269.2 2.5 271.7
Deferred income taxes 12.7 16.9 (16.9)(6) 12.7
Other long-term liabilities 102.2 102.2
-------- -------- -------- ---------
Total liabilities 919.0 78.6 615.1 1,612.7
Shareowners' Equity
Common shares 136.1 136.1
Additional paid-in capital 229.8 51.9 (51.9)(7) 229.8
Retained earnings 217.7 24.1 (24.1)(7) 191.3
(26.4)(3)
Currency translation adjustments (3.9) (.9) .9(7) (3.9)
-------- -------- -------- ---------
Total shareowners' equity 579.7 75.1 (101.5) 553.3
-------- -------- -------- ---------
Total Liabilities and Shareowners' Equity $1,498.7 $ 153.7 $ 513.6 $ 2,166.0
-------- -------- -------- ---------
-------- -------- -------- ---------
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
F-15
CINCINNATI BELL INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(Millions of Dollars, Except Per Share Amounts)
Historical Historical Pro Forma
Cincinnati Bell Inc. Transtech Adjustments Pro Forma
-------------------- --------- ----------- ---------
Revenues $1,756.8 $ 402.4 $ 2,159.2
Costs and expenses excluding special items 1,429.7 364.0 $ 23.5(2) 1,817.2
-------- -------- -------- ---------
Operating income excluding special items 327.1 38.4 (23.5) 342.0
Special items 14.0 14.0
-------- -------- -------- ---------
Operating income 313.1 38.4 (23.5) 328.0
Other income (expense), net 19.3 1.1 20.4
Interest expense 35.5 .2 36.3(4) 72.0
-------- -------- -------- ---------
Income before income taxes 296.9 39.3 (59.8) 276.4
Income taxes 103.3 15.2 (22.6)(2)(4) 95.9
-------- -------- -------- ---------
Income from continuing operations $ 193.6 $ 24.1 $ (37.2) $ 180.5
-------- -------- -------- ---------
-------- -------- -------- ---------
Earnings Per Common Share:
Income from continuing operations
Basic $1.43 $1.34
Diluted $1.41 $1.31
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
F-16
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following notes identify the pro forma adjustments made to the historical
amounts in the unaudited pro forma condensed consolidated financial statements:
(1) The adjustments to the unaudited pro forma condensed consolidated
balance sheet give effect to the Company's allocation of the Transtech
purchase price to the tangible and intangible assets acquired, based on
an appraisal. The purchase price of $632.0 million was based on the
contract purchase price of $625 million in cash and other direct
acquisition costs estimated to be approximately $7.0 million. Any
adjustment from these acquisition cost estimates to actual costs will be
recorded later in 1998 as an adjustment to goodwill, as will any
adjustment to the $625 million purchase price that results from the
settlement of the closing balance sheet purchase price adjustment called
for in the acquisition agreement. The Company's allocation of the
Transtech purchase price of $632.0 million is as follows: acquired
contracts - $68.2 million; in-process research and development - $42.6
million; assembled workforce - $11.4 million; internally-developed
software - $4.4 million; fair value of other tangible assets acquired -
$91.0 million (includes the $20.0 million excess of the fair value of
acquired property over the historical book value); and goodwill - $414.4
million.
(2) The adjustments to the unaudited pro forma condensed consolidated
statement of income give effect to the amortization of intangible assets
acquired and the related income tax benefits at a rate of 37.8%.
Assigned lives for intangible assets are as follows: acquired contract -
eight years; assembled workforce - fifteen years; and goodwill - thirty
years. Assigned lives for property and equipment are as follows:
software and personal computers - three years; equipment - five years;
and buildings - thirty years.
(3) The Company assigned $42.6 million of the purchase price to acquired
research and development costs resulting in a reduction to pro forma
retained earnings. The after-tax effect of these costs is $26.4
million, net of $16.2 million of deferred income tax benefits, which
will be reflected as an expense in the Company's financial reporting for
the period in which the acquisition occurred. This one-time charge has
been excluded from the unaudited pro forma condensed consolidated income
statement.
(4) The acquisition and associated costs were financed entirely through
short-term variable rate commercial paper. Interest expense on the debt
has been recorded through a pro forma adjustment to the unaudited pro
forma condensed consolidated statement of income, at the current rate
for the commercial paper that was issued to finance the acquisition of
5.75%. The related income tax benefit has been recorded at a rate of
37.8%. A 1/8% change in the interest rate from that used in the pro
forma adjustment would change the related interest expense by $.8
million.
(5) Eliminates from the unaudited pro forma condensed consolidated balance
sheet a Transtech intercompany receivable from AT&T that was not
acquired by the Company.
(6) Eliminates from the unaudited pro forma condensed consolidated balance
sheet the deferred tax asset and liability that will not carry over to
the Company since the Company has elected under the Internal Revenue
Service Code Section 338(h)(10) to treat the stock acquisition as an asset
acquisition.
(7) This adjustment eliminates the historical Transtech capital structure
from the unaudited pro forma condensed consolidated balance sheet.
(8) During 1997, the Company recorded a one-time, non-cash extraordinary
charge of $210.0 million (which is net of a $129.2 million deferred tax
benefit) for the discontinuation of Statement of Financial Accounting
Standards No. 71. "Accounting for Certain Types of Regulation." This
charge has not been reflected in the unaudited pro forma condensed
consolidated statement of income.
F-17