SELECTED FINANCIAL AND OPERATING DATA Cincinnati Bell Inc.
Millions of dollars except per share amounts 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Revenues $ 885.1 $ 834.5 $ 779.8 $ 736.0 $ 704.3
Costs and expenses excluding special charges (credits) 706.2 664.1 628.9 595.0 587.8
-------- -------- -------- -------- --------
Operating income excluding special charges (credits) 178.9 170.4 150.9 141.0 116.5
Special charges (credits) (a) (1.1) (21.0) (29.7) 131.6 7.7
-------- -------- -------- -------- --------
Operating income 180.0 191.4 180.6 9.4 108.8
Wireless venture loss 27.3 -- -- -- --
Other (income) expense, net 2.4 2.7 (.5) 9.1 1.3
Interest expense 24.2 30.1 27.9 45.4 40.1
-------- -------- -------- -------- --------
Income (loss) before income taxes, extraordinary items
and cumulative effect of change in accounting principle 126.1 158.6 153.2 (45.1) 67.4
Income taxes 44.3 56.3 53.7 (16.0) 24.4
-------- -------- -------- -------- --------
Income (loss) from continuing operations 81.8 102.3 99.5 (29.1) 43.0
Income from discontinued operations, net of taxes (b) 69.1 91.3 85.5 3.8 32.0
-------- -------- -------- -------- --------
Income (loss) before extraordinary items 150.9 193.6 185.0 (25.3) 75.0
Extraordinary items and cumulative effect of
change in accounting principle (c) (1.0) (210.0) -- (7.0) (2.4)
-------- -------- -------- -------- --------
Net income (loss) $ 149.9 $ (16.4) $ 185.0 $ (32.3) $ 72.6
-------- -------- -------- -------- --------
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ .60 $ .76 $ .74 $ (.22) $ .33
Income from discontinued operations, net of taxes .51 .67 .64 .03 .25
Extraordinary items, net of taxes (.01) (1.55) -- (.05) (.02)
Income (loss) $ 1.10 $ (.12) $ 1.38 $ (.24) $ .56
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $ .59 $ .74 $ .73 $ (.22) $ .33
Income from discontinued operations, net of taxes .50 .67 .62 .03 .24
Extraordinary items, net of taxes (.01) (1.53) -- (.05) (.02)
Income (loss) $ 1.08 $ (.12) $ 1.35 $ (.24) $ .55
Dividends declared per common share $ .40 $ .40 $ .40 $ .40 $ .40
Weighted average common shares (millions)
Basic 136.0 135.2 133.9 132.0 130.7
Diluted 138.2 137.7 137.2 133.5 130.9
FINANCIAL POSITION
Total assets (b) (c) $1,041.0 $1,275.1 $1,415.9 $1,363.8 $1,474.8
Long-term debt $ 366.8 $ 268.0 $ 271.2 $ 370.0 $ 523.7
Total debt $ 553.0 $ 399.5 $ 409.0 $ 423.7 $ 514.9
Common shareowners' equity (b) (c) $ 142.1 $ 579.7 $ 634.4 $ 478.1 $ 552.4
OTHER DATA
Telephone plant construction $ 136.3 $ 141.1 $ 101.4 $ 90.3 $ 112.8
Network access lines (000) 1,033 1,005 958 906 877
Access minutes of use (millions)
Interstate 3,151 2,945 2,744 2,536 2,336
Intrastate 1,112 1,055 963 956 932
Employees 3,500 3,300 3,100 3,100 3,700
Market price per share (d)
High $ 38.625 $ 33.750 $ 30.813 $ 17.625 $ 10.063
Low $ 20.875 $ 23.063 $ 15.875 $ 8.438 $ 7.688
Close $ 37.813 $ 31.000 $ 30.813 $ 17.375 $ 8.500
(a) See Note 12 of Notes to Financial Statements.
(b) See Note 3 of Notes to Financial Statements.
(c) See Note 4 of Notes to Financial Statements.
(d) Prices are before spin-off of Convergys. Cincinnati Bell Inc. stock began
trading on a post-spin-off basis on January 4, 1999.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cincinnati Bell Inc.
Cincinnati Bell Inc. (the Company) is a full-service telecommunications company
that conducts its operations through the following reportable segments:
LOCAL COMMUNICATIONS SERVICES -- The Company provides local, long distance,
data networking and transport, Internet and payphone services, as well as
sales of communications equipment, in southwestern Ohio, northern Kentucky
and southeastern Indiana. Services are marketed and sold to both residential
and business customers and are delivered via the Company's Cincinnati Bell
Telephone (CBT) subsidiary.
DIRECTORY SERVICES -- The Company sells directory advertising and information
services, primarily to business customers in the aforementioned area. This
segment's identifiable product is the yellow pages directory delivered via
the Company's Cincinnati Bell Directory (CBD) subsidiary.
OTHER COMMUNICATIONS SERVICES -- The Company (i) resells long distance and
Internet access services and provides data services and products to small-
and medium-sized business customers in a five-state Midwestern area and (ii)
resells telecommunications and computer equipment in the secondary market.
These services are provided through the Company's Cincinnati Bell Long
Distance (CBLD) and Cincinnati Bell Supply (CBS) subsidiaries, respectively.
On December 31, 1998, the Company acquired an 80% interest from AT&T
Wireless PCS, Inc. (AT&T PCS) in a venture offering personal communications
services (PCS) in the Greater Cincinnati and Dayton markets. The Company
anticipates that this new digital wireless communications business,
Cincinnati Bell Wireless, will be reported as an operating segment in 1999.
The Company recently formed two new subsidiaries. ZoomTown.com Inc.,
formed in the first quarter of 1999, provides FUSE Internet access,
e-commerce and transactional services. EnterpriseWise IT Consulting LLC
(formerly KSM Consulting and the Network Solutions Group) was formed in the
third quarter of 1998 and provides network integration and consulting
services. Operating results from these services have been included in the
Local Communications Services segment.
This report 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 is a full-service provider of local, long distance, wireless,
data, Internet, payphone, directory services and related communications
equipment to customers in the Midwest.
The Company's competitive strengths include its (i) well-regarded brand
name, (ii) technologically advanced network, (iii) communications industry
focus, knowledge and experience, (iv) reputation for service quality, (v)
large customer base and (vi) strategic relationships with targeted industry
leaders, including AT&T Corp. (AT&T), Lucent Technologies, Cisco Systems and
PSINet. By leveraging its competitive strengths, the Company believes that it
can capture the full benefit of its strategic relationships with these
targeted industry leaders to provide world-class service.
In May 1998, the Company formed a new subsidiary, Convergys Corporation
(Convergys), to hold the Company's information management and customer
management businesses (formerly CBIS and MATRIXX Marketing, respectively) and
the Company's interest in a cellular partnership.
In November, the Company's Board of Directors authorized the Company to
complete the divestiture of Convergys. On December 31, 1998, the Company
distributed one share of Convergys stock for each share of Company stock
owned by those Company shareholders of record on December 1, 1998. Subsequent
to the divestiture on December 31, 1998, the Company has no ownership
interest in Convergys.
20
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Revenues were $885.1 million, up 6% from $834.5 million in 1997, primarily as
a result of increased activities in Local Communications Services. Costs and
expenses, excluding special credits, were $706.2 million, up 6% from $664.1
million. Operating margins, excluding special credits in both years, were
comparable.
Income from continuing operations was $81.8 million, or $.59 per share in
1998 compared with $102.3 million, or $.74 per share in 1997. In 1998, the
Company recognized $1.1 million in special credits resulting from the 1995
business restructuring, compared with $21.0 million in 1997 (see Note 12 of
Notes to Financial Statements). The Company also recorded a $27.3 million
loss on its new wireless venture in 1998, while no such loss was recorded in
1997. Excluding special credits and the wireless dilution, income from
continuing operations on a per share basis was $.72 in 1998 compared with
$.64 in 1997.
Extraordinary items affected both years. In 1998, retirement of long-term
debt and a portion of a credit facility resulted in an extraordinary charge
of $1.0 million, net of taxes. In 1997, the discontinuation of Statement of
Financial Accounting Standard (SFAS) 71,"Accounting for the Effects of
Certain Types of Regulation," at CBT resulted in a non-cash charge of $210.0
million after-tax.
Costs to reprogram information systems for the Year 2000 and to implement
regulator-mandated interconnection and local number portability also affected
operating results. These costs were $21.5 million in 1998 compared with $10.5
million in 1997.
1997 COMPARED TO 1996
Revenues were $834.5 million, up 7% from $779.8 million in 1996, as a result
of balanced growth across the Company's businesses. Costs and expenses,
excluding special credits, were $664.1 million, up 6% from 1996. Operating
income, excluding special credits, increased to $170.4 million, a 20.4%
margin, from $150.9 million, a 19.4% margin, in 1996. Income from continuing
operations was $102.3 million, or $.74 per share in 1997, compared with $99.5
million, or $.73 per share in 1996. Excluding special credits, income from
continuing operations increased to $88.9 million, or $.64 per share from
$80.2 million, or $.59 per share in 1996.
In 1997, the Company recognized $21.0 million in special credits resulting
from the 1995 business restructuring, compared with $29.7 million in 1996
(see Note 12 of Notes to Financial Statements). Interest expense of $30.1
million in 1997 was $2.2 million higher than in 1996 due to a non-recurring
reversal of $2.5 million in interest expense associated with overearnings
liabilities recorded in 1996. Results in 1997 also included an extraordinary,
non-cash charge of $210.0 million due to the discontinuance of SFAS 71. This
charge was net of a related tax benefit of $129.2 million (see Note 4 of
Notes to Financial Statements).
Operating results were also affected by two significant initiatives that
began in 1997. The first initiative was the effort to reprogram the Company's
information systems for the Year 2000. The second was the effort to modify
CBT's network, as mandated by regulators, to accommodate connections with
competing networks and to allow customers to maintain their telephone numbers
when they switch local service providers.
- --------------------------------------------------------------------------------
LOCAL COMMUNICATIONS SERVICES
% Change % Change
($ in millions) 1998 1997 98 vs. 97 1996 97 vs. 96
- --------------------------------------------------------------------------------
Revenues:
Local service $407.9 $386.2 6 $370.6 4
Network access 180.9 170.0 6 161.9 5
Other services 129.6 113.9 14 118.3 (4)
------ ------ ------
Total 718.4 670.1 7 650.8 3
Costs and expenses:
Operating expenses 555.2 533.8 4 523.6 2
Year-2000
programming costs 10.9 4.2 160 -- --
Mandated
telecommunications
costs 10.6 6.3 68 -- --
Special credits:
Restructuring/
settlement gains -- (21.0) -- (28.5) --
------ ------ ------
Total 576.7 523.3 10 495.1 6
Operating income $141.7 $146.8 (3) $155.7 (6)
Excluding special
credits:
Operating income $141.7 $125.8 13 $127.2 (1)
Operating margin 19.7% 18.8% 19.6%
1998 COMPARED TO 1997
The Local Communications Services segment had another strong performance in
1998, enjoying the benefits of continued growth in access lines, voice grade
equivalents and value-added services, such as Caller ID and other custom
calling features. This, in combination with increased usage of the Company's
network on a minutes-of-use basis, contributed significantly to the increase
in revenue over 1997. Excluding special credits, continued focus on the
Company's cost structure allowed for the improvement of operating margins
over 1997. In 1997, a pension settlement gain of $21.0 million benefited
operating income, while no such gain was realized in 1998.
21
REVENUES
Revenues increased $48.3 million, or 7%. Local service revenues increased
$21.7 million, primarily due to access line growth of 3% and increased usage
of the Company's suite of custom calling services.
Network access revenues increased $10.9 million, or 6%. This was primarily
due to growth in high-capacity digital services; voice grade equivalents
increased 40%. Minutes of use increased 6.6% along with an increase in
end-user access charges, but these were offset by a reduction in interstate
per-minute rates instituted by the Federal Communications Commission (FCC)
and by a reduction in intrastate rates instituted as part of the "Commitment
2000" plan as approved by the Public Utilities Commission of Ohio.
Revenues from other services increased $15.7 million, or 14%. Revenues
from the Company's National Payphone Clearinghouse business and commissions
associated with the deregulation of the public payphone business increased
$6.9 million in 1998. The Company's FUSE Internet access service increased
$2.6 million in 1998. The remainder of the increase in this category is
attributable to equipment and wiring sales and consulting revenues from the
Company's new data services business, partially offset by increased
uncollectible expense of $4.3 million.
COSTS AND EXPENSES
Operating expenses increased $21.4 million, or 4%. Approximately $12 million
of the increase is attributable to increased headcount and higher wages.
Right-to-use fees for network switching systems decreased by $2.3 million,
but were offset by increased expenditures for contract and consulting
services. Expenses also increased approximately $5 million due to mandated
charges to fund universal service initiatives and $2.3 million for increased
advertising.
Depreciation expense was approximately $14 million lower in 1998,
attributable to the discontinuance of SFAS 71, "Accounting for the Effects of
Certain Types of Regulation," in the fourth quarter of 1997 (see further
discussion in Note 4 of Notes to Financial Statements).
Year-2000 programming expenses totaled $10.9 million, a $6.7 million
increase. Regulator-mandated interconnection and local number portability
expenses totaled $10.6 million in 1998, $4.3 million more than the prior year.
No pension settlement gains or adjustments relating to the 1995
restructuring were recognized in 1998, whereas 1997 costs and expenses
included a credit of $21.0 million.
1997 COMPARED TO 1996
REVENUES
Revenues increased $19.3 million, or 3%. Local service revenues increased
$15.6 million, or 4%, primarily from continuing growth in access lines. The
strong business economy, higher installations of second lines and demand for
access to on-line computer services increased access lines 5% for the year.
Revenues from enhanced custom calling features increased as a result of
access line growth, promotions and increased advertising.
Network access revenues increased $8.1 million or 5%. Digital services
revenues increased $3.3 million; voice grade equivalents increased 25%.
End-user charges associated with access line growth increased $3.2 million.
Usage-sensitive revenues increased $1.6 million on an 8% increase in minutes
of use.
Other services decreased $4.4 million, or 4% due to the repricing of
directory listing information provided to CBD, offset by increased revenues
for existing products, the introduction of new services such as Internet
access and the deregulation of pay telephone services.
COSTS AND EXPENSES
Operating expenses increased $10.2 million, or 2%. Contract labor, consulting
fees and right-to-use fees increased $14.1 million. Depreciation expense
increased $4.0 million, primarily as a result of higher telephone plant
balances throughout 1997. This was somewhat offset by a $4.0 million lower
pension and benefit expense and a $4.3 million reduction in taxes imposed
upon the gross revenues of the segment.
Year-2000 programming costs totaled $4.2 million while regulator-mandated
spending for interconnection and local number portability totaled $6.3
million.
Special credits were $21.0 million in pension settlement gains in 1997 and
$28.5 million in pension settlement gains and restructuring adjustments in
1996.
In the fourth quarter of 1997, the application of SFAS 71, "Accounting for
the Effects of Certain Types of Regulation," was discontinued and a $210.0
million non-cash, extraordinary charge was recognized. The discontinuance of
SFAS 71 did not have a significant effect on 1997 operating results (see Note
4 of Notes to Financial Statements).
22
- --------------------------------------------------------------------------------
DIRECTORY SERVICES
% Change % Change
($ in millions) 1998 1997 98 vs. 97 1996 97 vs. 96
- --------------------------------------------------------------------------------
Revenues $72.9 $72.9 -- $72.6 --
Costs and expenses 47.5 48.0 (1) 51.6 (7)
Operating income 25.4 24.9 2 21.0 19
Operating margin 34.8% 34.1% 28.9%
1998 COMPARED TO 1997
REVENUES
Despite the advent of full-scale competition into our market area during
1998, Directory Services managed to preserve its revenue stream from 1997.
While some degree of competitive loss was felt from two new competitors, one
of which was previously a sales agent for the Company, revenues were
maintained as a result of the introduction of new listing options that
resulted in additional revenues.
COSTS AND EXPENSES
Costs and expenses in 1998 were virtually unchanged in comparison to the
prior year. Sales commissions decreased as a result of slightly lower sales
volume and a renegotiated commission rate. Advertising spending increased as
new campaigns were designed to preserve market share and stimulate demand for
value-added listings.
1997 COMPARED TO 1996
REVENUES
Revenues were essentially unchanged in comparison to 1996, due to a
realignment of responsibility between segments as to the Company's white
pages directory. The production of the white pages directory, and its
approximately $3 million in revenues, were transitioned to the Local
Communications Services segment in 1997. Excepting this, the segment would
have shown growth of 5% versus the previous year.
COSTS AND EXPENSES
Costs and expenses decreased $3.6 million, or 7%. The majority of this
decrease resulted from lower charges from CBT pursuant to changes in contract
pricing for directory listing information and lower sales commissions. Some
of the reduction in expense was offset by the development of a complementary,
Internet-based service named "Cincinnati Today." Management believes that
this Internet presence is necessary for more robust revenue growth in the
face of new competition from other directory publishers.
- --------------------------------------------------------------------------------
OTHER COMMUNICATIONS SERVICES
% Change % Change
($ in millions) 1998 1997 98 vs. 97 1996 97 vs. 96
- --------------------------------------------------------------------------------
Revenues $106.1 $101.7 4 $ 81.8 24
Costs and expenses 95.6 90.2 6 70.9 27
Operating income 10.5 11.5 (9) 10.9 5
Operating margin 9.9% 11.3% 13.3%
1998 COMPARED TO 1997
REVENUES
Revenues increased $4.4 million, or 4%. The Company's long distance
subsidiary contributed a substantial gain in revenues over the prior year,
adding $10.0 million of revenue as a result of increased subscribership and
usage. The Company's equipment reseller reported a $5.6 million decline in
its revenues, due to the reduction in sales volume with a major customer and
lower salvage prices on reclaimed materials for resale.
COSTS AND EXPENSES
Costs and expenses increased $5.4 million, or 6%. The long distance
subsidiary experienced increased selling and administrative expenses to
acquire new subscribers and enter the data market with the introduction of
frame relay service and Internet access. The equipment reseller operation
reported lower product costs due to the decreased sales volume previously
discussed.
23
1997 COMPARED TO 1996
REVENUES
Revenues increased $19.9 million, or 24%. The Company's long distance subsidiary
reported an $8.0 million increase in revenues from 1996 results. This was the
result of increased subscribership and usage by end-user customers and increased
sales of station equipment to business customers. The Company's equipment
reseller reported an increase of $11.9 million as a result of increased sales of
personal computers to a large customer.
COSTS AND EXPENSES
Costs and expenses increased $19.3 million, or 27%. The long distance subsidiary
experienced increased selling and administrative expenses to acquire new
subscribers and higher product costs related to the sale of station equipment to
business customers. The equipment reseller operation showed a $10.5 million
increase in product costs related to the sale of personal computers.
- -------------------------------------------------------------------------------
WIRELESS VENTURE LOSS AND
OTHER (INCOME) EXPENSE, NET
% Change % Change
($ in millions) 1998 1997 98 vs. 97 1996 97 vs. 96
- -------------------------------------------------------------------------------
Wireless venture loss $27.3 -- -- -- --
Other (income)
expense, net 2.4 $2.7 -- $(.5) --
1998 COMPARED TO 1997
On December 31, 1998, the Company acquired an 80% interest from AT&TPCS in a
venture offering PCS in the Greater Cincinnati and Dayton markets. The agreement
specified that prior to the funding of the venture, the Company and AT&T PCS
would operate under an interim agreement whereby losses would be funded in the
same percentages as the proposed venture. In 1998, this resulted in a loss of
$27.3 million. It is anticipated that this PCS business will be reported as an
operating segment in 1999.
1997 COMPARED TO 1996
The net reduction in income is primarily the result of reduced interest income
and higher corporate expenses.
- -------------------------------------------------------------------------------
INTEREST EXPENSE
% Change % Change
($ in millions) 1998 1997 98 vs. 97 1996 97 vs. 96
- -------------------------------------------------------------------------------------
$24.2 $30.1 (20) $27.9 8
1998 COMPARED TO 1997
Interest expense declined in 1998 due to lower weighted average interest rates
and a reclassification of interest during construction in 1998.
1997 COMPARED TO 1996
Excluding a reversal of $2.5 million in interest expense related to overearnings
liabilities in the third quarter 1996, interest expense in 1997 was comparable
to 1996.
- ------------------------------------------------------------------------------
INCOME TAXES
% Change % Change
($ in millions) 1998 1997 98 vs. 97 1996 97 vs. 96
- --------------------------------------------------------------------------------
Income taxes $44.3 $56.3 (21) $53.7 5
Effective tax rate 35.1% 35.5% 35.1%
1998 COMPARED TO 1997 AND 1997 COMPARED TO 1996
In 1998, the decrease in tax expense was the result of lower pre-tax income,
primarily due to the wireless venture loss. The 1997 increase was the result of
higher pre-tax income. The effective tax rates were comparable.
- -------------------------------------------------------------------------------
EXTRAORDINARY ITEMS, NET OF TAXES
% Change % Change
($ in millions) 1998 1997 98 vs. 97 1996 97 vs. 96
- -------------------------------------------------------------------------------------
$1.0 $210.0 -- -- --
1998 COMPARED TO 1997 AND 1997 COMPARED TO 1996
In the fourth quarter of 1998, the Company retired debt and a portion of a
credit facility, and recorded an extraordinary non-cash charge of $1.0 million,
which is net of a related tax benefit of $.5 million.
In 1997, as described in Note 4 of Notes to Financial Statements, the Company
discontinued the application of SFAS 71 which resulted in an extraordinary,
non-cash charge of $210.0 million, net of income taxes.
24
- -------------------------------------------------------------------------------
FINANCIAL CONDITION
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
Management believes that the Company has adequate internal and external
resources available to finance its on-going operating requirements, including
network expansion and modernization, business development and dividend programs.
In October 1998, the Company and CBT filed a shelf registration with the
Securities and Exchange Commission for the sale of up to $350 million in debt
securities, with terms to be determined at the time of sale. Proceeds of any
issues will be used to repay debt and for general corporate purposes.
In November, CBT used the shelf registration to issue $150 million of 6.3%
debentures due 2028. The proceeds were used to finance the early redemption of
$50 million of 7 3/8% debentures due in August 2011, and to reduce short-term
debt.
On December 31, 1998, the Company paid approximately $162 million in cash to
AT&T PCS in exchange for an 80% interest in a PCS venture, including the license
for the operating area and other operating assets and liabilities. The
transaction was financed by the issuance of short-term debt.
The Company plans to issue $100 million of long-term debt securities in the
first half of 1999. The proceeds will be used to pay down short-term debt
incurred for the acquisition of the PCS venture. The Company would still have
$100 million of unused capacity from the shelf registration.
Cash provided by operating activities was $212 million compared to $197
million in 1997. Earnings, adjusted for non-cash expenses, special credits and
extraordinary items, were higher in 1998. Increases in payables and other
liabilities were partially offset by an increase in accounts receivable.
The Company's significant investing activities are capital expenditures and
acquisitions. Capital expenditures were approximately $143 million, down from
$167 million in 1997. This decrease is attributable to lower equipment purchases
by CBT in 1998 and CBT's 1997 purchase of a separate 10 mega-hertz wireless
license. Acquisitions totaled approximately $166 million for the investment in
the PCS venture, and for the purchase of a network integration and consulting
business.
Capital expenditures for 1999, including capitalization of software as
required by AICPA Statement of Position 98-1, are estimated to be $190 million,
excluding acquisitions.
BALANCE SHEET
Receivables increased $10.1 million primarily as a result of higher revenues.
Significant increases in property, plant and equipment, goodwill and other
intangibles, and short-term and long-term debt were primarily due to the
acquisitions noted in other sections of this report. Total net assets and
shareholders' equity were reduced by $520.7 million to reflect the spin-off of
Convergys.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes. To manage its
exposure to interest rate changes, the Company uses a combination of variable
rate short-term and fixed rate long-term financial instruments. The Company may,
from time to time, employ a small number of financial instruments to manage its
exposure to fluctuations in interest rates. The Company does not hold or issue
derivative financial instruments for trading purposes, or enter into interest
rate transactions for speculative purposes.
Interest Rate Risk Management -- The Company's objective in managing its
exposure to interest rate changes is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs.
The following table describes the financial instruments that were held by the
Company at December 31, 1998:
MATURITY DATES FOR LONG-TERM DEBENTURES AND NOTES
($ in millions) 1999-2001 2002 Thereafter Total Fair Value
- -----------------------------------------------------------------------------
Fixed-rate debentures
and notes -- $20.0 $320.0 $340.0 $355.1
Average interest rate -- 4.4% 6.7% 6.5%
25
- -----------------------------------------------------------------------------
REGULATORY MATTERS AND COMPETITIVE TRENDS
FEDERAL -- In July 1997, the U.S. Court of Appeals issued a decision stating
that the FCC exceeded its authority under the Telecommunications Act of 1996 in
several areas regarding rules governing local competition. On January 25, 1999,
the U.S. Supreme Court overturned the U.S. Court of Appeals decision and
reinstated the FCC's rules involving local competition. While the FCC now has
the ability to pre-empt a state's rules when they are inconsistent with the
FCC's, Ohio and Kentucky have both followed the FCC's rules in most
circumstances. The "pick and choose" provision will likely move CBT in the
future to a single set of contractual provisions for all interconnectors.
In May 1997, the FCC adopted an order in the access charge reform proceeding.
The order generally removed from minute-of-use access rates, costs that are not
incurred on a per minute-of-use basis. The order also adopted changes to the
interstate rate structure for transport services that are designed to move the
charges for these services to more cost-based levels. CBT and numerous other
local exchange carriers (LECs) filed appeals in the U.S. Court of Appeals for
the Eighth Circuit challenging various aspects of the FCC's May 1997 order. On
August 19, 1998, the Court issued a decision upholding the FCC's order. Since
CBT had already begun complying with the FCC's order, the Court's decision is
not expected to have a material impact on CBT's operations.
Also in May 1997, the FCC adopted an order on the new universal service
program. Several parties, including CBT, filed petitions for review of the order
in various circuits of the U.S. Court of Appeals. The court heard the case on
December 1, 1998, but a decision has not yet been rendered. Given the ongoing
judicial developments in this case, the Company cannot determine the full impact
that its ultimate resolution may have on CBT's operations.
In July 1997, CBT's price cap tariff filing was approved by the FCC without
suspension. CBT and another company have filed petitions for reconsideration
with the FCC to revisit the establishment of the 6.5% productivity offset. In
addition, several appeals have been filed with the U.S. Court of Appeals
regarding the order establishing the 6.5% productivity offset. At this time, the
outcome of the petition for reconsideration and the appeals cannot be
determined.
On February 25, 1999, the FCC issued a Declaratory Ruling classifying dial-up
traffic to Internet service providers (ISPs) as interstate traffic. The FCC
stated this conclusion does not in itself determine whether reciprocal
compensation is due in any particular instance and that the parties should be
bound by their existing interconnection agreements, as interpreted by state
commissions. In addition, the FCC issued a Notice of Proposed Rule Making,
opening a proceeding which will address, on a prospective basis, if Federal
rules are required to address reciprocal compensation issues for ISP traffic. At
this time, the Company cannot determine the full impact that the ultimate
outcome of the proceeding will have on CBT's operations.
On May 12, 1998, the FCC released an order allowing telecommunications
carriers to recover their carrier-specific costs of implementing local number
portability over a five-year period. Local number portability allows customers
to retain their local telephone numbers in the event they change local exchange
carriers. CBT implemented local number portability in May 1998. Although the May
FCC order permits such cost recovery through query charges to carriers who
access CBT's local number portability database and through an end-user charge, a
subsequent ruling by the Common Carrier Bureau on December 14, 1998, narrowly
defined costs that the telecommunications carriers can recover through these
charges. On January 13, 1999, CBT asked the FCC to overturn the Common Carrier
Bureau's ruling and allow carriers to recover all costs for implementing local
number portability. This Application for Review is still pending. CBT's tariff
for the charges was approved by the FCC and became effective February 1, 1999,
the earliest date allowed under FCC rules.
26
OHIO -- On March 19, 1998, CBT, the PUCO, the Office of Consumers Counsel and
other intervenors reached a settlement on CBT's "Commitment 2000" alternative
regulation plan application. The settlement was approved by the PUCO on April 9,
1998. Terms of the settlement include: (i) greater pricing flexibility for most
services and elimination of rate-of-return regulation; (ii) no increase in basic
residential access line rates for the term of the plan; (iii) business rates set
based on CBT's discretion and market conditions; and (iv) a 30% reduction in
basic rates for qualified, low-income residential customers. The term of the
plan is three and one-half years but can be extended up to an additional two
years at CBT's discretion as long as a service quality benchmark is maintained.
The portion of this case pertaining to the rates that CBT can charge competitive
LECs for unbundled network elements (UNEs) remains undecided. Currently, CBT is
charging interim rates developed in contract negotiations. A hearing concerning
these rates began in March 1999.
KENTUCKY -- On June 29, 1998, CBT filed an application with the Public Service
Commission of Kentucky (PSCK) requesting a plan similar to the "Commitment 2000"
plan approved by the PUCO. On January 25, 1999, the PSCK issued an order in this
case. The PSCK approved the alternative regulation plan with modifications,
adopting an earnings sharing plan allowing customers to receive one-half the
earnings on equity in excess of 13.5%. The PSCK also specified that residential
rates be frozen for three years and ordered rate reductions of approximately $3
million per year versus current rates. CBT filed a petition for rehearing with
the PSCK on February 12, 1999. This petition for rehearing on the earnings
sharing plan was granted on March 4, 1999.
- --------------------------------------------------------------------------------
BUSINESS OUTLOOK
Evolving technology, the preferences of consumers, the legislative and
regulatory initiatives of policy makers and the convergence of other industries
with the telecommunications industry are causes for increasing competition
throughout the telecommunications industry. The range of communications
services, the equipment available to provide and access such services, and the
number of competitors offering such services, continue to increase. These
initiatives and developments could make it difficult for the Company to maintain
current revenue and profit levels.
CBT's competitors could include other incumbent LECs, wireless services
providers, interexchange carriers, competitive local exchange carriers and
others. To date, CBT has signed 10 interconnection agreements with competitors,
and approximately 4,000 access lines have been transferred to competitors.
The Company's other subsidiaries face intense competition in their markets,
principally from larger companies. These subsidiaries primarily seek to
differentiate themselves by leveraging the strength and recognition of the
Company brand name, by providing customers with superior service and by focusing
on niche markets and opportunities to develop and market customized packages of
services. CBD's competitors are directory services companies, newspapers and
other media advertising services providers in the Cincinnati metropolitan market
area. CBD now competes with its former sales representative for Yellow Pages
directory customers. This competition may affect CBD's ability to grow or
maintain profits and revenues. CBLD's competitors include interexchange carriers
and certain local exchange companies. CBS's competitors include vendors of new
and used communications and computer equipment operating regionally and across
the nation. CBW is one of five active wireless service providers in the
Cincinnati and Dayton metropolitan market areas.
YEAR-2000 READINESS
Since 1996, the Company has devoted significant time and resources to achieve
Year-2000 compliance.
A Steering Committee, chaired by the CBT's Senior Vice President,
Operations, and composed of upper-level management personnel, sets the
direction and monitors the activity of the Year-2000 Program Management
Office. The Program Management Office's responsibility is to make CBT
Year-2000 compliant and to provide oversight for the Company's other
subsidiaries as they track the status of their Year-2000 projects. In
addition to internal Year-2000 activities, the Program Management Office is
communicating with suppliers and clients with which CBT's systems interface
or rely upon, to determine their progress toward Year-2000 compliance.
27
The Company incurred Year-2000 expenses of $10.9 million in 1998. Year-2000
expenses in 1999 are estimated to be in the range of $5 million to $8 million.
CBT's goal is to have its network, information technology (IT) and facilities
systems equipped with any required fixes, upgrades or replacements, and tested,
by July 31, 1999.
The Company's other subsidiaries hope to have their networks, IT, facilities
and billing systems equipped with any required fixes, upgrades or replacements,
and tested, by June 30, 1999.
The Company has no reason to believe that the July 31, 1999, target date will
not be achieved. However, because of the complexity of the Year-2000 problem,
there can be no guarantee that the Company will achieve complete Year-2000
compliance by this date or before the Year 2000.
To minimize the disruption to its operations that may result from a variety
of occurences, the Company is developing a well-defined and executable Year-2000
contingency plan and enhancing its business continuity plans to ensure
reasonable preparedness for any Year-2000 issues that might arise. These plans
are scheduled for testing in September. Although the Company anticipates minimal
business disruption as a result of the century change, if the Company were to be
unsuccessful in readying its software and systems for the Year 2000 or preparing
adequate plans to avoid business interruption that could result from the century
change, this would have a material adverse impact on the Company. This material
adverse effect could include a disruption to the provision of services to its
customers, which could result in lost revenues, the incurrence of material
contractual penalties and damaged customer relationships.
The failure of one of the Company's significant customers to modify its
systems for the Year 2000 successfully or to provide the appropriate business
continuity planning also could have an adverse impact on the Company as the
Company is, to a certain extent dependent on the success of its customers.
The Company's success in becoming Year-2000 compliant largely depends on the
Company's vendors and business partners being Year-2000 compliant. The Program
Management Office is working diligently with the Company's vendors and business
partners to assure itself, to the extent possible, that the vendors and business
partners are taking the necessary steps to become Year-2000 compliant. To the
extent that any of the Company's vendors or business partners experience
Year-2000 technology difficulties which materially affect their businesses, such
difficulties could have a material adverse effect on the Company's business,
results of operations and financial condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1999, the Company adopted AICPA Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires the capitalization of certain expenditures for
software that is purchased or internally developed for use in the business. As
compared to prior years when these types of expenditures were expensed as
incurred, the 1999 adoption of SOP 98-1 is estimated to result in the
capitalization of as much as $9 million to $12 million of internal use software
development costs, which will be amortized over a three-year period.
In June 1998, Statement of Financial Accounting Standards (SFAS) 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
these instruments at fair value. The Company may, from time to time, employ a
small number of financial instruments to manage its exposure to fluctuations in
interest rates. The Company will adopt SFAS 133, as required in the year 2000,
and does not expect the impact of adoption to be material.
BUSINESS DEVELOPMENT
To enhance shareowner value, the Company continues to review opportunities for
acquisitions, divestitures and strategic partnerships.
28
REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS CINCINNATI BELL INC.
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 the system of internal controls 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. 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 PricewaterhouseCoopers LLP,
independent accountants. Their audit was conducted in accordance with generally
accepted auditing standards.
The Audit & Finance Committee of the Board of Directors (see page 45), which
is composed of four directors who are not employees, meets periodically with
management, the internal auditors and PricewaterhouseCoopers LLP 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 & Finance
Committee and have access to the Audit & Finance Committee at any time.
/s/ Kevin W. Mooney
- ------------------------
Kevin W. Mooney
CHIEF FINANCIAL OFFICER
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND THE
SHAREOWNERS OF CINCINNATI BELL INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of shareowners'
equity and of cash flows present fairly, in all material respects, the financial
position of Cincinnati Bell Inc. (the Company) and its subsidiaries at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 4 to the Financial Statements, the Company discontinued
applying the provisions of Statement of Financial Accounting Standard 71,
"Accounting for the Effects of Certain Types of Regulation," in 1997.
/s/ PricewaterhouseCoopers LLP
- ------------------------------------
PricewaterhouseCoopers LLP
Cincinnati, Ohio
March 12, 1999
29
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (LOSS) Cincinnati Bell Inc.
Millions of dollars except per share amounts Year ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
REVENUES $ 885.1 $ 834.5 $ 779.8
- ------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Costs of providing services and products sold 369.6 344.6 321.3
Selling, general and administrative 204.0 184.7 186.6
Depreciation and amortization 111.1 124.3 121.0
Year 2000 programming costs 10.9 4.2 --
Mandated telecommunications costs 10.6 6.3 --
Special charges (credits) (1.1) (21.0) (29.7)
------- ------- -------
Total costs and expenses 705.1 643.1 599.2
------- ------- -------
OPERATING INCOME 180.0 191.4 180.6
- ------------------------------------------------------------------------------------------------------------------------
Wireless Venture Loss 27.3 -- --
Other (Income) Expense, Net 2.4 2.7 (.5)
Interest Expense 24.2 30.1 27.9
------- ------- -------
Income from Continuing Operations Before Income Taxes 126.1 158.6 153.2
Income Taxes 44.3 56.3 53.7
------- ------- -------
Income from Continuing Operations 81.8 102.3 99.5
Income from Discontinued Operations, Net of Taxes 69.1 91.3 85.5
------- ------- -------
Income Before Extraordinary Items 150.9 193.6 185.0
Extraordinary Items, Net of Taxes (1.0) (210.0) --
------- ------- -------
NET INCOME (LOSS) $ 149.9 $ (16.4) $ 185.0
------- ------- -------
------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), Net of Tax:
Currency translation adjustments $ (4.8) $ (1.6) $ (.5)
Additional minimum pension liability adjustment (2.5) .8 --
------- ------- -------
Total other comprehensive income (loss) (7.3) (.8) (.5)
------- ------- -------
COMPREHENSIVE INCOME (LOSS) $ 142.6 $ (17.2) $ 184.5
------- ------- -------
------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER COMMON SHARE
Income from Continuing Operations $ .60 $ .76 $ .74
Income from Discontinued Operations, Net of Taxes .51 .67 .64
Extraordinary Items, Net of Taxes (.01) (1.55) --
------- ------- -------
Net Income (Loss) $ 1.10 $ (.12) $ 1.38
------- ------- -------
------- ------- -------
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Income from Continuing Operations $ .59 $ .74 $ .73
Income from Discontinued Operations, Net of Taxes .50 .67 .62
Extraordinary Items, Net of Taxes (.01) (1.53) --
------- ------- -------
Net Income (Loss) $ 1.08 $ (.12) $ 1.35
------- ------- -------
------- ------- -------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (MILLIONS)
Basic 136.0 135.2 133.9
Diluted 138.2 137.7 137.2
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
30
CONSOLIDATED BALANCE SHEETS Cincinnati Bell Inc.
Millions of dollars except per share amounts at December 31 1998 1997
- --------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10.1 $ 7.8
Receivables, less allowances of $12.0 and $9.1 138.0 127.9
Material and supplies 16.9 16.3
Deferred income tax benefits 13.8 10.9
Prepaid expenses and other current assets 18.6 21.3
-------- --------
Total current assets 197.4 184.2
PROPERTY, PLANT AND EQUIPMENT, NET 698.2 573.2
GOODWILL AND OTHER INTANGIBLES 103.3 17.4
INVESTMENTS IN UNCONSOLIDATED ENTITIES 2.5 4.9
DEFERRED CHARGES AND OTHER ASSETS 39.6 64.6
NET ASSETS OF DISCONTINUED OPERATIONS -- 430.8
-------- --------
TOTAL ASSETS $1,041.0 $1,275.1
-------- --------
-------- --------
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Debt maturing within one year $ 186.2 $ 131.5
Payables and other current liabilities 219.1 186.8
-------- --------
Total current liabilities 405.3 318.3
LONG-TERM DEBT 366.8 268.0
DEFERRED INCOME TAXES 6.3 14.4
OTHER POSTRETIREMENT BENEFITS 47.5 50.0
OTHER LONG-TERM LIABILITIES 73.0 44.7
-------- --------
Total liabilities 898.9 695.4
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREOWNERS' EQUITY
Preferred shares, no par value; 5,000,000 shares authorized;
no shares issued and outstanding -- --
Common shares, $1 par value; 480,000,000 shares authorized;
136,381,509 and 136,066,965 shares issued and outstanding 136.4 136.1
Additional paid-in capital 12.4 229.8
Retained earnings -- 221.9
Accumulated other comprehensive income (loss) (6.7) (8.1)
-------- --------
Total shareowners' equity 142.1 579.7
-------- --------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $1,041.0 $1,275.1
-------- --------
-------- --------
- --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
31
CONSOLIDATED STATEMENTS OF CASH FLOWS Cincinnati Bell Inc.
Millions of dollars Year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 149.9 $ (16.4) $185.0
Less: income from discontinued operations, net of taxes (69.1) (91.3) (85.5)
------- ------- ------
Net income (loss) from continuing operations 80.8 (107.7) 99.5
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 111.1 124.3 121.0
Special charges (credits) (1.1) (21.0) (29.7)
Provision for loss on receivables 15.8 7.3 8.0
Extraordinary items, net of taxes 1.0 210.0 --
Other, net -- (6.4) 10.8
Change in operating assets and liabilities net of effects from acquisitions
and disposals:
Increase in receivables (24.9) (26.3) (1.3)
Decrease (increase) in other current assets 2.1 (7.4) .1
Increase (decrease) in accounts payable and accrued liabilities 40.9 45.1 (53.4)
Increase (decrease) in other current liabilities (7.5) (43.2) (21.7)
Increase (decrease) in deferred income taxes and unamortized
investment tax credits (11.0) 17.4 7.1
Decrease (increase) in other assets and liabilities, net 5.1 5.3 (8.4)
------- ------- ------
Net cash provided by operating activities of continuing operations 212.3 197.4 132.0
------- ------- ------
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - telephone plant (136.3) (143.9) (99.3)
Capital expenditures - other (7.0) (23.2) (.7)
Acquisitions (165.9) -- (.3)
Dispositions of assets -- -- 12.7
Other investing activities, net -- 13.3 (4.9)
------- ------- ------
Net cash used in investing activities of continuing operations (309.2) (153.8) (92.5)
------- ------- ------
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 150.0 -- --
Repayment of long-term debt (51.2) (99.6) (82.4)
Short-term borrowings, net 54.7 109.5 67.4
Issuance of common shares .3 9.1 23.7
Dividends paid (54.4) (54.3) (53.7)
------- ------- ------
Net cash provided by (used in) financing activities of continuing operations 99.4 (35.3) (45.0)
------- ------- ------
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations (.2) (.2) 2.3
------- ------- ------
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2.3 8.1 (3.2)
Cash and cash equivalents at beginning of year 7.8 (.3) 2.9
------- ------- ------
Cash and cash equivalents at end of year $ 10.1 $ 7.8 $ (.3)
------- ------- ------
------- ------- ------
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
32
CONSOLIDATED STATEMENTS OF COMMON SHAREOWNERS' EQUITY Cincinnati Bell Inc.
Common Shareowners' Equity
-------------------------------------------------------------
Accumulated
Common Other
Shares Additional Compre-
Outstanding Common Paid-In Retained hensive
Millions of dollars except per share amounts (millions) Shares Capital Earnings Income Total
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1996 133.4 $133.4 $ 189.4 $ 162.1 $(6.8) $478.1
Shares issued under shareowner and employee plans 1.7 1.7 23.7 .3 -- 25.7
Net income -- -- -- 185.0 -- 185.0
Currency translation adjustments -- -- -- -- (.5) (.5)
Dividends on common shares, $.40 per share -- -- -- (53.9) -- (53.9)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 135.1 135.1 213.1 293.5 (7.3) 634.4
Shares issued under shareowner and employee plans 1.0 1.0 16.7 (.8) -- 16.9
Net loss -- -- -- (16.4) -- (16.4)
Additional minimum pension liability adjustment -- -- -- -- .8 .8
Currency translation adjustments -- -- -- -- (1.6) (1.6)
Dividends on common shares, $.40 per share -- -- -- (54.4) -- (54.4)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 136.1 136.1 229.8 221.9 (8.1) 579.7
Shares issued under shareowner and employee plans .3 .3 (.3) -- -- --
Net income -- -- -- 149.9 -- 149.9
Additional minimum pension liability adjustment -- -- -- -- (2.5) (2.5)
Currency translation adjustments -- -- -- -- (4.8) (4.8)
Restricted stock issuance -- -- (4.9) -- -- (4.9)
Dividends on common shares, $.40 per share -- -- -- (54.6) -- (54.6)
Spin-off of Convergys -- -- (212.2) (317.2) 8.7 (520.7)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 136.4 $136.4 $ 12.4 $ -- $(6.7) $142.1
------ ------- ------ ------ ------ ------
------ ------- ------ ------ ------ ------
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements
33
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
CONSOLIDATION AND BASIS OF PRESENTATION -- The consolidated financial
statements include the accounts of Cincinnati Bell Inc. and its majority
owned subsidiaries in which the Company exercises control (the Company). The
Company provides diversified communications services through businesses in
three industry segments: Local Communications Services, Directory Services,
and Other Communications Services. All significant intercompany transactions
and balances have been eliminated in consolidation. Certain prior year
amounts have been reclassified to conform to the current classifications with
no effect on financial results.
REGULATORY ACCOUNTING -- In the fourth quarter of 1997, the Company
discontinued accounting under Statement of Financial Accounting Standards
(SFAS) 71, "Accounting for the Effects of Certain Types of Regulation," at
CBT (see Note 4).
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.
CASH EQUIVALENTS -- Cash equivalents consist of short-term, highly liquid
investments with original maturities of three months or less.
MATERIALS AND SUPPLIES -- Materials and supplies are carried at the lower of
average cost or market.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated at
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. Prior to the discontinuation of SFAS 71, the depreciation of
telephone plant at CBT was determined using lives allowed by regulators. As a
result of the discontinuation of SFAS 71 in the fourth quarter of 1997, CBT
recognized shorter, more economically realistic lives than those prescribed
by regulators and increased its accumulated depreciation balance by $309.0
million (see Note 4). 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. For other property, plant
and equipment retired or sold, the gain or loss is recognized in other income.
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 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. If future
expected undiscounted cash flows are insufficient to recover the carrying
amount of the asset, an impairment loss is recognized, based on expected
discounted cash flows.
REVENUE RECOGNITION -- Within the Local Communications Services segment,
local service revenues are generally billed monthly, in advance, with
revenues recognized as earned. Network access revenues are billed according
to usage and are recognized as earned. Other local communications services
revenues are recognized as earned. Directory Services revenues and related
directory costs are generally deferred and recognized over the life of the
associated directory, normally twelve months. Other Communications Services
revenues are recognized as earned.
ADVERTISING -- Costs related to advertising are expensed as incurred.
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 using 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.
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.
FINANCIAL INSTRUMENTS -- In the normal course of business, the Company may,
from time to time, employ a small number of financial instruments to manage
its exposure to fluctuations in interest rates. The Company does not hold or
issue derivative financial instruments for trading purposes.
RECENTLY ISSUED ACCOUNTING STANDARDS -- On January 1,1999, the Company
adopted AICPA Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," issued in March
1998. SOP 98-1 requires the capitalization of certain expenditures for
software that are purchased or internally developed for use in the business.
The Company's adoption of this standard will result in capitalization of
software development costs in 1999.
In June 1998, Statement of Financial Accounting Standards (SFAS) 133,
"Accounting for Derivative instruments and Hedging Activities," was issued.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
34
financial position and measure those instruments at fair value. The Company
may, from time to time, employ a small number of financial instruments to
manage its exposure to fluctuations in interest rates. The Company does not
hold or issue such financial instruments for trading purposes. The Company
will adopt SFAS 133, as required in the year 2000, and does not expect the
impact of adoption to be material.
- --------------------------------------------------------------------------------
2. ACQUISITIONS
In February 1998, the Company announced its intention to acquire from AT&T
Wireless PCS, Inc. (AT&T PCS), an 80% interest in a venture offering personal
communications services (PCS) in the Greater Cincinnati and Dayton markets.
The agreement specified that prior to the funding of the venture, the Company
and AT&T PCS would operate under an interim agreement where losses would be
funded in the same percentages as the proposed venture. The Company's
required funding of the losses was $27.3 million from February through
December 31, 1998, the closing date of the acquisition. This loss has been
included in the Company's Consolidated Statements of Income and Comprehensive
Income under the caption, "Wireless Venture Loss."
On December 31, 1998, the Company paid approximately $162 million in cash
to AT&T PCS in exchange for an 80% interest in the wireless venture,
including a PCS license and other assets and liabilities. At the balance
sheet date, the Company has recognized approximately $85 million as an
estimate of the goodwill and other intangibles related to this purchase which
will be amortized over a 40-year period. Since the independent valuation
being performed to assess the value of assets purchased is not yet complete,
a further adjustment will be required in 1999 to reflect the fair value of
these assets. In addition, the purchase price will be adjusted based on the
final determination of assets transferred.
The following table illustrates the effects of the venture acquisition on
a pro-forma basis as though it had occurred at January 1, 1998. The unaudited
pro-forma combined financial information presented below is provided for
informational purposes only and does not purport to be indicative of future
results or what the results of operations would have been had the acquisition
been effective with the inception of this business:
Millions of dollars
except per share
amount (unaudited) Year ended December 31 1998
- -------------------------------------------------------------------------------
Revenues $903.4
Income from continuing operations before tax $110.7
Income from continuing operations $ 72.6
Income from continuing operations per diluted common share $ .53
In October 1998, the Company acquired KSM Consulting, a software solutions
company (now part of a newly-created subsidiary named EnterpriseWise IT
Consulting LLC). The purchase price was approximately $3.9 million and was
accounted for by the purchase method of accounting. The goodwill recorded for
this acquisition was $3.0 million, and will be amortized over a 10-year
period.
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS
On May 8, 1998, the Company formed a new subsidiary, Convergys Corporation
(Convergys), to hold the Company's billing and customer management businesses
(formerly CBIS and MATRIXX Marketing, respectively) and the Company's
interest in a cellular partnership. In August 1998, Convergys sold
approximately 15 million common shares to the public, reducing the company's
interest in Convergys to approximately 90% of shares outstanding. On December
31, 1998, the Company completed the tax-free spin-off of Convergys by
distributing to Company shareowners the remaining Convergys shares on a
one-for-one basis, resulting in a $520.7 million reduction in the Company's
common shareowners' equity.
The consolidated financial statements have been restated to reflect the
disposition of Convergys and its subsidiaries as discontinued operations.
Accordingly, the revenues, costs and expenses, assets and liabilities, and
cash flows of Convergys have been reported through December 31, 1998, as
"Income from Discontinued Operations, Net of Taxes," or "Net Assets of
Discontinued Operations," or "Net Cash Provided by Discontinued Operations."
Summarized financial information for the discontinued operations is as
follows:
Millions of dollars Year ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Revenues $1,387.3 $ 922.3 $ 793.9
Income before income taxes 118.3 138.3 131.5
Income taxes 49.2 47.0 46.0
Net income 69.1 91.3 85.5
FINANCIAL POSITION
Current assets 360.5 265.8
Total assets 1,450.9 654.4
Current liabilities 697.9 216.7
Total liabilities 930.2 223.6
Net assets of discontinued operations 520.7 430.8
Income before income taxes includes allocated interest expense of $33.7
million, $5.4 million, and $6.0 million in 1998, 1997 and 1996, respectively.
Interest expense was allocated based on the capital structure of Convergys
anticipated at the date of distribution and the Company's weighted average
interest rates. The effective tax rates for discontinued operations were 42%,
34% and 35%, respectively.
In 1998, 1997 and 1996, the Company had revenues from Convergys of $10.1
million, $18.6 million and $6.2 million, respectively, resulting from the
provision of communications and other services.
35
In 1998, 1997 and 1996, the Company incurred costs for services provided by
Convergys of $49.8 million, $49.6 million and $45.0 million, respectively,
resulting from billing and customer management services.
At December 31, 1998 and 1997, the Company had net receivables from Convergys
of $3.9 million and $1.6 million, respectively.
The Company and Convergys entered into the Plan of Reorganization and
Distribution Agreement (the Plan) dated July 20, 1998. The Plan provides, among
other things, that the Company will indemnify Convergys for all liabilities
arising from the Company's business and operations and for all contingent
liabilities related to the Company's business and operations otherwise assigned
to the Company. The Plan provides for the equal sharing of contingent
liabilities not allocated to one of the companies. In addition, the Company has
a number of other agreements with Convergys regarding federal, state and local
tax allocation and sharing, employee benefits, general services, billing and
information services provided to the Company by Convergys, and
telecommunications support services provided by the Company to Convergys.
- -------------------------------------------------------------------------------
4. DISCONTINUATION OF SFAS 71
In the fourth quarter of 1997, the Company determined that the application of
SFAS 71 was no longer appropriate, as a result of changes in CBT's competitive
and regulatory environment. Accordingly, CBT discontinued the application of
SFAS 71, and recorded an extraordinary non-cash charge of $210.0 million, which
is net of a related tax benefit of $129.2 million.
The components of the charge are as follows:
Millions of dollars
- -------------------------------------------------------------------------------
Reduction in plant-related balances $327.7
Elimination of other net regulatory assets and liabilities 11.5
------
Total pre-tax charge $339.2
Total after-tax charge $210.0
The change in plant balances primarily represents an increase in accumulated
depreciation of $309.0 million for the removal of an embedded regulatory asset
resulting from the use of regulatory lives for depreciation of plant assets
which have typically been longer than the estimated economic lives. The
adjustment was supported by a discounted cash flow analysis which estimated
amounts of plant that may not be recoverable from future cash flows. The
adjustment also included elimination of accumulated depreciation reserve
deficiencies recognized by regulators and amortized as part of depreciation
expense and an adjustment of approximately $9.5 million to fully depreciate
analog switching equipment scheduled for replacement.
The following is a comparison of new depreciation lives to those prescribed
by regulators for selected plant categories:
Regulator- Estimated
Average lives in years Prescribed Economic
- -------------------------------------------------------------------------------
Digital switch 15 12
Digital circuit 11 9
Conduit 50 50
Copper cable 18-25 15-17
Fiber cable 25 20-22
The discontinuance of SFAS 71 also required CBT to eliminate from its balance
sheet the effects of any other actions of regulators that had been recognized as
assets and liabilities pursuant to SFAS 71, but would not have been recognized
as assets and liabilities by enterprises in general. Prior to the discontinuance
of SFAS 71, CBT had recorded deferred income taxes based upon the cumulative
amount of income tax benefits previously flowed through to ratepayers and
recorded a regulatory asset for the same amount ($10.2 million at December 31,
1996). Also, CBT had recorded a regulatory liability of $22.1 million at
December 31, 1996, a substantial portion of which represents the excess deferred
income taxes on depreciable assets, resulting primarily from the reduction in
the statutory federal income tax rate from 46% to 35%. The discontinuation of
SFAS 71 at CBT had no effect on the accounting for the Company's other
subsidiaries.
- -------------------------------------------------------------------------------
5. INCOME TAXES
Income tax expense consists of the following:
Millions of dollars Year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------
Current:
Federal $51.1 $57.3 $36.1
State and local 7.6 4.3 4.8
----- ----- -----
Total current 58.7 61.6 40.9
Deferred (12.8) (4.1) 14.7
Investment tax credits (1.6) (1.2) (1.9)
----- ----- -----
Total $44.3 $56.3 $53.7
----- ----- -----
----- ----- -----
The components of the Company's deferred tax assets and liabilities
are as follows:
Millions of dollars at December 31 1998 1997
- -------------------------------------------------------------------------------
Deferred tax asset:
Employee benefits $19.8 $15.7
Unamortized investment tax credit 3.0 3.5
Wireless venture loss 9.6 -
Bad debt 3.4 1.2
Capitalized leases 3.3 3.0
State taxes 2.5 .5
Other 7.3 9.5
----- -----
Total deferred tax asset 48.9 33.4
----- -----
Deferred tax liability:
Depreciation and amortization 22.3 19.3
Other - .3
----- -----
Total deferred tax liability 22.3 19.6
Net deferred tax asset $26.6 $13.8
----- -----
----- -----
36
The losses from the wireless venture were primarily responsible for the
significant increase in the Company's deferred tax asset in 1998.
The following is a reconciliation of the statutory Federal income tax rate
with the effective tax rate for each year:
1998 1997 1996
- ---------------------------------------------------------------
U.S. Federal statutory rate 35.0% 35.0% 35.0%
Rate differential on reversing
temporary differences - (.2) (.7)
State and local income taxes, net
of federal income tax benefit 3.3 .9 2.3
Investment and research tax credits (1.6) (1.5) (1.4)
Other differences (1.6) 1.3 (.1)
----- ----- -----
Effective rate 35.1% 35.5% 35.1%
----- ----- -----
----- ----- -----
- -------------------------------------------------------------
6. EMPLOYEE BENEFIT PLANS
PENSIONS AND POSTRETIREMENT PLANS
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; the
pension benefit is determined by a combination of compensation-based credits
and annual guaranteed interest credits. The nonmanagement pension is also a
cash balance plan; 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 to an irrevocable trust fund. The contributions are
determined using the aggregate cost method.
Effective January 1, 1999, pension assets were divided between the pension
trusts of the Company and Convergys so that each company's plans have the
required assets to meet the minimum requirements set forth in applicable
benefit and tax regulations. The remaining assets in excess of the minimum
requirements were divided between the pension trusts of the Company and
Convergys in accordance with the Employee Benefits Agreement between the two
companies. As of December 31, 1998, subject to final adjustment, the
projected benefit obligations and plan assets to be retained by the Company's
plans, effective January 1, 1999, were $476.5 million and $579.3 million,
respectively. The Company's share of the plans' transition asset, prior
service cost and net gains at December 31, 1998, were $14.4 million, $19.2
million and $105.5 million, respectively. The Company has recorded a prepaid
pension asset of $2.1 million at December 31, 1998.
The Company uses the projected unit credit cost method for determining
pension cost for financial reporting purposes. It accounts for certain
benefits provided under early retirement packages, discussed in Note 12 as a
special termination benefit.
The following information relates to all Company non-contributory
defined-benefit pension plans, including amounts related to Convergys.
Pension cost includes the following components:
Millions of dollars Year ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
Service cost (benefits earned
during the period) $ 15.5 $ 8.5 $ 7.2
Interest cost on projected
benefit obligation 35.0 37.6 35.3
Expected return on plan assets (44.5) (42.9) (33.5)
Amortization of transition asset (2.7) (2.9) (3.8)
Amortization of prior service cost 1.7 1.7 1.6
Amortization of net loss .3 .3 1.2
Settlement gains -- (21.0) (27.4)
Curtailment loss 1.4 .3 --
----- ------- ------
Pension cost (income) $ 6.7 $(18.4) $(19.4)
----- ------- ------
----- ------- ------
Pension cost (income) from
continuing operations $ .7 $(20.6) $(21.2)
The following table sets forth the plans' funded status:
Millions of dollars Year ended December 31 1998 1997
- --------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $514.9 $ 587.3
Service cost 15.5 8.5
Interest cost 35.0 37.6
Amendments 1.8 3.5
Actuarial loss 32.3 1.1
Settlement - (76.3)
Curtailment .9 (.2)
Benefits paid (44.4) (46.6)
------- ------
Benefit obligation at end of year $556.0 $514.9
------- ------
------- ------
Change in plan assets:
Fair value of plan assets at
beginning of year $700.0 $698.6
Actual return on plan assets 86.5 108.1
Employer contribution 5.4 16.2
Benefits paid (44.4) (46.6)
Settlement - (76.3)
------- ------
Fair value of plan assets at end of year $747.5 $700.0
------- ------
Funded status $ 191.5 $185.1
Unrecognized transition asset (16.5) (18.7)
Unrecognized prior service cost 23.9 23.8
Unrecognized net gain (172.8) (162.7)
------- ------
Net prepaid benefit expense $ 26.1 $27.5
------- ------
------- ------
The combined net prepaid benefit expense consists of:
Millions of dollars Year ended December 31 1998 1997
- --------------------------------------------------------------
Prepaid benefit cost $40.0 $38.7
Accrued benefit liability (22.4) (18.0)
Intangible asset 1.8 2.5
Accumulated other comprehensive income 6.7 4.3
------ -----
Net amount recognized $26.1 $27.5
------ -----
------ -----
At December 31, 1998, plan assets include $52.8 million in Company and
Convergys common stocks.
37
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 1998 1997 1996
- --------------------------------------------------------------
Discount rate - projected
benefit obligation 6.50% 7.00% 7.25%
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 $4.0 million, $3.4 million and $3.2 million for 1998, 1997 and 1996,
respectively. These amounts exclude $6.8 million, $5.8 million and $6.2 million
in 1998, 1997 and 1996, respectively, related to the spin-off of Convergys.
OTHER POSTRETIREMENT BENEFITS
The Company provides health care and group life insurance benefits for retirees
with a service pension. The Company funds its group life insurance benefits
through Retirement Funding Accounts (RFA) 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.
Immediately following the spin-off of Convergys, Convergys established
separate health and life insurance plans for certain of its employees. As of
December 31, 1998, subject to final adjustment, the projected benefit obligation
and plan assets to be retained by the Company's plans effective January 1, 1999,
were $234.8 million and $127.9 million, respectively. The Company's share of the
unrecognized transition obligation, prior service costs and net gains at
December 31, 1998, were estimated to be $68.6 million, $2.6 million and $11.8
million, respectively. The Company recorded an accrued postretirement benefit
liability of $47.5 million at December 31, 1998.
The following information relates to all Company postretirement healthcare
and life insurance benefit plans, including amounts related to Convergys.
The components of postretirement benefit cost are as follows:
>
Millions of dollars Year ended December 31 1998 1997 1996
- ---------------------------------------------------------------------------
Service cost (benefits earned
during the period) $ 2.5 $ 2.1 $ 1.8
Interest cost on accumulated
postretirement benefit obligation 16.1 16.1 15.6
Expected return on plan assets (9.4) (7.3) (5.7)
Amortization of transition asset/obligation 5.1 5.1 5.1
Amortization of prior service cost .2 .2 .2
Amortization of net gain (.2) (.1) --
----- ----- -----
Postretirement benefit cost $14.3 $16.1 $17.0
----- ----- -----
----- ----- -----
Postretirement benefit cost
from continuing operations $12.3 $14.3 $15.4
The funded status of the plan is:
Millions of dollars Year ended December 31 1998 1997
- ---------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $236.7 $227.3
Service cost 2.5 2.1
Interest cost 16.1 16.1
Actuarial loss 14.1 6.2
Benefits paid (17.0) (15.0)
------ ------
Benefit obligation at end of year $252.4 $236.7
------ ------
------ ------
Change in plan assets:
Fair value of plan assets at beginning of year $116.8 $ 95.1
Actual return on plan assets 18.7 23.7
Employer contribution 15.2 13.0
Benefits paid (17.0) (15.0)
------ ------
Fair value of plan assets at end of year $133.7 $116.8
------ ------
------ ------
Funded status $(118.7) $ (119.9)
Unrecognized transition obligation 72.2 77.3
Unrecognized prior service cost 2.9 3.1
Unrecognized net gain (10.3) (15.3)
------ ------
Accrued benefit expense $(53.9) $(54.8)
------ ------
------ ------
The transition obligation is being amortized over 20 years.
The Company used the following rates to determine the actuarial present
value of the accumulated postretirement benefit obligation (APBO) and of
postretirement benefit costs:
at December 31 1998 1997 1996
- ---------------------------------------------------------------------------
Discount rate - APBO 6.50% 7.00% 7.25%
Expected long-term rate of
return for VEBA assets 8.25% 8.25% 8.25%
Expected long-term rate of
return for RFA assets 8.00% 8.00% 8.00%
The assumed health care cost trend rate used to measure the postretirement
health benefit obligation at December 31, 1998, was 5.4% and is assumed to
decrease gradually to 4.3% by the year 2005. In addition, a one percentage point
change in assumed health care cost trend rates would have the following effect
on the postretirement benefit costs and obligation:
Millions of dollars 1% Increase 1% Decrease
- ---------------------------------------------------------------------------
1998 service and interest costs $.8 $(.7)
Postretirement benefit obligation
at December 31, 1998 $9.8 $(8.4)
- ---------------------------------------------------------------------------
7. DEBT OBLIGATIONS
Debt maturing within one year consists of the following:
Millions of dollars at December 31 1998 1997 1996
- ----------------------------------------------------------------------------
Short-Term Debt:
Commercial paper $185.5 $57.0 $ --
Bank notes -- 71.0 37.1
Current maturities of long-term debt .7 3.5 100.7
------ ------ ------
Total $186.2 $131.5 $137.8
------ ------ ------
------ ------ ------
Weighted average interest rates
on short-term debt 5.6% 5.7% 5.6%
Average balances of short-term debt and related interest rates for the last
three years are as follows:
Millions of dollars 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Average amounts of short-term debt
outstanding during the year* $ 87.5 $ 64.2 $ 35.6
Weighted average interest rate
during the year** 5.6% 5.7% 5.6%
Maximum amounts of short-term debt
at any month-end during the year $185.5 $129.5 $ 62.1
* 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.
In the first quarter of 1998, the Company entered into a $1,250 million debt
facility primarily to fund Convergys' short-term borrowing needs prior to the
spin-off. In the fourth quarter of 1998, the Company retired $650 million of
this facility, resulting in an extraordinary charge of $.4 million, net of a
related tax benefit of $.3 million. At December 31, 1998, the Company had
approximately $415 million of unused bank lines of credit under this facility,
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.
Long-term debt consists of the following:
Millions of dollars at December 31 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Debentures/Notes
Year of Maturity Interest Rate %
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
2023 7.250 50.0 50.0
2023 7.180-7.270 80.0 80.0
2028 6.300 150.0 --
-------- --------
340.0 240.0
Capital leases and other 28.4 31.5
-------- --------
368.4 271.5
Current maturities (1.6) (3.5)
-------- --------
Total $ 366.8 $ 268.0
-------- --------
-------- --------
In October 1998, the Company and CBT filed a shelf registration with the
Securities and Exchange Commission (SEC) for the sale of up to $350 million in
debt securities with terms to be determined at the time of sale. The proceeds
will be used to repay debt and for general corporate purposes.
In November, CBT issued $150 million of 6.3% debentures due 2028 and redeemed
$50 million of 7.375% notes due 2011. The early redemption of this debt resulted
in an extraordinary non-cash charge of $.6 million, which is net of a related
tax benefit of $.2 million.
- -------------------------------------------------------------------------------
8. STOCK-BASED COMPENSATION PLANS
During 1998 and in prior years, certain employees of the Company were granted
stock options and other stock-based awards under the Company's Long-Term
Incentive Plan (Company LTIP). Effective December 31, 1998, awards outstanding
under the Company LTIP were modified such that, for each Company option or share
award, the holder also received a Convergys option or share award pursuant to
Convergys' Long-Term Incentive Plan (Convergys LTIP). These Convergys stock
options or share awards have the same vesting provisions, option periods and
other terms and conditions as the original Company options. Under the Company
LTIP, options are granted with exercise prices that are no less than market
value of the stock at the grant date. Generally, stock options have ten-year
terms and vesting terms of three to four years. There were no Company stock
appreciation rights granted or outstanding during the three-year period ended
December 31, 1998.
The Company follows the disclosure-only provisions of SFAS 123, "Accounting
for Stock-Based Compensation," but applies Accounting Principles Board Opinion
25 and related interpretations in accounting for its plans. If the Company had
elected to recognize compensation cost for the issuance of the Company or
Convergys options to employees based on the fair value at the grant dates for
awards consistent with the method prescribed by SFAS 123, net income and
earnings per share would have been impacted as follows:
Millions of dollars Year ended
except per share amounts December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss):
As reported $149.9 $ (16.4) $ 185.0
Pro forma compensation expense,
net of tax benefits (2.1) (5.1) (1.9)
------- ------- -------
Total pro forma $ 147.8 $ (21.5) $ 183.1
------- ------- -------
------- ------- -------
Diluted earnings (loss) per share:
As reported $ 1.08 $ (.12) $ 1.35
Pro forma $ 1.06 $ (.16) $ 1.33
The pro forma effect on net income (loss) for all periods shown above 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. Additionally, the pro forma disclosure for 1998
includes incremental compensation expense based on the difference in the fair
value of the replacement options issued at the date of the distribution to
employees who held Company options.
39
The weighted average fair value on the date of grant for the
Convergys options granted during 1998 was $7.68. The weighted average fair
values at the date of grant for the Company options granted to employees
during 1998, 1997 and 1996 were $8.73, $9.64 and $4.60, respectively. Such
amounts were estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions:
Convergys
1998 1997 1996 1998
- -------------------------------------------------------------
Expected dividend yield 1.4% 1.8% 3.5% -
Expected volatility 25.0% 29.9% 29.2% 44.9%
Risk-free interest rate 5.7% 6.2% 5.5% 5.4%
Expected holding
period -- years 4 4 4 4
Presented below is a summary of the status of outstanding Company stock
options issued to employees, the issuance of Convergys options to Company
option holders at the date of distribution, and related transactions:
Weighted
Average
Exercise
Millions of dollars Shares Price
- ---------------------------------------------------------------
Company options held by
employees at January 1, 1996 3,016 $ 9.63
Granted 531 $20.20
Exercised (760) $9.45
Forfeited/expired (269) $13.76
-----
Company options held by
employees at December 31, 1996 2,518 $13.14
-----
Granted 357 $30.01
Exercised (196) $10.08
Forfeited/expired (15) $23.90
-----
Company options held by
employees at December 31, 1997 2,664 $17.16
-----
Granted 374 $31.25
Exercised (124) $12.02
Forfeited/expired (80) $28.26
-----
Company options held by
employees at December 31, 1998 2,834 $20.33
-----
Total Company options outstanding
at December 31, 1998,
(including options held by
Convergys employees) 7,284 $20.33
Total Company options outstanding
after re-pricing for Convergys
spin-off at December 31, 1998,
(including options held by
Convergys employees) 7,284 $8.73
The following table summarizes the status of Company stock options
outstanding and exercisable at December 31, 1998:
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
- --------------- --------------------- -------- ----------------
$3.360 to $4.999 2,674 4.34 $4.02 2,675 $4.01
$5.228 to $12.887 1,957 7.24 $8.91 819 $7.75
$12.981 to $16.125 2,653 8.62 $13.27 356 $13.53
----- -----
Total 7,284 6.69 $8.73 3,850 $5.69
----- -----
----- -----
Restricted stock awards during 1998, 1997 and 1996 were 320,000 shares,
126,000 shares and 100,000 shares, respectively. The weighted average market
value of the shares, on a pre-spin-off basis, on the grant date were $32.59,
$29.48 and $20.21, respectively. Restricted stock awards generally vest
within one to five years.
On January 4, 1999, the Company announced stock option grants to each of
its approximately 3,500 employees. According to the terms of this program,
stock option grant recipients remaining with the Company until January 4,
2002, can exercise their options to purchase up to 500 common shares each.
The exercise price for these options is $16.75 per share, the average of the
opening and closing prices for the Company's common stock on the date of the
grant. This plan includes a provision for option grants to future employees,
in smaller amounts and at an exercise price based on the month of hire. The
terms of the program allow for cashless exercises. Grant recipients must
exercise their options prior to January 4, 2009. The Company does not expect
a significant amount of dilution as a result of this grant.
- -------------------------------------------------------------------------------
9. BUSINESS SEGMENT INFORMATION
In the fourth quarter of 1998, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes a new framework for
segment reporting and requires that externally reported segments be aligned
in the same manner as is viewed by a company's "chief operating decision
maker." The chief operating decision maker, or decision-making group, is the
person (or persons) who decides on resource allocation among a company's
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision-making
group.
The Company evaluates performance based on several factors, of which the
primary financial measure is business segment operating income. The Company
generally accounts for inter-segment sales and transfers as if the sales or
transfers were to third parties, i.e., at current market prices. The
accounting policies of the business segments are the same as those described
in Accounting Policies (see Note 1). Certain corporate
40
administrative expenses have been allocated to segments based upon the nature
of the expense.
The Company is organized on the basis of products and services. The Company's
segments are strategic business units that offer distinct products and services,
organized around a telecommunications core, and are aligned with specific
subsidiaries of the Company.
The Local Communications Services segment provides local, long distance, data
networking and transport, Internet and payphone services, as well as sales of
communications equipment, in southwestern Ohio, northern Kentucky, and
southeastern Indiana. Services are marketed and sold to both residential and
business customers, and are delivered via the Company's Cincinnati Bell
Telephone subsidiary.
The Directory Services segment sells directory advertising and information
services primarily to business customers in the aforementioned area. This
segment's identifiable product is the yellow pages directory delivered via the
Company's Cincinnati Bell Directory subsidiary.
The Other Communications Services segment (i) resells long distance and
Internet access services and provides data services and products to small- and
medium-sized business customers mainly in a five-state Midwestern area and (ii)
resells telecommunications and computer equipment in the secondary market. These
services are provided through the Company's Cincinnati Bell Long Distance and
Cincinnati Bell Supply subsidiaries, respectively.
The Company anticipates that its new digital wireless PCS business,
Cincinnati Bell Wireless, will be reported as an operating segment in 1999. In
1998, total assets of $212.1 million and capital additions of $164.2 million,
including acquisitions, are included in the segment financial information under
the caption "Other Communications Services."
The Company has formed two new subsidiaries. ZoomTown.com Inc., formed in the
first quarter of 1999, provides FUSE Internet access, e-commerce, and
transactional services. EnterpriseWise IT Consulting LLC (formerly KSM
Consulting and the Network Solutions Group) formed in the third quarter of 1998,
provides network integration and consulting services. Operating results from
these services have been included in the Local Communications Services segment.
The Company's segment financial information is as follows:
Millions of dollars Year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------
Revenues
Local Communications Services $ 718.4 $ 670.1 $ 650.8
Directory Services 72.9 72.9 72.6
Other Communications Services 106.1 101.7 81.8
Intersegment (12.3) (10.2) (25.4)
---------- ---------- ----------
Total $ 885.1 $ 834.5 $ 779.8
---------- ---------- ----------
---------- ---------- ----------
Intersegment Revenues
Local Communications Services $ 6.8 $ 6.0 $ 22.3
Directory Services .4 -- --
Other Communications Services 5.1 4.2 3.1
---------- ---------- ----------
Total $ 12.3 $ 10.2 $ 25.4
---------- ---------- ----------
---------- ---------- ----------
Operating Income
Local Communications Services $ 141.7 $ 146.8 $ 155.7
Directory Services 25.4 24.9 21.0
Other Communications Services 10.5 11.5 10.9
Corporate and Eliminations 2.4 8.2 (7.0)
---------- ---------- ----------
Total $ 180.0 $ 191.4 $ 180.6
---------- ---------- ----------
---------- ---------- ----------
Assets
Local Communications Services $ 749.5 $ 706.4 $ 1,005.5
Directory Services 28.4 30.6 26.7
Other Communications Services 247.3 32.6 24.6
Corporate and Eliminations 15.8 74.7 (5.1)
---------- ---------- ----------
Total $ 1,041.0 $ 844.3 $ 1,051.7
---------- ---------- ----------
---------- ---------- ----------
Capital Additions (including acquisitions)
Local Communications Services $ 140.2 $ 141.1 $ 101.4
Directory Services -- -- .2
Other Communications Services 168.2 7.1 4.5
Corporate .8 16.1 .2
---------- ---------- ----------
Total $ 309.2 $ 164.3 $ 106.3
---------- ---------- ----------
---------- ---------- ----------
Depreciation and Amortization
Local Communications Services $ 106.2 $ 120.6 $ 116.6
Directory Services .1 -- --
Other Communications Services 3.7 3.3 4.0
Corporate 1.1 .4 .4
---------- ---------- ----------
Total $ 111.1 $ 124.3 $ 121.0
---------- ---------- ----------
---------- ---------- ----------
The Company derives significant revenues from AT&T and its affiliates
primarily by providing network access services. Revenues from AT&T were 9%, 11%
and 12% of the Company's consolidated revenues for 1998, 1997, and 1996,
respectively.
- ----------------------------------------------------------------------------
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate, where practicable,
the fair value of each class of financial instruments:
Cash and cash equivalents, and short-term debt -- the carrying amount
approximates fair value because of the short-term maturity of these 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, 1998, and
41
1997 were $340.0 million and $240.0 million, respectively. The estimated fair
values at December 31, 1998 and 1997, were $355.1 million and $250.8 million,
respectively.
Interest rate risk management -- the Company is exposed to the impact of
interest rate changes. The Company's objective is to manage the impact of
interest rate changes on earnings and cash flows and to lower its overall
borrowing costs. The Company continuously monitors the ratio of variable to
fixed interest rate debt to maximize its total return. As of December 31,
1998, approximately 65% of debt was long-term, fixed-rate debt and
approximately 35% was commercial paper and bank loans with variable interest
rates and original maturities of less than one year.
- ------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases certain facilities and equipment used in its operations.
Total rental expenses were approximately $11.7 million, $10.5 million and
$9.3 million in 1998, 1997 and 1996, respectively.
At December 31, 1998, the total minimum annual rental commitments under
noncancelable leases are as follows:
OPERATING CAPITAL
MILLIONS OF DOLLARS LEASES LEASES
- ------------------------------------------------------------------------------
1999 $13.6 $ 4.6
2000 12.9 4.6
2001 11.6 4.6
2002 9.8 4.6
2003 6.0 4.7
Thereafter 27.7 40.9
----- -----
Total $81.6 64.0
-----
-----
Amount representing interest 35.6
-----
Present value of net minimum lease payments 28.4
-----
-----
The effects of a new operating lease for equipment associated with the
Company's new high-bandwidth service offering are included in "total minimum
annual rental commitments" above. This lease takes effect on January 1, 1999,
and extends through 2002.
CONTINGENCIES
In the normal course of business, the Company is subject to various
regulatory proceedings, lawsuits, claims, and other matters. Such matters are
subject to many uncertainties, and outcomes are not predictable with
assurance. However, the Company believes that the resolution of such matters
for amounts above those reflected in the consolidated financial statements
would not likely have a materially adverse effect on the Company's financial
condition.
At December 31, 1998, the Company had approximately 3,500 employees. CBT
had approximately 2,000 employees covered under collective bargaining
agreements with the Communications Workers of America (CWA), which is
affiliated with the AFL-CIO. This agreement expires in May 1999. Negotiations
with representatives of the CWA are planned to begin in March 1999, and the
outcome cannot be determined at this time.
- ------------------------------------------------------------------------------
12. SPECIAL CHARGES (CREDITS)
In 1995, the Company initiated a restructuring plan in response to a need for
fewer employees. A restructuring liability was established to provide for the
voluntary and involuntary separation of employees. Provisions were made for
early retirements and more than 1,300 employees accepted the early retirement
offer. The Company recorded charges of $131.6 million, net of pension
settlement gains, to reflect the cost of this plan. The charges included
$58.0 million for pension enhancements, $54.0 million of curtailment losses
for postretirement health care costs, $7.0 million for lease terminations and
$4.0 million for vacation buyouts and severance pay. The remainder was for
other costs. These charges reduced 1995 net income by approximately $84.0
million.
The following table illustrates activity in this reserve since 1996:
MILLIONS OF DOLLARS YEAR ENDED DECEMBER 31 1998 1997 1996
- ------------------------------------------------------------------------------
Restructure liability
Remaining balance, beginning of year $5.3 $8.7 $15.2
Vacation/severance .9 2.6 2.0
Real estate and lease 1.7 .6 1.2
Reversal of unneeded amounts 1.1 -- 2.3
Other -- .2 1.0
Transfer to Convergys at spin-off 1.1 -- --
---- ---- ----
Remaining balance, end of year $.5 $5.3 $8.7
---- ---- ----
---- ---- ----
Management believes that the remaining balance of $.5 million at December
31, 1998, is adequate to complete the restructuring plan.
Since the establishment of the reserve, certain gains have been realized
that have been reflected in income. These appear in the Consolidated
Statements of Income and Comprehensive Income under the caption, "Special
charges (credits)." Associated amounts are as follows:
MILLIONS OF DOLLARS YEAR ENDED DECEMBER 31 1998 1997 1996
- ------------------------------------------------------------------------------
Special charges (credits)
Non-cash settlement gains $ -- $(21.0) $(27.4)
Reversal of unneeded amounts (1.1) -- (2.3)
---- ------ ------
Total $(1.1) $(21.0) $(29.7)
---- ------ ------
---- ------ ------
- -------------------------------------------------------------------------------
13. 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 1998 1997 1996
- -----------------------------------------------------------------------------
Revenues $ 718.4 $ 670.1 $650.8
Costs and expenses $ 576.7 $ 523.3 $495.1
Income before extraordinary item $ 81.7 $ 85.2 $ 92.6
Net income (loss) $ 81.1 $(124.8) $ 92.6
Balance Sheet
Millions of dollars at December 31 1998 1997
- -------------------------------------------------------------------------------
Current assets $151.6 $142.5
Telephone plant - net 580.8 550.6
Other noncurrent assets 17.1 13.3
------ ------
Total assets $749.5 $706.4
------ ------
------ ------
Current liabilities $144.2 $214.0
Noncurrent liabilities 38.7 33.8
Long-term debt 317.1 218.4
Shareowner's equity 249.5 240.2
------ ------
Total liabilities and shareowner's equity $749.5 $706.4
------ ------
------ ------
Results for 1997 include an extraordinary, non-cash charge of $339.2 from the
discontinuance of SFAS 71. The charge reduced net income $210.0 million (see
Note 4).
Results for 1997 and 1996 include $21.0 million and $28.5 million,
respectively, for pension settlement gains from lump sum distributions to
employees under the 1995 business restructuring. The settlement gains increased
net income $13.4 million and $18.2 million, respectively.
Results for 1996 also include a reversal of $2.5 million of accrued interest
expense related to overearnings liabilities which increased net income by $1.6
million.
- -------------------------------------------------------------------------------
14. ADDITIONAL FINANCIAL INFORMATION
Income Statement
Millions of dollars Year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------
Interest expense:
Long-term debt $20.8 $23.2 $23.7
Short-term debt 4.9 6.1 5.7
Other (1.5) .8 (1.5)
----- ----- -----
Total $24.2 $ 30.1 $ 27.9
----- ----- -----
----- ----- -----
Balance Sheet
Millions of dollars at December 31 1998 1997
- -------------------------------------------------------------------------------
Property, plant and equipment, net:
Telephone plant $ 1,739.1 $ 1,633.7
Accumulated depreciation (1,158.3) (1,083.1)
--------- ---------
Net telephone plant 580.8 550.6
Other property and equipment 134.0 37.1
Accumulated depreciation (16.6) (14.5)
--------- ---------
Total $ 698.2 $ 573.2
--------- ---------
--------- ---------
Goodwill and other Intangibles:
Goodwill and other intangibles - gross $ 108.9 $ 23.0
Accumulated amortization (5.6) (5.6)
--------- ---------
Total $ 103.3 $ 17.4
--------- ---------
--------- ---------
Payables and other current liabilities:
Accounts payable $ 57.9 $ 75.4
Accrued payroll and benefits 33.9 33.0
Accrued taxes 40.6 35.1
Advance billing and customers' deposits 26.8 25.9
Other current liabilities 59.9 17.4
--------- ---------
Total $ 219.1 $ 186.8
--------- ---------
--------- ---------
Accumulated other comprehensive income (loss):
Currency translation adjustment $ -- $ (3.9)
Additional minimum pension liability (6.7) (4.2)
--------- ---------
Total $ (6.7) $ (8.1)
--------- ---------
--------- ---------
Statement of Cash Flows
Millions of dollars Year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------
Cash paid for:
Interest (net of amount capitalized) $26.8 $29.6 $31.3
Income taxes (net of refunds) $81.4 $82.8 $55.6
- -------------------------------------------------------------------------------
15. COMMON AND PREFERRED SHARES
COMMON SHARES
Par value of the common shares is $1 per share. At December 31, 1998 and 1997,
common shares outstanding were 136.4 million and 136.1 million, respectively.
COMMON SHARE PURCHASE RIGHTS PLAN
In the first quarter of 1997, the Company's Board of Directors adopted a Share
Purchase Rights Plan by granting a dividend of one preferred share purchase
right for each outstanding common share to shareowners of record at the close
of business on May 2, 1997. Under certain conditions, each right entitles the
holder to purchase one-hundredth of a Series A Preferred Share. The rights
cannot be exercised or transferred apart from
43
common shares, unless a person or group acquires 15% or more of the Company's
outstanding common shares. The rights will expire May 2, 2007, if they have
not been redeemed.
PREFERRED SHARES
The Company is authorized to issue up to 4 million voting preferred shares and 1
million nonvoting preferred shares.
EARNINGS PER SHARE
Basic earnings per share is based upon the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects the
potential dilution that would occur if common stock equivalents were exercised.
The following table is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for income from continuing
operations, before extraordinary items, for the following periods:
Millions of dollars
except per share
amounts Year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------
Basic earnings per share:
Income from continuing operations $ 81.8 $102.3 $ 99.5
Weighted average common shares
outstanding (in millions) 136.0 135.2 133.9
Earnings per share from
continuing operations $.60 $.76 $.74
Fully diluted earnings per share:
Income from continuing operations $ 81.8 $102.3 $ 99.5
Effect of dilutive securities:
Weighted average common shares
outstanding (in millions) 136.0 135.2 133.9
Stock options (in millions) 1.7 1.9 2.7
Stock-based compensation
arrangements (in millions) .5 .6 .6
------ ------ ------
Weighted average common shares
outstanding, fully diluted
(in millions) 138.2 137.7 137.2
Fully diluted earnings per share
from continuing operations $ .59 $ .74 $ .73
Options to purchase 1,360,077 weighted average shares of common stock at an
average of $30.19 per share were outstanding during the year ended December 31,
1997, but were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price of the common
shares for the year.
- -------------------------------------------------------------------------------
16. 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
- -------------------------------------------------------------------------
1998
REVENUES $216.5 $219.5 $222.6 $ 226.5 $ 885.1
OPERATING INCOME $ 41.2 $ 39.5 $ 47.1 $ 52.2 $ 180.0
INCOME FROM:
CONTINUING
OPERATIONS $ 22.5 $ 16.1 $ 21.0 $ 22.2 $ 81.8
DISCONTINUED
OPERATIONS,
NET OF TAXES $ .3 $ 26.4 $ 27.4 $ 15.0 $ 69.1
EXTRAORDINARY ITEM $ -- $ -- $ -- $ (1.0) $ (1.0)
NET INCOME $ 22.8 $ 42.5 $ 48.4 $ 36.2 $ 149.9
BASIC EARNINGS
PER SHARE $ .17 $ .31 $ .36 $ .26 $ 1.10
DILUTED EARNINGS
PER SHARE $ .16 $ .31 $ .35 $ .26 $ 1.08
1997
Revenues $199.9 $207.1 $211.0 $ 216.5 $ 834.5
Operating Income $ 54.5 $ 47.5 $ 45.5 $ 43.9 $ 191.4
Income from:
Continuing
Operations $ 29.9 $ 25.3 $ 24.6 $ 22.5 $ 102.3
Discontinued
Operations,
Net of Taxes $ 27.3 $ 28.9 $ 27.2 $ 7.9 $ 91.3
Extraordinary Item $ -- $ -- $ -- $(210.0) $(210.0)
Net Income (Loss) $ 57.2 $ 54.2 $ 51.8 $(179.6) $ (16.4)
Basic Earnings
(Loss) Per Share $ .42 $ .40 $ .38 $ (1.32) $ (.12)
Diluted Earnings
(Loss) Per Share $ .41 $ .39 $ .38 $ (1.30) $ (.12)
In the fourth quarter of 1998, the extraordinary items were for retirement of
long-term debt and a portion of a credit facility, which, net of tax, reduced
net income by $1.0 million or $.01 per share.
In the fourth quarter of 1997, the extraordinary item, net of tax, was the
result of CBT's discontinuance of SFAS 71, which reduced net income $210.0
million, or $1.52 per share.
In the first and second quarters of 1997, pension
settlement gains from the business restructuring increased net income $9.6
million, or $.07 per share and $3.8 million, or $.03 per share, respectively.
44