Prepared by MERRILL CORPORATION

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

 

ý     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2001

 

OR

 

 

 

o      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from________ to ________

 

Commission File Number 1-8519

 

BROADWING INC.

 

Incorporated under the laws of the State of Ohio

 

 

I.R.S. Employer Identification Number 31-1056105

 

201 East Fourth Street, Cincinnati, Ohio 45202

 

Telephone - Area Code 513 397-9900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý   No o

 

At October 31, 2001, there were 218,715,680 common shares outstanding.

 

 


TABLE OF CONTENTS

PART I.  Financial Information

 

Description

 

 

Item 1.

Financial Statements

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited) Three Months and Nine Months Ended September 30, 2001 and 2000

 

 

 

Condensed Consolidated Balance Sheets September 30, 2001 (Unaudited) and December 31, 2000

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2001 and 2000

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition And Results of Operations

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

PART II.  Other Information

 

 

Description

 

 

Item 1.

Legal Proceedings

 

 

Item 2.

Changes in Securities and Use of Proceeds

 

 

Item 3.

Defaults Upon Senior Securities

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

Item 5.

Other Information

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

Signature

 


 

Form 10-Q Part I

Broadwing Inc.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(Millions of Dollars, Except Per Common Share Amounts)

(Unaudited)

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2001

 

2000

 

2001

 

2000

 

Revenues

 

 

 

 

 

 

 

 

 

Broadband

 

$

304.0

 

$

264.3

 

$

919.3

 

$

715.8

 

Local

 

208.8

 

199.5

 

621.6

 

588.8

 

Wireless

 

64.3

 

48.8

 

184.1

 

127.9

 

Other

 

42.8

 

37.3

 

123.3

 

103.0

 

Intersegment

 

(22.0

)

(18.7

)

(64.1

)

(46.4

)

Total revenues

 

597.9

 

531.2

 

1,784.2

 

1,489.1

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

295.0

 

251.8

 

866.8

 

699.1

 

Selling, general and administrative

 

137.3

 

142.0

 

435.1

 

438.0

 

Depreciation

 

114.8

 

88.6

 

319.9

 

252.2

 

Amortization

 

28.6

 

28.7

 

85.8

 

84.9

 

Restructuring charges (credits)

 

-

 

-

 

10.0

 

(0.2

)

Total costs and expenses

 

575.7

 

511.1

 

1,717.6

 

1,474.0

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

22.2

 

20.1

 

66.6

 

15.1

 

 

 

 

 

 

 

 

 

 

 

Minority interest expense

 

13.8

 

11.2

 

39.2

 

33.2

 

Equity loss in unconsolidated entities

 

-

 

3.5

 

4.0

 

9.5

 

Interest expense

 

44.1

 

43.1

 

127.2

 

119.7

 

Other expense (income), net

 

(7.4

)

(24.6

)

(6.5

)

(31.6

)

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before income taxes and cumulative effect of change in accounting principle

 

(28.3

)

(13.1

)

(97.3

)

(115.7

)

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(0.4

)

10.3

 

(6.7

)

(7.1

)

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before cumulative effect of change in accounting principle

 

(27.9

)

(23.4

)

(90.6

)

(108.6

)

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of taxes

 

-

 

0.1

 

-

 

0.4

 

Cumulative effect of change in accounting principle, net of taxes

 

-

 

-

 

-

 

(0.8

)

Net Loss

 

(27.9

)

(23.3

)

(90.6

)

(109.0

)

 

 

 

 

 

 

 

 

 

 

Dividends and accretion applicable to preferred stock

 

2.6

 

2.6

 

7.8

 

5.5

 

 

 

 

 

 

 

 

 

 

 

Net Loss Applicable to Common Shareowners

 

$

(30.5

)

$

(25.9

)

$

(98.4

)

$

(114.5

)

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss), Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on interest rate swaps

 

(4.9

)

-

 

(7.9

)

-

 

Unrealized (loss) gain on investments

 

-

 

102.5

 

(85.9

)

(25.3

)

Unrealized gain on cash flow hedges

 

-

 

-

 

17.0

 

-

 

Reclassification adjustment - minority equity investments and gain on cash flow hedges

 

(17.0

(14.8

)

(17.0

(19.2

)

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss)

 

$

(49.8

)

$

64.4

 

$

(184.4

)

$

(153.5

)

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Loss Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before cumulative effect of change in accounting principle

 

$

(0.14

)

$

(0.12

)

$

(0.45

)

$

(0.54

)

Income from discontinued operations, net of taxes

 

-

 

-

 

-

 

-

 

Cumulative effect of change in accounting principle, net of taxes

 

-

 

-

 

-

 

-

 

Net Loss

 

$

(0.14

)

$

(0.12

)

$

(0.45

)

$

(0.54

)

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding (millions)

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

217.8

 

215.1

 

217.2

 

210.4

 

 

See Notes to Financial Statements.


 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Millions of Dollars, Except Per Share Amounts)

 

 

 

(Unaudited)

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2001

 

2000

 

Assets

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

24.8

 

$

37.9

 

Receivables, less allowances of $41.5 and $49.0, respectively

 

343.1

 

330.6

 

Other current assets

 

119.3

 

94.2

 

Total current assets

 

487.2

 

462.7

 

 

 

 

 

 

 

Property, plant and equipment, net

 

3,193.6

 

2,979.0

 

Goodwill and other intangibles, net

 

2,472.6

 

2,559.4

 

Other noncurrent assets

 

277.4

 

476.1

 

Net assets from discontinued operations

 

-

 

0.4

 

Total Assets

 

$

6,430.8

 

$

6,477.6

 

 

 

 

 

 

 

Liabilities and Shareowners' Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Short-term debt

 

$

119.7

 

$

14.0

 

Accounts payable

 

197.3

 

244.4

 

Current portion of unearned revenue and customer deposits

 

198.5

 

88.0

 

Accrued taxes

 

114.0

 

90.4

 

Other current liabilities

 

218.9

 

290.5

 

Total current liabilities

 

848.4

 

727.3

 

 

 

 

 

 

 

Long-term debt, less current portion

 

2,655.6

 

2,507.0

 

Unearned revenue, less current portion

 

444.7

 

611.0

 

Other noncurrent liabilities

 

171.8

 

177.0

 

 

 

 

 

 

 

Total liabilities

 

4,120.5

 

4,022.3

 

 

 

 

 

 

 

Minority interest

 

435.9

 

433.8

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareowners' Equity

 

 

 

 

 

6 3/4% Cumulative Convertible Preferred Stock, $.01 par value, 5,000,000 shares authorized, 155,250 shares issued and outstanding at September 30, 2001 and December 31, 2000

 

129.4

 

129.4

 

 

 

 

 

 

 

Common shares, $.01 par value; 480,000,000 shares authorized; 225,721,241 and 223,335,343 shares issued at September 30, 2001 and December 31, 2000

 

2.3

 

2.1

 

Additional paid-in capital

 

2,366.5

 

2,329.5

 

Accumulated deficit

 

(467.6

)

(377.1

)

Accumulated other comprehensive income (loss)

 

(11.1

)

82.7

 

Common stock in treasury, at cost:  7,805,800 shares at September 30, 2001 and December 31, 2000

 

(145.1

)

(145.1

)

 

 

 

 

 

 

Total shareowners' equity

 

1,874.4

 

2,021.5

 

 

 

 

 

 

 

Total Liabilities and Shareowners' Equity

 

$

6,430.8

 

$

6,477.6

 

 

See Notes to Financial Statements

 


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions of Dollars)

(Unaudited)

 

 

 

Nine Months Ended,

 

 

 

September 30,

 

 

 

2001

 

2000

 

Cash Flows from Operating Activities

 

 

 

 

 

Net loss

 

$

(90.6

)

$

(109.0

)

Less:  income from discontinued operations, net of taxes

 

-

 

(0.4

)

Net loss from continuing operations

 

(90.6

)

(109.4

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

319.9

 

252.2

 

Amortization

 

85.8

 

84.9

 

Provision for loss on receivables

 

77.4

 

53.0

 

Minority interest

 

39.2

 

33.2

 

Deferred income tax expense (benefit)

 

(32.6

)

(46.2

)

Non-cash interest expense

 

27.3

 

25.8

 

Tax benefits from employee stock option plans

 

23.1

 

39.1

 

Recognized gain on sale of investments, net

 

(9.8

)

(31.9

)

Other, net

 

8.8

 

0.4

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in receivables

 

(100.9

)

(119.2

)

(Increase) decrease in other current assets

 

(24.7

)

3.3

 

Decrease in accounts payable

 

(45.4

)

(11.4

)

(Decrease) increase in accrued and other current liabilities

 

(28.1

)

127.2

 

Decrease in unearned revenue

 

(44.6

)

(9.2

)

Increase in other assets and liabilities, net

 

(6.0

)

(48.9

)

Net cash provided by operating activities of continuing operations

 

198.8

 

242.9

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures

 

(536.8

)

(545.7

)

Proceeds from sale of investments

 

113.9

 

25.9

 

Payments for investments/acquisitions, net of cash acquired

 

(1.5

)

(75.9

)

Other, net

 

0.1

 

2.2

 

 

 

 

 

 

 

Net cash used in investing activities of continuing operations

 

(424.3

)

(593.5

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Proceeds from forward sale agreement and other short-term borrowings

 

47.1

 

6.8

 

Issuance of long-term debt

 

436.0

 

658.0

 

Repayment of long-term debt

 

(244.9

)

(405.2

)

Issuance of common shares

 

18.7

 

59.5

 

Minority interest and preferred stock dividends paid

 

(44.9

)

(46.8

)

Net cash provided by financing activities of continuing operations

 

212.0

 

272.3

 

Net cash provided by discontinued operations

 

0.4

 

7.9

 

Net decrease in cash and cash equivalents

 

(13.1

)

(70.4

)

Cash and cash equivalents at beginning of period

 

37.9

 

80.8

 

Cash and cash equivalents at end of period

 

$

24.8

 

$

10.4

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Income taxes, net of refunds

 

$

(17.9

)

$

(23.5

)

Interest, net of amount capitalized

 

$

94.8

 

$

84.7

 

Non-cash investing and financing activities:

 

 

 

 

 

Accretion of preferred stock

 

$

2.3

 

$

1.5

 

Redemption of 7 1/4% convertible preferred stock

 

$

-

 

$

228.6

 

 

See Notes to Financial Statements

 


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.         Basis of Presentation

Broadwing Inc. (“the Company”) is organized into four operating segments that are strategic business units, offering distinct products and services, and aligned with specific subsidiaries of the Company.

The Broadband segment utilizes its advanced optical network consisting of approximately 18,500 route miles to provide broadband transport through private line and indefeasible right of use ("IRU") agreements, Internet services utilizing technology based on Internet protocol (“IP”), and long distance services provided to both wholesale and retail markets.  The Broadband segment also offers data collocation, information technology consulting, network construction and other services.  These services are offered nationally through the Company’s Broadwing Communications Inc. subsidiary.

The Local segment reflects the operations of the Cincinnati Bell Telephone Company (“CBT”) subsidiary which provides local telephone service, network access, data transport, high-speed Internet access and other ancillary products and services to customers in southwestern Ohio, northern Kentucky and southeastern Indiana.

The Wireless segment includes the operations of the Cincinnati Bell Wireless LLC (“CBW”) subsidiary, a venture in which the Company owns 80.1% and AT&T Wireless Services Inc. (“AWS”) owns the remaining 19.9%.  This segment provides advanced digital personal communications and sales of related communications equipment to customers in the Greater Cincinnati and Dayton, Ohio operating areas.

The Other segment combines the operations of Cincinnati Bell Any Distance (“CBAD”), Cincinnati Bell Directory (“CBD”), ZoomTown.com (“ZoomTown”) and Cincinnati Bell Public Communications Inc. (“Public”).  CBAD resells voice long distance service, CBD publishes Yellow Pages directories, ZoomTown provides web hosting and Internet-based services and Public provides public payphone services.

The Company evaluates the performance of its segments based on several financial measures including revenues, capital expenditures and EBITDA (which is defined as earnings before interest, taxes, depreciation, amortization, and restructuring charges).  EBITDA is commonly used in the communications industry to measure operating performance and is not intended to represent cash flows for the periods presented.  Because all companies do not calculate EBITDA identically, the amounts presented for the Company may not be comparable to similarly titled measures of other companies.

 

The consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows for each period presented.  All adjustments are of a normal and recurring nature except for those outlined in Notes 2 and 10.  Certain prior year amounts have been reclassified to conform to the current classifications with no effect on financial results.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations.  The December 31, 2000 condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.  It is suggested that these financial statements be read in conjunction with financial statements and notes thereto included in the Company's 2000 Annual Report on Form 10-K.

 


2.               Restructuring Charges (Credits)

 

2001 Restructuring Plan

 

In February 2001, the Company initiated a reorganization of the activities of several of its Cincinnati- based subsidiaries, including CBT, CBAD, CBW, Public and CBD in order to create one centralized “Cincinnati Bell” presence for its customers.  Total restructuring costs of $9.4 million were recorded in the first quarter and consisted of $2.5 million related to lease terminations and $6.9 million related to involuntary employee separation benefits (including severance, medical insurance and other benefits) for 114 employees.  The severance payments are expected to be substantially complete by December 31, 2001 and consist of $5.8 million in cumulative severance payments as of September 30, 2001.  This includes $0.5 million for severance benefits recorded in the second quarter of 2001 that were in excess of the initial estimate.  The lease terminations are expected to be complete by March 31, 2002. In total, the Company expects this restructuring plan to result in cash outlays of $8.5 million and non-cash items of $0.9 million. The following table illustrates the activity in this reserve since February of 2001:

 

 

 

 

 

 

 

 

 

Balance

 

Type of costs (in millions):

 

Initial Charge

 

Expenditures

 

Adjustments

 

September 30,

2001

 

Employee separations

 

$

6.9

 

$

(6.3

)

$

0.5

 

$

1.1

 

Terminate contractual obligations

 

2.5

 

(0.2

)

-

 

2.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

9.4

 

$

(6.5

)

$

0.5

 

$

3.4

 

 

1999 Restructuring Plan

In December 1999, the Company initiated a restructuring plan to integrate the operations of the Company and Broadwing Communications, improve service delivery, and reduce the Company’s expense structure.  Total restructuring costs and impairments of $18.6 million were recorded in 1999 and consisted of $7.7 million related to Broadwing Communications (recorded as a component of the purchase price allocation) and $10.9 million related to the Company (recorded as a cost of operations).  The $10.9 million relating to the Company consisted of restructuring and other liabilities in the amount of $9.5 million and related asset impairments in the amount of $1.4 million.  The restructuring costs accrued in 1999 included the costs of involuntary employee separation benefits (including severance, medical insurance and other benefits) related to 347 employees primarily involved in customer support, infrastructure and the Company’s long distance operations.   As of March 31, 2001, all of the employee separations had been completed. The restructuring plans also included costs associated with closing a number of technical and customer support facilities, decommissioning certain switching equipment, and terminating contracts with vendors.  The following table illustrates activity in this reserve since December 31, 2000:

 

 

 

Balance

 

 

 

 

 

Balance

 

Type of costs (in millions):

 

December 31, 2000

 

Expenditures

 

Adjustments

 

September 30,

2001

 

Employee separations

 

$

0.1

 

$

(0.2

)

$

0.1

 

$

-

 

Facility closure costs

 

2.2

 

(0.8

)

-

 

1.4

 

Other exit costs

 

$

1.5

 

(1.5

)

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3.8

 

$

(2.5

)

$

0.1

 

$

1.4

 

 

In total, the Company expects these restructuring plans to result in cash outlays of $14.6 million and non-cash items of $3.3 million.  Management believes that the remaining balance of $1.4 million at September 30, 2001 is adequate to complete the restructuring plan.  Substantially all of the related actions will be completed by June 30, 2002.  The adjustment of $0.1 million shown in the table above is related to additional severance benefits in excess of the initial estimate.

 

3.         Debt

 

The Company’s debt consists of the following:

 

Millions of dollars

 

September 30, 2001

 

December 31, 2000

 

Short-Term Debt:

 

 

 

 

 

Capital lease obligations

 

$

10.6

 

$

5.7

 

Bank notes, current portion

 

89.1

 

-

 

Current maturities of long-term debt

 

20.0

 

8.3

 

Total short-term debt

 

$

119.7

 

$

14.0

 

 

 

 

 

 

 

Long-Term Debt:

 

 

 

 

 

Bank notes, less current portion

 

$

1,785.9

 

$

1,639.0

 

9.0% Senior subordinated notes

 

46.0

 

46.0

 

6.75% Convertible subordinated debentures

 

462.7

 

440.2

 

Various Cincinnati Bell Telephone notes

 

270.0

 

290.0

 

7.25% Senior secured notes

 

50.0

 

50.0

 

PSINet forward sale

 

-

 

3.0

 

Capital lease obligations

 

41.0

 

38.8

 

 

 

 

 

 

 

 

 

Total long-term debt

 

$

2,655.6

 

$

2,507.0

 

 


Capital Lease Obligations

The Company leases facilities and equipment used in its operations, some of which are required to be capitalized in accordance with Statement of Financial Accounting Standard No. 13, “Accounting for Leases” (“SFAS 13”).  SFAS 13 requires the capitalization of leases meeting certain criteria, with the related asset being recorded in property, plant and equipment and an offsetting amount recorded as a liability.  The Company had $51.6 million in total indebtedness relating to capitalized leases as of September 30, 2001, $41.0 million of which is considered long-term.

 

Bank Notes

In November 1999, the Company obtained a $1.8 billion credit facility from a group of lending institutions that was amended to $2.1 billion in January 2000 and subsequently increased to $2.3 billion in June 2001.  The credit facility consists of $900 million in revolving credit and $1.4 billion in term loans.  At September 30, 2001, the Company had drawn approximately $1.875 billion from the credit facility in order to refinance its existing debt and debt assumed as part of the merger with IXC Communications Inc. (“IXC”) in November 1999, as well as to provide for additional financing needs.  Accordingly, the Company has approximately $425 million in additional borrowing capacity under this facility as of September 30, 2001.

The facility’s financial covenants require that the Company maintain certain debt to EBITDA, senior secured debt to EBITDA, debt to capitalization, and interest coverage ratios.  The facility also contains covenants which, among other things, restrict the Company’s ability to incur additional debt, pay dividends, repurchase Company common stock, sell assets and merge with another company.  As of September 30, 2001, the Company was in compliance with all of the covenants of the credit facility.  As a result of the restructuring of its operations (further discussed in “Financial Condition” on page 31 of this Report on Form 10-Q), the Company is conducting a review of its debt covenants to assess if any modifications will be required.

The interest rates charged on borrowings from this credit facility can range from 100 to 275 basis points above the London Interbank Offering Rate (“LIBOR”), and are currently at 175 to 275 basis points above LIBOR based on the Company’s credit rating.  The Company will incur banking fees in association with this credit facility ranging from 37.5 basis points to 75 basis points, applied to the unused amount of borrowings of the facility.

9% Senior Subordinated Notes

In 1998, IXC issued $450 million of 9% senior subordinated notes due 2008 (“the 9% notes”) that were assumed as part of the merger with IXC (now "Broadwing Communications").  The 9% notes are general unsecured obligations and are subordinate in right of payment to all existing and future senior indebtedness and other liabilities of the Company’s subsidiaries.  The indenture related to the 9% notes requires Broadwing Communications to comply with various financial and other covenants and restricts Broadwing Communications from incurring certain additional indebtedness.  In January 2000, $404 million of these 9% notes were redeemed through a tender offer as a result of the change of control terms of the bond indenture.  Accordingly, $46 million of the 9% notes remain outstanding at September 30, 2001.

 


6.75% Convertible Subordinated Debentures

In July 1999, the Company issued $400 million of 10-year, convertible subordinated debentures to Oak Hill Capital Partners, L.P.  These notes are convertible into common stock of the Company at a price of $29.89 per common share at the option of the holder.  For as long as this debt is outstanding, these notes bear a coupon rate of 6.75% per annum, with the associated interest expense being added to the debt principal amount through June 2004.  Interest payments for the remaining five years will then be paid in cash. Through September 30, 2001 and since inception, the Company has recorded $62.7 million in interest expense and has adjusted the carrying amount of the debt accordingly.  During the three months ended September 30, 2001 and 2000, the Company recorded non-cash interest expense of approximately $7.7 million and $7.2 million, respectively, related to these debentures.

Cincinnati Bell Telephone Notes

CBT has $290 million in corporate bonds outstanding that are guaranteed by its parent company, Broadwing Inc.  Of this amount, $270 million is considered long-term.  These bonds, which are not guaranteed by other subsidiaries of Broadwing Inc., generally have maturity terms ranging from 30 to 40 years and were issued at various dates from 1962 to 1998.  Interest rates on this indebtedness range from 4.375% to 7.27%.

7.25% Senior Secured Notes

In 1993, the Company issued $50 million of 7.25% senior secured notes due 2023 (the “7.25% notes”).  The indenture related to these 7.25% notes does not subject the Company to restrictive financial covenants.

PSINet Forward Sale

 

In June and July 1999, Broadwing Communications received approximately $111.8 million representing amounts from a financial institution in connection with two prepaid forward sale contracts on six million shares of PSINet common stock.  This amount was accounted for as notes payable and was collateralized by six million shares of PSINet common stock owned by the Company.  Given the significant decline in the value of PSINet common stock during 2000, the Company adjusted the carrying value of this liability to approximately $3 million during the fourth quarter of 2000.

During the first quarter of 2001, the Company settled the forward sale liability for approximately 5.8 million shares of PSINet common stock.  The difference between the six million shares collateralized and the 5.8 million shares required to settle the liability were sold in the open market, generating a pretax gain of $0.5 million.

4.        Financial Instruments

The Company adopted Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) on January 1, 2001.  SFAS 133 requires that all derivative instruments be recognized on the balance sheet at fair value.  Fair values are determined based on quoted market prices of comparable instruments, if available, or on pricing models using current assumptions.  On the date the financial instrument is entered into, the Company designates it as either a fair value or cash flow hedge.

 


Upon adoption of SFAS 133 on January 1, 2001, offsetting transition adjustments related to the PSINet forward sale and the underlying six million shares of PSINet (further described in Note 3 above) were reclassified from other comprehensive income to net income.  Accordingly, there was no net cumulative effect adjustment to either net income or other comprehensive income related to these items.

As of September 30, 2001, the Company’s derivative contracts have been determined to be highly effective cash flow hedges.  Unrealized gains and losses of highly effective cash flow hedges are recorded in other comprehensive income until the underlying transaction is executed.

 

Interest Rate Contracts

 

From time to time the Company enters into interest rate swap agreements with the intent of managing its exposure to interest rate risk.  Interest rate swap agreements are contractual agreements between two parties for the exchange of interest payment streams on a notional principal amount and agreed upon fixed or floating rate, for a defined time period.  These agreements are hedges against debt obligations related to the Company’s $2.3 billion credit facility.  Realized gains and losses from the interest rate swaps are recognized as an adjustment to interest expense each periodThe interest rate swap agreements currently in place expire between 2002 and 2003.  At September 30, 2001, the interest rate swaps on notional amounts of $440 million were a liability with a fair value of $12.1 million, resulting in year-to-date, after-tax net losses in accumulated other comprehensive income (loss) of $7.9 million.

 

Marketable Equity Forward Contracts

 

From time to time the Company enters into forward contracts on the sale of marketable equity securities held in the Company's investment portfolio.  It is the Company's intent to manage its exposure to fluctuations in U.S. equity markets related to these minority investments.  Forward contracts are contractual agreements between two parties for the sale of borrowed shares to be settled by delivery of the equivalent number of shares owned by the Company at an agreed upon future date.

 

During the first half of 2001, the Company entered into a forward sale contract with a financial institution to hedge its investment in eight million shares of Corvis Corporation.  The Company received a $42.7 million prepayment in connection with the forward sale contract, which was accounted for as a note payable and collateralized by 2.6 million of the forward sold shares.

 

The Company continued to hedge the remaining Corvis shares during the quarter ended September 30, 2001.  Also during the third quarter, the Company delivered the eight million hedged shares in settlement of the forward sale, receiving additional proceeds amounting to $39.2 million, for a total of $81.9 million.  The $42.7 million note payable was repaid and the Company recognized a gain of approximately $26 million ($17 million net of tax) upon settlement of the entire transaction.

 

The PSINet forward sale was settled during the first quarter of 2001.  For a detailed discussion of the PSINet forward sale, see Note 3 of the “Notes to Condensed Consolidated Financial Statements.”

 


5.         Earnings (Loss) Per Common Share

 

Basic earnings (loss) per common share (“EPS”) is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if common stock equivalents were exercised, but only to the extent that they are considered dilutive to the Company’s earnings. The following table is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for loss from continuing operations before the cumulative effect of a change in accounting principle for the following periods:

 

 

 

Three Months

 

Nine Months

 

Shares and dollars in millions

 

Ended September 30,

 

Ended September 30,

 

(except per share amounts)

 

2001

 

2000

 

2001

 

2000

 

Numerator:

 

 

 

 

 

 

 

 

 

Loss from continuing operations before cumulative effect of change in accounting principle

 

$

(27.9

)

$

(23.4

)

$

(90.6

)

$

(108.6

)

Preferred stock dividends

 

2.6

 

2.6

 

7.8

 

5.5

 

Numerator for EPS and EPS assuming dilution - income applicable to common shareowners

 

$

(30.5

)

$

(26.0

)

$

(98.4

)

$

(114.1

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic EPS - weighted average common shares outstanding

 

217.8

   

215.1

   

217.2

   

210.4

   

Potential dilution:

 

 

 

 

 

 

 

 

 

Stock options

 

-

 

-

 

-

 

-

 

Stock-based compensation arrangements

 

-

 

-

 

-

 

-

 

Denominator for diluted EPS per common share

 

217.8

 

215.1

 

217.2

 

210.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted EPS from continuing operations before cumulative effect of change in accounting principle

 

$

(0.14

)

$

(0.12

)

$

(0.45

)

$

(0.54

)

 


Because the effect of their inclusion in the EPS calculation would be anti-dilutive, approximately 3.8 million additional shares related to “in the money” stock options and stock-based compensation agreements are not included in the denominator of the EPS calculation.  The Company also has outstanding convertible preferred stock and convertible subordinated debentures, both of which bear a stated rate of 6.75% and are further described in Notes 5 and 7, respectively, in the Company’s 2000 Annual Report on Form 10-K.  Based on their conversion terms, neither of these issues are currently in-the-money.

 

6.       Minority Interest

 

 

 

September 30,

 

December 31,

 

Millions of dollars

 

2001

 

2000

 

Minority interest consists of:

 

 

 

 

 

 

 

 

 

 

 

 

 

12.5% Exchangeable Preferred Stock

 

$

418.7

 

$

421.0

 

Minority Interest in Cincinnati Bell Wireless held by AWS

 

14.4

 

10.2

 

Other

 

2.8

 

2.6

 

Total

 

$

435.9

 

$

433.8

 

 

Broadwing Communications has outstanding approximately 395,000 shares of 12 1/2% Junior Exchangeable Preferred Stock (“12 1/2% Preferreds”) that are carried on the Company’s balance sheet at $418.7 million.  The 12 1/2% Preferreds are mandatorily redeemable on August 15, 2009 at a price equal to their liquidation preference of $1,000 a share, plus accrued and unpaid dividends. Dividends on the 12 1/2% Preferreds are classified as “Minority interest expense” in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss).  The 12 1/2% Preferreds are being accreted from their fair market value to the redemption value.  The accretion of the difference between the carrying value and the mandatory redemption value is treated as an offsetting reduction to “Minority interest expense”.

 

AWS maintains a 19.9% ownership in the Company’s Cincinnati Bell Wireless LLC (“CBW”) subsidiary.  The balance is adjusted as a function of AWS’ 19.9% share of the operating income (or loss) of CBW, with an offsetting amount being reflected in the Condensed Consolidated Statements of Income and Comprehensive Income (Loss) under the caption “Minority interest expense”.

 


7.        Business Segment Information

 

The Broadband segment utilizes its advanced optical network consisting of approximately 18,500 route miles to provide broadband transport through private line and IRU agreements, Internet services utilizing IP-based technology, and long distance services provided to both wholesale and retail markets.  The Broadband segment also offers data collocation, information technology consulting, network construction and other services.  These services are offered nationally through the Company’s Broadwing Communications Inc. subsidiary.

The Local segment comprises the operations of the Cincinnati Bell Telephone Company (“CBT”) subsidiary which provides local telephone service, network access, data transport, high-speed Internet access and other ancillary products and services to customers in southwestern Ohio, northern Kentucky and southeastern Indiana.

The Wireless segment comprises the operations of the Cincinnati Bell Wireless LLC (“CBW”) subsidiary, a joint venture in which the Company owns 80.1% and AT&T Wireless Services Inc. owns the remaining 19.9%.  This segment provides advanced digital personal communications and sales of related communications equipment to customers in the Greater Cincinnati and Dayton, Ohio operating areas.

The Other segment combines the operations of Cincinnati Bell Any Distance (“CBAD”), Cincinnati Bell Directory (“CBD”), ZoomTown.com (“ZoomTown”) and Cincinnati Bell Public Communications Inc. (“Public”).  CBAD resells voice long distance service, CBD publishes Yellow Pages directories, ZoomTown provides web hosting and Internet-based services and Public provides public payphone services.

 


Certain corporate administrative expenses have been allocated to segments based upon the nature of the expense.  The Company’s business segment information is as follows:

 

 

 

Three Months

 

Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

Millions of Dollars

 

2001

 

2000

 

2001

 

2000

 

Revenues

 

 

 

 

 

 

 

 

 

Broadband

 

$

304.0

 

$

264.3

 

$

919.3

 

$

715.8

 

Local

 

208.8

 

199.5

 

621.6

 

588.8

 

Wireless

 

64.3

 

48.8

 

184.1

 

127.9

 

Other

 

42.8

 

37.3

 

123.3

 

103.0

 

Intersegment

 

(22.0

)

(18.7

)

(64.1

)

(46.4

)

Total Revenues

 

$

597.9

 

$

531.2

 

$

1,784.2

 

$

1,489.1

 

 

 

 

 

 

 

 

 

 

 

Intersegment Revenues

 

 

 

 

 

 

 

 

 

Broadband

 

$

14.2

 

$

9.7

 

$

38.9

 

$

23.3

 

Local

 

7.6

 

8.4

 

24.1

 

22.2

 

Wireless

 

0.1

 

0.5

 

0.8

 

0.5

 

Other

 

0.1

 

0.1

 

0.3

 

0.4

 

Total Intersegment Revenues

 

$

22.0

 

$

18.7

 

$

64.1

 

$

46.4

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

 

 

 

 

 

 

 

 

Broadband

 

$

33.1

 

$

27.1

 

$

101.7

 

$

51.0

 

Local

 

106.1

 

101.1

 

315.8

 

288.2

 

Wireless

 

19.5

 

7.4

 

49.4

 

14.8

 

Other

 

7.2

 

2.4

 

17.4

 

(1.4

)

Corporate and Eliminations

 

(0.3

)

(0.6

)

(2.0

)

(0.6

)

Total EBITDA

 

$

165.6

 

$

137.4

 

$

482.3

 

$

352.0

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Broadband

 

$

5,102.1

 

$

4,825.3

 

$

5,102.1

 

$

4,825.3

 

Local

 

799.1

 

803.2

 

799.1

 

803.2

 

Wireless

 

353.5

 

307.2

 

353.5

 

307.2

 

Other

 

89.8

 

94.1

 

89.8

 

94.1

 

Corporate and Elminations

 

86.3

 

620.4

 

86.3

 

620.4

 

Total Assets

 

$

6,430.8

 

$

6,650.2

 

$

6,430.8

 

$

6,650.2

 

 

 

 

 

 

 

 

 

 

 

Capital Additions

 

 

 

 

 

 

 

 

 

Broadband

 

$

119.4

 

$

159.3

 

$

395.3

 

$

360.7

 

Local

 

27.0

 

38.4

 

91.4

 

128.1

 

Wireless

 

12.5

 

20.7

 

33.8

 

44.4

 

Other

 

3.6

 

4.5

 

15.5

 

11.3

 

Corporate and Elminations

 

0.3

 

0.7

 

0.8

 

1.2

 

Total Capital Additions

 

$

162.8

 

$

223.6

 

$

536.8

 

$

545.7

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

 

 

 

 

 

 

 

Broadband

 

$

98.7

 

$

78.1

 

$

276.8

 

$

224.9

 

Local

 

34.5

 

31.2

 

100.8

 

90.8

 

Wireless

 

7.3

 

5.4

 

20.4

 

14.9

 

Other

 

2.8

 

2.6

 

7.4

 

6.4

 

Corporate and Elminations

 

0.1

 

-

 

0.3

 

0.1

 

Total Depreciation and Amortization

 

$

143.4

 

$

117.3

 

$

405.7

 

$

337.1

 

 


8.        Supplemental Guarantor Information

 

CBT, a wholly owned subsidiary of the Company, has debt outstanding that is guaranteed by the Company.  Generally, funds necessary to meet the Company’s debt service obligations are provided by distributions or advances from its subsidiaries.

 

The following information sets forth the condensed consolidating balance sheets of the Company as of September 30, 2001 and December 31, 2000 and the condensed consolidating statements of income (loss) for the three and nine-month periods ended September 30, 2001 and 2000 and cash flows for the nine-month periods ended September 30, 2001 and 2000.

 

Condensed Consolidating Statements of Income (Loss)

(In millions of dollars)

 

 

 

For the quarter ended September 30, 2001

 

 

 

Parent

 

CBT

 

Other

 

Eliminations

 

Total

 

Revenues

 

$

-

 

$

208.8

 

$

411.1

 

$

(22.0

)

$

597.9

 

Operating costs and expenses

 

0.4

 

137.1

 

460.2

 

(22.0

)

575.7

 

Operating income

 

(0.4

)

71.7

 

(49.1

)

-

 

22.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

40.7

 

5.7

 

21.8

 

(24.1

)

44.1

 

Other expense (income), net

 

(11.9

)

(0.6

)

(5.2

)

24.1

 

6.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes and cumulative effect of change in accounting principle

 

(29.2

)

66.6

 

(65.7

)

-

 

(28.3

)

Income tax provision (benefit)

 

(6.7

)

23.8

 

(17.5

)

-

 

(0.4

)

Income (loss) from continuing operations before cumulative effect of change in accounting principle

 

(22.5

)

42.8

 

(48.2

)

-

 

(27.9

)

Income from discontinued operations, net

 

-

 

-

 

-

 

-

 

-

 

Cumulative effect of change in accounting principle, net of tax

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(22.5

)

$

42.8

 

$

(48.2

)

$

-

 

$

(27.9

)

 

 

 

For the quarter ended September 30, 2000

 

 

 

Parent

 

CBT

 

Other

 

Eliminations

 

Total

 

Revenues

 

$

-

 

$

199.5

 

$

350.4

 

$

(18.7

)

$

531.2

 

Operating costs and expenses

 

0.6

 

129.6

 

399.6

 

(18.7

)

511.1

 

Operating income

 

(0.6

)

69.9

 

(49.2

)

-

 

20.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

41.1

 

5.4

 

24.8

 

(28.2

)

43.1

 

Other expense (income), net

 

(16.9

)

0.1

 

(21.3

)

28.2

 

(9.9

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes and cumulative effect of change in accounting principle

 

(24.8

)

64.4

 

(52.7

)

-

 

(13.1

)

Income tax provision (benefit)

 

1.4

 

22.5

 

(13.6

)

-

 

10.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before cumulative effect of change in accounting principle

 

(26.2

)

41.9

 

(39.1

)

-

 

(23.4

)

Income from discontinued operations, net

 

-

 

-

 

0.1

 

-

 

0.1

 

Cumulative effect of change in accounting principle, net of tax

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(26.2

)

$

41.9

 

$

(39.0

)

$

-

 

(23.3

)

 


 

Condensed Consolidating Statements of Income (Loss)

(In millions of dollars)

 

 

 

For the nine months ended September 30, 2001

 

 

 

Parent

 

CBT

 

Other

 

Eliminations

 

Total

 

Revenues

 

$

-

 

$

621.6

 

$

1,226.7

 

$

(64.1

)

$

1,784.2

 

Operating costs and expenses

 

4.9

 

413.1

 

1,363.7

 

(64.1

)

1,717.6

 

Operating income

 

(4.9

)

208.5

 

(137.0

)

-

 

66.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

126.1

 

16.8

 

66.6

 

(82.3

)

127.2

 

Other expense (income), net

 

(46.6

)

0.1

 

0.9

 

82.3