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, 2002

 

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

 

201 East Fourth Street, Cincinnati, Ohio 45202

 

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

 

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  Noo

 

At October 31, 2002, there were 218,886,063 common shares outstanding.

 

 



 

TABLE OF CONTENTS

 

 

 

PART I.  Financial Information

 

 

Description

 

 

 

Item 1.

Financial Statements

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income
(Loss) (Unaudited)
Three Months and Nine Months Ended September 30, 2002 and 2001

 

 

 

Condensed Consolidated Balance Sheets (Unaudited)
September 30, 2002 and December 31, 2001

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2002 and 2001

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

Item 2.

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

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

Item 4.

Controls and Procedures

 

 

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

 

 

 

Certifications

 

2



 

Form 10-Q Part I

 

Broadwing Inc.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

($ in Millions, Except Per Common Share Amounts)

(Unaudited)

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

562.9

 

$

578.0

 

$

1,652.8

 

$

1,725.6

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

Cost of services and products (excluding depreciation of $96.3, $91.6, $278.8 and $248.0 included below)

 

251.8

 

287.6

 

784.0

 

844.3

 

Selling, general and administrative

 

116.5

 

136.6

 

369.1

 

431.8

 

Depreciation

 

120.6

 

114.7

 

351.6

 

319.7

 

Amortization

 

6.2

 

28.6

 

19.2

 

85.8

 

Restructuring and other charges

 

7.1

 

 

23.6

 

9.6

 

Total costs and expenses

 

502.2

 

567.5

 

1,547.5

 

1,691.2

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

60.7

 

10.5

 

105.3

 

34.4

 

 

 

 

 

 

 

 

 

 

 

Minority interest expense

 

15.5

 

13.8

 

44.4

 

39.2

 

Equity loss in unconsolidated entities

 

 

 

 

4.0

 

Interest expense

 

40.1

 

44.2

 

117.4

 

127.3

 

Gain on investments

 

 

(10.9

)

(0.4

)

(9.8

)

Other expense, net

 

1.4

 

3.5

 

0.8

 

3.4

 

Income (loss) from continuing operations before income taxes

 

3.7

 

(40.1

)

(56.9

)

(129.7

)

Income tax benefit

 

(0.3

)

(4.5

)

(9.1

)

(18.3

)

Income (loss) from continuing operations

 

4.0

 

(35.6

)

(47.8

)

(111.4

)

Income from discontinued operations, net of taxes of $0.0, $4.9, $119.7 and $13.4, respectively

 

 

7.7

 

217.6

 

20.8

 

Cumulative effect of change in accounting principle, net of taxes of $3.1

 

 

 

(2,008.7

)

 

Net Income (Loss)

 

4.0

 

(27.9

)

(1,838.9

)

(90.6

)

Dividends applicable to preferred stock

 

2.6

 

2.6

 

7.8

 

7.8

 

Net Income (Loss) Applicable to Common Shareowners

 

$

1.4

 

$

(30.5

)

$

(1,846.7

)

$

(98.4

)

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

4.0

 

$

(27.9

)

$

(1,838.9

)

$

(90.6

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on interest rate swaps

 

0.2

 

(4.9

)

1.2

 

(7.9

)

Unrealized loss on investments

 

 

 

 

(85.8

)

Unrealized gain on cash flow hedges

 

 

 

 

17.0

 

Reclassification adjustment - minority equity investments

 

 

(17.0

)

 

(17.0

)

Total other comprehensive income (loss)

 

0.2

 

(21.9

)

1.2

 

(93.7

)

Comprehensive Income (Loss)

 

$

4.2

 

$

(49.8

)

$

(1,837.7

)

$

(184.3

)

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings (Loss) Per Common Share

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

0.01

 

$

(0.18

)

$

(0.26

)

$

(0.55

)

Income from discontinued operations, net of taxes

 

 

0.04

 

1.00

 

0.10

 

Cumulative effect of change in accounting principle, net of taxes

 

 

 

(9.20

)

 

Net Earnings (Loss) per Common Share

 

$

0.01

 

$

(0.14

)

$

(8.46

)

$

(0.45

)

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding (millions)

 

 

 

 

 

 

 

 

 

Basic

 

218.5

 

217.8

 

218.3

 

217.2

 

Diluted

 

219.0

 

217.8

 

218.3

 

217.2

 

 

The accompanying notes are an integral part of the financial statements.

 

3



 

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in Millions, Except Per Share Amounts)

(Unaudited)

 

 

 

September 30,
2002

 

December 31,
2001

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

34.7

 

$

30.0

 

Short-term investments

 

 

22.7

 

Receivables, net of allowances of $40.2 and $36.4

 

303.5

 

310.9

 

Materials and supplies

 

31.8

 

39.7

 

Deferred income tax benefits

 

14.1

 

16.7

 

Prepaid expenses and other current assets

 

28.4

 

30.0

 

Assets of discontinued operations

 

 

21.4

 

Total current assets

 

412.5

 

471.4

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation of $2,391.2 and $2,080.4

 

2,850.2

 

3,059.3

 

Goodwill

 

40.9

 

2,048.6

 

Other intangibles, net

 

371.9

 

396.3

 

Deferred income tax benefits

 

91.2

 

227.9

 

Other noncurrent assets

 

130.6

 

108.5

 

Total assets

 

$

3,897.3

 

$

6,312.0

 

 

 

 

 

 

 

Liabilities and Shareowners’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Short-term debt

 

$

91.9

 

$

150.0

 

Accounts payable

 

147.4

 

189.9

 

Current portion of unearned revenue and customer deposits

 

133.1

 

178.3

 

Accrued taxes

 

116.1

 

110.9

 

Restructuring

 

40.9

 

5.3

 

Other current liabilities

 

154.7

 

275.9

 

Liabilities of discontinued operations

 

 

11.9

 

Total current liabilities

 

684.1

 

922.2

 

 

 

 

 

 

 

Long-term debt, less current portion

 

2,471.0

 

2,702.0

 

Unearned revenue, less current portion

 

298.7

 

415.9

 

Other noncurrent liabilities

 

161.7

 

157.8

 

 

 

 

 

 

 

Total liabilities

 

3,615.5

 

4,197.9

 

 

 

 

 

 

 

Minority interest

 

443.0

 

435.7

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Shareowners’ Equity (Deficit)

 

 

 

 

 

6¾% Cumulative Convertible Preferred Stock, 2,357,299 shares authorized, 155,250 (converted into 3,105,000 depository shares) issued and outstanding at September 30, 2002 and December 31, 2001

 

129.4

 

129.4

 

 

 

 

 

 

 

Common shares, $.01 par value; 480,000,000 shares authorized; 226,272,002 and 225,873,352 shares issued; 218,466,202 and 218,067,552 outstanding at September 30, 2002 and December 31, 2001

 

2.3

 

2.3

 

Additional paid-in capital

 

2,363.8

 

2,365.8

 

Accumulated deficit

 

(2,502.1

)

(663.3

)

Accumulated other comprehensive loss

 

(9.5

)

(10.7

)

Common shares in treasury, at cost:

 

 

 

 

 

7,805,800 shares at September 30, 2002 and December 31, 2001

 

(145.1

)

(145.1

)

 

 

 

 

 

 

Total shareowners’ equity (deficit)

 

(161.2

)

1,678.4

 

 

 

 

 

 

 

Total liabilities and shareowners’ equity (deficit)

 

$

3,897.3

 

$

6,312.0

 

 

The accompanying notes are an integral part of the financial statements.

 

4



 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in Millions)

(Unaudited)

 

 

 

Nine Months
Ended September 30,

 

 

 

2002

 

2001

 

Cash Flows from Operating Activities

 

 

 

 

 

Net loss

 

$

(1,838.9

)

$

(90.6

)

 

 

 

 

 

 

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

 

 

 

 

 

Cumulative effect of change in accounting principle, net of tax

 

2,008.7

 

 

Gain from sale of discontinued operations, net of taxes

 

(211.8

)

 

Depreciation

 

351.6

 

319.7

 

Amortization

 

19.2

 

85.8

 

Provision for loss on receivables

 

40.6

 

73.1

 

Noncash interest expense

 

31.4

 

27.3

 

Minority interest expense

 

44.4

 

39.2

 

Equity loss in unconsolidated entities

 

 

4.0

 

Gain on investments

 

(0.4

)

(9.8

)

Deferred income tax benefit

 

(9.8

)

(27.9

)

Tax benefits from employee stock option plans

 

0.7

 

23.1

 

Other, net

 

1.3

 

0.6

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in receivables

 

(33.6

)

(99.1

)

Decrease (Increase) in prepaid expenses and other current assets

 

5.1

 

(22.1

)

(Decrease) increase in accounts payable

 

(35.0

)

(45.4

)

Decrease in accrued and other current liabilities

 

(66.5

)

(29.9

)

Decrease in unearned revenue

 

(168.5

)

(45.0

)

Decrease (increase) in other assets and liabilities, net

 

1.1

 

(3.2

)

Net cash provided by (used in) discontinued operations

 

(9.5

)

(0.6

)

Net cash provided by operating activities

 

130.1

 

199.2

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures

 

(139.9

)

(536.8

)

Proceeds from sale of investments

 

23.3

 

113.9

 

Payments for investments/acquisitions, net of cash acquired

 

 

(1.5

)

Other, net

 

 

0.1

 

Proceeds from  sale of discontinued operations

 

345.0

 

 

Net cash provided by (used in) investing activities

 

228.4

 

(424.3

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Issuance of long-term debt

 

113.1

 

436.0

 

Repayment of long-term debt

 

(418.8

)

(244.9

)

Short-term borrowings (repayments), net

 

(7.5

)

47.1

 

Other financing cost

 

(8.5

)

 

Issuance of common shares - exercise of stock options

 

0.5

 

18.7

 

Minority interest and preferred stock dividends paid

 

(32.6

)

(44.9

)

Net cash (used in) provided by financing activities

 

(353.8

)

212.0

 

Net increase (decrease) in cash and cash equivalents

 

4.7

 

(13.1

)

Cash and cash equivalents at beginning of period

 

30.0

 

37.9

 

Cash and cash equivalents at end of period

 

$

34.7

 

$

24.8

 

 

The accompanying notes are an integral part of the financial statements.

 

5



 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                          Basis of Presentation, Liquidity and Accounting Policies

 

Basis of Presentation The Condensed Consolidated Financial Statements of Broadwing Inc. (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.

 

The adjustments referred to above are of a normal and recurring nature except for those outlined in Notes 2, 3, 4, 13, and as outlined below.  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, 2001 Condensed Consolidated 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 Condensed Consolidated Financial Statements be read in conjunction with the notes thereto included in the Company’s 2001 Annual Report on Form  10-K.

 

Liquidity and Financial Resources — As of September 30, 2002, the amount available under the Company’s credit facility was $187 million. The Company’s total credit facility will decrease throughout the remaining three months of 2002 to approximately $1.825 billion at December 31, 2002, due to approximately $1.2 million of scheduled repayments of the term debt portions of the credit facility and $33.8 million of scheduled amortization of the revolving portion of the credit facility.  The Company believes that the borrowing availability will be sufficient to provide for financing requirements in excess of amounts generated by operations through September 30, 2003.  The Company’s debt maturities as of September 30, 2002 amounted to $205.4 million in 2003 and $994.9 million in 2004 (for a complete debt maturity schedule, refer to Note 5). The Company’s ability to meet its principal debt payment obligations beyond September 30, 2003, of which most are obligations under the credit facility, is dependent on its ability to refinance its existing indebtedness.  The Company is assessing a complete range of strategic alternatives, including raising capital, selling select assets and discontinuing lines of business, in order to improve its financial position (for further discussion, refer to Note 14).  The Company also plans to enter into discussions with its banks to amend various provisions of its credit facility, including extending the 2004 maturities.  If the Company is unable to refinance its existing indebtedness or successfully negotiate amendments to its credit facility, there could be a material adverse impact on the Company’s operations.

 

Use of Estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates.

 

Revenue Recognition — Local, wireless and broadband transport service revenue is billed monthly, in advance, with revenue being recognized when earned.  Revenue from product sales and certain services is generally recognized upon performance of contractual obligations, such as shipment, delivery, installation or customer acceptance.  Service activation revenue is deferred and recognized over the appropriate life for the associated service, in accordance with the SEC’s Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”).

 

6



 

Indefeasible right-of-use agreements, or “IRUs”, represent the lease of network capacity or dark fiber and are recorded as unearned revenue at the earlier of the acceptance of the applicable portion of the network by the customer or the receipt of cash.  The buyer of IRU services typically pays cash upon execution of the contract, and the associated IRU revenue is then recognized over the life of the agreement as services are provided, beginning on the date of customer acceptance. In the event the buyer of an IRU terminates a contract prior to the contract expiration and releases the Company from the obligation to provide future services, the remaining unamortized unearned revenue is recognized in the period in which the contract is terminated.  In the third quarter of 2002 and the year-to-date period ended September 30, 2002, the Company recognized noncash, non-recurring revenue and operating income related to IRU terminations with bankrupt customers to whom the Company was no longer obligated to provide services, totaling $41.2 million and $58.7 million (net of a $4.25 million termination payment discussed in Note 13), respectively.  IRU and related maintenance revenue are included in the broadband transport category of the Broadband segment.

 

Construction revenue and estimated profits are recognized according to the percentage of completion method on a cost incurred to total costs estimated at completion basis.  The method is used because the Company can make reasonably dependable estimates of revenue and costs applicable to various stages of a contract.  As the financial reporting of these contracts depends on estimates that are continually assessed throughout the terms of the contracts, revenue recognized is subject to revision as the contracts near completion.  Revisions in estimates are reflected in the period in which the facts that give rise to the revision become known and could impact revenue and costs of services and products.  Construction projects are considered substantially complete upon customer acceptance.  In November 2001, the Company announced its intention to exit the construction business upon completion of one remaining contract as discussed in Note 4.  That contract is in dispute as discussed in Note 13.  The amount of construction revenue recognized totaled $22.9 million in the third quarter of 2001 and $76.6 million for the year-to-date period ended September 30, 2001.

 

Unbilled Receivables Unbilled receivables arise from local, broadband and wireless services rendered but not yet billed, in addition to network construction revenue that is recognized under the percentage-of-completion method.  Network construction receivables are billable upon achievement of contractual milestones or upon completion of contracts.  As of September 30, 2002 and December 31, 2001, unbilled receivables totaled $92 million and $95 million, respectively.  Unbilled receivables of $51 million and $45 million at September 30, 2002 and December 31, 2001, respectively, include both claims and signed change orders related to a construction contract that was terminated during the second quarter of 2002.    Management believes such amounts are valid and collectible receivables.  See Note 13 for a detailed discussion of this construction contract.

 

Fiber Exchange Agreements — In connection with the development of its optical network, the Company entered into various agreements to exchange fiber usage rights.  The Company accounts for agreements with other carriers to exchange fiber asset service contracts either for capacity or services by recognizing the fair value of the revenue earned and expense incurred.  Exchange agreements accounted for noncash revenue and expense, in equal amounts, of $2.0 million and $3.0 million in the third quarter of 2002 and 2001, respectively, and $6.0 million and $9.5 million in the first nine months of 2002 and 2001, respectively, with no impact on operating income or net income (loss).

 

7



 

Income Taxes — The income tax expense (or benefit) consists of an amount for taxes currently payable and an expense (or benefit) for tax consequences deferred to future periods.  In evaluating the carrying value of its deferred tax benefits, the Company considers prior operating results, future taxable income projections, expiration of tax loss carryforwards and ongoing prudent and feasible tax planning strategies.

 

Pension and Postretirement Benefits The Company calculates net periodic pension and postretirement expenses and liabilities on an actuarial basis under the provisions of Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” and Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”.  The key assumptions used in determining these calculations are disclosed in the Company’s 2001 Annual Report on Form 10-K.  The most significant of these numerous assumptions, which are reviewed annually, include the discount rate, expected long-term rate of return on plan assets and health care cost trend rates.  The discount rate is selected based on current market interest rates on high-quality, fixed-rate debt securities.  The expected long-term rate of return on plan assets is based on the participants’ benefit horizon, the mix of investments held directly by the benefit plans and the current view of expected future returns, which is influenced by historical averages.  The health care cost trend rate is based on actual claims experience and future projections of medical cost trends.  A revision to these estimates would impact both cost of services and products and selling, general and administrative expenses.

 

During the nine months ended September 30, 2002, the value of the assets held in the Company’s pension and postretirement trusts decreased approximately 20% as general equity market conditions deteriorated.  The asset decline is expected to increase the Company’s 2003 noncash operating expenses by approximately $20 million.  The Company does not expect to make cash funding contributions to the pension trust in 2003, but currently anticipates a cash contribution of approximately $8 million in 2004.

 

Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”).  This statement deals with the legally obligated costs of closing facilities and removing assets.  SFAS 143 requires entities to record the fair value of a legal liability for an asset retirement obligation in the period it is incurred.  This cost is initially capitalized and amortized over the remaining life of the underlying asset.  Once the obligation is ultimately settled, any difference between the final cost and the recorded liability is recognized as a gain or loss on disposition.  SFAS 143 is effective for fiscal years beginning after June 15, 2002.  The Company is currently evaluating the impact that SFAS 143 will have on its consolidated financial statements.

 

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Exit or Disposal Activities” (“SFAS 146”).  SFAS 146 addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including costs related to terminating contracts that are not capital leases and termination benefits that involuntarily terminated employees receive in certain instances.  SFAS 146 supersedes Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”) and requires liabilities associated with exit and disposal activities to be expensed as incurred.  SFAS 146 is effective for exit or disposal activities of the Company that are initiated after    December 31, 2002.

 

8



 

2.                          Discontinued Operations

 

On March 8, 2002, the Company sold substantially all of the assets of its Cincinnati Bell Directory (“CBD”) subsidiary to a group of investors for $345 million in cash and a 2.5% equity stake in the newly formed entity.  CBD published Yellow Pages directories and sold directory advertising and informational services in Cincinnati Bell Telephone’s local service area.  In the first quarter of 2002, the Company recorded a pre-tax gain of $328.3 million ($211.8 million, net of taxes), in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) under the caption “Income from discontinued operations, net of taxes.”

 

The Condensed Consolidated Financial Statements and the Company’s Other segment have been restated to reflect the disposition of CBD as a discontinued operation under Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).  Accordingly, revenue, costs, expenses, assets, liabilities and cash flows of CBD have been reported as “Income from discontinued operations, net of taxes,” “Assets of discontinued operations,” “Liabilities of discontinued operations,” “Net cash provided by (used in) discontinued operations,” “Gain from sale of discontinued operations, net of taxes”, or “Proceeds from sale of discontinued operations, net of taxes” for all periods presented.

 

Selected financial information for the discontinued operations is as follows:

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

($ in millions)

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

20.2

 

$

15.7

 

$

59.5

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations before income taxes

 

 

12.6

 

9.0

 

34.2

 

Gain on disposition of discontinued operations

 

 

 

328.3

 

 

Income tax expense (including $116.5 expense

 

 

 

 

 

 

 

 

 

on disposition of discontinued operations)

 

 

4.9

 

119.7

 

13.4

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

$

 

$

7.7

 

$

217.6

 

$

20.8

 

 

The effective tax rates of discontinued operations were 35.5% in all periods presented.

 

9



 

3.                          Goodwill and Intangible Assets

 

On June 29, 2001 the FASB issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).  SFAS 142 requires cessation of the amortization of goodwill and indefinite-lived intangible assets, which will amount to an annual decrease in amortization expense of $88 million compared to 2001, and annual impairment testing of those assets.  Intangible assets that have finite useful lives will continue to be amortized.  The Company adopted SFAS 142 on January 1, 2002, as required.  The Company completed the initial impairment test for its Wireless and Broadband businesses, during the first quarter of 2002, which indicated that goodwill of its Broadband business was impaired as of January 1, 2002.    In the second quarter of 2002, the Company recorded an impairment charge of $2,008.7 million, net of taxes, effective as of January 1, 2002.  The impairment charge is reflected as a cumulative effect of change in accounting principle, net of taxes, in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

The following table reconciles the Company’s third quarter and year-to-date 2001 net income, adjusted to exclude amortization of goodwill and indefinite lived intangible assets pursuant to SFAS 142, to the third quarter and year-to-date 2002 reported amounts:

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

($ in millions, except per common share amounts)

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Reported net income (loss) from continuing operations

 

$

4.0

 

$

(35.6

)

$

(47.8

)

$

(111.4

)

Add back: Goodwill amortization, net of tax

 

 

18.3

 

 

55.0

 

Add back: Assembled workforce amortization, net of tax

 

 

1.3

 

 

3.9

 

Add back: FCC License amortization, net of tax

 

 

0.1

 

 

0.4

 

Adjusted net income (loss) from continuing operations

 

$

4.0

 

$

(15.9

)

$

(47.8

)

$

(52.1

)

 

 

 

 

 

 

 

 

 

 

Reported net income (loss)

 

$

4.0

 

$

(27.9

)

$

(1,838.9

)

$

(90.6

)

Add back: Goodwill amortization, net of tax

 

 

18.3

 

 

55.0

 

Add back: Assembled workforce amortization, net of tax

 

 

1.3

 

 

3.9

 

Add back: FCC License amortization, net of tax

 

 

0.1

 

 

0.4

 

Adjusted net income (loss)

 

$

4.0

 

$

(8.2

)

$

(1,838.9

)

$

(31.3

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per common share from continuing operations

 

 

 

 

 

 

 

 

 

Reported net income (loss) from continuing operations

 

$

0.01

 

$

(0.18

)

$

(0.26

)

$

(0.55

)

Add back: Goodwill amortization

 

 

0.08

 

 

0.25

 

Add back: Assembled workforce amortization

 

 

0.01

 

 

0.02

 

Add back: FCC License amortization

 

 

 

 

 

Adjusted net income (loss) from continuing operations

 

$

0.01

 

$

(0.09

)

$

(0.26

)

$

(0.28

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per common share

 

 

 

 

 

 

 

 

 

Reported net income (loss)

 

$

0.01

 

$

(0.14

)

$

(8.46

)

$

(0.45

)

Add back: Goodwill amortization

 

 

0.08

 

 

0.25

 

Add back: Assembled workforce amortization

 

 

0.01

 

 

0.02

 

Add back: FCC License amortization

 

 

 

 

 

Adjusted net income (loss)

 

$

0.01

 

$

(0.05

)

$

(8.46

)

$

(0.18

)

 

10



 

The following table details the components of the carrying amount of other intangible assets.  Indefinite-lived intangible assets consist primarily of FCC licenses of the Wireless segment.  Intangible assets subject to amortization expense consist primarily of customer relationships acquired in connection with the merger with IXC Communications Inc. in November 1999:

 

($ in millions)

 

September 30,
2002

 

December 31,
2001

 

Indefinite-lived intangible assets, excluding goodwill

 

$

35.7

 

$

35.7

 

 

 

 

 

 

 

Intangible assets subject to amortization:

 

 

 

 

 

Gross carrying amount

 

418.8

 

441.3

 

Accumulated amortization

 

(82.6

)

(80.7

)

Net carrying amount

 

$

336.2

 

$

360.6

 

 

 

 

 

 

 

Total other intangible assets

 

$

371.9

 

$

396.3

 

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

($ in millions)

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Amortization expense of finite-lived other intangible assets

 

$

6.2

 

$

9.7

 

$

19.2

 

$

29.4

 

 

The estimated intangible asset amortization expense for each of the fiscal years 2002 through 2006 is approximately $25 million.

 

The following table presents a rollforward of the activity related to goodwill by segment:

 

 

 

Nine Months Ended
September 30, 2002

 

Year Ended
December 31, 2001

 

($ in millions)

 

Broadband

 

Wireless

 

Other

 

Total

 

Broadband

 

Wireless

 

Other

 

Total

 

Beginning Period Goodwill balance

 

$

2,007.7

 

$

40.1

 

$

0.8

 

$

2,048.6

 

$

2,007.7

 

$

40.1

 

$

0.8

 

$

2,048.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of Assembled Workforce

 

4.1

 

 

 

4.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment charge

 

(2,011.8

)

 

 

(2,011.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period End Total

 

$

 

$

40.1

 

$

0.8

 

$

40.9

 

$

2,007.7

 

$

40.1

 

$

0.8

 

$

2,048.6

 

 

11



 

4.                          Restructuring and Other Charges

 

September 2002 Restructuring Charge

 

During the third quarter of 2002, the Company recorded restructuring charges of $9.6 million.  The restructuring charges consisted of $4.6 million related to employee separation benefits and $5.0 million related to contractual terminations associated with the Company’s exit of a product line (for a further discussion of the contractual termination, refer to Note 13).  The restructuring costs include the cost of employee separation benefits, including severance, medical and other benefits, related to three employees including the former CEO of the Company.  The Company expects to utilize the remaining liability by December 31, 2002.  In total, the Company expects these charges to result in cash outlays of $9.1 million.  Total cash expenditures during the third quarter of 2002 amounted to $5.4 million.

 

The following table illustrates the activity in this reserve since its inception:

 

Type of costs ($ in millions)

 

Initial Charge

 

Utilizations

 

Balance
September 30,
2002

 

 

 

 

 

 

 

 

 

Employee separations

 

$

4.6

 

$

(0.6

)

$

4.0

 

Terminate contractual obligations

 

5.0

 

(5.0

)

 

Total

 

$

9.6

 

$

(5.6

)

$

4.0

 

 

November 2001 Restructuring Plan

 

In November 2001, the Company adopted a restructuring plan which included initiatives to consolidate data centers, reduce the Company’s expense structure, exit the network construction business, eliminate other nonstrategic operations and merge the digital subscriber line (“DSL”) and certain dial-up Internet operations into the Company’s existing Local operations.  Total restructuring and impairment costs of $232.3 million were recorded in 2001 related to these initiatives.  The $232.3 million consisted of restructuring liabilities in the amount of $84.2 million and related noncash asset impairments in the amount of $148.1 million.  The restructuring charge was comprised of $21.4 million related to involuntary employee separation benefits, $62.5 million related to lease and other contractual terminations and $0.3 million related to other exit costs.

 

During the first quarter of 2002, the Company recorded additional restructuring charges of $16.5 million resulting from employee separation benefits and costs to terminate contractual obligations, which were actions contemplated in the original plan for which an amount could not be reasonably estimated at that time.  In total, the Company expects this restructuring plan to result in cash outlays of $95.7 million and noncash items of $153.1 million.  The Company expects to complete the plan by December 31, 2002, except for certain lease obligations, which are expected to continue through December 31, 2005.

 

12



 

The restructuring costs include the cost of involuntary employee separation benefits, including severance, medical and other benefits, related to 895 employees across all areas of the Company.  As of September 30, 2002, 862 employee separations had been completed which utilized reserves of $22.3 million, $17.5 million of which was cash.  Total cash expenditures during the first nine months of 2002 amounted to $53.6 million.

 

The following table illustrates the activity in this reserve since December 31, 2001:

 

Type of costs ($ in millions)

 

Balance
December 31,
2001

 

Utilizations

 

Adjustments

 

Balance
September 30,
2002

 

 

 

 

 

 

 

 

 

 

 

Employee separations

 

$

13.6

 

$

(14.5

)

$

1.0

 

$

0.1

 

Terminate contractual obligations

 

60.1

 

(39.7

)

15.4

 

35.8

 

Other exit costs

 

0.3

 

(0.4

)

0.1

 

 

Total

 

$

74.0

 

$

(54.6

)

$

16.5

 

$

35.9

 

 

February 2001 Restructuring Plan

 

In February 2001, the Company initiated a reorganization of the activities of several of its Cincinnati-based subsidiaries, including Cincinnati Bell Telephone (“CBT”), Cincinnati Bell Any Distance (“CBAD”), Cincinnati Bell Wireless LLC (“CBW”), and Cincinnati Bell Public Communications (“Public”) 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 of 2001 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.  Of the total charge, $0.4 million in contractual terminations were related to CBD, which is presented as a discontinued operation.  During the third quarter of 2002, a $2.0 million adjustment was made to the restructuring reserve due to an expected lease termination that did not occur.  The remaining severance payments and lease terminations are expected to be substantially complete by December 31, 2002.  In total, the Company expects this restructuring plan to result in cash outlays of $6.5 million and noncash items of $0.9 million.  Total cash expenditures in the first nine months of 2002 amounted to $0.2 million.

 

The following table illustrates the activity in this reserve since December 31, 2001:

 

Type of costs ($ in millions)

 

Balance
December 31,
2001

 

Utilizations

 

Adjustments

 

Balance
September 30,
2002

 

 

 

 

 

 

 

 

 

 

 

Employee separations

 

$

0.7

 

$

(0.1

)

$

 

$

0.6

 

Terminate contractual obligations

 

2.2

 

(0.1

)

(2.0

)

0.1

 

Total

 

$

2.9

 

$

(0.2

)

$

(2.0

)

$

0.7

 

 

13



 

1999 Restructuring Plan

 

In December 1999, the Company’s management approved restructuring plans, which included initiatives to integrate 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 related to these initiatives.  The $18.6 million consisted of $7.7 million relating to Broadwing Communications (recorded as a component of the purchase price allocation) and $10.9 million relating 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 recorded in 1999 included the costs of involuntary employee separation benefits related to 347 employees (263 Broadwing Communications employees and 84 employees from other subsidiaries of the Company).  As of March 31, 2001, all employee separations had been completed for a total cash expenditure of $9.1 million.  Employee separation benefits included severance, medical and other benefits, and primarily affected customer support, infrastructure, and the Company’s long-distance operations.  The restructuring plans also included costs associated with the closure of a variety of technical and customer support facilities, the decommissioning of certain switching equipment, and the termination of contracts with vendors.

 

The following table illustrates activity in this reserve since December 31, 2001:

 

Type of costs ($ in millions)

 

Balance
December 31,
2001

 

Utilizations

 

Adjustments

 

Balance
September 30,
2002

 

 

 

 

 

 

 

 

 

 

 

Facility closure costs

 

$

1.3

 

$

(0.8

)

$

(0.5

)

$

 

 

Total cash expenditures during the first nine months of 2002 amounted to $0.8 million.  These restructuring activities were completed in the third quarter of 2002, and the remaining reserve of $0.5 million related to facility closure costs was reversed.

 

14



 

 

5.                          Debt

 

The Company’s debt consists of the following:

 

($ in millions)

 

September 30, 2002

 

December 31, 2001

 

 

 

 

 

 

 

Short-term debt:

 

 

 

 

 

Capital lease obligations, current portion

 

$

9.6

 

$

11.2

 

Bank notes, current portion

 

82.3

 

118.8

 

Current maturities of long-term debt

 

 

20.0

 

Total short-term debt

 

$

91.9

 

$

150.0

 

 

 

 

 

 

 

Long-term debt:

 

 

 

 

 

Bank notes, less current portion

 

$

1,578.9

 

$

1,828.2

 

9% Senior subordinated notes

 

46.0

 

46.0

 

6¾% Convertible subordinated debentures

 

494.5

 

470.5

 

Cincinnati Bell Telephone notes

 

269.5

 

269.5

 

7¼% Senior secured notes

 

49.6

 

49.5

 

Capital lease obligations, less current portion

 

31.7

 

37.5

 

Other

 

0.8

 

0.8

 

 

 

 

 

 

 

Total long-term debt

 

$

2,471.0

 

$

2,702.0

 

 

Bank Notes

 

In November 1999, the Company obtained a $1.8 billion credit facility from a group of lending institutions.  The credit facility was increased to $2.1 billion in January 2000 and increased again to $2.3 billion in June 2001.  Total availability under the credit facility decreased to $1.860 billion as of September 30, 2002 following a $335 million prepayment of the outstanding term debt facilities in the first quarter of 2002 (resulting from the sale of substantially all of the assets of CBD), $4 million in scheduled repayments of the term debt facilities and $101 million in year-to-date scheduled amortization of the revolving credit facility.  As of September 30, 2002, the total credit facility capacity consisted of $799 million in revolving credit, maturing in various amounts between 2002 and 2004, and $569 million in term loans from banking institutions and $492 million from non-banking institutions, maturing in various amounts between 2002 and 2007.

 

At September 30, 2002, the Company had drawn approximately $1.661 billion from the credit facility capacity of $1.860 billion, and had outstanding letters of credit totaling $12 million, leaving $187 million in additional borrowing capacity under the facility.  The credit facility borrowings have been used by the Company to refinance its debt and debt assumed as part of the merger with IXC Communications Inc. (“IXC”) in November 1999 and to fund its capital expenditure program and other working capital needs.  The amount refinanced in conjunction with the IXC merger included approximately $404 million borrowed in order to redeem the majority of the outstanding 9% Senior Subordinated Notes assumed during the merger as part of a tender offer and $391 million in outstanding bank debt.  The tender offer was required under the terms of the bond indenture due to the change in control provision.

 

15



 

The credit 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 or liens; pay dividends; repurchase Company common stock; sell, lease, transfer or dispose of assets; make investments; and merge with another company.  In December 2001, the Company obtained an amendment to the credit facility to exclude substantially all of the charges associated with the November 2001 restructuring plan (refer to Note 4) from the covenant calculations.  In March 2002, the Company obtained an additional amendment to allow for the sale of substantially all of the assets of CBD, exclude charges related to SFAS 142, increase its ability to incur additional indebtedness and amend certain defined terms.

 

In May 2002, the Company obtained an amendment to the credit facility to exclude certain subsidiaries from the obligation to secure the credit facility with subsidiary guarantees and asset liens, extend the time to provide required collateral and obtain the ability to issue senior unsecured indebtedness and equity under specified terms and conditions.  The amendment also placed additional restrictions on the Company under the covenants related to indebtedness and investments, required the Company to transfer its cash management system to a wholly-owned subsidiary and increased the interest rates on the total credit facility by 50 basis points.

 

The interest rates that could be charged on borrowings from the credit facility as of September 30, 2002 ranged from 150 to 350 basis points above the London Interbank Offering Rate (“LIBOR”) and were at 275 to 325 basis points above LIBOR, or 4.54% to 5.04%, respectively, based on the Company’s credit ratings.  The Company will incur commitment fees in association with this credit facility ranging from 37.5 basis points to 75 basis points of the unused amount of borrowings of the facility.

 

9% Senior Subordinated Notes

 

In 1998, the former IXC (now Broadwing Communications) issued $450 million of 9% senior subordinated notes due 2008 (“the 9% notes”).  In January 2000, $404 million of these 9% notes were redeemed through a tender offer as a result of the change of control provision of the related indenture.  Accordingly, $46 million of the 9% notes remain outstanding at September 30, 2002.

 

The 9% notes are general unsecured obligations of Broadwing Communications and are subordinate in right of payment to all existing and future senior indebtedness of Broadwing Communications and its subsidiaries.  The 9% notes indenture includes a limitation on the amount of indebtedness that Broadwing Communications can incur based upon the maintenance of either debt to operating cash flow or debt to capital ratios.  The 9% indenture also provides that if Broadwing Communications incurs any additional indebtedness secured by liens on its property or assets that are subordinate to or equal in right of payment with the 9% notes, then Broadwing Communications must secure the outstanding 9% notes equally and ratably with such indebtedness.  As of September 30, 2002, Broadwing Communications had the ability to incur additional debt.

 

16



 

6¾% Convertible Notes

 

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 6¾% per annum, with the associated interest expense being added to the debt principal amount through July 21, 2004.  Interest payments for the remaining five years will then be paid in cash. Through September 30, 2002 and since inception, the Company has recorded $94.5 million in cumulative, noncash interest expense and has adjusted the carrying amount of the debt accordingly.  The Company incurred $8.2 million of noncash interest expense related to these notes in the third quarter of 2002.

 

Cincinnati Bell Telephone Notes

 

CBT has $270 million in corporate notes outstanding that are guaranteed by its parent company, Broadwing Inc. These notes, which are not guaranteed by other subsidiaries of Broadwing Inc., have original maturities of 30 to 40 years and mature at various intervals between 2003 and 2028.  In August 2002, $20 million of the CBT notes matured and were retired by the Company.  As of September 30, 2002, $269.5 million ($270 million face amount, net of unamortized discount of $0.5 million) was considered long-term indebtedness.  Interest rates on this indebtedness range from 6.24% to 7.27%.  These notes also contain a covenant that provides that if CBT incurs certain liens on its property or assets, CBT must secure the outstanding notes equally and ratably with the indebtedness or obligations secured by such liens.

 

7¼% Senior Secured Notes

 

In 1993, the Company issued $50 million of 7¼% senior secured notes due 2023 (the “7¼% notes”).  The indenture related to these 7¼% notes does not subject the Company to restrictive financial covenants.  However, the 7¼% notes do contain a covenant that provides that if the Company incurs certain liens on its property or assets, the Company must secure the outstanding notes equally and ratably with the indebtedness or obligations secured by such liens. The 7¼% notes are secured with the assets of the Company by virtue of the lien granted under the Company’s bank credit facility. As of September 30, 2002, $49.6 million ($50 million face amount, net of unamortized discount of $0.4 million) of the 7¼% notes remain outstanding.

 

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 $41.3 million in total indebtedness relating to capitalized leases as of September 30, 2002, $31.7 million of which was considered long-term.

 

17



 

Other

 

As of September 30, 2002, Broadwing Communications had outstanding $0.8 million of 12½% senior notes maturing in 2005.

 

Debt Maturity Schedule

 

The following table summarizes the Company’s maturities of debt obligations, excluding capital leases, as of September 30, 2002.  It reflects the $335 million prepayment of the outstanding term debt facilities in the first quarter of 2002 (resulting from the sale of substantially all of the assets of CBD) and a $20 million principal payment of the CBT Notes in the third quarter of 2002:

 

Annual Debt Obligations ($ in millions)

 

Payments Due by Period

 

Total

 

October 1, 2002 to
December 31, 2002

 

2003

 

2004

 

2005

 

2006

 

2007

 

Thereafter

 

$

2,521.6

 

$

1.2

 

$

205.4

 

$

994.9

 

$

24.9

 

$

402.0

 

$

72.6

 

$

820.6

 

 

The following table summarizes the Company’s quarterly maturities of debt obligations through December 31, 2003:

 

Quarterly Debt Obligations ($ in millions)

 

Payments Due by Period

 

Total

 

4Q 02

 

1Q 03

 

2Q 03

 

3Q 03

 

4Q 03

 

$

206.6

 

$

1.2

 

$

1.2

 

$

28.0

 

$

51.9

 

$

124.3

 

 

6.                          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 contract is entered into, the Company designates it as either a fair value or cash flow hedge.

 

As of September 30, 2002, the Company’s derivative contracts have been determined to be highly effective cash flow hedges.  In accordance with SFAS 133, unrealized gains and losses of highly effective cash flow hedges are recorded in other comprehensive income until the underlying transaction is executed.

 

18



 

Interest Rate Contracts

 

From time to time the Company enters into interest rate swap agreements with the intent of limiting its exposure to movements in interest rates.  Interest rate swap agreements are contractual agreements between two parties for the exchange of interest payment streams on a notional principal amount at agreed upon fixed and floating rates, for a defined time period.  These agreements are hedges against movements in the LIBOR rate, which determines the rate of interest paid by the Company on debt obligations under its credit facility.  Realized gains and losses from the interest rate swaps are recognized as an adjustment to interest expense in each period.  The interest rate swap agreements currently in place expire during the fourth quarter of 2002 and throughout 2003.  At September 30, 2002, the interest rate swaps on notional amounts of $440 million were a liability with a fair value of $9.6 million, resulting in inception-to-date, after-tax net losses in other comprehensive (loss) income (“OCI”) of $6.2 million.  During the first nine months of 2002, the fair value of the interest rate swaps increased, causing a decrease to the associated liability carried on the balance sheet to $9.6 million from a liability of $11.5 million at December 31, 2001, resulting in a year-to-date, after-tax net gain in OCI of $1.2 million.

 

7.                          Concentrations of Credit Risk and Major Customers

 

The Company may be subject to credit risk due to concentrations of receivables from companies that are communications providers, internet service providers and cable television companies.  The Company performs ongoing credit evaluations of customers’ financial condition and typically does not require significant collateral.

 

Revenue from the Company’s ten largest customers accounted for approximately 26% and 22% of total revenue in the third quarter and first nine months of 2002, respectively.  Three of the Company’s ten largest customers were in Chapter 11 bankruptcy proceedings as of September 30, 2002.  Total revenue from these customers approximated 13% of consolidated revenue during the third quarter and 8% year-to-date in 2002.  Revenue from these bankrupt customers generated by the amortization of IRU agreements and the early termination of two IRUs (refer to Note 1) approximated 9% of consolidated revenue during the third quarter and 5% year-to-date in 2002.  In addition, a significant portion of the Company’s revenue is derived from telecommunications carriers.  Revenue from telecommunications carriers accounted for 24% and 21% of total revenue in the third quarter and first nine months of 2002, respectively.

 

8.                          Earnings (Loss) Per Common Share from Continuing Operations

 

Basic earnings (loss) per common share from continuing operations (“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 earnings (loss) from continuing operations for the following periods:

 

19



 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

($ and shares in millions,
except per common share amounts)

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

4.0

 

$

(35.6

)

$

(47.8

)

$

(111.4

)

Preferred stock dividends

 

2.6

 

2.6

 

7.8

 

7.8

 

Numerator for EPS and EPS assuming dilution - earnings (loss) applicable to common shareowners

 

$

1.4

 

$

(38.2

)

$

(55.6

)

$

(119.2

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic EPS - weighted average common shares outstanding

 

218.5

 

217.8

 

218.3

 

217.2

 

Potential dilution:

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

Stock-based compensation arrangements

 

0.5

 

 

 

 

Denominator for diluted EPS per common share

 

219.0

 

217.8

 

218.3

 

217.2

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted EPS from continuing operations

 

$

0.01

 

$

(0.18

)

$

(0.26

)

$

(0.55

)

 

The inclusion of the 0.5 million additional shares related to unvested restricted stock during the third quarter of 2002 had an immaterial impact on the diluted EPS calculation.  For the nine months ended September 30, 2002, approximately 0.7 million additional shares related to vested “in-the-money” stock options and restricted stock are not included in the denominator of the EPS calculation because the effect of their inclusion in the EPS calculation would be anti-dilutive.  The total number of potential additional shares outstanding related to stock options, restricted stock and the assumed conversion of the Company’s 6¾% convertible preferred stock and 6¾% convertible subordinated debentures was approximately 53 million and 50 million at September 30, 2002 and 2001, respectively, if all stock options currently outstanding were exercised, restrictions on restricted stock were to lapse and all convertible securities were to convert.

 

9.                          Minority Interest

 

($ in millions)

 

September 30,
2002

 

December 31,
2001

 

 

 

 

 

 

 

Minority interest consists of:

 

 

 

 

 

 

 

 

 

 

 

12½% Exchangeable Preferred Stock of Broadwing Communications

 

$

415.5

 

$

417.8

 

Minority Interest in Cincinnati Bell Wireless held by AT&T Wireless Services Inc. (“AWS”)

 

25.4

 

15.5

 

Other

 

2.1

 

2.4

 

Total

 

$

443.0

 

$

435.7

 

 

20



 

As of September 30, 2002, Broadwing Communications had 395,210 shares of 12½% Junior Exchangeable Preferred Stock (“12½% Preferreds”) that were carried on the Company’s balance sheet at $415.5 million.  The 12½% 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.  Through November 15, 1999, dividends on the 12½% Preferreds were being effected through additional shares of the 12½% Preferreds.  On November 16, 1999, the Company converted to a cash pay option for these dividends.  Dividends on the 12½% Preferreds are classified as “Minority interest expense” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).  The Company announced that Broadwing Communications would defer the August 15, 2002 and November 15, 2002 cash dividend payments on the 12½% Preferreds in accordance with the terms of the security.  The dividend will accrue and therefore will continue to be presented as “Minority interest expense” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).  The 12½% Preferreds are being accreted from their fair market value at the date of the merger with the former IXC to the redemption value.  As such, the accretion of the difference between the carrying value and the mandatory redemption value is treated as a reduction to minority interest expense over the remaining life of the preferred stock.

 

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’s 19.9% share of the net income (or loss) of CBW, with an offsetting amount being reflected in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) under the caption “Minority interest expense.”

 

10.                   Employee Stock Option Plan

 

The Company follows the disclosure-only provisions of Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), 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 Company options to employees based on the fair value at the grant dates for awards consistent with the method prescribed by SFAS 123, net income (loss) and earnings per share would have been impacted as follows:

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

($ in millions except per share amounts)

 

2002

 

2001

 

2002

 

2001

 

Net income (loss) applicable to common shareowners:

 

 

 

 

 

 

 

 

 

As reported

 

$

1.4

 

$

(30.5

)

$

(1,846.7

)

$

(98.4

)

Pro forma compensation expense, net of tax benefits

 

(7.7

)

(6.6

)

(22.9

)

(19.1

)

Total pro forma

 

$

(6.3

)

$

(37.1

)

$

(1,869.6

)

$

(117.5

)

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.01

 

$

(0.14

)

$

(8.46

)

$

(0.45

)

Pro forma

 

$

(0.03

)

$

(0.17

)

$

(8.56

)

$

(0.54

)

 

21



 

The weighted average fair values at the date of grant for the Company options granted to employees were $1.66 and $8.39 for the three months ended September 30, 2002 and 2001, respectively, and were $3.02 and $9.42 for the nine months ended September 30, 2002 and 2001, respectively.  These amounts were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

 

2002

 

2001

 

2002

 

2001

 

Expected dividend yield

 

 

 

 

 

Expected volatility

 

63.7

%

53.1

%

86.4

%

59.6

%

Risk-free interest rate

 

2.5

%

3.9

%

3.4

%

4.4

%

Expected holding period - years

 

3

 

3

 

3

 

3

 

 

The Company granted 202,500 and 585,105 options during the three months ended September 30, 2002 and 2001, respectively, and granted 1,152,600 and 6,550,165 options during the nine months ended September 30, 2002 and 2001, respectively.

 

The following table summarizes the status of Company stock options outstanding at September 30, 2002:

 

Shares in thousands

 

 

 

Options Outstanding

 

Range of
Exercise Prices

 

Shares

 

Weighted Average
Remaining Contractual
Life in Years

 

Weighted Average
Exercise Price

 

$1.44 to $9.65

 

9,449

 

8.02

 

$

8.62

 

$9.90 to $16.78

 

11,184

 

6.17

 

$

15.53

 

$17.50 to $26.38

 

8,442

 

7.64

 

$

22.31

 

$25.47 to $38.19

 

2,893

 

7.09

 

$

33.22

 

Total

 

31,968

 

7.19

 

$

16.88

 

 

11.                   Business Segment Information

 

The Company is organized on the basis of products and services. The Company’s four segments are strategic business units that offer distinct products and services and are aligned with specific subsidiaries of the Company.

 

The Company completed the realignment of its business segments during the first quarter of 2002, as described in the Company’s 2001 Annual Report on Form 10-K.  The Company’s web hosting operations provided by ZoomTown.com (“ZoomTown”), previously reported in the Other segment, were merged into the Company’s Broadwing Communications Inc. subsidiary and are now reported in the Broadband segment.  ZoomTown’s DSL and dial-up Internet operations, also previously reported in the Other segment, were merged into CBT and are now reported in the Local segment.  In addition, during the first quarter of 2002, the Company sold substantially all of the assets of CBD, which was previously reported in the Other segment.  Accordingly, the historical results of operations of the Broadband, Local, and Other segments have been recast to reflect the transfer and disposition of these operations.

 

22



 

The Broadband segment provides data and voice communication services nationwide through the Company’s Broadwing Communications subsidiary. These services are provided over approximately 18,700 route miles of fiber-optic transmission facilities.  Broadband segment revenue is generated by broadband transport through private line and indefeasible right of use (“IRU”) agreements, Internet services utilizing technology based on Internet protocol (“IP”), and switched voice services provided to both wholesale and retail customers.  The Broadband segment also offers data collocation, web hosting, information technology consulting (“IT consulting”), network construction and other services.  As further discussed in Note 4, the Company announced its intention to exit the network construction business as part of the November 2001 restructuring.

 

The Local segment provides local telephone service, network access, DSL and dial-up Internet access, data transport services and switched long-distance, as well as other ancillary products and services to customers in southwestern Ohio, northern Kentucky and southeastern Indiana.  This market consists of approximately 2,400 square miles located within an approximately 25-mile radius of Cincinnati, Ohio.  Services are provided through the Company’s CBT subsidiary.

 

The Wireless segment includes the operations of the CBW subsidiary; a venture in which the Company owns 80.1% and 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 CBAD and Public.  CBAD resells voice long-distance service and Public provides public payphone services.

 

The Company evaluates performance of its business segments using several performance measurements including EBITDA.  EBITDA represents net income (loss) from continuing operations before interest, income tax, depreciation, amortization, restructuring and other charges, minority interest expense, equity loss in unconsolidated entities, gain on investments, other expense, extraordinary items and the effect of changes in accounting principles.  EBITDA does not represent cash flow for the periods presented and should not be considered as an alternative to net income (loss) as an indicator of the Company’s operating performance or as an alternative to cash flows as a source of liquidity, and may not be comparable with EBITDA as defined by other companies.  The Company has presented certain information regarding EBITDA because the Company believes that EBITDA is generally accepted as providing useful information regarding a company’s ability to service and incur debt.

 

23



 

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

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

($ in millions)

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Broadband

 

$

296.2

 

$

306.1

 

$

843.4

 

$

925.1

 

Local

 

206.5

 

208.5

 

626.0

 

620.3

 

Wireless

 

66.9

 

64.3

 

196.8

 

184.1

 

Other

 

19.5

 

20.3

 

59.4

 

57.6

 

Intersegment

 

(26.2

)

(21.2

)

(72.8

)

(61.5

)

Total Revenue

 

$

562.9

 

$

578.0

 

$

1,652.8

 

$

1,725.6

 

 

 

 

 

 

 

 

 

 

 

Intersegment Revenue

 

 

 

 

 

 

 

 

 

Broadband

 

$

19.0

 

$

13.9

 

$

51.6

 

$

38.2

 

Local

 

7.0

 

7.0

 

20.7

 

22.0

 

Wireless

 

0.1

 

0.1

 

0.2

 

0.8

 

Other

 

0.1

 

0.2

 

0.3

 

0.5

 

Total Intersegment Revenue

 

$

26.2

 

$

21.2

 

$

72.8

 

$

61.5

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

 

 

 

 

 

 

 

 

Broadband

 

$

56.9

 

$

33.0

 

$

100.1

 

$

99.7

 

Local

 

106.6

 

105.1

 

321.3

 

313.2

 

Wireless

 

30.1

 

19.5

 

79.4

 

49.4

 

Other

 

1.3

 

(0.3

)

3.2

 

(1.4

)

Corporate

 

(0.3

)

(3.5

)

(4.3

)

(11.2

)

Total EBITDA

 

$

194.6

 

$

153.8

 

$

499.7

 

$

449.7

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

 

 

 

 

 

 

 

Broadband

 

$

80.0

 

$

100.0

 

$

235.8

 

$

280.1

 

Local

 

38.0

 

35.3

 

109.9

 

103.2

 

Wireless

 

8.2

 

7.3

 

23.3

 

20.4

 

Other

 

0.5

 

0.6

 

1.4

 

1.6

 

Corporate and Eliminations

 

0.1

 

0.1

 

0.4

 

0.2

 

Total Depreciation and Amortization

 

$

126.8

 

$

143.3

 

$

370.8

 

$

405.5

 

 

 

 

 

 

 

 

 

 

 

Capital Additions

 

 

 

 

 

 

 

 

 

Broadband

 

$

12.9

 

$

121.1

 

$

56.9

 

$

406.7

 

Local

 

22.7

 

28.3

 

57.1

 

94.0

 

Wireless

 

4.4

 

12.5

 

25.2

 

33.8

 

Other

 

0.1

 

0.6

 

0.6

 

1.5

 

Corporate and Eliminations

 

0.1

 

0.3

 

0.1

 

0.8

 

Total Capital Additions

 

$

40.2

 

$

162.8

 

$

139.9

 

$

536.8

 

 

 

 

September 30,
2002

 

December 31,
2001

 

Assets

 

 

 

 

 

Broadband

 

$

2,699.6

 

$

4,977.8

 

Local

 

766.9

 

790.8

 

Wireless

 

380.9

 

382.8

 

Other

 

18.1

 

16.1

 

Corporate, Discontinued Operations and Eliminations

 

31.8

 

144.5

 

Total Assets

 

$

3,897.3

 

$

6,312.0

 

 

24



 

12.                   Supplemental Guarantor Information

 

CBT, a wholly owned subsidiary of Broadwing Inc. (“Parent Company”), has registered debt outstanding that is guaranteed by the Parent Company but not by other subsidiaries of the Parent Company.  Substantially all of the Parent Company’s income and cash flow is generated by its subsidiaries.  Generally, funds necessary to meet the Parent 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, 2002 and December 31, 2001 and the condensed consolidating statements of operations (loss) and cash flows for the periods ended September 30, 2002 and 2001.

 

Condensed Consolidating Statements of Operations (Loss)

($ in millions)

 

 

 

 

For the quarter ended September 30, 2002

 

 

 

Parent
(Guarantor)

 

CBT

 

Other
(Non-guarantors)

 

Discontinued
Operations and
Eliminations

 

Total

 

Revenue

 

$

 

$

206.5

 

$

382.6

 

$

(26.2

)

$

562.9

 

Operating costs and expenses

 

4.6

 

135.9

 

387.9

 

(26.2

)

502.2

 

Operating income

 

(4.6

)

70.6

 

(5.3

)

 

60.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings (loss) of subsidiaries and discontinued operations

 

23.0

 

 

 

(23.0

)

 

Interest expense

 

33.9

 

5.4

 

20.9

 

(20.1

)

40.1

 

Other expense (income), net

 

(7.7

)

(0.7

)

5.2

 

20.1

 

16.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

(7.8

)

65.9

 

(31.4

)

(23.0

)

3.7

 

Income tax provision (benefit)

 

(11.8

)

23.3

 

(11.8

)

 

(0.3

)

Income (loss) from continuing operations

 

4.0

 

42.6

 

(19.6

)

(23.0

)

4.0

 

Income from discontinued operations, net

 

 

 

 

 

 

Cumulative effect of change in accounting principle, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4.0

 

$

42.6

 

$

(19.6

)

$

(23.0

)

$

4.0

 

 

 

 

For the quarter ended September 30, 2001

 

 

 

Parent
(Guarantor)

 

CBT

 

Other
(Non-guarantors)

 

Discontinued
Operations and
Eliminations

 

Total

 

Revenue

 

$

 

$

208.5

 

$

390.9

 

$

(21.4

)

$

578.0

 

Operating costs and expenses

 

4.2

 

138.7

 

446.6

 

(22.0

)

567.5

 

Operating income

 

(4.2

)

69.8

 

(55.7

)

0.6

 

10.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings (loss) of subsidiaries and discontinued operations

 

(2.4

)

 

 

2.4

 

 

Interest expense

 

40.7

 

5.8

 

21.7

 

(24.0

)

44.2

 

Other expense (income), net

 

(11.9

)

(0.6

)

(5.2

)

24.1

 

6.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

(35.4

)

64.6

 

(72.2

)

2.9

 

(40.1

)

Income tax provision (benefit)

 

(7.5

)

23.0

 

(20.0

)

 

(4.5

)

Income (loss) from continuing operations

 

(27.9

)

41.6

 

(52.2

)

2.9

 

(35.6

)

Income from discontinued operations, net

 

 

 

 

7.7

 

7.7

 

Cumulative effect of change in accounting principle, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(27.9

)

$

41.6

 

$

(52.2

)

$

10.6

 

$

(27.9

)

 

25



 

 

 

For the nine months ended September 30, 2002

 

 

 

Parent
(Guarantor)

 

CBT

 

Other
(Non-guarantors)

 

Discontinued
Operations and
Eliminations

 

Total

 

Revenue

 

$

 

$

626.0

 

$

1,099.6

 

$

(72.8

)

$

1,652.8

 

Operating costs and expenses

 

9.0

 

413.0

 

1,198.5

 

(73.0

)

1,547.5

 

Operating income

 

(9.0

)

213.0

 

(98.9

)

0.2

 

105.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings (loss) of subsidiaries and discontinued operations