SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
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 X No
At April 30, 2001, there were 218,081,588 common shares were
outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
DESCRIPTION PAGE
Item 1. Financial Statements
Condensed Consolidated Statements of Income and
Comprehensive Income (Loss) (Unaudited)
Three Months Ended March 31, 2001 and 2000 1
Condensed Consolidated Balance Sheets
March 31, 2001 (Unaudited) and December 31, 2000 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2001 and 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
PART II. OTHER INFORMATION
DESCRIPTION PAGE
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 31
Signature 32
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
Ended March 31,
----------------------
2001 2000
-------- --------
REVENUES
Broadband $ 296.6 $ 212.0
Local Communications 205.4 192.8
Wireless 57.1 36.6
Other Communications 39.6 29.5
Intersegment (20.4) (10.7)
-------- --------
Total revenues 578.3 460.2
-------- --------
COSTS AND EXPENSES
Cost of providing services and products sold 280.0 217.9
Selling, general and administrative 143.6 157.3
Depreciation 99.2 82.5
Amortization 28.5 28.1
Restructuring charges 9.5 --
-------- --------
Total costs and expenses 560.8 485.8
-------- --------
OPERATING INCOME (LOSS) 17.5 (25.6)
Gain on investments, net 2.8 7.3
Minority interest expense 12.7 10.9
Equity loss in unconsolidated entities 3.3 2.0
Interest expense 42.4 36.4
Other expense, net 0.8 0.3
-------- --------
Loss from continuing operations before income
taxes and cumulative effect of change in
accounting principle (38.9) (67.9)
Income tax benefit (4.9) (12.3)
-------- --------
Loss from continuing operations before cumulative
effect of change in accounting principle (34.0) (55.6)
Income from discontinued operations, net of taxes -- 0.1
Cumulative effect of change in accounting
principle, net of taxes -- (0.8)
-------- --------
NET LOSS (34.0) (56.3)
Dividends and accretion applicable to preferred
stock 2.6 0.3
-------- --------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (36.6) $ (56.6)
======== ========
Other comprehensive income (loss), net of tax:
Unrealized gain on cash flow hedges 17.0 --
Unrealized loss on investments (86.5) (16.3)
-------- --------
COMPREHENSIVE LOSS $ (103.5) $ (72.6)
======== ========
BASIC AND DILUTED LOSS PER COMMON SHARE
Loss from continuing operations before
cumulative effect of change in
accounting principle $ (0.17) $ (0.28)
Income from discontinued operations, net
of taxes -- --
Cumulative effect of change in accounting
principle, net of taxes -- --
-------- --------
NET LOSS $ (0.17) $ (0.28)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(MILLIONS)
Basic and Diluted 216.4 202.3
See Notes to Financial Statements.
1
Form 10-Q Part I Broadwing Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
March 31, December 31,
2001 2000
---------- ------------
ASSETS
Current Assets
Cash and cash equivalents $ 34.2 $ 37.9
Receivables, less allowances of $58.3 and $49.0, respectively 362.2 330.6
Material and supplies 30.7 34.1
Deferred income tax benefits 17.0 16.6
Prepaid expenses and other current assets 43.7 43.5
---------- ------------
Total current assets 487.8 462.7
Property, plant and equipment, net 3,053.8 2,966.2
Goodwill and other intangibles, net 2,557.3 2,572.2
Investments in other entities 115.7 254.9
Deferred income tax benefits 167.2 109.1
Other noncurrent assets 124.9 112.1
Net assets from discontinued operations -- 0.4
---------- ------------
Total Assets $ 6,506.7 $ 6,477.6
========== ============
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Short-term debt $ 53.4 $ 14.0
Accounts payable 247.7 244.4
Current portion of unearned revenue and customer deposits 84.9 88.0
Accrued taxes 85.9 90.4
Other current liabilities 279.1 290.5
---------- ------------
Total current liabilities 751.0 727.3
Long-term debt, less current portion 2,602.1 2,507.0
Unearned revenue, less current portion 598.1 611.0
Other long-term liabilities 177.4 177.0
---------- ------------
Total liabilities 4,128.6 4,022.3
Minority interest 434.1 433.8
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 March 31, 2001 and December 31, 2000 129.4 129.4
Common shares, $.01 par value; 480,000,000 shares authorized;
224,684,836 and 222,335,243 shares issued at March 31, 2001
and December 31, 2000 2.3 2.1
Additional paid-in capital 2,355.3 2,329.5
Accumulated deficit (411.1) (377.1)
Accumulated other comprehensive income 13.2 82.7
Common stock in treasury, at cost: 7,805,800 shares at
March 31, 2001 and December 31, 2000 (145.1) (145.1)
---------- ------------
Total shareowners' equity 1,944.0 2,021.5
---------- ------------
Total Liabilities and Shareowners' Equity $ 6,506.7 $ 6,477.6
========== ============
See Notes to Financial Statements
2
Form 10-Q Part I Broadwing Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
Three Months
Ended March 31,
----------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (34.0) $ (56.3)
Less: income from discontinued operations,
net of taxes -- (0.1)
-------- --------
Net loss from continuing operations (34.0) (56.4)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 99.2 82.5
Amortization 28.5 28.1
Restructuring and related charges 9.5 --
Provision for loss on receivables 33.2 14.5
Minority interest 12.7 10.9
Deferred income taxes (20.6) 50.6
Non-cash interest expense 9.0 9.4
Gain on investments, net (2.8) (7.3)
Equity loss in unconsolidated entities 3.3 2.0
Tax benefits from employee stock option plans 15.7 20.5
Other, net 2.4 4.4
Changes in operating assets and liabilities:
Increase in receivables (64.8) (35.1)
Decrease in prepaid expenses and in other
current assets 3.3 11.2
Increase (decrease) in accounts payable 0.5 (86.1)
Increase (decrease) in other current liabilities (23.2) (49.3)
Decrease in unearned revenue (16.1) (1.3)
Decrease (increase) in other assets and liabilities, net (15.3) 23.3
-------- --------
Net cash provided by operating activities of
continuing operations 40.5 21.9
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (198.4) (153.5)
Proceeds from sale of investments 28.9 15.7
Payments for investments/acquisitions, net of
cash acquired (0.3) (16.0)
Other, net -- 0.3
-------- --------
Net cash used in investing activities of
continuing operations (169.8) (153.5)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net 1.7 1.9
Proceeds from forward sale agreement 42.7 --
Issuance of long-term debt 91.0 450.0
Repayment of long-term debt (5.1) (404.0)
Issuance of common shares-exercise of stock options 9.9 37.8
Minority interest dividends paid (12.4) (12.4)
Preferred stock dividends paid (2.6) (4.5)
-------- --------
Net cash provided by financing activities of
continuing operations 125.2 68.8
-------- --------
Net cash provided by discontinued operations 0.4 0.9
-------- --------
Net decrease in cash and cash equivalents (3.7) (61.9)
Cash and cash equivalents at beginning of period 37.9 80.8
-------- --------
Cash and cash equivalents at end of period $ 34.2 $ 18.9
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ -- $ --
======== ========
Interest, net of amount capitalized $ 42.4 $ 41.3
======== ========
Non-cash investing and financing activities:
Accretion of preferred stock $ -- $ 4.2
======== ========
See Notes to Financial Statements
3
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Broadwing Inc. ("the Company") is organized into four 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
more than 18,250 route miles to provide broadband transport, Internet
services and long distance. The Broadband segment also offers data
collocation, information technology consulting, network construction and
other services. As part of broadband transport, the Company leases
network capacity in the form of indefeasible right of use ("IRU")
agreements. These services are offered nationally through the Company's
Broadwing Communications Inc. subsidiary.
The Local Communications 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, long distance 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 Communications 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 performance of its segments based on EBITDA
(earnings before interest, taxes, depreciation, amortization, and
restructuring charges). EBITDA is commonly used in the communications
industry to measure operating performance. EBITDA is not intended to
represent cash flows for the periods. Because EBITDA is not
calculated identically by all companies, 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 Note 2. 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.
4
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. RESTRUCTURING AND OTHER CHARGES
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
and other benefits) for 114 employees. The severance payments are
expected to be substantially complete by June 30, 2001. 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 during the first quarter of
2001:
Balance
Type of costs (in millions): Initial Charge Expenditures Adjustments March 31, 2001
--------------------------------- -------------- ------------ ----------- --------------
Employee separations $ 6.9 $ 2.5 $ -- $ 4.4
Terminate contractual obligations 2.5 0.2 -- 2.3
------ ------ ------- -----
Total $ 9.4 $ 2.7 $ -- $ 6.7
====== ====== ======= =====
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 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, 2001 Expenditures Adjustments March 31, 2001
--------------------------------- ----------------- ------------ ----------- --------------
Employee separations $ 0.1 $ 0.2 $ 0.1 $ --
Facility closure costs 2.2 0.3 -- 1.9
Relocation -- -- -- --
Other exit costs 1.5 -- -- 1.5
--------- --------- -------- ---------
Total $ 3.8 $ 0.5 $ 0.1 $ 3.4
========= ========= ======== =========
5
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $3.4 million at March 31, 2001 is
adequate to complete the restructuring plan. Substantially all of the
related actions will be completed by June 30, 2001. The adjustment of
$0.1 million during the quarter relates to additional severance benefits
above the amount initially estimated.
3. DEBT
The Company's debt consists of the following:
Millions of dollars March 31, 2001 December 31, 2000
-----------------------------------------------------------------------------------------------
Short-Term Debt:
Capital lease obligations $ 6.3 $ 5.7
Corvis forward sale 42.7 --
Current maturities of long-term debt 4.4 8.3
------------- ------------
Total short-term debt $ 53.4 $ 14.0
============= ============
Long-Term Debt:
Bank notes $ 1,730.0 $ 1,639.0
9.0% Senior subordinated notes 46.0 46.0
6.75% Convertible subordinated debentures 447.5 440.2
Various Cincinnati Bell Telephone notes 290.0 290.0
7.25% Senior subordinated notes 50.0 50.0
PSINet forward sale -- 3.0
Capital lease obligations 38.6 38.8
------------ ------------
Total long-term debt $ 2,602.1 $ 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 $44.9 million in total indebtedness relating to capitalized leases as
of March 31, 2001, $38.6 million of which is considered long-term.
CORVIS FORWARD SALE
At March 31, 2001, the Company's total investment in Corvis Corporation
("Corvis") consisted of approximately 8 million shares. During the first
quarter of 2001, the Company received approximately $42.7 million from a
financial institution in connection with a prepaid forward sale contract
on 2.6 million shares of the Corvis common stock due in the third quarter
of 2001. This amount is accounted for as notes payable and is
collateralized by 2.6 million shares of Corvis common stock in the
Company's investment portfolio.
6
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. The credit facility consists of $900 million in revolving
credit, $750 million in term loans from banking institutions and $450
million in term loans from non-banking institutions. At March 31, 2001,
the Company had drawn approximately $1,730 million from the credit
facility in order to refinance its existing debt and debt assumed as part
of the merger with IXC Communications Inc. ("IXC"), as well as to provide
for additional financing needs. Accordingly, the Company has
approximately $370 million in additional borrowing capacity under this
facility as of March 31, 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 or merge with another company.
The interest rates charged on borrowings from this credit facility can
range from 100 to 225 basis points above the London Interbank Offering
Rate ("LIBOR"), and are currently at 175 to 225 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, the former IXC issued $450 million of 9% senior subordinated
notes due 2008 ("the 9% notes"). 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 March 31, 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 March 31, 2001 and since inception, the Company has recorded
$47.5 million in interest expense and has adjusted the carrying amount of
the debt accordingly. During the three months ended March 31, 2001 and
2000, the Company recorded interest expense of approximately $7 million
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. (the "Parent Company"). These
bonds, which are not guaranteed by other subsidiaries of the Company,
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
ranges from 4.375% to 7.27%.
7
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 the 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, this liability could be settled for
approximately $3 million at December 31, 2000. Accordingly, 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 were reclassified from other comprehensive income to net
income related to the PSINet forward sale and the underlying 6 million
shares of PSINet further described in Note 3 of the Notes to Condensed
Consolidated Financial Statements. Accordingly, there was no net
cumulative effect adjustment to either net income or other comprehensive
income.
As of March 31, 2001, the Company's derivative contracts have been
determined to be highly effective. 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
$2.1 billion credit facility. Gains and losses from the interest rate
swaps are recognized as an adjustment to interest expense. The interest
rate swap agreements currently in place expire between 2002 and 2003. At
March 31, 2001, the interest rate swaps were a liability with an
immaterial fair value.
8
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARKETABLE EQUITY FORWARD CONTRACTS
From time to time the Company enters into forward contracts on the sale
of marketable equity securities with the intent of managing its exposure
to fluctuations in U.S. equity markets. 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.
As of March 31, 2001 the Company had entered into a forward contract for
the sale of up to 4 million shares of its investment in Corvis. The
contract is intended to hedge a portion of the Company's investment in
Corvis, which totaled 8 million shares with a market value of
approximately $83 million as of March 31, 2001. The unrealized pre-tax
gain of approximately $26 million associated with this contract is
recorded in other comprehensive income, and will be recognized upon
settlement of the contract during the third quarter of 2001.
The PSINet forward sale was settled during the first quarter of 2001. See
a detailed discussion in 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. The following table is a reconciliation of
the numerators and denominators of the basic and diluted EPS computations
for income from continuing operations before the cumulative effect of a
change in accounting principle for the following periods:
Shares and dollars in millions March 31, March 31,
(except per share amounts) Three months ended 2001 2000
---------------------------------------------------------------------------------------------------
Numerator:
Net loss from continuing operations before
cumulative effect of change in accounting principle $ (34.0) $ (55.6)
Preferred stock dividends 2.6 0.3
------- -------
Numerator for EPS and EPS assuming dilution -
income applicable to common shareowners $ (36.6) $ (55.9)
======= =======
Denominator:
Denominator for basic EPS - weighted average
common shares 216.4 202.3
Potential dilution:
Stock options -- --
Stock-based compensation arrangements -- --
------- -------
Denominator for diluted EPS per common share 216.4 202.3
======= =======
Basic and Diluted EPS from continuing operations $ (0.17) $ (0.28)
======= =======
9
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Because the effect of their inclusion in the EPS calculation would be
anti-dilutive, approximately 7.5 million additional shares related to
stock options, restricted stock and the assumed conversion of the
Company's 6 3/4% convertible preferred stock and 6 3/4% convertible
subordinated debentures are not included in the denominator of the EPS
calculation. The total number of potential additional shares outstanding
related to these securities is approximately 50 million if all stock
options currently outstanding were exercised and all convertible
securities were to convert.
6. BUSINESS SEGMENT INFORMATION
The Broadband segment utilizes its advanced optical network consisting of
more than 18,250 route miles to provide broadband transport, Internet
services and long distance. The Broadband segment also offers data
collocation, information technology consulting, network construction and
other services, as well as the leasing of network capacity in the form of
IRU agreements. These services are offered nationally through the
Company's Broadwing Communications Inc. subsidiary.
The Local Communications 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, long distance 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 Communications 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:
10
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
Three Months
Millions of Dollars Ended March 31,
------------------- -----------------------------
2001 2000
--------- ---------
REVENUES
Broadband $ 296.6 $ 212.0
Local Communications 205.4 192.8
Wireless 57.1 36.6
Other Communications 39.6 29.5
Intersegment (20.4) (10.7)
--------- ---------
$ 578.3 $ 460.2
========= =========
INTERSEGMENT REVENUES
Broadband $ 12.0 $ 4.7
Local Communications 8.0 5.8
Wireless 0.3 --
Other Communications 0.1 0.2
--------- ---------
$ 20.4 $ 10.7
========= =========
EBITDA
Broadband $ 33.1 $ (2.2)
Local Communications 104.4 90.5
Wireless 14.7 1.6
Other Communications 4.4 (4.4)
Corporate and Eliminations (1.9) (0.5)
--------- ---------
$ 154.7 $ 85.0
========= =========
ASSETS (AT MARCH 31, 2001 AND DECEMBER 31, 2000)
Broadband $ 5,084.6 $ 5,004.2
Local Communications 829.8 848.7
Wireless 350.2 343.4
Other Communications 66.0 83.3
Corporate and Eliminations 176.1 198.0
--------- ---------
$ 6,506.7 $ 6,477.6
========= =========
CAPITAL ADDITIONS
Broadband $ 150.3 $ 88.9
Local Communications 32.1 43.9
Wireless 9.7 18.0
Other Communications 6.1 2.7
Corporate and Eliminations 0.2 --
--------- ---------
$ 198.4 $ 153.5
========= =========
DEPRECIATION AND AMORTIZATION
Broadband $ 86.9 $ 74.8
Local Communications 32.8 29.4
Wireless 5.9 4.5
Other Communications 2.1 1.9
Corporate and Eliminations -- --
--------- ---------
$ 127.7 $ 110.6
========= =========
11
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. SUPPLEMENTAL GUARANTOR INFORMATION
CBT, a wholly owned subsidiary of the Parent Company, has debt
outstanding that is guaranteed by both CBT and 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 March 31, 2001 and December 31, 2000 and the
condensed consolidating statements of income (loss) and cash flows for
the periods ended March 31, 2001 and 2000.
12
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
(IN MILLIONS OF DOLLARS)
For the quarter ended March 31, 2001
---------------------------------------------------------------
Parent CBT Other Eliminations Total
------- --------- --------- ------------ --------
Revenues $ - $ 205.4 $ 393.3 $ (20.4) $ 578.3
Operating costs and expenses 4.0 140.5 436.7 (20.4) 560.8
---------------------------------------------------------------
Operating income (4.0) 64.9 (43.4) - 17.5
Interest expense 44.3 5.5 24.7 (32.1) 42.4
Other expense (income), net (19.8) 0.5 1.2 32.1 14.0
---------------------------------------------------------------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle (28.5) 58.9 (69.3) - (38.9)
Income tax provision (benefit) (8.3) 21.1 (17.7) - (4.9)
---------------------------------------------------------------
Income (loss) before cumulative effect of
change in accounting principle (20.2) 37.8 (51.6) - (34.0)
Income from discontinued operations, net - - - - -
Cumulative effect of change in accounting
principle, net of tax - - - - -
---------------------------------------------------------------
Net income (loss) $ (20.2) $ 37.8 $ (51.6) $ - $ (34.0)
===============================================================
For the quarter ended March 31, 2000
---------------------------------------------------------------
Parent CBT Other Eliminations Total
------- --------- --------- ------------ --------
Revenues $ - $ 192.8 $ 278.1 $ (10.7) $ 460.2
Operating costs and expenses 0.4 131.8 364.3 (10.7) 485.8
---------------------------------------------------------------
Operating income (0.4) 61.0 (86.2) - (25.6)
Interest expense 32.9 5.7 18.0 (20.2) 36.4
Other expense (income), net (8.1) 0.3 (6.6) 20.3 5.9
---------------------------------------------------------------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle (25.2) 55.0 (97.6) (0.1) (67.9)
Income tax provision (benefit) 1.2 19.2 (32.7) - (12.3)
---------------------------------------------------------------
Income (loss) before cumulative
effect of change in accounting
principle (26.4) 35.8 (64.9) (0.1) (55.6)
Income from discontinued operations, net - - - 0.1 0.1
Cumulative effect of change in
accounting principle, net of tax - (0.8) - - (0.8)
---------------------------------------------------------------
Net income (loss) $ (26.4) $ 35.0 $ (64.9) $ - $ (56.3)
===============================================================
13
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN MILLIONS OF DOLLARS)
March 31, 2001
---------------------------------------------------------------
Parent CBT Other Eliminations Total
------- --------- --------- ------------ --------
Cash and cash equivalents $ 20.1 $ - $ 14.1 $ - $ 34.2
Receivables, net 0.1 97.2 264.9 - 362.2
Other current assets 8.9 50.8 33.9 (2.2) 91.4
Intercompany receivables 1,483.6 - - (1,483.6) -
---------------------------------------------------------------
Total current assets 1,512.7 148.0 312.9 (1,485.8) 487.8
Property, plant and equipment, net 1.4 608.3 2,444.1 - 3,053.8
Goodwill and other intangibles, net 1.1 25.2 2,531.0 - 2,557.3
Investments in subsidiaries and other
entities 2,878.3 - 114.5 (2,877.1) 115.7
Deferred charges and other assets 101.4 55.2 178.7 (43.2) 292.1
Net assets from discontinued operations - - - - -
---------------------------------------------------------------
TOTAL ASSETS 4,494.9 836.7 5,581.2 (4,406.1) 6,506.7
===============================================================
Short-term debt - 6.3 47.1 - 53.4
Accounts payable 8.0 40.5 199.2 - 247.7
Other current liabilities 14.2 113.0 310.9 11.8 449.9
Intercompany payables - current - 27.6 - (27.6) -
---------------------------------------------------------------
Total current liabilities 22.2 187.4 557.2 (15.8) 751.0
Long-term debt, less current portion 2,227.1 324.7 50.3 - 2,602.1
Other long-term liabilities 76.2 70.7 685.9 (57.3) 775.5
Intercompany payables - noncurrent - - 1,456.5 (1,456.5) -
---------------------------------------------------------------
Total liabilities 2,325.5 582.8 2,749.9 (1,529.6) 4,128.6
Minority interest 422.8 - 11.3 - 434.1
Mezzanine financing - - 422.8 (422.8) -
Shareowners' equity 1,746.6 253.9 2,397.2 (2,453.7) 1,944.0
---------------------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY 4,494.9 836.7 5,581.2 (4,406.1) 6,506.7
===============================================================
December 31, 2000
---------------------------------------------------------------
Parent CBT Other Eliminations Total
------- --------- --------- ------------ --------
Cash and cash equivalents $ 5.8 $ - $ 32.1 $ - $ 37.9
Receivables, net - 101.4 229.2 330.6
Other current assets 5.5 50.6 40.6 (2.5) 94.2
Intercompany receivables 1,429.6 - - (1,429.6) -
---------------------------------------------------------------
Total current assets 1,440.9 152.0 301.9 (1,432.1) 462.7
Property, plant and equipment, net 1.3 619.4 2,345.5 - 2,966.2
Goodwill and other intangibles, net 1.1 12.8 2,558.3 - 2,572.2
Investments in subsidiaries and other
entities 2,874.8 - 253.2 (2,873.1) 254.9
Deferred charges and other assets 102.9 40.8 155.8 (78.3) 221.2
Net assets from discontinued operations - - - 0.4 0.4
---------------------------------------------------------------
TOTAL ASSETS 4,421.0 825.0 5,614.7 (4,383.1) 6,477.6
===============================================================
Short-term debt - 5.7 8.3 - 14.0
Accounts payable 9.0 45.9 235.4 - 290.3
Other current liabilities 42.0 91.3 277.6 12.1 423.0
Intercompany payables - current - 31.1 - (31.1) -
---------------------------------------------------------------
Total current liabilities 51.0 174.0 521.3 (19.0) 727.3
Long-term debt, less current portion 2,128.8 324.2 54.0 - 2,507.0
Other long-term liabilities 74.5 69.8 736.7 (93.0) 788.0
Intercompany payables - noncurrent - - 1,377.7 (1,377.7) -
---------------------------------------------------------------
Total liabilities 2,254.3 568.0 2,689.7 (1,489.7) 4,022.3
Minority interest 423.6 - 10.2 - 433.8
Mezzanine financing - - 423.6 (423.6) -
Shareowners' equity 1,743.1 257.0 2,491.2 (2,469.8) 2,021.5
---------------------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY 4,421.0 825.0 5,614.7 (4,383.1) 6,477.6
===============================================================
14
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
For the quarter ended March 31, 2001
---------------------------------------------------------------
Parent CBT Other Eliminations Total
------- --------- --------- ------------ --------
Cash Flows from operating activities $ (11.7) $ 75.4 $ (23.2) $ - $ 40.5
---------------------------------------------------------------
Capital expenditures (0.2) (32.1) (166.1) - (198.4)
Other investing activities - - 28.6 - 28.6
---------------------------------------------------------------
Cash Flows from investing activities (0.2) (32.1) (137.5) - (169.8)
---------------------------------------------------------------
Issuance of long-term debt/capital contributions 19.0 (44.5) 116.9 (0.4) 91.0
Repayment of long-term debt - - (5.1) - (5.1)
Short-term borrowings and capital leases, net - 1.2 43.2 - 44.4
Issuance of common shares - exercise of
stock options 9.9 - - - 9.9
Other financing activities (2.6) - (12.4) - (15.0)
---------------------------------------------------------------
Cash Flows from financing activities 26.3 (43.3) 142.6 (0.4) 125.2
---------------------------------------------------------------
Cash Flows from discontinued operations - - - 0.4 0.4
---------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents 14.4 - (18.1) - (3.7)
Beginning cash and cash equivalents 5.7 - 32.2 - 37.9
---------------------------------------------------------------
Ending cash and cash equivalents $ 20.1 $ - $ 14.1 $ - $ 34.2
===============================================================
For the quarter ended March 31, 2000
---------------------------------------------------------------
Parent CBT Other Eliminations Total
------- --------- --------- ------------ --------
Cash Flows from operating activities $ (7.4) $ 90.4 $ (61.1) $ - $ 21.9
---------------------------------------------------------------
Capital expenditures - (43.9) (109.6) - (153.5)
Other investing activities 0.3 - (0.3) - -
---------------------------------------------------------------
Cash Flows from investing activities 0.3 (43.9) (109.9) - (153.5)
---------------------------------------------------------------
Issuance of long-term debt/capital
contributions (50.8) (31.7) 532.5 - 450.0
Repayment of long-term debt (0.8) - (404.0) 0.8 (404.0)
Short-term borrowings, net - - - - -
Issuance of common shares - exercise of
stock options 37.8 - - - 37.8
Other financing activities (4.5) 2.1 (10.9) (1.7) (15.0)
---------------------------------------------------------------
Cash Flows from financing activities (18.3) (29.6) 117.6 (0.9) 68.8
---------------------------------------------------------------
Cash Flows from discontinued operations - - - 0.9 0.9
---------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents (25.4) 16.9 (53.4) - (61.9)
Beginning cash and cash equivalents 43.8 (16.9) 53.9 - 80.8
---------------------------------------------------------------
Ending cash and cash equivalents $ 18.4 $ - $ 0.5 $ - $ 18.9
===============================================================
8. CONTINGENCIES
In the normal course of business, the Company is subject to various
regulatory proceedings, lawsuits, claims and other matters. Such matters
are subject to many uncertainties and outcomes are not predictable with
assurance.
In the course of closing the Company's merger with IXC, the Company became
aware of IXC's possible non-compliance with certain requirements under
state and federal environmental laws. Since the Company is committed to
compliance with environmental laws, management decided to undertake a
voluntary environmental compliance audit of the former IXC facilities and
operations and, by letter dated
15
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 9, 1999, disclosed potential non-compliance at the former IXC
facilities to the U.S. Environmental Protection Agency ("EPA") under the
Agency's Self-Policing Policy. The Company made similar voluntary
disclosures to various state authorities. The EPA determined that IXC
appears to have satisfied the "prompt disclosure" requirement of the
Self-Policing Policy for the Company to complete its environmental audit of
all former IXC facilities and report any violations to the Agency. The
Company has filed its preliminary environmental audit report with the EPA
and is currently working with the EPA and several state environmental
protection agencies to bring the Company into compliance with all
applicable regulations, and to develop internal procedures to ensure future
compliance.
The Company believes that the resolution of such matters for amounts in
excess of those reflected in the consolidated financial statements would
not likely have a materially adverse effect on the Company's financial
condition.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted SFAS 133. The adoption of
SFAS 133 did not have a material effect on the Company's financial position
or results of operations. The Company does not invest in derivatives for
trading purposes, nor does it enter into interest rate transactions for
speculative purposes. See Note 4 of the Notes to Condensed Consolidated
Financial Statements for a detailed discussion of the Company's derivative
instruments.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." In SAB 101, the SEC
Staff expressed its views regarding the appropriate recognition of revenue
with respect to a variety of circumstances, some of which are of particular
relevance to the Company. As required, the Company adopted SAB 101 in the
fourth quarter of 2000 and modified its revenue recognition policies
retroactive to January 1, 2000 to recognize service activation revenues and
associated direct incremental costs over their respective customer lives.
As a result, the previously reported quarterly results have been restated.
The adoption of this accounting change resulted in a one-time, non-cash,
after-tax charge of $0.8 million in the first quarter of 2000, having
virtually no effect on reported earnings per share in the first quarter of
2000. In the first quarter of 2001, the Company recognized $2.5 million
in additional revenues and $2.3 million in incremental direct expenses
pertaining to amounts included in the cumulative effect adjustment for SAB
101 as of January 1, 2000. Offsetting these amounts are deferrals of
$3.2 million in current quarter revenues and $3.0 million in incremental
direct expenses deferred to future periods in accordance with SAB 101.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information included in this Quarterly Report on Form 10-Q contains certain
forward-looking statements that involve potential risks and uncertainties. The
Company's future results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed herein, and those discussed in the Form 10-K for the
year ended December 31, 2000. Readers are cautioned not to place undue reliance
on these forward-looking statements that speak only as of the date thereof.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and segment data. Results for interim periods may not be
indicative of the results for the full years. The symbol "n/m" is used to refer
to calculations in which the result is not meaningful.
16
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of operations are as follows:
(Unaudited)
Three Months Ended March 31,
----------------------------------------------
($ Millions) 2001 2000 Change %
-------- -------- -------- -------
Revenues:
Broadband $ 296.6 $ 212.0 $ 84.6 40%
Local Communications 205.4 192.8 12.6 7%
Wireless 57.1 36.6 20.5 56%
Other Communications 39.6 29.5 10.1 34%
Intersegment (20.4) (10.7) (9.7) 91%
-------- -------- --------
Total revenues 578.3 460.2 118.1 26%
-------- -------- --------
Costs and expenses:
Cost of providing services and products sold 280.0 217.9 62.1 28%
Selling, general and administrative 143.6 157.3 (13.7) (9%)
-------- -------- --------
Total costs and expenses 423.6 375.2 48.4 13%
-------- -------- --------
EBITDA 154.7 85.0 69.7 82%
Depreciation 99.2 82.5 16.7 20%
Amortization 28.5 28.1 0.4 1%
Restructuring charges 9.5 -- 9.5 n/m
-------- -------- --------
Operating income (loss) 17.5 (25.6) 43.1 n/m
Gain on investments, net 2.8 7.3 (4.5) (62%)
Equity loss in unconsolidated entities 3.3 2.0 1.3 65%
Minority interest expense 12.7 10.9 1.8 17%
Interest expense 42.4 36.4 6.0 16%
Other expense, net 0.8 0.3 0.5 167%
-------- -------- --------
Loss from continuing operations before
income taxes and cumulative effect of change
in accounting principle (38.9) (67.9) 29.0 (43%)
Income tax benefit (4.9) (12.3) 7.4 (60%)
-------- -------- --------
Loss from continuing operations before cumulative
effect of change in accounting principle (34.0) (55.6) 21.6 (39%)
Income from discontinued operations, net of taxes -- 0.1 (0.1) (100%)
Cumulative effect of change in accounting principle,
net of taxes -- (0.8) 0.8 100%
-------- -------- --------
Net loss (34.0) (56.3) 22.3 (40%)
-------- -------- --------
Dividends and accretion applicable
to preferred stock 2.6 0.3 2.3 n/m
-------- -------- --------
Net loss attributable to common shareowners $ (36.6) $ (56.6) $ 20.0 (35%)
======== ======== ========
Basic and diluted loss per common share $ (.17) $ (.28) $ .11 (39%)
======== ======== ========
17
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED OVERVIEW
Consolidated revenues totaled $578 million in the first quarter of 2001, which
was $118 million, or 26%, greater than the same quarter in 2000. Seventy-nine
percent of the revenue growth came from data, wireless and internet services.
The Broadband segment generated more than 70% of the revenue growth during the
quarter. Broadband segment revenues of $297 million were $85 million, or 40%,
higher than in the first quarter of 2000, with the bulk of the growth coming
from services such as broadband transport, data and Internet and other services.
The Local Communications segment produced revenue totaling $205 million, a $13
million, or 7%, increase over the first quarter of 2000. The Wireless segment
contributed $20 million in additional revenues over the prior year quarter,
growing sales to $57 million, representing a 56% increase. Other Communications
segment revenues grew $10 million, or 34%, to $40 million on the strength of the
CBAD "Any Distance" offering.
Costs of providing services and products sold totaled $280 million in the first
quarter of 2001 compared to $218 million in the prior year quarter, a 28%
increase. The majority of this $62 million increase is due to the cost of
network construction projects and information technology consulting personnel
and hardware costs in the Broadband segment. The remaining cost increases are a
function of subscriber increases in the wireless segment.
Selling, general and administrative ("SG&A") expenses of $144 million declined
$14 million, or 9%, from the first quarter of 2000. The decrease is primarily
due to advertising and customer acquisition campaigns associated with the launch
of the "Broadwing" brand and the "Any Distance" service offering which totaled
$23 million during the first quarter of 2000 and were not repeated in 2001.
EBITDA of $155 million increased 82%, or $70 million, over the same quarter in
the prior year, with all segments contributing to the increase. The Broadband
segment contributed approximately half of the increase. The Local Communications
and Wireless segments each contributed 20% of the EBITDA growth for the quarter.
EBITDA margin expanded to 27% in the first quarter from 18% in the year earlier
period.
Depreciation expense increased by 20%, or $17 million, to $99 million for the
quarter. The increase was primarily driven by the Broadband segment and reflects
the continued buildout of its national optical network. Amortization expense of
$29 million relates to purchased goodwill and other intangible assets and was
virtually unchanged compared to the first quarter of 2000.
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 pertaining to the 2001 restructuring plan and consisted of
$2.5 million related to lease terminations and $6.9 million related to
involuntary employee separation benefits (including severance, medical and
other benefits) for 114 employees. The severance payments are expected to be
substantially complete by June 30, 2001. The lease terminations are expected
to be complete by March 31, 2002. As of March 31 approximately 80% of the
employee separations had been completed for a total cash expenditure of $2.5
million. An additional $0.1 million expense was recorded in the first quarter
of 2001 pertaining to the 1999 restructuring plan.
Operating income improved by $43 million from a loss of $26 million to a profit
of $17 million during the quarter on the strength of significant improvements
from the Broadband and Wireless segments.
The Company recorded a net gain on investments of $3 million during the quarter,
reflecting a decrease of $4 million from the $7 million in investment gains
recorded during the first quarter of 2000. The net gain is comprised of a gain
from the sale of the Company's investment in PSINet, offset by impairment
writedowns
18
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
on other investments. The gain of $7 million in the first quarter of 2000 is
related to the sale of the Company's investment in PurchasePro.
The Company recorded $3 million in equity-share losses on the Applied Theory
investment compared to only $2 million in the first quarter of 2000 as Applied
Theory's loss grew.
Minority interest expense grew to $13 million from $11 million, representing an
increase of 17%, as higher minority interest dividends were offset by the
improved operating results of the Wireless segment (of which 19.9% is
attributable to AT&T Wireless Services Inc. as a result of its minority interest
in the wireless venture).
Interest expense of $42 million increased $6 million or 16% compared to the
first quarter of 2000, as debt levels increased to fund the continued
expansion of the national optical network. The increase is the net effect of
an $11 million increase due to higher debt levels, offset by $4 million in
additional capitalization of interest expense related to construction
projects (thereby reducing interest expense) and a $1 million reduction
related to lower interest rates.
Other expense was minimal in both 2001 and 2000.
The income tax benefit of $5 million in the first quarter of 2001 is $7 million
less than the $12 million benefit in the first quarter of 2000. The reduction in
the benefit is due to improved operating results.
The Company reported a net loss of $34 million in first quarter of 2001 compared
to a loss of $56 million in the first quarter of 2000. Dividends and accretion
on preferred stock totaled approximately $3 million, resulting in a net loss
applicable to shareowners of $37 million. The loss per share of $.17 was $.11
less than in the prior year, but included a restructuring charge of $.02 per
share. The loss per share for the first quarter of 2000 totaled $.28 but
included a one-time gain of $.02 per share. Excluding nonrecurring items, the
Company reported a net loss of $0.15 per share for the quarter versus a net loss
of $0.30 per share for the same quarter in 2000.
BROADBAND
(Unaudited)
Three Months Ended March 31,
------------------------------------------------
($ Millions) 2001 2000 Change %
--------- --------- --------- -------
Revenues:
Broadband transport $ 111.7 $ 90.3 $ 21.4 24%
Switched services 103.9 103.0 0.9 1%
Data and Internet 27.0 9.7 17.3 178%
Other services 54.0 9.0 45.0 n/m
--------- --------- ---------
Total revenues 296.6 212.0 84.6 40%
--------- --------- ---------
Costs and expenses:
Cost of providing services and products sold 178.8 125.2 53.6 43%
Selling, general and administrative 84.7 89.0 (4.3) (5%)
--------- --------- ---------
Total costs and expenses 263.5 214.2 49.3 23%
--------- --------- ---------
EBITDA $ 33.1 $ (2.2) $ 35.3 n/m
19
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Broadband segment utilizes its advanced optical network consisting of more
than 18,250 route miles to provide broadband transport, Internet services and
long distance. The Broadband segment also offers data collocation, information
technology consulting, network construction and other services in addition to
providing network capacity and fibers in the form of IRU agreements. These
services are offered nationally by the Company's Broadwing Communications Inc.
subsidiary.
Broadband transport services are comprised of the lease of dedicated circuits to
customers. These services are sold on a circuit lease and IRU basis. Switched
services represent the transmission of long distance traffic to retail business
customers and resellers. Data and Internet services include providing ATM/frame
relay, data collocation and web hosting. Other services are comprised of
information technology consulting and network construction services.
REVENUES
Broadband segment revenues increased $85 million, or 40%, to $297 million
compared to the first quarter of 2000, with all revenue categories contributing
to the increase. The broadband transport category contributed $21 million in
incremental revenue, growing 24% to $112 million. Seventy-two percent of the
revenue growth was generated by data services as the Company experienced
continuing growth in higher-bandwidth services. Improved revenues were offset by
an increase in the provision for loss on receivables.
Switched services revenue increased 1% over the first quarter of 2000 to $104
million as higher minutes of use in both wholesale and retail were offset by a
reduction in the average rate per minute of both products.
Data and Internet revenues nearly tripled during the first quarter of 2001
compared to 2000, increasing $17 million, or 178%, to $27 million. These
revenues continue to grow on the strength of demand for Internet-based,
ATM/frame relay, data collocation and web hosting services, along with higher
equipment sales. Data collocation and web hosting services are provided via the
Company's data centers, of which it now operates eleven throughout the United
States. These data centers can be expanded as demand for these services grows.
Other revenues rose six-fold, or $45 million, during the first quarter of 2001
compared to 2000, increasing from $9 million to $54 million on the strength of
$22 million in network construction project revenue for El Paso Energy and $23
million in additional revenues from information technology consulting.
COSTS AND EXPENSES
Costs of providing services and products sold consists primarily of access
charges paid to local exchange carriers, transmission lease payments to other
carriers, costs incurred for network construction projects, and personnel and
hardware costs for information technology consulting. In the first quarter of
2001, costs of providing services and products sold amounted to $179 million,
a 43%, or $54 million, increase over the prior year. These increases were
driven primarily by the revenue growth of information technology consulting
and network construction, causing an increase of $37 million, in addition to
a $15 million increase in access charges from other carriers due to increased
traffic.
SG&A expenses declined $4 million, or 5%, to $85 million for the quarter.
Advertising expenses decreased $14 million from the first quarter of 2000, as
the national advertising campaign to launch the "Broadwing" brand in 2000 was
not repeated in 2001. The advertising decrease was offset by an increase in
wages and benefits as approximately 700 employees were added in support of new
products and services primarily for broadband transport and information
technology consulting.
20
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EBITDA for the segment improved significantly from a loss of $2 million in the
first quarter of 2000 to a positive $33 million as a 40% increase in sales was
partially offset by an aggregate increase of 23% in the cost of providing
services and products sold and SG&A.
LOCAL COMMUNICATIONS
(Unaudited)
Three Months Ended March 31,
------------------------------------------------
($ Millions) 2001 2000 Change %
--------- --------- --------- -------
Revenues
Local service $ 115.4 $ 111.3 4.1 4%
Network access 51.7 48.3 3.4 7%
Other services 38.3 33.2 5.1 15%
--------- --------- ---------
Total revenues 205.4 192.8 12.6 7%
Costs and Expenses:
Cost of providing services and products sold 70.9 66.4 4.5 7%
Selling, general and administrative 30.1 35.9 (5.8) (16%)
--------- --------- ---------
Total costs and expenses 101.0 102.3 (1.3) (1%)
EBITDA $ 104.4 $ 90.5 13.9 15%
The Local Communications segment provides local telephone service, network
access, data transport, high-speed Internet access, long distance and other
ancillary products and services to customers in southwestern Ohio, northern
Kentucky and southeastern Indiana. These services are provided by the Company's
Cincinnati Bell Telephone Company ("CBT") subsidiary.
REVENUES
Revenues increased $13 million over the first quarter of 2000, to $205 million
with all revenue categories contributing to the 7% growth. Of this increase, 88%
resulted from high-speed data and Internet services. CBT also continues to
leverage the investment in its network assets through the sale of value-added
services such as custom calling features. The sale of these and other
value-added services were the primary drivers of the remaining revenue growth.
The local service category grew 4%, or $4 million, contributing 33% of the
revenue growth for the quarter. More than 18,000 subscribers selected the
Company's Complete Connections(R) calling service bundle during the first
quarter of 2001, bringing subscribership to 199,000, or 27% penetration of
residential lines. Of the 18,000 new Complete Connections subscribers, nearly
6,000 chose CBT's most complete product bundling offer, Complete Connections
Universal(R), which allows the customer to combine high-speed data transport,
local service, custom-calling features, Internet access, wireless, long distance
and security monitoring services on one customer bill.
Similar success has been achieved with the Company's ZoomTown(SM) high-speed
data transport service with subscribership now over 45,000, a 91% increase
over the first quarter of 2000, resulting in over $2 million in additional
revenues in the first quarter of 2001. CBT is now able to provision
asynchronous digital subscriber
21
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
line ("ADSL") service across the vast majority of its regional network
infrastructure, with 81% of its access lines being loop-enabled.
Network access revenues of $52 million represented a 7%, or $3 million, increase
over the first quarter of 2000. Voice-grade equivalents ("VGEs") representing
the digital and optical product offerings for CBT increased 32%. Access minutes
of use increased 1%, although switched access revenues for the quarter were
approximately $3 million lower due to decreased per-minute rates.
Other services revenue grew 15% in the current quarter, increasing $5 million
over the first quarter of 2000, to $38 million. The Company's Internet access
service (Fuse(R)) produced 12,000 new subscribers during the first quarter and
nearly $1 million in new revenues compared to the first quarter of 2000. Total
subscribership at the end of the quarter stood at 86,000. Further increases in
the other services category are attributable to equipment sales and related
installation and maintenance of $2 million and the resale of broadband products
totaling $2 million.
COSTS AND EXPENSES
Costs of providing services and products sold of $71 million in the current
quarter totaled 7% more than the first quarter of 2000, a $5 million increase.
The increase is comprised of $3 million in materials and supplies related to
network operations, $2 million in costs related to the resale of broadband
products and $2 million related to customer care expenses for internet access
service, offset by a $2 million reduction in salaries and wages. Gross profit
margins remained steady at approximately 65%, as revenues and expenses increased
proportionately.
SG&A expenses were $6 million lower in the first quarter of 2001 due to a $2
million reduction in advertising expenses, a $1 million reduction in
outsourced telemarketing expense, a $1 million decrease in rent expense and a
$2 million reduction in other expenses.
As a result of the above, EBITDA reached $104 million in the current quarter, a
$14 million, or 15%, increase over the same quarter in 2000, growing at twice
the rate of revenues. Similar improvement was achieved with regard to EBITDA
margin, which expanded by four margin points to more than 51%.
CBT continues to improve its margins, EBITDA and profitability by leveraging the
investment in its telecommunications network to offer new value-added products
and services without significant incremental costs. Furthermore, CBT is able to
offer a wide variety of telecommunications services at attractive prices with
the added convenience of one customer bill. As a result, CBT has maintained
approximately 99% of its access lines since the commencement of competition in
its operating area.
22
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
WIRELESS
(Unaudited)
Three Months Ended March 31,
------------------------------------------------
($ Millions) 2001 2000 Change %
--------- --------- --------- -------
Revenues:
Service $ 53.6 $ 33.2 20.4 61%
Equipment 3.5 3.4 0.1 3%
--------- --------- ---------
Total revenues 57.1 36.6 20.5 56%
Costs and expenses:
Cost of providing services and products sold 24.4 17.6 6.8 39%
Selling, general and administrative 18.0 17.4 0.6 3%
--------- --------- ---------
Total costs and expenses 42.4 35.0 7.4 21%
EBITDA $ 14.7 $ 1.6 13.1 n/m
The Wireless segment comprises the operations of Cincinnati Bell Wireless LLC, a
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
services and sales of related communications equipment to customers in the
Greater Cincinnati and Dayton, Ohio operating areas. Services are provided over
the Company's regional and AT&T Wireless Services' national wireless networks.
REVENUES
Wireless revenues grew 56% to $57 million in the first quarter of 2001. The
$20 million revenue growth was the result of higher service revenues from
both the postpaid and prepaid service offerings. Postpaid revenues accounted
for approximately 55% of the revenue growth, with the remaining growth
produced by prepaid service revenue. Equipment sales were flat compared to
the first quarter of 2000.
CBW added approximately 40,000 net subscribers during the current quarter,
with 64% of the growth generated by the prepaid category and the remainder by
postpaid services. Subscribership to the Company's i-wireless(SM) prepaid
product grew from approximately 28,000 subscribers at the end of the first
quarter of 2000 to approximately 123,000 at the end of the first quarter of
2001. This is significant because i-wireless(SM) represents an efficient use
of the Company's wireless network as the subscribers generally make use of
the network during off-peak periods. In addition, the cost per gross addition
("CPGA") for i-wireless(SM) subscribers is less than half that of postpaid
subscribers. Total subscribership now stands at approximately 379,000, a 90%
increase compared to the first quarter of the prior year.
Average revenue per unit ("ARPU") from postpaid subscribers of $62 decreased
6% in comparison to ARPU of $66 in the first quarter of 2000 due to expansion
of the customer base. Average monthly customer churn remained low and was
among the best in the industry at 1.5% for postpaid subscribers. Prepaid ARPU
remained constant at approximately $28.
23
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COSTS AND EXPENSES
Cost of providing services and products sold consists largely of incollect
expense (whereby CBW incurs costs associated with its subscribers using their
handsets while in the territories of other wireless service providers),
network operations costs, the cost of equipment sold and customer care. These
costs were 43% of revenue in the first quarter of 2001, significantly less
than the 48% of revenue incurred during the same quarter of the prior year.
In total, costs of providing services and products sold increased $7 million,
or 39%, due primarily to increased subscribership and the associated
interconnection charges, incollect expense and customer care.
Gross profit also continued to improve, increasing to nearly $33 million. The
gross profit margin of 57% in the first quarter of 2001 represents nearly 5
points in gross margin improvement versus the 52% recorded in the first quarter
of 2000.
SG&A expenses include the cost of customer acquisition, which consist primarily
of customer handset subsidies, advertising, distribution and promotional
expenses. These costs increased by less than $1 million or 3% in first quarter
of 2001 versus the same period in 2000. CBW continues to leverage the
subscribership expansion across its previously existing infrastructure. In the
first quarter, CPGA for postpaid customers decreased to $311, or 19% less than
the $385 incurred in the same period in the prior year quarter. SG&A expenses
continued to decrease significantly as a percentage of total revenue, declining
from 48% of revenues in the first quarter of 2000 to 32% in 2001.
The Wireless segment continues to significantly improve EBITDA as the Company
leverages its network investment and benefits from an embedded customer base,
low customer churn and previous promotional efforts. In the current quarter,
EBITDA of nearly $15 million represented a $13 million improvement over the same
quarter in the prior year. EBITDA margin improved to 26% in the current quarter,
an increase of nearly 22 margin points over the 4% EBITDA margin reported in the
first quarter of 2000.
OTHER COMMUNICATIONS
(Unaudited)
Three Months Ended March 31,
------------------------------------------------
($ Millions) 2001 2000 Change %
--------- --------- --------- -------
Revenues $ 39.6 $ 29.5 10.1 34%
Costs and expenses:
Cost of providing services and products sold 23.9 17.3 6.6 38%
Selling, general and administrative 11.3 16.7 (5.4) (32%)
--------- --------- ---------
Total costs and expenses 35.2 34.0 1.2 4%
EBITDA $ 4.4 $ (4.5) 8.9 n/m
The Other Communications segment comprises the operations of the Company's
Cincinnati Bell Any Distance ("CBAD"), Cincinnati Bell Directory ("CBD"),
ZoomTown.com ("ZoomTown") and Cincinnati Bell Public Communications ("Public")
subsidiaries. The results of operations of Cincinnati Bell Supply are no longer
reflected in this segment pursuant to the sale of this business in the second
quarter of 2000.
24
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
REVENUES
Revenues of $40 million were 34%, or $10 million, higher during the first
quarter of 2001 compared to the same prior year period. CBAD produced
approximately 72% of the revenue growth, increasing more than $7 million in
comparison to the first quarter of 2000 on the success of its "Any Distance"
service offering. This offer has been successful in capturing 387,000
subscribers in Cincinnati, representing residential and business market share of
64% and 30%, respectively.
CBD accounts for approximately half of the total revenues for this segment and
contributed 6% of the revenue growth during the quarter on the strength of a
successful sales campaign. ZoomTown's web hosting and content business provided
approximately 16%, or $2 million, of growth for the segment during the first
quarter. Revenues from Public were approximately $1 million more than in the
first quarter of 2000, contributing the remaining 6% of revenue growth in the
segment.
COSTS AND EXPENSES
Costs of providing services and products sold were $24 million in the current
quarter, a 38%, or $7 million increase versus the first quarter of 2000. CBAD
and Zoomtown incurred $4 million and $2 million increases, respectively,
primarily for access charges, network engineering, employee and customer care
costs associated with the continued growth of the Any Distance offering and
ZoomTown's web hosting business. CBD costs remained flat versus the first
quarter of 2000. The remaining $1 million increase was incurred by Public as a
result of increased line charges.
In the first quarter of 2001, gross profit margin for the segment decreased one
margin point to approximately 40% as gross margins remained essentially flat at
Public and CBD. Gross profit margin improvement at CBAD resulted from leveraging
the Company's initial expenditures for the Any Distance offering. The reduced
gross margin in the managed hosting business is due to the buildup of personnel
to support revenue growth.
SG&A expenses decreased $5 million, or 32%, in the first quarter of 2001. Over
$6 million of the decrease is due to the relatively high customer acquisition
costs at CBAD as part of the introduction of the Any Distance offering in the
first quarter of 2000, that was not repeated in 2001. This decrease was offset
by $1 million in additional SG&A expenses related to the expansion of the
managed hosting business at ZoomTown.
EBITDA improved to $4 million as a result of the increased sales noted above,
outpacing the increase in expenses. This represents a $9 million improvement in
comparison to the $5 million EBITDA loss reported in the first quarter of 2000.
EBITDA margin experienced a similar increase, improving from -15% in the first
quarter of 2000 to 11% in the current quarter, an improvement of 26 margin
points. The Company expects significant expenditures will be required in order
to grow the web hosting business, but anticipates an increasing demand for these
types of services.
25
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
As the Company expands its national presence as a provider of high bandwidth
services and regional wireless service, while maintaining an advanced local
network, capital expenditures and other investing needs are expected to
decrease from the most recent periods, but remain significant.
In order to provide for these continuing cash requirements and other general
corporate purposes, the Company maintains a $2.1 billion credit facility with a
group of lending institutions. The credit facility consists of $900 million in
revolving credit, $750 million in term loans from banking institutions and $450
million in term loans from non-banking institutions. At March 31, 2001, the
Company had drawn approximately $1,730 million from the credit facility in order
to refinance its existing debt and debt assumed as part of the merger with IXC
and to provide for the Company's business needs. At March 31, 2001, the Company
had approximately $370 million in additional borrowing capacity available under
this facility which it believes will be sufficient in order to provide for its
financing requirements in excess of amounts generated from its operations.
The interest rates to be charged on borrowings from the credit facility can
range from 100 to 225 basis points above the London Interbank Offering Rate
("LIBOR"), and are currently at 175 to 225 basis points as a result of the
Company's credit rating. The Company incurs banking fees in association with
this credit facility that range from 37.5 basis points to 75 basis points,
applied to the unused amount of borrowings of the facility.
The Company is subject to financial covenants in association with the credit
facility. These financial covenants require that the Company maintain certain
debt to EBITDA, senior secured debt to EBITDA, debt to capitalization and
interest coverage ratios. This facility also contains certain covenants which,
among other things, may restrict the Company's ability to incur additional debt,
pay dividends, repurchase Company common stock and sell assets or merge with
another company.
As of the date of this filing, the Company maintains the following credit
ratings:
Duff & Phelps Moody's
Entity Description Standard and Poor's Credit Rating Service Investor Service
----------------------------------------------------------------------------------------------------------
BRW Corporate Credit Rating BB+ BB+ Ba2
CBT Corporate Credit Rating BB+ BBB+ Baa3
The Company also has an ownership position in equity securities that were valued
at approximately $116 million as of March 31, 2001. The market value of this
portfolio decreased approximately $139 million in the quarter due to a decline
in the market value of the Company's investments in Corvis and other privately
held companies and the liquidation of PSINet and a portion of Applied Theory
shares held by the Company.
CASH FLOW
For the first three months of 2001, cash provided by operating activities was
$41 million, compared to $22 million in 2000. The increase in cash provided by
operating activities was primarily due to a lower net loss. An increase in
receivables and decreases in unearned revenues and deferred income taxes were
offset by non-cash expenses including depreciation, amortization and the
provision for losses on receivables.
26
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Capital expenditures for the quarter were approximately $198 million, 30% higher
than the $154 million spent in the first quarter for 2000. The increase is
attributable to continued construction of the Company's optical network and
additional equipment purchases by CBT. Capital expenditures to maintain and grow
the optical network and maintain the local Cincinnati networks are expected to
be approximately $700 million in 2001.
Approximately $15 million in preferred stock dividends were paid to shareowners
during the first quarter of 2001. This amount includes the "Minority interest
expense" caption in the Condensed Consolidated Statements of Income and
Comprehensive Income (Loss). In addition, the Company borrowed $91 million
during the quarter from the $2.1 billion credit facility discussed above. During
the first quarter of 2001, the Company also entered into a forward sale
agreement for 4 million shares of its investment in Corvis Corporation.
Approximately 2.6 million shares were borrowed and sold on the open market in
the first quarter, generating proceeds of $42.7 million. The prepaid forward
sale liability is recorded as note payable and included in short-term debt.
BALANCE SHEET
The following comparisons are relative to December 31, 2000.
The increase in property, plant and equipment, long-term debt and short-term
debt and the decrease in investments are discussed above. Accounts receivable
increased 10%, primarily as a result of revenue growth during the quarter and a
5% increase in days sales outstanding. The increase in the deferred income tax
asset is due to continuing operating losses and the decline of market value in
equity investments reflected in other comprehensive income.
REGULATORY MATTERS AND COMPETITIVE TRENDS
FEDERAL - In February 1996, Congress enacted the Telecommunications Act of 1996
("the 1996 Act"), the primary purpose of which was to introduce greater
competition into the market for telecommunications services. Since February
1996, the Federal Communications Commission ("FCC") has initiated numerous
rulemaking proceedings to adopt regulations pursuant to the 1996 Act. The 1996
Act and the FCC's rulemaking proceedings can be expected to impact CBT's
in-territory local exchange operations in the form of greater competition.
However, these statutes and regulations also create opportunities for the
Company to expand the scope of its operations, both geographically and in terms
of products and services offered.
OHIO - The TELRIC phase of CBT's alternative regulation case, which will
establish the rates CBT can charge to competitive local exchange carriers for
unbundled network elements, remains pending. The Public Utilities Commission of
Ohio ("PUCO") issued its decision on the methodology CBT must use to calculate
these rates on November 4, 1999. On January 20, 2000, the PUCO denied all
parties' requests for rehearing except for one issue regarding nonrecurring
charges. On March 17, 2000, CBT filed an appeal to the Ohio Supreme Court with
respect to several issues. The appeal has been fully briefed and was argued on
January 30, 2001, but no decision has been released at this time. Nevertheless,
CBT has submitted new cost studies as required by the PUCO's orders and is
working with the PUCO staff to address their comments. After a period for review
of the studies and resolution of any disputes, CBT is to file a tariff
implementing the resulting rates.
27
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS OUTLOOK
Evolving technology, the preferences of consumers, the legislative and
regulatory initiatives of policy makers and the convergence of other industries
with the communications industry are causes for increasing competition. The
range of communications services, the equipment available to provide and access
such services and the number of competitors offering such services continue to
increase. These initiatives and developments could make it difficult for the
Company to maintain current revenue and operating margins.
Broadwing Communications faces significant competition from other fiber-based
telecommunications companies such as AT&T, Worldcom, Sprint, Level 3
Communications, Qwest Communications International, Global Crossing and Williams
Communications. Broadwing IT Consulting, a subsidiary of Broadwing
Communications, competes with Intranet hardware vendors, system integrators,
value added resellers and other information technology consulting businesses. In
order to achieve competitive advantage, the Company intends to develop new
products and services or blend products and services from other subsidiaries
into the operations of Broadwing Communications as deemed necessary by the
Company.
Cincinnati Bell Telephone's current and potential competitors include wireless
services providers, interexchange carriers, competitive local exchange carriers
and others. To date, CBT has signed various interconnection agreements with
competitors and approximately 1% of net access lines have been transferred since
the advent of competition in CBT's service area.
The Company's other subsidiaries face intense competition in their markets,
principally from larger companies. These subsidiaries primarily seek to
differentiate themselves by leveraging the strength and recognition of the
Company's brand equity, by providing customers with superior service, and by
focusing on niche markets and opportunities to develop and market customized
packages of services.
Cincinnati Bell Wireless is one of six active wireless service providers in the
Cincinnati and Dayton, Ohio metropolitan market areas. Cincinnati Bell
Directory's competitors are directory services companies, newspapers and other
media advertising service providers in the Cincinnati metropolitan market area.
CBD now competes with "Yellow Book" following the sale of Donnelley's Cincinnati
operations to Yellow Book. This competition may affect CBD's ability to grow or
maintain profits and revenues.
Cincinnati Bell Any Distance has captured substantial market share in the
Greater Cincinnati area since the introduction of its Any Distance service
offering in January 2000, but still faces intense competition from larger long
distance providers and other resellers. As a matter of necessity, margins on
long distance minutes continue to fall as providers attempt to hold on to their
subscriber base. Furthermore, additional advertising is necessary in order to
capture and retain market share. The web hosting operations of ZoomTown.com had
a successful launch in 2000, but competes with nationally known web hosting
providers such as Exodus Communications, Inc. and Digex, Incorporated.
The Company believes that it will continue to grow as a result of its reputation
for quality service and the introduction of innovative products. The Company has
successfully blended its provisioning and marketing expertise with Broadwing
Communications' next-generation optical network in order to introduce advanced
calling and data transport services throughout the United States. The Company
intends to retain market share
28
Form 10-Q Part I Broadwing Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
with respect to its current service offerings and continue to pursue rapid
growth in broadband data transport and wireless communications services. The
Company also intends to continue to leverage its investment in its local
communications and its regional wireless networks and national partnership with
AT&T Wireless Services to provide new and incremental product and service
offerings to customers in the Greater Cincinnati and Dayton, Ohio markets.
BUSINESS DEVELOPMENT
To enhance shareowner value, the Company continues to review opportunities for
acquisitions, divestitures, equity investments and strategic partnerships.
CONTINGENCIES
In the normal course of business, the Company is subject to various
regulatory proceedings, lawsuits, claims and other matters. Such matters are
subject to many uncertainties and outcomes are not predictable with assurance.
In the course of closing the Company's merger with IXC, the Company became
aware of IXC's possible non-compliance with certain requirements under state
and federal environmental laws. Since the Company is committed to compliance
with environmental laws, management decided to undertake a voluntary
environmental compliance audit of the former IXC facilities and operations
and, by letter dated November 9, 1999, disclosed potential non-compliance at
the former IXC facilities to the U.S. Environmental Protection Agency ("EPA")
under the Agency's Self-Policing Policy. The Company made similar voluntary
disclosures to various state authorities. The EPA determined that IXC appears
to have satisfied the "prompt disclosure" requirement of the Self-Policing
Policy for the Company to complete its environmental audit of all former IXC
facilities and report any violations to the Agency. The Company has filed its
preliminary environmental audit report with the EPA and is currently working
with the EPA and several state environmental protection agencies to bring the
Company into compliance with all applicable regulations, and to develop
internal procedures to ensure future compliance.
The Company believes that the resolution of such matters for amounts in
excess of those reflected in the consolidated financial statements would not
likely have a materially adverse effect on the Company's financial condition.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes. To manage its
exposure to interest rate changes, the Company uses a combination of variable
rate short-term and fixed rate long-term financial instruments. The Company may,
from time to time, employ a small number of financial instruments to manage its
exposure to fluctuations in interest rates. The Company does not hold or issue
derivative financial instruments for trading purposes or enter into interest
rate transactions for speculative purposes. Management is reviewing steps
necessary to mitigate this exposure.
Interest Rate Risk Management - The Company's objective in managing its exposure
to interest rate changes is to limit the impact of interest rate changes on
earnings and cash flows and to lower its overall borrowing costs. The Company
has entered into a series of interest rate swap agreements on notional amounts
totaling $240 million at March 31, 2001. A detailed discussion of the Company's
interest rate swaps can be found in Note 4 of the Notes to Condensed
Consolidated Financial Statements.
29
Form 10-Q Part II Broadwing Inc.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in Note 8 of the notes to the
condensed consolidated financial statements on page 15 of this quarterly report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company is restricted as to the payment of certain dividends as defined in
the Credit Agreement that is filed as Exhibit (10) (i) (1) to the December 31,
2000 Report on form 10-K. (original agreement filed as Exhibit 10.1 to Form 8-K,
date at report November 12, 1999, file No. 1-8519).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the first
quarter of 2001.
The Company's annual meeting of shareholders was conducted on April 30, 2001. At
this meeting, shareholders voted on:
i. Election of three directors for three-year terms expiring in 2004,
The results of such votes were as follows:
i. Phillip R. Cox was elected as a director with 173,954,536 common shares
voting for election and 4,096,089 shares voting against election. William
A. Friedlander was elected as a director with 174,011,075 common shares
voting for election and 4,039,550 shares voting against election. John M.
Zrno was elected as a director with 173,813,723 common shares voting for
election and 4,236,902 shares voting against election.
ITEM 5. OTHER INFORMATION
None.
30
Form 10-Q Part I Broadwing Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following are filed as Exhibits to Part I of this Form 10-Q:
EXHIBIT NUMBER
(10)(iii)(A)(12) Employment Agreement effective January 1, 2000 between the Company and
Jeffrey C. Smith.
(10)(iii)(A)(13) Employment Agreement effective January 1, 1999 between the Company and
John F. Cassidy.
(b) Reports on Form 8-K.
(i) Form 8-K, dated February 20, 2001, reporting that the Company
adopted a reorganization plan regarding the activities of its
Cincinnati based subsidiaries, including Cincinnati Bell
Telephone Company, Cincinnati Bell Wireless Company,
Cincinnati Bell Any Distance Inc. and Cincinnati Bell
Directory Inc. The Company also reported that Jeffrey C.
Smith, Chief Legal and Administrative Officer, would assume
the duties of General Counsel and Corporate Secretary,
replacing the retiring Thomas E. Taylor.
(ii) Form 8-K, dated March 9, 2001, reporting that the Board of
Directors of Broadwing Inc. approved amendments to the insider
trading policy pursuant to Rule 10b5-1 of the Securities and
Exchange Act of 1934.
31
Form 10-Q Part I Broadwing Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Broadwing Inc.
Date: May 14, 2001 /s/ Kevin W. Mooney
-------------- ----------------------------------
Kevin W. Mooney
Chief Financial Officer
32