<PAGE>
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 SEPTEMBER 30, 2000
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 0-20803
BROADWING COMMUNICATIONS INC.
Incorporated under the laws of the State of Delaware
1122 Capital of Texas Highway South, Austin, Texas 78746-6426
I.R.S. Employer Identification Number 74-2644120
Telephone - Area Code 512 328-1112
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 .
--- ---
All outstanding shares of the Registrant's common stock are owned by Broadwing
Inc.
The number of shares of Preferred Stock outstanding was 395,210 on October 31,
2000.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DESCRIPTION PAGE
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income and Comprehensive Income
Three Months and Nine Months Ended September 30, 2000 and 1999 3
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
DESCRIPTION PAGE
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
</TABLE>
<PAGE>
Form 10-Q Part I Broadwing Communications Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Millions of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Company Predecessor Company Predecessor
------- ----------- ------- -----------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues............................................... $ 264.0 $ 170.1 $ 718.1 $ 489.4
Costs and Expenses
Cost of providing services and products sold......... 158.5 106.4 425.5 319.5
Selling, general and administrative.................. 78.4 66.3 241.6 179.1
Depreciation ........................................ 50.4 42.8 142.8 107.8
Amortization......................................... 27.8 7.8 82.1 18.7
Restructuring charges................................ -- 6.7 .1 19.9
Other infrequent costs............................... -- 1.1 -- 13.9
--------- ------- ---------- --------
Total Costs and Expenses............................. 315.1 231.2 892.1 658.9
--------- ------- ---------- --------
Operating Loss......................................... (51.1) (61.1) (174.0) (169.5)
Other (Income) Expense, net............................ -- (1.0) (.5) 4.0
Minority Interest Expense (Income)..................... .1 -- (.2) .5
Equity Losses in Unconsolidated Entities............... 3.5 3.0 9.5 19.1
Interest Expense....................................... 18.6 10.5 49.4 30.6
--------- -------- ---------- -------
Net Loss Before Income Taxes........................... (73.3) (73.6) (232.2) (223.7)
Income Tax Provision (Benefit)......................... (20.6) (4.5) (71.1) 1.8
---------- ------- ----------- ------
Net Loss............................................... (52.7) (69.1) (161.1) (225.5)
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gain (loss) on investments................ (190.3) (51.7) (254.8) 89.4
---------- ------- ----------- ------
Comprehensive Income (Loss)............................ $(243.0) $(120.8) $(415.9) $(136.1)
========= ======== ========== ========
</TABLE>
See Notes to Financial Statements.
3
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Form 10-Q Part I Broadwing Communications Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
(Unaudited)
-----------
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents..................................................... $ -- $ 56.2
Receivables, less allowances of $24.8 and $36.0............................... 143.8 77.1
Deferred income tax benefits.................................................. 16.7 16.8
Prepaid expenses and other current assets..................................... 9.7 10.2
------------ ------------
Total current assets.................................................. 170.2 160.3
Property, plant and equipment, net.............................................. 1,811.5 1,726.4
Goodwill and other intangibles, net............................................. 2,570.5 2,561.3
Investments in other entities................................................... 197.0 634.2
Investments in unconsolidated subsidiaries...................................... 70.5 61.0
Deferred charges and other assets............................................... 3.5 4.0
------------ ------------
Total Assets.......................................................... $ 4,823.2 $ 5,147.2
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREOWNERS' EQUITY
Current Liabilities
Short-term debt............................................................... $ 6.1 $ 5.9
Accounts payable.............................................................. 146.9 143.3
Intercompany payable to Parent Company........................................ 1,004.4 442.9
Current portion of unearned revenue and customer deposits..................... 61.6 53.6
Accrued expenses and other current liabilities................................ 22.9 137.6
------------ ------------
Total current liabilities............................................. 1,241.9 783.3
Long-term debt, less current portion............................................ 184.5 597.4
Unearned revenue, less current portion.......................................... 613.5 633.5
Deferred income taxes........................................................... 64.5 178.4
Other long-term liabilities..................................................... 74.6 72.8
------------ ------------
Total liabilities..................................................... 2,179.0 2,265.4
------------ ------------
12 1/2% Junior Exchangeable Preferred Stock; $.01 par value; authorized -
3,000,000 shares of all classes of preferred stock; 395,210 shares issued and
outstanding with an aggregate liquidation preference of $395.2 at
September 30, 2000 and December 31, 1999 ..................................... 410.5 418.2
Commitments and Contingencies
Shareowners' Equity
Common shares, $.01 par value, 1,000,000 shares authorized;
500,000 shares issued and outstanding...................................... -- --
Additional paid-in capital.................................................... 2,610.6 2,424.6
Accumulated deficit........................................................... (206.6) (45.5)
Accumulated other comprehensive income ....................................... (170.3) 84.5
------------- ------------
Total shareowners' equity............................................. 2,233.7 2,463.6
------------ ------------
Total Liabilities, Redeemable Preferred Stock and Shareowners' Equity........... $ 4,823.2 $ 5,147.2
============ ============
</TABLE>
See Notes to Financial Statements.
4
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Form 10-Q Part I Broadwing Communications Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
Company Predecessor
------- -----------
Nine Months
Ended September 30,
-------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss........................................................................ $ (161.1) $ (225.5)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation ................................................................. 142.8 107.8
Amortization.................................................................. 82.1 18.7
Provision for doubtful accounts and service credits........................... 37.0 70.0
Current and deferred income taxes............................................. (71.1) --
Equity in net loss of unconsolidated subsidiaries............................. 9.5 19.1
Other, net.................................................................... (12.3) 6.1
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable........................................................... (97.3) (37.4)
Notes receivable from customers and indefeasable right-to-use sales........... 1.5 93.5
Other current assets.......................................................... (1.1) 4.6
Deferred charges and other non-current assets................................. (3.4) (5.9)
Accounts payable.............................................................. 20.2 62.3
Current portion of unearned revenue and customer deposits..................... (12.0) 21.2
Accrued expenses and other current liabilities................................ 70.9 --
Other non-current liabilities................................................. 3.5 5.7
---------- ---------
Net cash provided by operating activities................................... 9.2 140.2
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................................... (336.2) (449.7)
Investments in unconsolidated subsidiaries.................................... (.5) (6.2)
Proceeds from collection of notes receivable.................................. - .8
Acquisitions, net of cash acquired............................................ - (73.3)
Proceeds from sale of property and equipment.................................. 2.2 (.3)
Proceeds from sale of ownership interest in joint venture..................... 8.2 -
---------- ---------
Net cash used in investing activities....................................... (326.3) (528.7)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan from Parent Company........................................ 715.5 -
Proceeds from issuance of debt................................................ - 288.9
Principal payments on long-term debt and capital lease obligations............ (417.7) (15.8)
Payment of preferred dividends................................................ (37.1) (8.5)
Issuance of common shares..................................................... - 6.7
Cash received from merged entity.............................................. .2 -
---------- ---------
Net cash provided by financing activities................................... 260.9 271.3
---------- ---------
Net decrease in cash and cash equivalents....................................... (56.2) (117.2)
Cash and cash equivalents at beginning of period................................ 56.2 264.8
---------- ---------
Cash and cash equivalents at end of period...................................... $ - $ 147.6
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes (net of refunds)................................................. $ -- $ 1.4
========== =========
Interest (net of amounts capitalized)......................................... $ 10.9 $ 5.9
========== =========
Non-cash Investing and Financing Activities:....................................
Amortization of preferred stock............................................... $ 1.5 $ -
</TABLE>
See Notes to Financial Statements.
5
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Form 10-Q Part I Broadwing Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Broadwing
Communications Inc. and its subsidiaries (formerly known as IXC
Communications, Inc., now referred to as "Broadwing Communications" or "the
Company"). The Company utilizes its advanced fiber-optic network consisting
of more than 18,000 route miles to provide broadband transport, data
transport, Internet services, data collocation, switched long distance,
network integration/consulting and other services. The Company also provides
network capacity and fibers in the form of indefeasable right-to-use ("IRU")
agreements.
Broadband transport services are comprised of the lease of dedicated circuits
that customers use to transmit communications traffic. These services are
sold on a circuit lease and IRU basis. Switched services represent the
transmission of long-distance switched traffic to retail business customers
and resellers. Data and Internet services include providing ATM/frame relay,
web hosting and data collocation services. Other revenues are comprised of
network integration and consulting services and the sale of the related
equipment, network construction services, revenues earned for trials of
vendor-supplied equipment and, in 1999, revenues from the Company's now
completed Vyvx project.
The Company became a wholly owned subsidiary of Broadwing Inc. ("the Parent
Company") on November 9, 1999, pursuant to the merger with Broadwing Inc. ("the
Merger"). On January 1, 2000, the Parent Company contributed the capital stock
of its network integration and consulting business, Broadwing IT Consulting ("IT
Consulting"), to the Company. Additionally, the Company also entered into an
agreement with Cincinnati Bell Long Distance ("CBLD") to service the customers
of CBLD outside of the Cincinnati, Ohio area. The contribution of the IT
Consulting stock resulted in approximately $11 million in assets and $12 million
in liabilities (at historical cost) being contributed to the Company in January
2000, representing net liabilities of approximately $1 million. During the
current quarter, the Company recognized $29 million in revenues and expenses
related to IT Consulting. The Company also recognized approximately $15 million
in revenues and $8 million in expenses related to the CBLD agreement. For the
first nine months of 2000, the Company recognized $53 million in revenues and
$56 million in expenses related to IT Consulting and $45 million in revenues and
$40 million in expense related to the CBLD agreement.
The financial statements for periods ended before November 9, 1999 were prepared
using the Company's historical basis of accounting and are designated as
"Predecessor". The comparability of operating results for the Predecessor
periods and periods subsequent to the Merger are affected by the purchase
accounting adjustments discussed in Note 2 and the contribution of IT Consulting
and the agreement with CBLD discussed above.
These consolidated financial statements 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
shown. All adjustments are of a normal and recurring nature except for those
outlined in Notes 2 and 5. 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, 1999 condensed consolidated balance sheet was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. It is suggested that these financial statements
be read in conjunction with financial statements and notes thereto included in
the Company's 1999 Annual Report on Form 10-K.
2. MERGER WITH BROADWING INC.
On November 9, 1999, the Company became a wholly owned subsidiary of Broadwing
Inc. ("the Parent Company") following the completion of its merger ("the
Merger") with a subsidiary of the Parent Company. The Company was renamed
Broadwing Communications Inc. following the completion of the Merger.
The aggregate purchase price of $2.2 billion consisted of (all numbers
approximate): $0.3 billion in cash for the purchase of five million shares of
Company common stock from Trustees of the General Electric Pension Trust; the
issuance of 69 million shares of the Parent Company's common stock (to
stockholders of the Company) valued at $1.6 billion; 155,000 shares of 6 3/4%
convertible preferred stock issued by the Parent Company on the Company's
6
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behalf and valued at $0.1 billion; and the issuance of 13 million options and
warrants to purchase Parent Company common stock valued at $0.2 billion.
The cost of the Merger has been allocated to the assets acquired and liabilities
assumed according to their estimated fair values at the acquisition date and is
subject to adjustment as the assumptions relating to the asset and liability
valuations are finalized. In addition, the allocation may be impacted by changes
in pre-acquisition contingencies identified during the allocation period by the
Company relating to certain environmental, litigation, and other matters. As a
result, amounts allocated to goodwill increased by approximately $51 million
during the first nine months of 2000. The amount allocated to goodwill
represents the excess of price paid over the fair value of assets realized and
liabilities assumed in the Merger. These amounts are being amortized to expense
over a 30-year period. This analysis will be finalized in the fourth quarter of
2000.
Included in the allocation of the cost to acquire the Company in the fourth
quarter of 1999 were restructuring costs associated with initiatives to
integrate operations of the Company with its Parent Company. The restructuring
costs recorded in 1999 included the costs of involuntary employee separation
benefits related to 263 employees of the Company. As of September 30, 2000, 244
of the employee separations had been completed for a total cash expenditure of
$1.8 million. The restructuring plans also included costs associated with the
closure of a number of technical and customer support facilities, the
decommissioning of certain switching equipment, and the termination of contracts
with vendors. The Company expects that most of these restructuring actions will
be complete by December 31, 2000, and will result in cash outlays of $7.5
million in 2000.
The following table illustrates activity in this reserve since December 31,
1999:
<TABLE>
<CAPTION>
Balance at Balance at
December 31, 1999 Expenditures September 30, 2000
----------------- ------------ ------------------
<S> <C> <C> <C>
FOURTH QUARTER RESTRUCTURING:
Employee separations........ $ 2.0 $ (1.8) $ 0.2
Facility closure costs...... 2.1 (1.9) 0.2
Relocation.................. 0.2 -- 0.2
Other exit costs............ 3.2 (0.1) 3.1
------ ------- ------
Total....................... $ 7.5 $ (3.8) $ 3.7
====== ======= ======
</TABLE>
Restructuring charges of $0.1 million during the nine months ended September 30,
2000 consisted of additional employee severance.
3. INVESTMENTS IN OTHER ENTITIES
PSINET, INC.
The Company's investment in PSINet, Inc. ("PSINet") consists of 20.5 million
shares of PSINet common stock. This investment had a fair market value of
approximately $197 million and $632 million as of September 30, 2000 and
December 31, 1999, respectively ($139 million and $498 million, respectively,
net of amounts collateralized on the forward sale of PSINet common stock). At
the balance sheet date, the difference between the market value and the
Company's basis in the PSINet investment is reported as an unrealized gain or
loss on marketable securities, net of tax and any additional liabilities
resulting from the stock price of PSINet related to the forward sale transaction
further described in Note 6. The PSINet investment is classified as
"available-for-sale" as defined by Statement of Financial Accounting Standard
No. 115. Accordingly, changes in the unrealized gain or loss amount are included
in "Other Comprehensive Income" on the accompanying Condensed Consolidated
Statement of Income and Comprehensive Income.
The net market value of the Company's investment has further decreased since
September 30, 2000, when this investment was valued at $139 million (net of
amounts collateralized). As of November 8, 2000, the net amount of this
investment is approximately $31 million (see "Management's Discussion and
Analysis" for a further discussion of the Company's business relationship
with PSINet).
7
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Form 10-Q Part I Broadwing Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DCI TELECOMMUNICATIONS
In November 1998, the Company entered into an agreement to acquire 4.25 million
shares of common stock of DCI Telecommunications, Inc. ("DCI") as consideration
for payment of amounts due from one of the Company's customers that was also a
vendor of DCI. The agreement provided that DCI was to issue additional shares of
common stock to the Company if the market value of the shares the Company owned
did not reach $17.7 million by June 1, 1999. As of June 1, 1999, and subsequent
thereto, the market value of the shares the Company owned was significantly less
than the $17.7 million guaranteed in the November 1998 agreement. The Company
has continues to pursue the remedies to which it is entitled under the November
1998 agreement, but has written this investment down to zero due to a decline in
the financial condition of DCI that is considered permanent.
4. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
MARCA-TEL
As of September 30, 2000, the Company holds an indirect investment equal to
30.0% of Marca-Tel S.A. de C.V. (Marca-Tel) pursuant to its 65.4% ownership of
Progress International, LLC ("Progress"). Progress owns 45.8% of Marca-Tel.,
with the remaining 54.2% ownership being held by three parties; Formento Radio
Beep, S.A. de C.V., Siemens S.A. de C.V and a Mexican individual. This
investment was previously written down to zero and is still being carried on the
Company's books at that amount at September 30, 2000.
STORM TELECOMMUNICATIONS, LTD.
In October 1997, Storm Telecommunications, Ltd. ("Storm") was formed. Storm was
a joint venture with Telenor Global Services AS ("Telenor"), a subsidiary of the
Norwegian national telephone company, to provide telecommunication services to
carriers and resellers in Europe. The joint venture was owned 40% by Telenor,
40% by the Company and 20% by Clarion Resources Communications Corporation, a
U.S.-based telecommunications company in which Telenor owned a controlling
interest. In February 2000, the Company sold its investment in Storm, plus
amounts due it relating to the joint venture, for $14.4 million. The Company's
investment in Storm had been written down to zero prior to the Merger because
the Company did not expect to realize any amounts pertaining to this investment.
The subsequent recovery of this investment resulted in an $8.2 million
adjustment to the preliminary purchase price allocation during the first quarter
of 2000.
APPLIED THEORY, INC.
The Company holds a 23.5% interest in Applied Theory with a carrying value of
$71 million and $61 million on September 30, 2000 and December 31, 1999,
respectively. Applied Theory, Inc., a New York-based Internet service provider,
was formed in 1996 to provide high-quality Internet services for the New York
state research and education community. The Company recognized approximately $4
million in losses in the current quarter and $10 million in losses year-to-date
resulting from its equity method accounting for the Applied Theory investment.
This compares to approximately $1 million in losses recognized in the prior year
quarter and $4 million for the prior nine-month period.
5. RESTRUCTURING CHARGES
In the second quarter of 1999, the Company recorded a charge of approximately
$13 million to exit certain operations in the switched wholesale business. The
restructuring charge consisted of severance and various other costs associated
with workforce reduction, network decommissioning, and various terminations. The
workforce reduction of 94 people included employees contributing to the sales
function and employees contributing to the network operations. The Company
expects these restructuring activities to be completed by the end of the first
quarter of 2001. Due to the Merger, it was determined that the combined
companies would need the switches that had been marked for decommissioning in
the second quarter 1999 restructuring charge. Additionally, it was determined
that the total period contemplated for lease payments relating to an abandoned
office would not be required. Consequently, the second quarter 1999
restructuring charge was reduced during the third quarter of 1999 by $1.2
million related to decommissioning the switches and $.4 million related to a
reduction in the lease pay off requirement.
8
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Form 10-Q Part I Broadwing Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In the third quarter of 1999, the Company recorded a charge of approximately
$8.3 million relating to the restructuring of the organization and to exit
certain foreign operations. The plan was developed prior to the Merger, by the
previous Chief Executive Officer, after reviewing the Company's operations. The
workforce reduction of 15 employees included management, administrative and
foreign sales personnel. The employees were notified of this program during July
and August of 1999. Generally, all of the charges are expected to be paid in
2000.
Activity in the first nine months of 2000 related to the accrued restructuring
liabilities was as follows (in millions):
<TABLE>
<CAPTION>
Balance at Balance at
December 31, 1999 Expenditures September 30, 2000
----------------- ------------ ------------------
<S> <C> <C> <C>
SECOND QUARTER RESTRUCTURING:
Employee separations...................... $ 1.2 $ (.5) $ .7
Network decommissioning................... 2.3 (1.7) .6
Terminate contractual obligations and
exit facilities........................... 4.2 (1.8) 2.4
------- ------- ------
Total..................................... $ 7.7 $(4.0) $ 3.7
====== ======= ======
THIRD QUARTER RESTRUCTURING:
Employee separations...................... $ 2.9 $ (2.6) $ 0.3
Terminate contractual obligations and
exit facilities........................... .5 (.1) 0.4
------- ------- ------
Total..................................... $ 3.4 $ (2.7) $ 0.7
====== ======= ======
</TABLE>
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following at
September 30, 2000 and December 31, 1999 (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------------------------------
<S> <C> <C>
9% Senior Subordinated Notes............................ $ 46.0 $ 450.0
12 1/2% Senior Notes.................................... .8 .8
Capital lease obligations............................... 9.6 11.3
PSINet forward sale .................................... 126.4 133.9
Other debt.............................................. 7.8 7.3
----------- -------------
Total long-term debt and capital lease obligations $ 190.6 $ 603.3
Less current portion.................................... 6.1 5.9
----------- -------------
Long-term debt and capital lease obligations............ $ 184.5 $ 597.4
=========== =============
</TABLE>
9% SENIOR SUBORDINATED NOTES
In 1998, the Company issued $450 million of 9% senior subordinated notes due
2008 ("the 9% Notes"). In January 2000, $404 million of the 9% Notes were
redeemed through a tender offer as a result of the change of control terms of
the bond indenture triggered as a result of the Merger. As a result, the $4.4
million premium paid upon redemption, net of taxes, was recorded as a component
of the purchase price allocation during the first quarter of 2000.
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 the
Company to comply with various financial and other covenants and restricts the
Company from incurring certain additional indebtedness.
9
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Form 10-Q Part I Broadwing Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PSINET FORWARD SALE
The Company's investment in PSINet consists of 20.5 million common shares (after
adjusting for PSINet's two-for-one stock split in February 2000). In June and
July 1999, the Company received approximately $111.8 million representing
amounts from a financial institution in connection with two prepaid forward sale
contracts on a total of six million shares of the PSINet common stock. This
amount is classified as long-term debt and is collateralized by six million
shares of PSINet common stock owned by the Company. Each forward-sale obligation
for three million shares of PSINet stock may be settled at future dates for a
maximum amount of three million shares of PSINet stock, or at the Company's
option, the equivalent value in cash.
The $126.4 million PSINet forward sale liability at September 30, 2000 is
based on certain assumptions as to the value of PSINet common stock at the
settlement date. Given the decline in the value of PSINet common stock since
the beginning of the year, it is probable that this liability would be
settled for significantly less than $126.4 million if the value of PSINet
common stock does not rise to assumed levels prior to settlement.
12 1/2% SENIOR NOTES
The Company's 12 1/2% senior notes, which originally consisted of an
indebtedness of $285.0 million, were reduced to $0.8 million in a tender offer
in 1998.
OTHER DEBT
Pursuant to the Company's May 10, 1999 acquisition of Coastal Telecom Limited
Company, the Company assumed $10 million in notes payable. This amount was
adjusted to $7.8 million as part of the purchase price allocation for the
Coastal acquisition. This amount remains outstanding at September 30, 2000.
CAPITAL LEASES
The Company has acquired certain facilities and equipment under capital leases.
The gross amount of assets recorded under capital leases at September 30, 2000
and December 31, 1999 (capital leases and associated accumulated depreciation
was revalued at the Merger date) was $13.5 million and $11.8 million,
respectively. The related accumulated depreciation was $6.9 million and $1.2
million at September 30, 2000 and December 31, 1999, respectively.
7. COMMITMENTS
The Company has entered into a purchase commitment with Corvis Corporation
(Corvis), a Columbia, Maryland-based manufacturer of optical network
equipment. The agreement specifies that the Company will purchase $200
million in optical network equipment from Corvis over a two-year period
beginning in July 2000. As of September 30, 2000, the Company has placed $147
million in orders towards satisfying this purchase commitment.
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.
A total of twenty-six Equal Employment Opportunity Commission ("EEOC") charges
were filed beginning in September 1999 by Broadwing Telecommunications Inc.
employees located in the Houston office (formerly Coastal Telephone, acquired by
the Company in May 1999) alleging sexual harassment, race discrimination and
retaliation. After completing its internal investigation of the charges and
cooperating fully with the EEOC, the Company and the complainants participated
in a voluntary mediation proceeding conducted by the EEOC. Through the mediation
process, the Company was able to reach settlement with all twenty-six
complainants. The Company also entered into a Conciliation Agreement with the
EEOC.
In the course of closing the Merger, the Company became aware of its possible
non-compliance with certain requirements under state and federal environmental
laws. Because the Company is committed to compliance with environmental laws,
management decided to undertake a voluntary environmental compliance audit of
Company
10
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Form 10-Q Part I Broadwing Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
facilities and operations and, by letter dated November 9, 1999, disclosed
potential non-compliance at Company facilities to U.S. Environmental Protection
Agency ("EPA") under the Agency's Self-Policing Policy. The Company made similar
voluntary disclosures to various state authorities. By letter dated January 19,
2000, the EPA determined that the Company appears to have satisfied the "prompt
disclosure" requirement of the Self-Policing Policy, and established a deadline
of May 1, 2000 for the Company to complete its environmental audit of all
Company facilities and report any violations to the Agency. This deadline was
subsequently extended to June 21, 2000. The Company filed its preliminary
environmental audit report with EPA on June 21st and filed a final environmental
audit report with EPA on September 11, 2000. The Company continues to work 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 is currently working with
EPA and states to resolve any liabilities associated with the non-compliance.
The Company believes that the resolution of such matters for amounts in
excess of those estimated and reflected in the purchase price allocation
associated with the Merger would not likely have a materially adverse effect on
the Company's financial condition.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards requiring that a derivative instrument be recorded in the
balance sheet as either an asset or liability, measured at its fair value. SFAS
133 has been subsequently amended through the release of SFAS 137, which
provides for a deferral of the effective date of SFAS 133 to all fiscal years
beginning after June 15, 2000. As a result, implementation of SFAS 133 is not
mandatory for the Company until January 1, 2001. In June 2000, the FASB issued
SFAS No. 138, an amendment of SFAS 133. Management is currently assessing the
impact of SFAS 133 and related amendments on the Company's results of
operations, cash flows and financial position, although it does not hold or
issue derivative financial instruments for trading purposes or enter into
interest rate transactions for speculative purposes.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101, "Revenue
Recognition in Financial Statements". In SAB 101, the SEC Staff expressed its
views regarding the appropriate recognition of revenue with regard to a variety
of circumstances, some of which are of particular relevance to the Company. In
June 2000, the SEC issued SAB 101B which delayed the effective date of
application of SAB 101 until the fourth quarter of 2000. The Company is
currently evaluating SAB 101 to determine its impact on the financial statements
and does not expect the application of SAB 101 to have a material effect on its
operating income.
11
<PAGE>
Form 10-Q Part I Broadwing Communications Inc.
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, 1999. Readers are cautioned not to place undue reliance
on these forward-looking statements that speak only as of the date thereof.
DESCRIPTION OF BUSINESS
Broadwing Communications Inc. ("the Company") is a leading provider of
telecommunications services with a coast-to-coast fiber optic network containing
approximately 18,000 route miles at September 30, 2000. The Company utilizes
this advanced fiber-optic network to provide broadband transport (previously
referred to as "private line"), data transport, Internet services, switched long
distance, network integration and consulting and other services. The Company
also provides network capacity and fibers in the form of indefeasable
right-to-use ("IRU") agreements. Broadband transport services are comprised of
the lease of dedicated circuits that customers use to transmit traffic. These
services are sold on a circuit lease and IRU basis. Switched services represent
the transmission of long-distance switched traffic to retail business customers
and resellers. Data and Internet services include providing ATM/frame relay,
data collocation, web hosting and consulting services. Other is comprised of
network integration and consulting services and the sale of the related
equipment, network construction services, revenues earned from trials of
vendor-supplied equipment and, in 1999, revenues from the Company's now
completed Vyvx partnership.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. Results for interim periods may not be
indicative of the results for the full years.
On November 9, 1999, the Company became a wholly owned subsidiary of Broadwing
Inc. ("the Parent Company") following the completion of its merger ("the
Merger") with a subsidiary of the Parent Company. The Company was renamed
Broadwing Communications Inc. following the completion of the Merger. The Parent
Company accounted for the Merger according to the purchase method of accounting,
with the purchase price allocation being "pushed down" to the Company's
financial statements. The purchase price has been preliminarily allocated to the
assets and liabilities assumed according to their estimated fair values and are
subject to adjustment when additional information concerning asset and liability
valuations is finalized. Property, plant and equipment was recorded at fair
market value based on preliminary appraisal results, and useful lives were
assigned to the assets. The excess of cost over the fair value assigned to the
net assets acquired was recorded as goodwill and is being amortized using the
straight-line method over 30 years. Because the Merger did not take place until
November 9, 1999, comparisons of current quarter results with that of the prior
year may not yield meaningful results with respect to certain expenses that were
affected by the push-down accounting adjustments.
On January 1, 2000, the Parent Company contributed the capital stock of
Broadwing IT Consulting ("IT Consulting") to the Company. Also effective January
1, 2000, the Company entered into an agreement with Cincinnati Bell Long
Distance, Inc. ("CBLD") to service the customers of CBLD outside of the
Cincinnati area. Accordingly, the current year's results of operations include
those of IT Consulting and amounts related to the service agreement with CBLD.
The contribution of the IT Consulting stock resulted in approximately $11
million in assets and $12 million in liabilities (at historical cost) being
contributed to the Company in January 2000, representing net liabilities of
approximately $1 million. During the current quarter, the Company recognized $29
million in revenues and expenses related to IT Consulting. The Company also
recognized approximately $15 million in revenues and $8 million in expenses
related to the CBLD agreement. For the first nine months of 2000, the Company
recognized $53 million in revenues and $56 million in expenses related to IT
Consulting and $45 million in revenues and $40 million in expense related to the
CBLD agreement.
12
<PAGE>
Form 10-Q Part I Broadwing Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Results of operations are as follows:
<TABLE>
<CAPTION>
Company Predecessor Company Predecessor
------- ----------- ------- -----------
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
($ Millions) 2000 1999 Change % 2000 1999 Change %
------------ ---- ---- ------ --- ---- ---- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Broadband transport $ 100.5 $ 76.1 $ 24.4 32 $ 288.8 $ 220.5 $ 68.3 31
Switched services 101.2 77.5 23.7 31 301.7 230.2 71.5 31
Data and Internet 20.7 5.6 15.1 -- 42.3 16.1 26.2 163
Other 41.6 10.9 30.7 -- 85.3 22.6 62.7 --
--------- -------- ------- -------- --------- --------
Total 264.0 170.1 93.9 55 718.1 489.4 228.7 47
Costs and Expenses:
Cost of providing services
and products sold 158.5 106.4 52.1 49 425.5 319.4 106.1 33
Selling, general and
administrative 78.4 66.3 12.1 18 241.5 179.1 62.4 35
--------- -------- ------- -------- --------- --------
Total 236.9 172.7 64.2 37 667.0 498.5 168.5 34
Earnings Before Interest Taxes,
Depreciation and Amortization (EBITDA) 27.1 (2.6) 29.7 -- 51.1 (9.1) 60.2 --
Depreciation and amortization 78.2 50.6 27.6 54 224.9 126.5 98.4 78
Restructuring charges -- 6.7 (6.7) (100) .1 19.9 (19.8) (99)
Other infrequent costs -- 1.1 (1.1) (100) -- 13.9 (13.9) (100)
--------- -------- ------- -------- --------- --------
Operating loss (51.1) (61.1) 9.9 16 (174.0) (169.5) (4.6) 3
Other (Income) Expense, net -- (1.0) (1.0) (100) (.5) 4.0 (4.5) (113)
Minority Interest (Income) Expense .1 -- .1 -- (.2) .5 (.7) (140)
Equity Losses in Unconsolidated Entities 3.5 3.0 .5 17 9.5 19.0 (9.6) (50)
Interest Expense 18.6 10.5 8.1 77 49.4 30.7 18.8 61
--------- -------- ------- -------- --------- --------
Net Loss Before Income Taxes (73.3) (73.6) .3 -- (232.2) (223.7) (8.5) (4)
Income Tax Provision (Benefit) (20.6) (4.5) (16.1) -- (71.1) 1.8 (72.9) --
--------- -------- ------- -------- --------- --------
Net Loss $ (52.7) $ (69.1) $ 16.4 24 $(161.1) $ (225.5) $ 64.4 29
========= ======== ======= ======== ========= ========
Gross Profit Margin 40.0% 37.4% +3 pts 40.7% 34.7% +6 pts
EBITDA Margin 10.3% (1.5)% +12 pts 7.1% (1.9)% +9 pts
</TABLE>
Strong revenue growth continued in the current quarter and for the first nine
months of 2000 versus the comparable 1999 periods, with increases of 55% and 47%
in the respective periods being contributed by all service categories (including
approximately $10 million in revenues in the current quarter and $23 million
year-to-date in revenues from other subsidiaries of the Parent Company). The
steady growth of the Broadband Transport and Switched Services categories
provided more than half of the revenue increase in both periods and is being
supplemented by new revenue sources within the Data and Internet and Other
categories.
13
<PAGE>
Form 10-Q Part I Broadwing Communications Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Broadband transport revenues increased $24 million in the current quarter,
growing 32% to $101 million. The nine-month period showed similar improvement,
with 31% growth providing an additional $68 million in revenues. Growth in
broadband transport is being fueled by an increasing demand for high-bandwidth
transport from businesses, Internet service providers and "dot.coms". In
addition, IRU revenue was higher in the current year, reflecting the
amortization of up-front payments.
Switched services revenue increased 31% for the quarter and the nine-month
periods, increasing $24 million and $95 million, respectively, versus prior year
results. The nine-month period benefited from additional traffic associated with
the May 10, 1999 acquisition of Coastal Telcom Limited Company and other related
companies under common control ("Coastal") and additional revenues relating to
the CBLD service agreement. This was partially offset by the decrease in the
wholesale portion of switched services revenues resulting from the decision to
de-emphasize this business. The Company has improved its margins on switched
wholesale revenues in the current year, achieving a small positive margin for
the first nine months.
For the quarter, data and Internet revenues of $21 million more than tripled in
comparison to the $6 million recorded in the prior year period. On a
year-to-date basis, data and Internet revenues increased 163%, growing from $16
million in the prior year to more than $42 million for the first nine months of
2000. These revenues continue to grow on the strength of demand for
Internet-based, ATM/frame relay, web hosting and data collocation services. The
Company is fulfilling demand for these services through the construction of new
data centers. In addition to the six new data centers constructed during the
second quarter of 2000, the Company established an additional data center in the
current quarter. This brings the Company's total of fully operational data
centers to 10 nationwide.
Other revenues increased by more than $30 million versus the prior year quarter
and nearly $63 million year-to-date. Network integration, consulting and
hardware revenues provided growth of $12 million in the current quarter and $19
million year-to-date. During the current quarter, the Company earned $19 million
in additional revenues from network construction projects, increasing
year-to-date construction revenues to $40 million.
Costs of providing services and products sold primarily reflect access charges,
transmission lease payments to other carriers, costs incurred for construction
projects and employee and hardware costs in the data-consulting arena. In the
current quarter, costs of providing services and products sold amounted to $159
million, a 49% increase over the $106 million incurred during the third quarter
of 1999. For the nine-month period, the $426 million incurred represented a 33%
increase over the $319 million incurred during the same period in 1999. These
increases were driven primarily by revenue growth, but were held to a minimum
due to a decreased reliance on transmission and access charges from other
carriers as the Company continues to construct and groom its nationwide
fiber-optic network. Future costs of providing services and products sold
expense is expected to continue to grow as a function of revenue, but decline
somewhat as a percentage of revenue as more of the traffic is carried on the
Company's network.
The Company's gross profit margin continued to rise, with both current quarter
and year-to-date gross margin percentages of approximately 40%. This compares
favorably with the 37% recorded in the prior year quarter and 35% for the first
nine months of 1999.
Selling, general and administrative ("SG&A") expenses were higher in the current
quarter, with expenses of $78 million representing an 18% increase over the
prior year quarter. For the nine-month period, SG&A expenses of $242 million
were 35% higher than in the respective prior period. For the nine-month
period, SG&A expenses are higher due to the addition of more than 600 employees
resulting from the acquisition of Coastal and the expansion of the Company's
sales force. Additionally, SG&A expenses are higher in the nine-month period
due to the acquisition of a portion of the Parent Company's switched long
distance and IT Consulting businesses. Current year SG&A expenses also include
a considerable increase in advertising expense incurred to launch the new
"Broadwing" brand and introduce new products and services. The Company incurred
$2 million in advertising expense for the quarter and $25 million year-to-date;
$1 million and $21 million increases, respectively. The vast majority of this
increase occurred in the first quarter of this year,
14
<PAGE>
Form 10-Q Part I Broadwing Communications Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
when $17 million in non-recurring advertising expense was incurred to introduce
the new "Broadwing" brand to a national audience.
The Company reported EBITDA of $27 million in the current quarter, raising
year-to-date EBITDA to $51 million. This compares to EBITDA losses of $3 million
and $9 million in the respective prior periods. In the current quarter, EBITDA
margin of 10% represented improvement of twelve margin points versus the
negative 2% margin reported in the prior year quarter. Additionally, EBITDA
margin for the nine-month period improved to more than 7%, representing an
increase of more than nine margin points.
Depreciation and amortization of $78 million for the quarter and $225 million
year-to-date was approximately $28 million and $98 million higher, respectively,
than prior year results. This significant increase was the result of continued
construction of the fiber-optic network and higher asset balances resulting from
the revaluation of network assets and intangibles at the Merger date.
The operating loss of $51 million recorded in the current quarter represents a
16% improvement over that recorded during the same quarter in the prior year,
despite considerably higher depreciation and amortization expense incurred
during the current year. On a year-to-date basis, the operating loss of $174
million is approximately $5 million higher than in the first nine months of 1999
and includes the $98 million in additional depreciation and amortization
mentioned above.
Other income of approximately $1 million for the first nine months of 2000
represented a $13 million improvement over the prior year. The prior year's
results included a $13 million write down of the DCI investment, but this was
somewhat offset on a year-to-date basis by approximately $7 million in interest
income earned in the prior year. Interest income is not being earned in the
current year because excess cash is now transferred to the Parent Company.
Consequently, interest income is expected to be near zero in the future.
Equity losses in unconsolidated subsidiaries amounted to $4 million in the
current quarter versus the $3 million recorded in the prior year quarter. The
$10 million in losses recorded during the nine-month period represented a $9
million reduction versus the $19 million recorded in the prior year quarter.
This was the result of the Company's liquidation of two of the three investments
that contributed to losses recorded in the first nine months of 1999. Most
recently, the Company sold its interest in the Storm joint venture for $14
million, including approximately $6 million for a recovery of amounts receivable
from partners in the joint venture.
Interest expense, net of amounts capitalized and consisting primarily of amounts
paid to the Parent Company, increased 77% in the current quarter and 61%
year-to-date. Interest expense paid to the Parent Company and amounted to $16
million in the current quarter and $40 million year-to-date as additional
funding was required in order to expand the Company's fiber-optic network.
Income tax expense declined $16 million from a benefit of $5 million in the
third quarter of 1999 to a benefit of $21 million in the current quarter.
Similarly, year-to-date income tax expense declined $73 million from a provision
of $2 million in the prior year to a benefit of $71 million in the current year.
The prior year's tax benefits were substantially offset by a valuation allowance
required due to the uncertainty of the future utilization of such benefits. The
current year benefits will be partially utilized against the Parent Company's
current income in the post-Merger environment. Any remaining benefits will be
recognized and carried forward to future periods.
As a result of the above, the Company reported a net loss of $53 million in the
current quarter and $161 million for the nine-month period, 24% and 29% less
than in the respective prior year periods.
SEGMENT INFORMATION
In accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," the
Company began reporting its results by operating segment in 1998. Historically,
management segregated the operations of the Company into three operating
segments; private line (now referred to as "broadband transport"), switched long
distance and data/Internet. The operations of the Company now comprise a single
15
<PAGE>
Form 10-Q Part I Broadwing Communications Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
segment and are reported as such to the Chief Executive Officer of the Parent
Company, who functions in the role of chief operating decision maker for the
Company.
FINANCIAL CONDITION
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
Historically, the Company financed the expansion of its network through the
issuance of debt and equity securities, the sale of fiber-based and
capacity-based IRUs, incurring bank debt and borrowing against its ownership of
PSINet common stock. Since the Merger, the Company has relied on the credit
facility secured by the Parent Company in order to support its cash deficit.
Net cash provided by operations of $9 million during the first nine months of
this year represented a $131 million reduction versus the prior year period.
This difference was primarily attributable to $94 million in cash received in
the prior year relating to IRU sales.
Cash used in investing activities of $326 million was $202 million less than
the $529 million in the first nine months of 1999 due primarily to higher
capital expenditures and acquisitions (despite the purchase of $25 million in
optronics equipment from Corvis) in the prior year period. Lower capital
expenditures in the current year were primarily a function of timing, as the
Company is projecting capital expenditures of $600 million in 2000 and
substantial spending thereafter to continue expansion of the fiber-optic
network. The Company's remaining joint venture has not required funding since
the beginning of the current year versus the $6 million expended in the prior
year quarter. The Company's interest in its Storm joint venture was sold in
the first quarter of 2000 for $14 million, including approximately $6 million
for a recovery of amounts receivable and deposits from partners in the joint
venture. Significant further funding of joint ventures is not currently
anticipated.
Approximately $261 million of cash was provided by financing activities in the
first nine months of 2000, $10 million less than the $271 million provided
during the first nine months of 1999. Funding needed to offset the Company's
operating loss and the $404 million tender offer on the 9% Notes was provided by
the Parent Company. In the prior year, financing came primarily from the
issuance of $289 million in debt. Approximately $37 million in cash was used to
pay dividends on the Company's 12 1/2% Junior Exchangeable Preferred Stock ("12
1/2% Preferred"), whereas cash was not required to effect these dividend
payments in the prior year. In the prior year, payments on the 12 1/2% Preferred
were made through additional shares of the 12 1/2% Preferred. Current year
dividend payments on the 12 1/2% Preferred were partially offset by $9 million
in dividend payments in the prior year on the Company's 6 3/4% and 7 1/4%
preferred stock issues that were redeemed by the Parent Company in the Merger.
In the prior year, $7 million in cash was provided through the exercise of
options on the Company's common stock. The Company no longer issues common stock
since all of its outstanding common stock is now held by the Parent Company.
The Parent Company has established a $2.1 billion credit facility in order to
fund the combined company, a portion of which was used to effect the
aforementioned $404 million tender offer for the 9% Notes in January 2000. Costs
associated with that redemption were considered part of the acquisition
accounting and were not reported as an extraordinary charge.
The Company seeks to obtain sufficient funding for the following significant
cash requirements:
- Network expansion and other capital expenditures
- Lease payments
- Working capital
- Dividends on preferred stock, and
- Debt service
The Company is required to make payments under existing debt and capital lease
arrangements of approximately $4 million, $5 million and $127 million for the
remainder of 2000, 2001 and 2002, respectively, assuming that the Company
chooses to settle the $126 million PSINet forward sale obligation in cash in
2002. Given the decline in the value of
16
<PAGE>
Form 10-Q Part I Broadwing Communications Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PSINet common stock since the beginning of the year, it is probable that this
liability would be settled for significantly less than $126 million if the
value of PSINet common stock does not rise to assumed levels prior to
settlement.
The Company is also required to pay quarterly dividends on the 12 1/2% Preferred
at the rate of $12 million per quarter. Although the Company has the option of
paying dividends on the 12 1/2% Preferred with additional shares of this
preferred stock through February 15, 2001, its current intention is to continue
paying these dividends in cash.
The Company believes that the credit facility established by the Parent Company
is sufficient to provide for the Company's financing requirements in excess of
amounts generated from its operations.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Effective with the retirement of the Company's previous revolving credit
facility and with new debt being assumed by the Parent Company, the Company is
not currently subject to market risk associated with changes 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.
Virtually all of the Company's revenue is derived from domestic operations, so
risk related to foreign currency exchange rates is considered minimal.
17
<PAGE>
Form 10-Q Part II Broadwing Communications Inc.
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 10 of this quarterly report
and is incorporated by reference in this Item 1.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits identified in parenthesis below, on file with the Securities and
Exchange Commission are incorporated herein by reference as exhibits hereto:
(a) Exhibits.
The following are filed as Exhibit(s) to Part I of this Form 10-Q:
Exhibit
NUMBER
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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 COMMUNICATIONS INC.
NOVEMBER 13, 2000 By: /S/ KEVIN W. MOONEY
--------------------------
Kevin W. Mooney
Chief Financial Officer
19
