<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 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 October 31, 2000, 216,126,940 common shares were outstanding.
<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 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
<CAPTION>
PART II. OTHER INFORMATION
DESCRIPTION Page
----------- ----
<S> <C>
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 30
Signature 31
</TABLE>
<PAGE>
Form 10-Q Part I Broadwing Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (Millions of Dollars,
Except Per Common Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues...............................................
Broadband............................................ $264.0 $ 19.7 $ 718.1 $ 54.9
Local communications................................. 199.5 186.9 589.2 549.1
Wireless............................................. 49.1 25.7 128.6 61.7
Other communications................................. 37.3 26.9 103.0 82.1
Intersegment......................................... (18.6) (3.5) (46.4) (9.9)
------- ------- -------- ------
Total Revenues .................................... 531.3 255.7 1,492.5 737.9
Costs and Expenses.....................................
Cost of providing services and products sold......... 251.6 107.8 701.8 316.6
Selling, general and administrative.................. 142.3 57.5 438.6 171.4
Depreciation......................................... 88.6 32.4 252.2 94.4
Amortization......................................... 28.7 .9 84.9 3.7
Restructuring credits................................ --- --- (.2) ---
------- ------- -------- ------
Total Costs and Expenses........................... 511.2 198.6 1,477.3 586.1
------- ------- -------- ------
Operating Income....................................... 20.1 57.1 15.2 151.8
Other Income........................................... 24.6 .5 31.6 .5
Minority Interest Expense (Income)..................... 11.2 (1.7) 33.2 (5.8)
Equity Losses in Unconsolidated Entities............... 3.5 6.3 9.5 6.3
Interest Expense....................................... 43.1 13.9 119.7 31.9
------- ------- -------- ------
Income (Loss) from Continuing
Operations Before Income Taxes........................ (13.1) 39.1 (115.6) 119.9
Income Tax Provision (Benefit)......................... 10.3 14.0 (7.1) 43.3
------- ------- -------- ------
Income (Loss) from Continuing Operations............... (23.4) 25.1 (108.5) 76.6
Income from Discontinued Operations, Net of Taxes...... .1 .7 .4 2.2
------- ------- -------- ------
Net Income (Loss)...................................... (23.3) 25.8 (108.1) 78.8
Dividends and Accretion Applicable to
Preferred Stock...................................... 2.6 --- 5.5 ---
------- ------- -------- ------
Net Income (Loss) Applicable to Common
Shareholders......................................... (25.9) 25.8 (113.6) 78.8
------- ------- -------- ------
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gain (loss) on investments................ 87.7 --- (44.4) ---
------- ------- -------- ------
Comprehensive Income (Loss)............................ $61.8 $ 25.8 $(158.0) $ 78.8
======= ======= ======== ======
Earnings (Loss) Per Common Share
Basic
Income (Loss) from Continuing Operations............ $(.12) $ .18 $ (.54) $ .56
Income from Discontinued Operations, Net of Tax..... --- .01 --- .02
------- ------- -------- ------
Net Income (Loss)................................... $(.12) $ .19 $ (.54) $ .58
======= ======= ======== ======
Diluted
Income (Loss) from Continuing Operations........... $(.12) $ .18 $ (.54) $ .54
Income from Discontinued Operations, Net of Tax..... --- .01 --- .02
------- ------- -------- ------
Net Income (Loss)................................... $(.12) $ .19 $ (.54) $ .56
======= ======= ======== ======
Dividends Declared Per Common Share.................... $ --- $ --- $ --- $ .20
Average Common Shares Used for Earnings
Per Share Calculations
Basic............................................... 215.1 134.1 210.4 135.8
Diluted............................................. 215.1 137.7 210.4 139.7
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
Form 10-Q Part I Broadwing 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......................................................... $ 10.4 $ 80.8
Receivables, less allowances of $42.0 and $53.6................................... 282.2 224.5
Material and supplies............................................................. 20.4 25.7
Deferred income tax benefits...................................................... 32.7 35.7
Prepaid expenses and other current assets......................................... 46.4 36.3
---------- ----------
Total current assets...................................................... 392.1 403.0
Property, plant and equipment, net.................................................. 2,660.2 2,500.6
Goodwill and other intangibles, net................................................. 2,682.5 2,679.8
Investments in other entities....................................................... 823.0 843.3
Deferred charges and other assets................................................... 92.0 70.8
Net assets of discontinued operations............................................... .4 7.9
---------- ----------
Total Assets.............................................................. $ 6,650.2 $ 6,505.4
========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREOWNERS' EQUITY
Current Liabilities
Short-term debt................................................................... $ 11.2 $ 9.2
Accounts payable.................................................................. 223.6 228.9
Current portion of unearned revenue and customer deposits......................... 93.4 82.6
Accrued taxes..................................................................... 89.3 87.7
Other current liabilities......................................................... 173.9 156.5
---------- ----------
Total current liabilities................................................. 591.4 564.9
Long-term debt, less current portion................................................ 2,404.4 2,136.0
Unearned revenue, less current portion.............................................. 613.5 633.5
Deferred income taxes............................................................... 150.5 221.8
Other long-term liabilities......................................................... 141.0 153.8
---------- ----------
Total liabilities......................................................... $ 3,900.8 $ 3,710.0
---------- ----------
Minority interest................................................................... 424.0 434.0
7 1/4% Convertible Preferred Stock, redeemable, $.01 par value, 5,000,000
shares authorized, no shares outstanding at September 30, 2000, aggregate
liquidation preference of $105.8 and 1,058,380 shares
issued and outstanding at December 31, 1999....................................... --- 228.6
Commitments and Contingencies
Shareowners' Equity
6 3/4% Cumulative Convertible Preferred Stock, $.01 par value, 5,000,000
shares authorized, 155,250 shares issued and outstanding at September 30,
2000 and December 31, 1999...................................................... 129.4 129.4
Common shares, $.01 par value; 480,000,000 shares authorized;
224,209,446 and 208,678,058 shares issued at September 30, 2000
and December 31, 1999.......................................................... 2.2 2.1
Additional paid-in capital........................................................ 2,324.5 1,979.5
Accumulated deficit............................................................... (108.1) ---
Accumulated other comprehensive income ........................................... 122.5 166.9
Common stock in treasury, at cost: 7,805,800 shares at
September 30, 2000 and December 31, 1999........................................ (145.1) (145.1)
---------- ----------
Total shareowners' equity................................................. $ 2,325.4 $ 2,132.8
---------- ----------
Total Liabilities, Redeemable Preferred Stock and Shareowners' Equity............... $ 6,650.2 $ 6,505.4
========== ==========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Form 10-Q Part I Broadwing Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................................................ $ (108.1) $ 78.8
Less: Income from discontinued operations, net of tax............................................ .4 2.2
-------- --------
Net income (loss) from continuing operations..................................................... (108.5) 76.6
Adjustments to reconcile net income (loss) from continuing operations to net
cash provided by operating activities:
Depreciation.................................................................................. 252.2 94.4
Amortization.................................................................................. 84.9 3.7
Provision for loss on receivables............................................................. 53.0 11.5
Non-cash interest expense..................................................................... 25.8 ---
Realized gain from the sale of marketable securities.......................................... (31.9) ---
Other, net.................................................................................... 26.5 (2.8)
Changes in assets and liabilities:
Increase in receivables....................................................................... (110.7) (16.6)
Decrease (increase) in other current assets................................................... 17.1 (6.6)
Increase (decrease) increase in accounts payable.............................................. 19.2 7.5
Increase in other current liabilities......................................................... 79.8 ---
Decrease in unearned revenues................................................................. (9.2) .9
Increase in deferred income taxes and unamortized investment tax credits...................... 2.8 (1.4)
Increase in other assets and liabilities-net.................................................. (80.1) (19.7)
-------- --------
Net cash provided by operating activities of continuing operations.......................... 220.9 153.1
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................................................................... (523.9) (147.7)
Purchase of common stock of IXC Communications, Inc. prior to Merger.......................... -- (250.0)
Proceeds from sale of marketable securities and ownership interest in joint venture........... 25.9 (2.0)
Proceeds from sale of property and equipment.................................................. 2.2 ---
Acquisitions (including Merger costs)......................................................... -- (24.3)
Purchase of equity securities................................................................. (75.7) ---
Purchase of treasury shares................................................................... -- (134.3)
-------- --------
Net cash used in investing activities of continuing operations................................ (571.5) (558.3)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in short-term debt............................................................... 6.8 35.6
Borrowings of long-term debt.................................................................. 658.0 400.0
Repayment of long-term debt................................................................... (405.2) (.7)
Issuance of common shares..................................................................... 59.5 5.9
Minority interest dividends paid.............................................................. (37.1) ---
Cash dividends paid........................................................................... (9.7) (41.1)
-------- --------
Net cash provided by financing activities of continuing operations............................ 272.3 399.7
-------- --------
Net cash provided by (used in) discontinued operations........................................ 7.9 (1.2)
-------- --------
Net decrease in cash and cash equivalents........................................................ (70.4) (6.7)
Cash and cash equivalents at beginning of period................................................. 80.8 10.1
-------- --------
Cash and cash equivalents at end of period....................................................... $ 10.4 $ 3.4
======== ========
Cash paid for:
Interest (net of amount capitalized).......................................................... $ 84.7 $ 16.1
======== ========
Income taxes (net of refunds)................................................................. $ .5 $ 41.1
======== ========
Non-cash Investing and Financing Activities:
Amortization of preferred stock............................................................... $ 1.5 $ ---
======== ========
Redemption of 7 1/4% convertible preferred stock............................................... $ 228.6 $ ---
======== ========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION - The consolidated financial statements
include the accounts of Broadwing Inc. and its consolidated
subsidiaries ("the Company"). The Company is a diversified
telecommunications company with principal businesses in four industry
segments: Broadband, Local Communications, Wireless and Other
Communications.
The Broadband segment utilizes its advanced fiber-optic network
consisting of more than 18,000 route miles to provide broadband
transport, Internet services, data collocation, switched long distance,
network integration/consulting and other services. This segment also
provides network capacity and fibers in the form of indefeasable
right-to-use ("IRU") agreements. These services are offered nationally
through the Company's Broadwing Communications Inc. subsidiary.
The Local Communications segment provides local service, network
access, long distance, data and Internet services, ADSL transport, as
well as sales of communications equipment to customers in southwestern
Ohio, northern Kentucky and southeastern Indiana. Services are marketed
and delivered via the Company's Cincinnati Bell Telephone ("CBT")
subsidiary.
The Wireless segment includes the Company's Cincinnati Bell Wireless
("CBW") subsidiary, an 80%-owned venture with AT&T Wireless PCS, Inc.
("AT&T PCS"), which provides advanced digital personal communications
to customers in its Greater Cincinnati and Dayton, Ohio operating
areas. Services are provided over the Company's regional, and AT&T PCS'
national, networks.
The Other Communications segment comprises the operations of the
Company's Cincinnati Bell Directory ("CBD"), Cincinnati Bell Long
Distance (doing business as Cincinnati Bell Any Distance) and
ZoomTown.com subsidiaries, as well as its public payphone subsidiary.
Cincinnati Bell Directory publishes Yellow Page directories and sells
directory advertising and informational services to customers
primarily in the Greater Cincinnati service area. Cincinnati Bell Any
Distance ("CBAD") resells voice long distance service primarily to
residence and small and medium-sized business customers also in the
Greater Cincinnati area. ZoomTown.com provides web hosting and other
Internet-based products and services. The results of operations of
Cincinnati Bell Supply are no longer reflected in this segment pursuant
to the exit of this business in the second quarter of 2000.
The consolidated financial statements of Broadwing Inc. 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, 3, 4 and 7. 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
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) ACQUISITIONS -
IXC COMMUNICATIONS, INC.:
On November 9, 1999, a wholly owned subsidiary of the Company was
merged ("the Merger") with and into IXC Communications, Inc. ("IXC"),
with IXC surviving as a wholly owned subsidiary of the Company. After
completion of the Merger, IXC was renamed Broadwing Communications Inc.
Under the terms of the Merger, each share of IXC common stock was
exchanged for 2.0976 shares of the Company's common stock. 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 IXC common stock from General Electric Pension Trust; the
issuance of 69 million shares of the Company's common stock valued at
$1.6 billion, the issuance of 155,000 shares of 6 3/4% convertible
preferred stock valued at $0.1 billion; and the issuance of 13 million
options to purchase Broadwing common stock valued at $0.2 billion.
These options were issued coincident with the Merger to replace the
then outstanding and unexercised options exercisable for shares of IXC
common stock. The Merger was accounted for as a purchase and,
accordingly, the operating results of
6
<PAGE>
IXC (now Broadwing Communications) have been included in the Company's
consolidated financial statements since the Merger date of November 9,
1999.
The cost of the Merger has been preliminarily 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 were increased by
approximately $51 million during the nine-month period ending September
30, 2000. This analysis will be finalized in the fourth quarter 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.
The following summarized unaudited pro forma financial information
assumes the Merger occurred at the beginning of each year:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
MILLIONS OF DOLLARS (EXCEPT PER SHARE AMOUNTS)
Revenues................................................ $ 531.3 $ 425.8 $ 1,492.5 $ 1,227.3
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA).................. 137.4 87.8 352.1 240.8
Net Loss Applicable to Common Shareholders.............. $ (25.9) $ (72.7) $ (113.6) $ (257.3)
Loss per common share (basic and diluted) .............. $ (.12) $ (.36) $ (.54) $ (1.26)
</TABLE>
The unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the
results of operations which actually would have resulted had the Merger
occurred on January 1, 1999.
(3) DISCONTINUED OPERATIONS - On May 23, 2000, the Company sold the
majority of the operations of Cincinnati Bell Supply ("CBS") to CBS'
management for $11.3 million in cash and the assumption of
approximately $1 million in liabilities, recognizing a gain of $0.7
million net of tax. The Company has exited CBS' remaining operations.
Cincinnati Bell Supply primarily refurbished and resold
telecommunications equipment and customized fiber optic cable solutions
for customers in the secondary market.
The consolidated financial statements have been restated to reflect the
disposition of CBS as a discontinued operation. Accordingly, the
revenues, costs and expenses, assets and liabilities, and cash flows of
CBS have been reported as "Income from Discontinued Operations, Net of
Taxes," "Net Assets of Discontinued Operations," or "Net Cash Provided
by (Used in) Discontinued Operations" for all periods presented.
Summarized financial information for the discontinued operation is
as follows (millions of dollars):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenues............................................. --- 8.6 14.1 25.6
Income (loss) before income taxes...................... .1 1.1 (.8) 3.4
Income tax provision (benefit)......................... --- .4 (.3) 1.4
Gain on sale of discontinued operations, net of tax.... --- --- .7 ---
----- ----- ----- -----
Net income (loss)...................................... .1 .7 .4 2.0
===== ===== ===== =====
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
FINANCIAL POSITION:
Current Assets....................................... .5 9.7 .5 9.7
Total Assets......................................... .5 10.6 .5 10.6
Current Liabilities.................................. --- 1.1 --- 1.1
Total Liabilities.................................... .1 1.2 .1 1.2
Net Assets of Discontinued Operations................ .4 9.4 .4 9.4
</TABLE>
The effective tax rates for discontinued operations were 35% in all
periods. The Company had an immaterial amount of revenues from CBS in
each period presented resulting from the provision of telecommunications
and other services.
(4) RESTRUCTURING AND OTHER CHARGES
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 related 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 which primarily affect customer
support, infrastructure and long distance operations. As of
September 30, 2000, approximately 300, or 88%, 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, 1999:
<TABLE>
<CAPTION>
Balance Balance
Type of costs (in millions): December 31, 1999 Expenditures Adjustments September 30, 2000
---------------------------- ----------------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Employee separations $ 8.2 $ (5.9) $ .8 $ 3.1
Facility closure costs 4.4 (2.2) (1.0) 1.2
Relocation .2 --- --- .2
Other exit costs 4.4 (.5) --- 3.9
--------- --------- --------- ---------
Total $ 17.2 $ (8.6) $ (.2) $ 8.4
========= ========= ========= =========
</TABLE>
Restructuring credits were recorded during the second quarter of 2000 and
consisted of additional employee severance, offset by an adjustment
related to lease terminations.
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 $8.4 million at September 30, 2000
is adequate to complete the restructuring plan and that most of the
related actions will be completed by December 31, 2000.
8
<PAGE>
(5) DEBT - The Company's indebtedness consists of the following:
<TABLE>
<CAPTION>
Millions of dollars September 30, 2000 December 31, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term Debt:
Current maturities of long-term debt $ 11.2 $ 9.2
------------- ------------
Total short-term debt $ 11.2 $ 9.2
============= ============
Long-Term Debt:
Bank notes $ 1,413.0 $ 755.0
9.0% Senior subordinated notes 46.0 450.0
6 3/4% Convertible subordinated debentures 433.0 412.0
Various CBT notes 290.0 290.0
7 1/4% Senior secured notes 50.0 50.0
PSINet forward sale 126.4 133.9
Capital lease obligations 38.2 37.0
Other 7.8 8.1
------------- ------------
Total long-term debt $ 2,404.4 $ 2,136.0
============= ============
</TABLE>
Bank Notes
In November 1999, the Company obtained a $1.8 billion credit facility
from a group of 24 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 September 30, 2000, the Company had drawn
approximately $1.4 billion from the credit facility in order to
refinance its existing debt and debt assumed as part of the Merger, as
well as additional financing needs since the Merger. Accordingly, the
Company has approximately $700 million in additional borrowing capacity
under this facility as of the date of this report. This facility's
financial covenants require that the Company maintain certain debt to
EBITDA ratios, debt to capitalization ratios, fixed to floating rate
debt ratios and interest coverage ratios. This facility also contains
covenants which, among other things, may 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 to be charged on borrowings from this credit
facility can range from 100 to 225 basis points above the London
Interbank Offering Rate ("LIBOR"), depending on the Company's credit
rating. The current borrowing rate ranges from 175 to 200 basis points
above LIBOR. 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.
The Company is required by terms negotiated with its lenders to engage
in interest rate swaps once certain thresholds are exceeded with regard
to floating rate debt as a percentage of the Company's total debt. The
Company exceeded this threshold during the current quarter and,
accordingly, entered into a series of interest rate swap agreements on
notional amounts totaling $80 million. The purpose of these agreements
is to hedge against changes in market interest rates to be charged on
the Company's borrowings against the credit facility.
These swap agreements involve the exchange of fixed and variable rate
interest payments and do not represent an actual exchange of the
notional amounts between the parties. Amounts to be exchanged are
reflected in the Company's financial statements as an adjustment to
interest expense.
9
<PAGE>
9% Senior Subordinated Notes
In 1998, Broadwing Communications Inc. 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 may restrict the Company from incurring certain
additional indebtedness.
6 3/4% 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 September 30, 2000, the Company has recorded $33
million in cumulative interest expense ($21 million of which has been
incurred in the current year) and has adjusted the carrying amount of
the debt accordingly.
PSINet Forward Sale
The Company's total investment in PSINet consists of 20.5 million
common shares after adjusting for their February 2000 two-for-one stock
split. 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 a
total of six million shares of the PSINet common stock. This amount is
accounted for as notes payable 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 significant 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 (see "Management's Discussion and Analysis"
for a further discussion of the business impacts resulting from the
Company's business relationship with PSINet).
(6) MINORITY INTEREST - Minority interest consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
(Millions of dollars) 2000 1999
---- ----
<S> <C> <C>
MINORITY INTEREST CONSISTS OF:
12.5% Junior Exchangeable Preferred Stock $ 410.5 $ 418.2
Minority Interest in Cincinnati Bell
Wireless held by AT&T PCS 11.1 13.1
Other 2.4 2.7
-------- --------
Total $ 424.0 $ 434.0
======== ========
</TABLE>
10
<PAGE>
Broadwing Communications has outstanding 395,210 shares of its 12 1/2%
Junior Exchangeable Preferred Stock ("12 1/2% Preferreds") at a
carrying value of $412.9 million. The 12 1/2% Preferreds are
mandatorily redeemable on August 15, 2009 at a price equal to their
liquidation preference ($1,000 a share), plus accrued and unpaid
dividends. Prior to February 15, 2000, dividends on the 12 1/2%
Preferreds were being effected through additional shares of the 12
1/2% Preferreds. The Company converted to a cash pay option for
these dividends on February 15, 2000. Dividends on the 12 1/2%
Preferreds are classified as minority interest expense in the
Consolidated Statements of Income and Comprehensive Income. At the
Merger date, and as part of purchase accounting, the 12 1/2%
Preferreds were adjusted to a fair market value which exceeds the
redemption value. As such, the accretion of the difference between
the new carrying value and the mandatory redemption value is treated
as an offsetting reduction to minority interest expense.
AT&T PCS maintains a 19.9% interest in the Company's CBW subsidiary.
The balance is adjusted as a function of AT&T PCS' 19.9% share of the
adjusted net income (or loss) of CBW, with an offsetting amount being
reflected in the Condensed Consolidated Statements of Income and
Comprehensive Income under the caption "Minority Interest Expense
(Income)".
(7) REDEMPTION AND CONVERSION OF 7 1/4% JUNIOR CONVERTIBLE PREFERRED STOCK
In connection with the Merger, the Company issued shares of 7 1/4%
junior convertible preferred stock due 2007 in exchange for similar
preferred shares of IXC. Pursuant to the Company's March 21, 2000
redemption offer, approximately 1.1 million of these preferred shares
were converted into common shares at a rate of 8.945 common shares for
each preferred share, creating approximately 9.5 million additional
common shares at April 26, 2000. Approximately 100 shares were redeemed
for less than $10,000 in cash in order to complete the Company's
obligations related to this preferred stock.
(8) EARNINGS (LOSS) PER COMMON SHARE - Basic earnings (loss) per common
share ("EPS") is based upon the 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 net income
(loss):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Share and dollars in millions
(except per common share amounts)
Numerator:
Income (loss) from continuing operations................ $ (23.4) $ 25.1 $ (108.5) $ 76.6
Income from discontinued operations..................... .1 .7 .4 2.2
----------- ---------- --------- ---------
Net Income (loss)....................................... (23.3) 25.8 (108.1) 78.8
Dividends and accretion applicable to preferred stock... 2.6 --- 5.5 ---
----------- ---------- --------- ---------
Numerator for basic EPS and EPS assuming dilution -
income applicable to common shareowners............... $ (25.9) $ 25.8 $ (113.6) $ 78.8
=========== ========== ========= =========
Denominator:
Denominator for basic EPS - weighted average
common shares......................................... 215.1 134.1 210.4 135.8
Potential Dilution:
Stock options......................................... --- 2.8 --- 3.1
Stock based compensation arrangements................. --- .8 --- .8
----------- ---------- --------- ---------
Denominator for diluted EPS................................ 215.1 137.7 210.4 139.7
=========== ========== ========= =========
Basic EPS.................................................. $ (.12) $ .19 $ (.54) $ .58
=========== ========== ========= =========
EPS assuming dilution...................................... $ (.12) $ .19 $ (.54) $ .56
=========== ========== ========= =========
</TABLE>
11
<PAGE>
Weighted average common shares outstanding at September 30, 2000 reflects the
conversion of approximately 1.1 million shares of 7 1/4% convertible
preferred stock into approximately 9.5 million shares of the Company's common
stock on April 6, 2000. These 9.5 million shares were added to the
denominator of the EPS calculation during the second quarter of 2000.
Because the effect of their inclusion in the EPS calculation would be
anti-dilutive, approximately seven 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 47 million if all stock options were exercised and all
convertible securities were to convert.
(9) BUSINESS SEGMENT INFORMATION - Information regarding the re-definition
of the Company's operating segments can be found in the Company's Forms 10-Q
for the three months ended March 31, 2000 and June 30, 2000. A description of
the various operating segments can be found in Note 1 of the notes to
financial statements.
Certain corporate administrative expenses have been allocated to segments
based upon the nature of the expense. Assets are those assets that are used
in the operations of the respective segment. The Company's business segment
information is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
MILLIONS OF DOLLARS
-------------------
REVENUES
Broadband.............................................. $ 264.0 $ 19.7 $ 718.1 $ 54.9
Local Communications................................... 199.5 186.9 589.2 549.1
Wireless............................................... 49.1 25.7 128.6 61.7
Other Communications................................... 37.3 26.9 103.0 82.1
Intersegment........................................... (18.6) (3.5) (46.4) (9.9)
---------- ----------- ---------- -----------
Total.................................................. $ 531.3 $ 255.7 $ 1,492.5 $ 737.9
=========== =========== ========== ===========
INTERSEGMENT REVENUES
Broadband.............................................. $ 9.7 $ -- $ 23.5 $ --
Local Communications................................... 8.3 3.3 22.1 9.5
Wireless............................................... .5 -- .5 --
Other Communications................................... .1 .2 .3 .4
----------- ----------- ---------- -----------
Total.................................................. $ 18.6 $ 3.5 $ 46.4 $ 9.9
=========== =========== ========== ===========
EBITDA
Broadband.............................................. $ 27.1 $ 2.3 $ 51.1 $ 4.5
Local Communications................................... 101.1 82.2 288.3 234.0
Wireless............................................... 7.4 (3.8) 14.7 (15.0)
Other Communications................................... 2.4 6.3 (1.3) 20.0
Corporate and Eliminations............................. (.6) 3.4 (.7) 6.4
----------- ----------- ---------- -----------
Total.................................................. $ 137.4 $ 90.4 $ 352.1 $ 249.9
=========== =========== ========== ===========
ASSETS
Broadband.............................................. $ 4,823.2 $ 9.9 $ 4,823.2 $ 9.9
Local Communications................................... 803.2 778.4 803.2 778.4
Wireless............................................... 307.2 247.9 307.2 247.9
Other Communications................................... 94.1 58.5 94.1 58.5
Corporate and Eliminations............................. 622.5 324.8 622.5 324.8
----------- ----------- ---------- -----------
Total.................................................. $ 6,650.2 $ 1,419.5 $ 6,650.2 $ 1,419.5
=========== =========== ========== ===========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
CAPITAL ADDITIONS (excluding acquisitions)
Broadband.............................................. $ 159.3 $ .1 $ 360.7 $ .7
Local Communications................................... 38.4 30.9 128.1 99.8
Wireless............................................... 20.7 23.4 44.4 54.2
Other Communications................................... 4.5 1.1 11.3 7.5
Corporate and Eliminations............................. .7 --- 1.2 ---
----------- ----------- ---------- -----------
Total.................................................. $ 223.6 $ 55.5 $ 545.7 $ 162.2
=========== =========== ========== ===========
DEPRECIATION AND AMORTIZATION
Broadband.............................................. $ 78.1 $ 1.6 $ 224.9 $ 4.3
Local Communications................................... 31.2 27.9 90.8 82.6
Wireless............................................... 5.4 3.6 14.9 10.4
Other Communications................................... 2.6 .2 6.5 .8
----------- ----------- ---------- -----------
Total.................................................. $ 117.3 $ 33.3 $ 337.1 $ 98.1
=========== =========== ========== ===========
</TABLE>
(10) CINCINNATI BELL TELEPHONE COMPANY - The following summarized financial
information is for the Company's consolidated wholly owned subsidiary,
Cincinnati Bell Telephone Company:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
MILLIONS OF DOLLARS
Revenues............................................... $ 199.5 $ 186.9 $ 589.2 $ 549.1
Costs and Expenses..................................... 129.6 132.5 391.7 397.7
----------- ----------- ----------- -----------
Operating Income....................................... 69.9 54.4 197.5 151.4
----------- ----------- ----------- -----------
Net Income............................................. $ 41.9 $ 31.9 $ 117.4 $ 88.2
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
MILLIONS OF DOLLARS
Current Assets............................................ $ 131.1 $ 148.5
Telephone Plant-Net....................................... 632.9 606.9
Other Noncurrent Assets................................... 39.2 26.0
----------- -----------
Total Assets.............................................. $ 803.2 $ 781.4
=========== ===========
Current Liabilities....................................... $ 174.6 $ 161.6
Noncurrent Liabilities.................................... 48.5 45.1
Long-Term Debt............................................ 324.3 322.0
Shareowner's Equity....................................... 255.8 252.7
----------- -----------
Total Liabilities and Shareowner's Equity................. $ 803.2 $ 781.4
=========== ===========
</TABLE>
13
<PAGE>
(11) COMMITMENTS - The Company and its Broadwing Communications Inc.
subsidiary have 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 November 8,
2000, the Company has placed $147 million in orders towards satisfying
this purchase commitment.
(12) CONTINGENCIES - In the normal course of business, the Company is
subjected 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 IXC 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 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 IXC
facilities and operations and, by letter dated November 9, 1999,
disclosed potential non-compliance at the 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. By letter dated January 19, 2000, the EPA
determined that IXC 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
IXC facilities and report any violations to the Agency. This deadline
was subsequently extended to June 21, 2000. 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 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.
(13) RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, the Financial
Accounting Standards Board (FASB) 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 may need
to be recorded in the balance sheet as either an asset or liability,
measured at its fair value. SFAS 133 was subsequently amended through
the release of SFAS 137, which provided 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 and will adopt this new standard on
January 1, 2001. The Company 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 Company's financial statements but does
not expect the application of SAB 101 to have a material effect on its
operating income.
14
<PAGE>
Form 10-Q Part I Broadwing 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.
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.
On November 9, 1999, the Company completed its merger with IXC
Communications, Inc. ("the Merger") and formed the basis for its Broadband
segment, i.e. the Broadwing Communications Inc. subsidiary. The Merger was
accounted for as a purchase and, accordingly, the operating results of
Broadwing Communications have been included in the Company's financial
statements since the Merger date. Because of the Merger, comparisons of
three-month and nine-month results with the same periods in the prior year
may not yield meaningful results in the absence of additional pro forma
information. With regard to consolidated results and those of the Broadband
segment, the Company has provided pro forma information (assuming the Merger
occurred on January 1, 1999) to aid in the reader's understanding of the
financial results presented. In these instances, financial results and
management's discussion thereof are labeled as "pro forma". The following
table summarizes the Company's actual results for 2000 and pro forma results
for the quarterly and year-to-date periods ending September 30, 1999:
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------------------------------------------------
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 $ 264.0 $ 189.8 $ 74.2 39 $ 718.1 $ 544.3 $ 173.8 32
Local communications 199.5 186.9 12.6 7 589.2 549.1 40.1 7
Wireless 49.1 25.7 23.4 91 128.6 61.6 67.0 109
Other communications 37.3 26.9 10.4 39 103.0 82.1 20.9 25
Intersegment (18.6) (3.5) (15.1) --- (46.4) (9.8) (36.6) ---
------- ------- ------- -------- -------- ---------
Total 531.3 425.8 105.5 25 1,492.5 1,227.3 265.2 22
Costs and expenses:
Costs of providing services and products sold 251.6 214.2 37.4 17 701.8 636.0 65.8 10
Selling, general and administrative 142.3 123.8 18.5 15 438.6 350.5 88.1 25
------- ------- ------- -------- -------- ---------
Total 393.9 338.0 55.9 17 1,140.4 986.5 153.9 16
EBITDA 137.4 87.8 49.6 56 352.1 240.8 111.3 46
Depreciation 88.6 75.2 13.4 18 252.2 202.3 49.9 25
Amortization 28.7 28.1 .6 2 84.9 85.2 (.3) ---
Restructuring Charges (Credits) --- 6.7 (6.7) --- (.2) 19.8 (20.0) ---
Other Infrequent Costs --- 1.1 (1.1) --- --- 13.9 (13.9) ---
------- ------- ------- -------- -------- --------
Operating Income (Loss) 20.1 (23.3) 43.4 --- 15.2 (80.4) 95.6 ---
Other Income (Expense), Net 24.6 1.6 23.0 --- 31.6 (3.5) 35.1 ---
Equity Loss in Unconsolidated Entities 3.5 3.1 .4 13 9.5 19.1 (9.6) (50)
Minority Interest Expense 11.2 10.4 .8 8 33.2 30.0 3.2 10
Interest Expense 43.1 25.9 17.2 66 119.7 77.6 42.1 54
------- ------- ------- -------- -------- --------
Loss from Continuing Operations
Before Income Taxes (13.1) (61.1) 48.0 79 (115.6) (210.6) 95.0 45
Income Tax Provision (Benefit) 10.3 10.7 (.4) (4) (7.1) 44.1 (51.2) ---
------- ------- ------- -------- -------- --------
Loss from Continuing Operations (23.4) (71.8) 48.4 67 (108.5) (254.7) 146.2 57
Income from Discontinued Operations,
Net of Taxes .1 .7 (.6) (86) .4 2.2 (1.8) (82)
------- ------- ------- -------- -------- --------
Net Loss (23.3) (71.1) 47.8 67 (108.1) (252.5) 144.4 57
Dividends and Accretion Applicable
to Preferred Stock 2.6 1.6 1.0 63 5.5 4.8 (.7) (15)
------- ------- ------- -------- -------- --------
Net Loss Applicable to
Common Shareowners $(25.9) $(72.7) $ 46.8 64 $(113.6) $(257.3) $ 143.7 59
======= ======= ======= ======== ======== ========
Loss per Common Share
(Basic and Diluted) $ (.12) $ (.36) $ .24 67 $ (.54) $ (1.26) $ .73 57
======= ======= ======= ======== ======== ========
</TABLE>
15
<PAGE>
CONSOLIDATED OVERVIEW
The discussion and analysis of the Company's Consolidated and Broadband
segment operating results are presented on both a "pro forma" and "as
reported" basis. All other operating segments are presented on an as reported
basis since they were not affected by the Merger.
CONSOLIDATED OVERVIEW ON A PRO FORMA BASIS:
Strong revenue growth continued in the current quarter with all segments
contributing to growth. Revenues for the current quarter and year-to-date
periods were 25% and 22% higher than in the respective prior periods.
The Broadband segment, which encompasses the operations of the Company's
Broadwing Communications Inc. subsidiary, produced more than 65% of the
increase for both periods. Broadband revenues of $264 million for the
current quarter were 39% higher than in the prior year quarter, while
year-to-date revenues of $718 million were 32% higher than in the first
nine months of 1999. Both periods benefited from growth in broadband
transport, data and Internet, and network integration and consulting
revenues. The Local Communications segment continued to provide revenue
growth with increases of 7% in both periods. Revenues of $200 million for the
quarter and $589 million year-to-date reflected growth that came primarily
from data and broadband transport and value-added services. The Company's
Wireless segment continued its rapid growth, with current quarter revenues of
$49 million and year-to-date revenues of $129 million representing 91% and
109% growth, respectively. Wireless segment revenues continue to increase on
the basis of both postpaid and prepaid subscriber growth. Revenues for the
Other Communications segment increased 39% in the current quarter and 25%
year-to-date, growing to $37 million and $103 million, respectively. These
increases are primarily the result of new sources of revenue such as the
residential long distance offering at Cincinnati Bell Any Distance ("CBAD")
and web hosting services provided by the Company's ZoomTown.com subsidiary,
along with higher revenues from traditional sources such as directory
advertising.
Costs of providing services and products sold were $252 million for the
current quarter and $702 million year-to-date, increases of $37 million and
$66 million versus the respective prior year periods. Higher costs were
incurred in the current year for customer care, maintenance of the
fiber-optic network and material costs associated with network integration
and consulting revenues. Somewhat offsetting these increases were reduced
access and transmission fees that result from a reduced reliance on other
interexchange carriers as the Company expands its national network
infrastructure. Although costs of providing services increased approximately
17% for the current quarter and 10% year-to-date, this compares favorably
with revenue growth. As a result, the Company's gross profit margin increased
significantly, rising to approximately 53% in both periods; three points and
five points higher, than the prior year quarter and year-to-date periods,
respectively.
Selling, general and administrative ("SG&A") expenses of $142 million in the
current quarter and $439 million year-to-date increased $19 million and $88
million over the respective prior year periods. These increases of 15% and
25%, respectively, were primarily due to spending on the Company's
advertising campaigns, an increased sales force to support both new and
existing products and services, and sales and marketing costs associated with
the rapid growth of the Company's wireless subscriber base.
In the current quarter, EBITDA of $137 million represented a 56% improvement
over the prior year quarter. On a year-to-date basis EBITDA of $352 million
increased 46%, or $111 million, over the same period in the prior year.
Current quarter and year-to-date EBITDA margin expanded to 26% and 24% for
the quarter and nine-month periods, respectively, compared to 21% and 20%
margins for the same periods in the prior year. Improvements in EBITDA were
contributed by the Broadband, Local Communications and Wireless segments but
these were somewhat offset by the declining EBITDA of the Other
Communications segment. Other Communications' lower EBITDA was largely
attributable to start-up costs (primarily advertising expenditures)
associated with the introduction of the Any Distance offer and the start-up
expenses associated with web hosting services.
16
<PAGE>
Depreciation and amortization expenses of $117 million in the current quarter
represented a $14 million increase over the prior year quarter, with
year-to-date totals increasing $50 million to $337 million. With regard to
depreciation expense, current quarter and year-to-date increases of 18% and 25%,
respectively, were incurred primarily by the Broadband segment and reflects the
continued buildout of its national network infrastructure. Higher depreciation
expenses were also incurred by the Local Communications and Wireless segments as
both continued construction of their regional network infrastructures.
Operating income of $20 million in the current quarter represented a $43
million improvement over the $23 million operating loss recorded in the prior
year quarter. The operating income of $15 million reported in the first nine
months of 2000 was $96 million better than the $80 million operating loss
reported in the prior year period, with improvements being provided by the
Broadband, Wireless and Local Communications segments.
Other income (expense) consisted of a gain of $25 million in the current
quarter and $32 million year-to-date on the sale of approximately 400,000
shares of the common stock of an investment that the Company classifies as an
"available for sale" security under SFAS 115.
The Company had losses of $4 million for the current quarter and $10 million
year-to-date relating to an equity investment accounted for under the equity
method, significantly better than the $19 million equity loss recorded during
the first nine months of 1999.
Minority interest expense consists of dividends and accretion on the 12 1/2%
preferred stock of Broadwing Communications Inc. offset by AT&T PCS' 19.9%
minority interest in the net loss of the Company's wireless business.
Minority interest expense of $11 million represented a small increase in
comparison to the prior year quarter, with year-to-date totals increasing by
$3 million to $33 million due to lower net losses by the CBW subsidiary in
the current year.
Interest expense increased $17 million for the quarter and $42 million
year-to-date due to higher average debt levels necessary to fund expansion of
the fiber-optic network and higher interest rates in the current year (see
further discussion of indebtedness under "Financial Condition" and in the
Notes to Financial Statements).
Income tax expense of $10 million in the current quarter was slightly lower
than in the prior year period, and $51 million lower year-to-date as a
function of lower pre-tax income, somewhat offset by the effect of certain
non-deductible expenses such as goodwill amortization and minority interest
dividends. The income tax provision for 1999 periods reflects a net expense
due to the non-recognition of tax benefits in the pre-Merger environment.
Income from discontinued operations, comprising the operations of the
Company's former Cincinnati Bell Supply ("CBS") subsidiary, contributed an
additional $.1 million in income (net of tax) in the current quarter and $.4
million year-to-date. Comparable amounts in the prior year periods were
approximately $1 million for the quarter and $2 million year-to-date.
The Company reported a net loss of $23 million during the third quarter and
$108 million for the first nine months, representing a $48 million
improvement over the prior year quarter and $144 million over the first nine
months of 1999.
17
<PAGE>
CONSOLIDATED OVERVIEW ON AN AS REPORTED BASIS:
A tabular presentation of the financial results referred to in this
discussion can be found in the Condensed Consolidated Statements of Income
and Comprehensive Income on page 3 of this Report on Form 10-Q.
Revenues of $531 million in the current quarter and $1,493 million
year-to-date were $276 million and $755 million higher than in the respective
prior periods, owing largely to the Merger and growth of the Company's
wireless business. Costs and expenses (less depreciation and amortization) of
$394 million for the quarter and $1,140 million for the first nine months
were $229 million and $652 million higher than in the same periods in 1999.
Over 90% of the increase in costs and expenses, or approximately $200 million
in each of the first three quarters, was attributable to the operations of
the recently acquired Broadband segment. Although the Wireless and Other
Communications segments experienced higher expenses as a function of higher
revenues (year-to-date increases of $37 million and $42 million,
respectively), the Local Communications segment was successful in reducing
expenses despite a $40 million increase in year-to-date revenues. Further
discussion of these results can be found in the discussion of pro forma
results.
For the current quarter, EBITDA improved $47 million to $137 million; an
increase of 52%. On a year-to-date basis, EBITDA increased $102 million to
$352 million, representing improvement of 41%. Significant EBITDA
improvements by the Local Communications and Wireless segments and the
addition of the Broadband segment in the current year was somewhat offset by
the declining EBITDA of the Other Communications segment. Also experiencing a
significant decline was EBITDA margin, which decreased to 26% in the current
quarter and 24% in the nine-month period due to higher maintenance to support
the fiber-optic network and expenses incurred to introduce the Company's new
brand name, nationwide presence and products and services. The Company is
experiencing an improvement in EBITDA as it begins to better leverage its
network infrastructure and back-office systems.
Income from discontinued operations, comprising the operations of the
Company's former CBS subsidiary, contributed an additional $.1 million in
income (net of tax) in the current quarter and $.4 million year-to-date.
Comparable amounts in the prior year periods were approximately $1 million in
the current quarter and $2 million year-to-date.
The Company reported a net loss of $23 million during the second quarter and
$108 million year-to-date, a $49 million and $187 million decline versus the
prior year, respectively. The net losses applicable to common shareowners
were $26 million in the second quarter, or a $.12 loss per common share and
$114 million in the first nine months, or $.54 per common share. In the prior
year quarter, net income applicable to common shareowners was $26 million,
resulting in basic earnings per common share of $.19. The net income
applicable to common shareowners was $79 million during the first nine months
of 1999, representing basic earnings per common share of $.58 and diluted
earnings per common share of $.56.
BROADBAND
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
($ 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 93.7 7.5 8 301.7 276.3 25.4 9
Data and Internet 20.7 5.6 15.1 --- 42.3 16.2 26.1 161
Other 41.6 14.4 27.2 189 85.3 31.3 54.0 173
--------- -------- ------- -------- --------- --------
Total 264.0 189.8 74.2 39 718.1 544.3 173.8 32
Costs and expenses:
Cost of providing services
and products sold 158.5 117.4 41.1 35 425.5 351.4 74.1 21
Selling, general and administrative 78.4 72.6 5.8 8 241.5 197.5 44.0 22
--------- -------- ------- -------- --------- --------
Total 236.9 190.1 46.8 25 667.0 548.9 118.1 22
EBITDA 27.1 (0.3) 27.4 --- 51.1 (4.6) 55.7 ---
EBITDA margin 10.3% --- +10 pts --- 7.1% (0.9%) +8 pts ---
</TABLE>
18
<PAGE>
BROADBAND ON A PRO FORMA BASIS:
The Broadband segment utilizes its advanced fiber-optic network consisting of
more than 18,000 route miles to provide broadband transport, Internet
services, switched long distance, network integration/consulting and other
services. This segment also provides network capacity and fibers in the form
of indefeasable right-to-use ("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
that customers use to transmit traffic. These services are sold on a circuit
lease and indefeasible right-to-use basis. Switched services represent the
transmission of long-distance switched traffic to retail business customers
and resellers. Data/Internet services include providing ATM/frame relay, data
collocation, web hosting and the sale of customer premise equipment. Other is
comprised of network integration/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.
Revenues increased $74 million in the current quarter and $174 million
year-to-date, growing 39% and 32% in comparison to the respective prior
periods. A significant portion of these increases came from growth in
broadband transport revenues, which contributed $24 million of the increase
over the prior year quarter and $68 million on a year-to-date basis.
Broadband transport revenues increased 32% over the prior year quarter and
31% year-to-date due to increasing demand for high-bandwidth transport from
businesses, Internet service providers and "dot-coms", along with higher IRU
revenues.
Switched services revenue increased $8 million in the current quarter and $25
million year-to-date, with both periods benefiting from additional traffic
associated with the May 10, 1999 acquisition of Coastal Telcom Limited
Company and other related companies under common control ("Coastal"). This
was partially offset by the decrease in the wholesale portion of switched
services revenues as a result of the decision to de-emphasize this business.
The Company has improved it margins on switched wholesale revenues in the
current year, achieving a small positive margin for the first nine months.
Data and Internet revenues more than doubled in both periods, contributing an
additional $15 million and $26 million versus the prior year periods. Data
and Internet revenues continue to grow on the strength of demand for
Internet-based, ATM/frame relay, data collocation and web hosting 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 ten nationwide.
Other revenues increased by more than $27 million versus the prior year
quarter and $54 million year-to-date. Network integration/consulting and
hardware revenues increased by $19 million in the current quarter and $37
million year-to-date. The Company has earned approximately $19 million in the
current quarter and $40 million year-to-date resulting from network
construction projects performed on behalf of customers.
Costs of providing services and products sold primarily reflects access
charges paid to LECs, transmission lease payments to other carriers, costs
incurred for construction services 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 35% increase over the prior
year quarter. For the nine-month period, the $426 million incurred
represented a 21% increase over 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 expand and groom its own nationwide fiber-optic
network. Future costs of providing services and products sold 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 gross profit margin continued to rise, with both current quarter
and year-to-date gross margin percentages at 40% or higher. This compares
favorably with the 38% recorded in the prior year quarter and 35% for the
first nine months of 1999.
19
<PAGE>
Selling, general and administrative expenses were higher in the current
quarter, with expenses of $78 million representing a $6 million, or 8%,
increase over the prior year quarter. For the nine-month period, SG&A
expenses of $242 million were $44 million, or 22%, 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 and the retail 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 segment
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, when
$17 million in non-recurring advertising expense was incurred to introduce
the new "Broadwing" brand to a national audience.
In the current quarter, EBITDA increased to $27 million from the $0.3 million
in negative EBITDA recorded during the third quarter of 1999. Similarly,
EBITDA of $51 million for the nine-month period was $56 million higher than
that reported in the first nine months of 1999. Significant improvements in
EBITDA margin were also experienced, as current quarter and year-to-date
EBITDA margins increased ten and eight margin points, respectively, in
comparison to the negative EBITDA margins recorded in the prior year periods.
<TABLE>
<CAPTION>
AS REPORTED
-------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
($ Millions) 2000 1999 Change 2000 1999 Change
------------ ---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Broadband transport $ 100.5 $ -- $ 100.5 $ 288.8 $ --- $ 288.8
Switched services 101.2 16.4 84.8 301.7 46.7 255.0
Data and Internet 20.7 -- 20.7 42.3 .1 42.2
Other 41.6 3.3 38.3 85.3 8.1 77.2
--------- -------- ------- -------- --------- --------
Total 264.0 19.7 244.3 718.1 54.9 663.2
Costs and expenses:
Cost of providing services
and products sold 158.5 11.1 147.4 425.5 31.7 393.8
Selling, general and administrative 78.4 6.3 72.1 241.5 18.5 223.0
--------- -------- ------- -------- --------- --------
Total 236.9 17.4 219.5 667.0 50.2 616.8
EBITDA 27.1 2.3 24.8 51.1 4.7 46.4
EBITDA margin 10.3% 11.7% -1 pt 7.1% 8.6% -2 pts
</TABLE>
BROADBAND ON AN AS REPORTED BASIS:
Revenues of $264 million in the current quarter were $244 million higher than
in the prior year quarter while year-to-date revenues of $718 million were
$663 million higher than that recorded in the prior year. All categories were
higher in the current year due to the Merger, with additional growth coming
from network integration and consulting services provided by the IT
Consulting subsidiary. These network integration and consulting revenues were
$19 million higher in the current quarter and $37 million year-to-date versus
the prior year periods.
Cost of providing services and products sold increased $147 million during
the current quarter and $394 million year-to-date due to the Merger and
growth in the IT Consulting business. Selling, general and administrative
expenses increased for the same reasons along with higher advertising
expenses, resulting in quarterly and year-to-date increases of $72 million
and $223 million, respectively.
In the current quarter, EBITDA of $27 million was $25 million higher than
during the same quarter last year. Similarly, year-to-date EBITDA of $51
million was $46 million higher than during the first six months of 1999.
20
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 Change % 2000 1999 Change %
---- ---- ------ - ---- ---- ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOCAL COMMUNICATIONS
($ Millions)
Revenues
Local service.......................... $ 114.7 $ 108.4 $ 6.3 6 $ 338.1 $317.9 $ 20.2 6
Network access......................... 50.9 46.2 4.7 10 148.5 138.3 10.2 7
Other services......................... 33.9 32.3 1.6 5 102.6 92.9 9.7 10
------- ------- ------ -------- ------ ------
Total.................................. 199.5 186.9 12.6 7 589.2 549.1 40.1 7
Costs and Expenses:
Cost of providing services and
products sold.......................... 64.7 70.6 (5.9) (8) 195.6 209.9 (14.3) (7)
Selling, general and administrative ... 33.7 34.1 (.4) (1) 105.3 105.2 .1 ---
------- ------- ------ -------- ------ ------
Total.................................. 98.4 104.7 (6.3) (6) 300.9 315.1 (14.2) (5)
EBITDA.................................... $ 101.1 $ 82.2 $ 18.9 23 $ 288.3 $234.0 $ 54.3 23
EBITDA margin............................. 50.7% 44.0% +7 pts 48.9% 42.6% +6 pts
Access lines (In thousands)............... 1,050 1,056 (6) --- 1,050 1,056 (6) ---
Voice grade equivalents (In thousands).... 668 477 191 40 668 477 191 40
</TABLE>
The Local Communications segment provides local service, network access, long
distance, data and Internet services, ADSL transport, sales and installation
of communications equipment and other ancillary telecommunications services
through its Cincinnati Bell Telephone ("CBT") subsidiary.
The local service category provided consistent revenue growth and accounted
for the majority of the increase for the segment, growing 6% for the quarter
and year-to-date ($6 million and $20 million, respectively). Nearly 9,000 new
subscribers were added for the Company's Complete Connections-Registered
Trademark- calling service bundle during the third quarter, bringing total
residential subscribership and penetration rates to 165,000 and 23%,
respectively. Over 3,000 of the 18,000 new subscribers chose CBT's latest
product bundling offer, Complete Connections Universal-Registered
Trademark-(introduced May 1, 2000), which allows the CBT customer to combine
high-speed data transport, local service, custom calling features, Internet
access, wireless and long distance services on one customer bill. Similar
success has been achieved with regard to the Company's ZoomTown-SM- ADSL
product with subscribership nearing 35,000 as a result of the 6,000
subscribers added this quarter. The growth of the ZoomTown-SM- service resulted
in $2 million in added revenues in comparison to the prior year quarter and
$3 million year-to-date. The Local Communications segment is now able to
provision ADSL service across 76% of its regional network infrastructure and
continues to add to this capability.
Network access revenues of $51 million for the quarter and $149 million
year-to-date represented 10% and 7% increases over the respective prior year
periods. The sale of high-speed data services provided 83% of revenue growth
for the segment, with digital services increasing 40% and optical services
growing 57%. High-speed products produced an additional $5 million in
revenues versus the prior year quarter, and $13 million year-to-date. The
Company also realized approximately $3 million in additional revenues due to
the recovery of mandated telecommunications costs. In spite of a 3% increase
in access minutes of use, current year switched access revenues were
approximately $6 million lower due to decreased per-minute rates as part of
the optional incentive rate regulation instituted at the Federal level in
July 1999.
Other services revenue grew 5% in the current quarter and 10% year-to-date,
increasing to $34 million and $103 million, respectively. The Company's
competitive pricing structure for the high-speed Internet access (ZoomTown-SM-)
and Internet service provider (FUSE-Registered Trademark-) bundle resulted in
increased subscribership for FUSE-Registered Trademark-, which added 8,000
new subscribers in the quarter and nearly 25,000 subscribers since the third
quarter of last year. As a result, FUSE-Registered Trademark- revenues were
nearly $1 million and $3 million higher than in the prior year quarter and
year-to-date, respectively. Other increases in the category are attributable
to higher agency fees received from interexchange carriers and sales of
long-distance services, rent and facilities collocation revenue.
21
<PAGE>
Costs of providing services and products sold of $65 million for the quarter
and $196 million year-to-date were $6 million and $14 million less than in
the prior year periods, respectively. This expense reduction was primarily
the result of lower employee costs and operating taxes. Consequently, gross
profit margin also continues to improve, increasing to approximately 67% in
the current year versus the 62% gross profit margin recorded in the prior
year periods.
Selling, general and administrative expenses in the quarter and during the
nine-month period were equivalent to prior year periods as higher advertising
and customer care expenses associated with new calling service bundles and
the Company's ZoomTown-SM- ADSL service were more than offset by lower Year
2000 programming costs.
As a result of the above, EBITDA grew to $101 million in the current quarter
and $288 million year-to-date, providing EBITDA margin increases of seven
points for the quarter and six points year-to-date. Current quarter results
represent the ninth consecutive quarter of EBITDA margin improvement for the
Local Communications segment. Cincinnati Bell Telephone continues to improve
its EBITDA, profitability and margins by leveraging the investment in its
telecommunications network to offer new products and services without
significant incremental costs. Furthermore, CBT is able to offer a wide
variety of telecommunications services at attractive prices and with the
added convenience of one customer bill. Also, CBT's access line losses to
competitive carriers have been minimal.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
WIRELESS 2000 1999 Change % 2000 1999 Change %
-------- ---- ---- ------ - ---- ---- ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ Millions)
Revenues
Service................................ $ 45.6 $ 22.9 $ 22.7 99 $ 120.6 $ 54.1 $ 66.5 123
Equipment.............................. 3.5 2.8 .7 25 8.0 7.6 .4 5
------- --------- -------- -------- ------- ------
Total..................................... 49.1 25.7 23.4 91 128.6 61.7 66.9 108
Costs and Expenses:
Cost of providing services and
products sold.......................... 22.2 15.1 7.1 47 59.0 41.1 17.9 44
Selling, general and administrative ... 19.5 14.4 5.1 35 54.7 35.6 19.1 54
------- --------- -------- -------- ------- ------
Total.................................. 41.7 29.5 12.2 41 113.7 76.7 37.0 48
EBITDA.................................... $ 7.4 $ (3.8) $ 11.2 -- $ 14.9 $(15.0) $ 29.9 ---
EBITDA margin............................. 15.1% (14.8%) +30 pts 11.6% (24.3%) +36 pts
Number of subscribers (in thousands)...... 278.6 112.5 166.1 148
Customer churn (monthly), postpaid
(quarterly average)...................... 1.36% 1.51% -- 10
Average revenue per unit, postpaid
customers (ARPU)........................ $69 $78 $(9) (12)
</TABLE>
The Wireless segment comprises the operations of Cincinnati Bell Wireless LLC
("CBW"), an 80%-owned venture with AT&T Wireless PCS, Inc. ("AT&T PCS"),
which provides advanced digital personal communications services and sales of
related communications equipment to customers in its Greater Cincinnati and
Dayton, Ohio operating areas. Services are provided over the Company's
regional, and AT&T PCS' national, wireless networks.
22
<PAGE>
Wireless segment revenues increased approximately $23 million in the current
quarter, continuing a trend that has resulted in year-to-date segment
revenues increasing $67 million versus the prior year period. In each of the
first three quarters of this year, revenues have nearly doubled in comparison
to the prior year period. In the current quarter, revenues of $49 million
represented a 91% increase over the prior year period with year-to-date
revenues increasing 108% to $129 million. Service revenues are providing the
growth for the segment, doubling from $23 million in the prior year quarter
to $46 million in the current quarter. On a year-to-date basis, service
revenues increased 123%, or $67 million, to $121 million on the basis of
increased subscribership, relatively high average revenue per unit ("ARPU")
and low customer churn. Remaining revenues resulted from the sale of handsets
and associated accessories.
Approximately 40,000 subscribers were added during the quarter, with growth
coming equally from both the postpaid and prepaid categories. Total
subscribership now stands at approximately 279,000, a 148% increase versus
the prior year quarter. ARPU from postpaid subscribers decreased 12% to $69,
primarily as a result of pricing pressure due to increasing competition.
Average monthly customer churn in the current quarter remained low and was
among the best in the industry at 1.36% per month for postpaid subscribers.
Additionally, subscribership to the i-wireless prepaid product grew from
approximately 47,000 subscribers at the end of the prior quarter to more than
66,000 at the end of the current quarter. This is significant because
i-wirelessSM represents an efficient use of the Company's wireless network
due to its use of off-peak minutes. Also, the cost per gross addition
("CPGA") for i-wireless subscribers is approximately half that of postpaid
subscribers.
Cost of providing services and products sold consists largely of incollect
expense (whereby CBW incurs costs associated with its subscribers using their
handset while in the territory of another wireless service provider), network
operations costs, interconnection expenses and cost of equipment sales. These
costs were 46% of revenue in the first nine months of 2000, considerably
better than the 67% incurred during the same period in the prior year. In
total, costs of providing services and products sold increased 47% in the
current quarter to $22 million due primarily to increased subscribership and
associated interconnection charges, incollect expense and operating taxes.
Gross profit and gross profit margin also continues its rapid improvement.
Gross profit of $27 million in the current quarter and $70 million
year-to-date represents gross profit margins of approximately 55%,
considerably better than the gross profit margins in the prior year period.
Selling, general and administrative expenses include the cost of customer
acquisition, consisting primarily of the subsidy of customer handsets,
advertising, distribution and promotional expenses. These costs increased
more than 35%, or $5 million for the quarter and 54%, or $35 million
year-to-date in support of significant growth in subscribership. The CPGA for
postpaid customers was $351 in the current quarter; a slight increase versus
the $339 recorded in the second quarter of 2000 but a significant decrease in
comparison to the $383 recorded in the prior year quarter. Selling, general
and administrative costs also dropped significantly as a percentage of total
revenue, decreasing from 58% of revenues for the first nine months of 1999 to
43% in the current year.
Significant EBITDA improvements have been achieved as the Company begins to
leverage its network investment and benefit from an embedded customer base
and low customer churn. For the quarter, EBITDA of $7 million represented an
$11 million improvement over the prior year quarter. Similarly, year-to-date
EBITDA of $15 million was $30 million higher than in the prior year period.
Also increasing was EBITDA margin, expanding to 15% for the current quarter
and 12% year-to-date, improvements of more than 30 points over the negative
EBITDA margins reported in the prior year periods.
23
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
OTHER COMMUNICATIONS
2000 1999 CHANGE % 2000 1999 CHANGE %
---- ---- ------ - ---- ---- ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ Millions)
Revenues.................................. $ 37.3 $ 26.9 $ 10.4 39 $ 103.0 $ 82.1 $ 20.9 25
Costs and Expenses:
Cost of providing services and
products sold.......................... 21.8 13.9 7.9 57 60.7 42.3 18.4 43
Selling, general and administrative ... 13.1 6.7 6.4 96 43.7 19.8 23.9 121
------- ------- ------- -------- ------ ------
Total.................................. 34.9 20.6 14.3 69 104.4 62.1 42.3 68
EBITDA.................................... $ 2.4 $ 6.3 $ (3.9) (62) $ (1.4) $ 20.0 $(21.4) (107)
EBITDA margin............................. 6.4% 23.4% -17 pts (1.4)% 24.4% -26 pts
</TABLE>
The Other Communications Services segment comprises the operations of the
Company's Cincinnati Bell Directory ("CBD"), Cincinnati Bell Long Distance
(doing business as Cincinnati Bell Any Distance) and ZoomTown.com
subsidiaries, as well as its public payphone subsidiary. Cincinnati Bell
Directory publishes Yellow Page directories and sells directory advertising
and informational services to customers primarily in its Local
Communications' segment service area. Cincinnati Bell Any Distance ("CBAD")
resells voice long distance service primarily to small and medium-sized
residence and business customers in the same Local Communications segment
service area. ZoomTown.com provides Web hosting and other Internet-based
products and services.
Revenues of $37 million for the quarter and $103 million year-to-date
represented 39% and 25% increases versus the respective prior year periods.
Producing the majority of the revenue increase was CBAD, gaining $9 million
in the quarter and $21 million year-to-date on the success of its new "Any
Distance" service offering. This offer has been successful in capturing
346,000 subscribers, representing a 56% household market share by the end of
the first nine months. Accounting for more than half of the revenues for this
segment was CBD, producing $20 million in revenues in the current quarter and
$58 million year-to-date. During each of the first three quarters, CBD's
revenues increased approximately $1 million, or 5%, versus the prior year
quarters, owing to the strength of the successful 1999 sales campaign.
ZoomTown.com's web hosting and content business continues to grow, providing
approximately $1 million in additional revenues in the current quarter and $2
million year-to-date.
Costs of providing services and products sold were $22 million for the
quarter and $61 million year-to-date; approximately $8 million and $18
million higher than the respective prior periods, with CBAD and Zoomtown.com
incurring the largest increases. This was primarily the result of the Any
Distance offer and the web hosting products offered by ZoomTown.com.
Cincinnati Bell Directory also experienced a small increase in direct costs
resulting from higher sales commissions and printing costs for its
directories. As a result of the above, gross profit margin for the segment
decreased to approximately 41% for the quarter and year-to-date versus
approximately 48% in the prior year periods.
The gross profit margin for this segment continues to improve in the current
year, growing to 26% in the current quarter, as CBAD begins to leverage heavy
start-up costs earlier in the year. The 26% gross profit margin compares
quite favorably with prior quarters, more than doubling in comparison to the
12% experienced in the first quarter of this year. The Company's ZoomTown.com
subsidiary reported increased SG&A expenses of $1 million in the current
quarter and $4 million year-to-date, which consisted largely of employee
costs, customer care, consulting and other operational expenses.
Selling, general and administrative expenses were also higher for each
subsidiary, increasing by $6 million versus the prior year quarter and $24
million year-to-date. The vast majority of the increase in SG&A expenses, or
$5 million in the current quarter and $20 million year-to-date, was incurred
by CBAD in support of its "Any Distance" offer. The CBAD subsidiary has
incurred relatively high customer acquisition costs in order to capture
household and business market shares of 56% and 27%, respectively.
As a result of lower EBITDA at CBAD and the dilutive effect of the
introduction of the web hosting business at Zoomtown.com, EBITDA declined to
slightly more than $2 million in the current quarter. Nine-month results
24
<PAGE>
were similar, with negative EBITDA of $1 million representing a $21 million,
or 107%, decline in comparison to the same period in 1999. Experiencing a
similar decrease was EBITDA margin, which dropped to slightly more than 6% in
the current quarter and a negative 1% for the nine-month period. Prior year
EBITDA margins were approximately 24%.
FINANCIAL CONDITION
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
The Company's continued transformation from a wireline voice communications
provider focused on its local franchise to a nationwide provider of data,
voice and Internet services and a regional provider of wireless services has
resulted in significantly different financing requirements. Although the
Company expects to generate positive cash flow from operations in 2000,
capital expenditures and other investing needs continue to increase the
Company's borrowings. The Company expects the need for additional borrowings
to continue in the near term.
In order to provide for these cash requirements and other general corporate
purposes, the Company maintains a $2.1 billion credit facility with a group
of 24 lending institutions. The credit facility consists of $900 million in
revolving credit and $750 million in term loans from banking institutions and
$450 million in term loans from non-banking institutions. At September 30,
2000, the Company had drawn approximately $1.4 billion from the credit
facility in order to refinance its existing debt and debt assumed as part of
the Merger and to provide for the Company's business needs. Accordingly, the
Company has approximately $700 million in additional borrowing capacity under
this facility as of the date of this report. The Company believes that this
will be sufficient to provide for the Company's 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"), depending on the Company's credit rating. The current borrowing
rate ranges from 175 to 200 basis points above LIBOR. 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 also subject to financial covenants in association with the
credit facility. These financial covenants require that the Company maintain
certain debt to EBITDA ratios, debt to total capitalization ratios, fixed and
floating rate debt ratios 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:
<TABLE>
<CAPTION>
Duff & Phelps Moody's
ENTITY Description Standard and Poor's Credit Rating Service Investor Service
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BRW Corporate Credit Rating BB+ BB+ Ba2
CBT Corporate Credit Rating BB+ BBB+ Baa3
</TABLE>
The Company also has an ownership position in five publicly traded companies
that were valued at approximately $730 million as of September 30, 2000, net
of amounts collateralized on the forward sale of PSINet common stock
discussed in Note 5. The market value of this portfolio decreased
approximately $20 million in the quarter as a result of the sale of a
minority investment and a decline in the market value of the Company's
investment in PSINet, offset by an increase in the market value of the
Company's investment in Corvis Corporation ("Corvis"). The future sale of the
Corvis investment is subject to SEC rules and contractual limitations.
25
<PAGE>
As mentioned above, the Company liquidated a portion of a minority investment
in another company in the current quarter, providing $14 million in
additional cash flow during the quarter. Approximately $26 million in cash
flow has been provided in the first nine months of this year through selected
liquidation of minority equity investments.
On April 6, 2000, the Company completed the redemption and conversion of its
7 1/4% convertible preferred stock, exchanging 9,466,000 shares of its common
stock for 1,058,292 shares of the 7 1/4% preferred stock, based on a
conversion factor of 8.9446 common shares for each of the preferred shares.
Conversion of these preferred shares into common stock of the Company
eliminates approximately $8 million per year in cash dividend payments.
CASH FLOW
For the first nine months of 2000, cash provided by operating activities was
$223 million, $70 million higher than the $153 million generated for the
first nine months of 1999.
The Company's significant investing activities were capital expenditures and
equity investments. Capital expenditures for the nine-month period were
approximately $524 million, considerably higher than the $148 million spent
in the prior year period. This increase is attributable to expenditures
associated with the expansion of the Company's nationwide fiber-optic network
acquired in the Merger (and includes the purchase of $25 million in optronics
equipment from Corvis) and additional equipment purchases by CBT. Capital
expenditures to maintain and grow the nationwide fiber network, complete the
wireless network expansion, and maintain the local Cincinnati network are now
expected to be approximately $830 million in 2000, slightly higher than
amounts spent by the Company on a pro forma basis in 1999. The Company
continues to make strategic equity investments, investing $19 million in
additional equity instruments of Corvis in the current quarter and bringing
to $76 million its total investment in various equity securities during the
nine-month period. Approximately $26 million in cash was provided through the
sale of a portion of the Company's minority equity investments.
In contrast to the first nine months of 1999 when $41 million in common stock
dividends were paid to shareowners, no dividends were paid on common stock in
the first nine months of 2000. However, approximately $10 million in
preferred stock dividends were paid to holders of the 7 1/4% preferred stock
during the current nine-month period (this preferred stock was converted into
common shares of the Company in April 2000). Additionally, the Company
switched to cash payments of dividends on its 12 1/2% preferred stock in
February 2000 and approximately $37 million in dividends were paid on this
preferred stock in the first nine months of 2000. This amount is included in
the "Minority Interest Expense (Income)" caption in the Condensed
Consolidated Statements of Income and Comprehensive Income. The Company did
not incur any preferred stock dividends in the prior year because it did not
have preferred stock outstanding prior to the Merger. The capital
expenditures necessary to expand the Company's leading-edge, fiber-optic
network and the retirement of $404 million of the outstanding 9% Notes has
resulted in additional short-term and long-term borrowings. During the
nine-month period, the Company has increased its net borrowings by $260
million. Slightly offsetting this was an additional $60 million in cash
generated through the issuance of common shares of the Company as a result of
stock option exercises during the first nine months of 2000.
BALANCE SHEET
The following comparisons are relative to December 31, 1999.
The change in cash and cash equivalents, property, plant and equipment,
investments in other entities, long-term debt, redeemable preferred stock and
additional paid in capital is further explained in the preceding cash flow
discussion. The increase in accounts receivable was primarily the result of
higher revenues. Lower inventory levels are attributable to an increase in
hardware sales. Goodwill and other intangibles increased slightly as
adjustments to the purchase price allocation associated with the Merger were
nearly offset by the related amortization expense (see Note 2). Restructuring
liabilities recorded in conjunction with the 1999 restructuring plan
decreased primarily as a result of cash expenditures during the first nine
months of 2000. Redeemable preferred stock decreased due to the conversion of
7 1/4% convertible preferred stock into
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common stock of the Company in April 2000, resulting in a corresponding
increase in additional paid in capital. Increases to common stock outstanding
and further increases to additional paid in capital are due to stock option
exercises in the first nine months of 2000. Accumulated other comprehensive
income decreased in response to changes in the market value of the Company's
current equity investment portfolio and the realization of investment gains
resulting from the sale of a portion of the Company's holdings in minority
equity investments.
The Company's net investment in PSINet consists of 14.5 million common shares
which had a market value of approximately $139 million and $31 million at
September 30, 2000 and November 8, 2000, respectively. The Company adjusts
this investment to fair market value at each balance sheet date and records
the unrealized holding gain or loss (net of tax) in comprehensive income in
accordance with SFAS 115 "Accounting for Certain Investments in Debt and
Equity Securities." The Company also provides various telecommunications
services to PSINet and the fees associated with such services are generally
received on a prepaid basis.
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, but has not yet been set for argument. Nevertheless, CBT has
submitted new cost studies as required by the PUCO's orders and is awaiting
comments. After a period for review of the studies and resolution of any
disputes, CBT is to file a tariff implementing the resulting rates.
BUSINESS OUTLOOK
Evolving technology, the preferences of consumers, the legislative and
regulatory initiatives of policy makers and the convergence of other
industries with the telecommunications industry are causes for increasing
competition. 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.
Cincinnati Bell Telephone's current and potential competitors include other
incumbent local exchange carriers, wireless services providers, interexchange
carriers, competitive local exchange carriers and others. To date, CBT has
signed various interconnection agreements with competitors and approximately
7,200 net access lines have been transferred to competitors.
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Broadwing Communications faces significant competition from other fiber-based
telecommunications companies such as Level 3 Communications, Qwest
Communications International, Global Crossing and Williams Communications.
These companies have enjoyed a competitive advantage over Broadwing
Communications in the past. The Company feels that Broadwing Communications
is well equipped to match these competitors on the basis of technology and
has been working to improve on critical processes, systems and the execution
of its business strategy. In order to achieve competitive advantage, the
Company intends to develop or blend even more products and services from
other subsidiaries into the operations of Broadwing Communications. This will
be done as deemed necessary by the Company. Broadwing IT Consulting competes
with Intranet hardware vendors, wiring vendors, and other network integration
and consulting businesses.
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 and it 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 offer, 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, significant advertising and other start-up costs are necessary
in order to capture, and retain, market share.
The Company believes that its reputation for quality service and innovative
products can be successfully exported outside of its local franchise area.
The Company plans to blend its provisioning and marketing expertise with
Broadwing Communications' next-generation fiber-optic network in order to
introduce advanced calling and data transport services throughout the United
States. The Company intends to retain market share with respect to its
current service offerings and pursue rapid growth in data transport services.
The Company also intends to leverage its investment in its local
communications network and its regional wireless network and national
partnership with AT&T PCS to provide new and incremental product and service
offerings.
BUSINESS DEVELOPMENT - To enhance shareholder value, the Company continues to
review opportunities for acquisitions, divestitures, equity investments and
strategic partnerships.
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.
The Company is, however, required by terms negotiated with its lenders to
engage in interest rate swaps once certain thresholds are exceeded with
regard to floating rate debt as a percentage of the Company's total debt. The
Company exceeded this threshold during the current quarter and, accordingly,
entered into a series of interest rate swap agreements on notional amounts
totaling $80 million. The purpose of these agreements is to hedge against
changes in market interest rates to be charged on the Company's borrowings
against the credit facility.
These swap agreements involve the exchange of fixed and variable rate
interest payments and do not represent an actual exchange of the notional
amounts between the parties. Because these amounts are not exchanged, the
notional amounts of these agreements are not indicative of the Company's
exposure resulting from these derivatives. The amounts to be exchanged
between the parties are primarily the result of the swap's notional amount
and the fixed and floating rate percentages to be charged on the swap.
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Potential non-performance by counter-parties to the swap agreements exposes
the Company to a certain amount of credit risk due to the possibility of
counter-party default. Because the Company only engages in swap agreements
with counter-parties who are at least investment grade, it believes the risk
of counter-party default is minimal.
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.
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Form 10-Q Part II Broadwing Inc.
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in Note 12 of the notes to
the condensed consolidated financial statements on page 13 of this quarterly
report and is incorporated by reference in this Item 1.
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 governing its $2.1 billion credit facility further
described on page 25 of this quarterly report and incorporated by reference
in this Item 2.
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
(a) Exhibits.
The following are filed as Exhibits to Part I of this Form 10-Q:
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
(27) Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None.
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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: November 13, 2000 /s/ Kevin W. Mooney
----------------- -----------------------------------
Kevin W. Mooney
Chief Financial Officer
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