<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 JUNE 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 July 31, 2000, 215,700,303 common shares were outstanding.
<PAGE>
TABLE OF CONTENTS
PART I. Financial Information
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income and Comprehensive Income
Three Months and Six Months Ended June 30, 2000 and 1999 3
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 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 27
</TABLE>
PART II. Other Information
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C> <C>
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signature 29
</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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues...............................................
Broadband............................................ $ 241.1 $ 18.1 $ 454.1 $ 35.3
Local communications................................. 196.9 183.1 389.7 362.2
Wireless............................................. 43.0 20.7 79.6 35.9
Other communications................................. 36.2 28.2 65.7 55.2
Intersegment......................................... (17.2) (3.0) (27.8) (6.4)
------- ------ ------- ------
Total Revenues ................................... 500.0 247.1 961.3 482.2
Costs and Expenses.....................................
Cost of providing services and products sold......... 231.3 105.8 450.2 208.7
Selling, general and administrative.................. 139.0 58.1 296.4 113.9
Depreciation......................................... 81.1 31.3 163.6 62.0
Amortization......................................... 28.1 1.3 56.2 2.9
Restructuring credits................................ (.2) -- (.2) --
------- ------ ------- ------
Total Costs and Expenses........................... 479.3 196.5 966.2 387.5
------- ------ ------- ------
Operating Income (Loss)................................ 20.7 50.6 (4.9) 94.7
Other Income (Expense), net........................... (.1) .1 6.9 --
Minority Interest Expense (Income).................... 11.0 (1.8) 21.9 (4.1)
Equity Loss in Unconsolidated Entities................. 4.0 -- 6.0 --
Interest Expense....................................... 40.2 9.3 76.6 17.9
------- ------ ------- ------
Income (Loss) from Continuing
Operations Before Income Taxes........................ (34.6) 43.2 (102.5) 80.9
Income Tax Provision (Benefit)......................... (5.1) 15.6 (17.4) 29.3
------- ------ ------- ------
Income (Loss) from Continuing Operations............... (29.5) 27.6 (85.1) 51.6
Income from Discontinued Operations, Net of Taxes...... .2 .7 .3 1.4
------- ------ ------- ------
Net Income (Loss)...................................... (29.3) 28.3 (84.8) 53.0
Dividends and Accretion Applicable to
Preferred Stock...................................... 2.6 -- 2.9 --
------- ------ ------- ------
Net Income (Loss) Applicable to Common
Shareholders......................................... (31.9) 28.3 (87.7) 53.0
------- ------ ------- ------
Other Comprehensive Income (Loss), Net of Tax:
Unrealized loss on investments....................... (115.9) -- (132.2) --
------- ------ ------- ------
Comprehensive Income (Loss)............................ $(147.8) $ 28.3 $(219.9) $ 53.0
======= ====== ======= ======
Earnings (Loss) Per Common Share
Basic
Income (Loss) from Continuing Operations............ $ (.15) $ .20 $ (.42) $ .38
Income from Discontinued Operations, Net of Tax..... -- .01 -- .01
------ ------ ------ ------
Net Income (Loss)................................... $ (.15) $ .21 $ (.42) $ .39
======= ====== ======= ======
Diluted
Income (Loss) from Continuing Operations........... $ (.15) $ .19 $ (.42) $ .37
Income from Discontinued Operations, Net of Tax..... -- .01 -- .01
------ ------ ------ ------
Net Income (Loss)................................... $ (.15) $ .20 $ (.42) $ .38
======= ====== ======= ======
Dividends Declared Per Common Share.................... $ -- $ .10 $ -- $ .20
Average Common Shares Used for Earnings
Per Share Calculations
Basic............................................... 213.9 136.9 208.1 136.7
Diluted............................................ 213.9 141.0 208.1 140.7
</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)
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................................................... $ 15.5 $ 80.8
Receivables, less allowances of $46.7 and $53.6................................... 280.4 224.5
Material and supplies............................................................. 20.7 25.7
Deferred income tax benefits...................................................... 32.7 35.7
Prepaid expenses and other current assets......................................... 31.2 36.3
------------ ------------
Total current assets...................................................... 380.5 403.0
Property, plant and equipment, net.................................................. 2,611.7 2,500.6
Goodwill and other intangibles, net................................................. 2,622.8 2,679.8
Investments in other entities....................................................... 695.6 843.3
Deferred charges and other assets................................................... 71.7 70.8
Net assets of discontinued operations............................................... -- 7.9
------------ ------------
Total Assets.............................................................. $ 6,382.3 $ 6,505.4
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREOWNERS' EQUITY
Current Liabilities
Short-term debt................................................................... $ 13.1 $ 9.2
Accounts payable.................................................................. 177.1 228.9
Current portion of unearned revenue and customer deposits......................... 85.3 82.6
Accrued taxes..................................................................... 81.6 87.7
Other current liabilities......................................................... 173.7 156.5
------------ ------------
Total current liabilities................................................. 530.8 564.9
Long-term debt, less current portion................................................ 2,295.6 2,136.0
Unearned revenue, less current portion.............................................. 624.7 633.5
Deferred income taxes............................................................... 114.7 221.8
Other long-term liabilities......................................................... 149.8 153.8
------------ ------------
Total liabilities......................................................... 3,715.6 3,710.0
------------ ------------
Minority interest................................................................... 424.7 434.0
7 1/4% Convertible Preferred Stock, redeemable, $.01 par value, 5,000,000
shares authorized, no shares outstanding at June 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 June 30,
2000 and December 31, 1999...................................................... 129.4 129.4
Common shares, $.01 par value; 480,000,000 shares authorized;
222,627,560 and 208,678,058 shares issued at June 30, 2000
and December 31, 1999.......................................................... 2.2 2.1
Additional paid-in capital........................................................ 2,305.5 1,979.5
Accumulated deficit............................................................... (84.7) -
Accumulated other comprehensive income ........................................... 34.7 166.9
Common stock in treasury, at cost: 7,805,800 shares issued and
outstanding at June 30, 2000 and December 31, 1999.............................. (145.1) (145.1)
------------- -------------
Total shareowners' equity................................................. 2,242.0 2,132.8
------------ ------------
Total Liabilities, Redeemable Preferred Stock and Shareowners' Equity............... $ 6,382.3 $ 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>
Six Months
Ended June 30,
--------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................................................ $ (84.8) $ 53.0
Less: Income from discontinued operations, net of tax............................................ .3 1.4
-------- ------
Net income (loss) from continuing operations..................................................... (85.1) 51.6
Adjustments to reconcile net income (loss) from continuing operations to net
cash provided by operating activities:
Depreciation.................................................................................. 163.6 62.0
Amortization.................................................................................. 56.2 2.9
Provision for loss on receivables............................................................. 33.4 7.8
Non-cash interest expense..................................................................... 17.0 --
Realized gain from the sale of marketable securities.......................................... (7.3) --
Other, net.................................................................................... 5.2 (2.7)
Changes in assets and liabilities:
Increase in receivables....................................................................... (89.3) (16.3)
Decrease (increase) in other current assets................................................... 10.0 (9.0)
Decrease in accounts payable.................................................................. (16.7) (6.3)
Increase (decrease) in other current liabilities.............................................. 67.6 (12.3)
Decrease in unearned revenues................................................................. (6.1) (6.7)
Increase in deferred income taxes and unamortized investment tax credits...................... 4.0 .2
Increase in other assets and liabilities-net.................................................. (43.4) (8.7)
-------- ------
Net cash provided by operating activities of continuing operations.......................... 109.1 62.5
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................................................................... (321.8) (108.8)
Proceeds from sale of marketable securities and ownership interest in joint venture........... 15.7 --
Purchase of equity securities................................................................. (58.3) --
Other investing activities, net............................................................... 1.1 --
-------- ------
Net cash used in investing activities of continuing operations................................ (363.3) (108.8)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in short-term debt............................................................... 1.5 --
Borrowings of long-term debt.................................................................. 562.3 64.1
Repayment of long-term debt................................................................... (404.0) (.5)
Issuance of common shares..................................................................... 50.0 5.3
Minority interest dividends paid.............................................................. (24.7) --
Cash dividends paid........................................................................... (4.5) (27.2)
-------- ------
Net cash provided by financing activities of continuing operations.......................... 180.6 41.7
-------- ------
Net cash provided by (used in) discontinued operations........................................ 8.3 (1.4)
-------- ------
Net decrease in cash and cash equivalents........................................................ (65.3) (6.0)
Cash and cash equivalents at beginning of period................................................. 80.8 10.1
-------- ------
Cash and cash equivalents at end of period....................................................... $ 15.5 $ 4.1
======== ======
Cash paid for:
Interest (net of amount capitalized)........................................................... $ 59.7 $ 3.6
======== ======
Income taxes (net of refunds).................................................................. $ .2 $ 6.4
======== ======
Non-cash Investing and Financing Activities:
Amortization of preferred stock............................................................... $ 1.0 $ --
======== ======
Fiber barter agreements....................................................................... $ 9.5 $ --
======== ======
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 wholly owned 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 17,000 route miles to provide broadband
transport (previously referred to as "private line"), data transport,
Internet services, switched long distance, network integration and
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
(including high-speed data transport), 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 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 6. 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 stock from GE Capital Pension Trust; the
issuance of 69 million shares of the Company's common stock valued at
$1.6 billion, 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 IXC (now Broadwing Communications) have been included in the
Company's consolidated financial statements since the Merger date of
November 9, 1999.
6
<PAGE>
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 preliminarily allocated to goodwill were
decreased by approximately $8 million during the six-month period
ending June 30, 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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
MILLIONS OF DOLLARS (EXCEPT PER SHARE AMOUNTS)
Revenues................................................ $ 500.0 $ 405.0 $ 961.3 $ 801.5
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA).................. 129.7 71.9 214.7 153.0
Net Loss Applicable to Common Shareholders.............. $ (31.9) $ (127.6) $ (87.7) $ (184.6)
Loss per common share (basic and diluted) .............. $ (.15) $ (.62) $ (.42) $ (.90)
</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 $.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 Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenues............................................... 4.4 8.3 14.1 17.0
Income (loss) before income taxes...................... (.8) 1.1 (.6) 2.4
Income tax provision (benefit)......................... (.3) .4 (.2) 1.0
Gain on sale of discontinued operations, net of tax.... .7 -- .7 --
-- -- -- --
Net income (loss)...................................... .2 .7 .3 1.4
-- -- -- ---
</TABLE>
7
<PAGE>
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
FINANCIAL POSITION:
Current Assets......................................... 1.7 8.0 1.7 8.0
Total Assets........................................... 1.7 8.9 1.7 8.9
Current Liabilities.................................... 1.5 1.5 1.5 1.5
Total Liabilities...................................... 1.7 1.6 1.7 1.6
Net Assets of Discontinued Operations.................. -- 7.3 -- 7.3
</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 the Company's long distance operations. As of
June 30, 2000, approximately 260, or 75%, 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 June 30, 2000
---------------------------- ----------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Employee separations $ 8.2 $ (5.1) $ -- $ 3.1
Facility closure costs 4.4 (1.7) (1.0) 1.7
Relocation .2 -- -- .2
Other exit costs 4.4 (.4) -- 4.0
--------- -------- -------- ---------
Total $ 17.2 $ (7.2) $ (1.0) $ 9.0
========= ======== ======== =========
</TABLE>
Restructuring credits recorded during the second quarter of 2000
consisted of additional employee severance, offset by the above
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 $9.0 million at June 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>
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) DEBT-The Company's indebtedness consists of the following:
<TABLE>
<CAPTION>
Millions of dollars June 30, 2000 December 31, 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term Debt:
Current maturities of long-term debt $ 13.1 $ 9.2
------------ -----------
Total short-term debt $ 13.1 $ 9.2
============ ===========
Long-Term Debt:
Bank notes $ 1,312.0 $ 755.0
9.0% Senior subordinated notes 46.0 450.0
6 3/4% Convertible subordinated debentures 425.9 412.0
Various CBT notes 290.0 290.0
7 1/4% Senior secured notes 50.0 50.0
PSINet forward sale 125.4 133.9
Capital lease obligations 35.1 37.0
Other 11.2 8.1
------------ ------------
Total long-term debt $ 2,295.6 $ 2,136.0
============ ============
</TABLE>
9% Senior Subordinated Notes
In 1998, the former IXC 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 June 30, 2000, the Company has recorded $25.9 million
in cumulative interest expense ($13.9 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 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 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.
9
<PAGE>
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Bank Notes
In November 1999, the Company obtained a $1.8 billion credit facility
from a group of 24 lending institutions that was amended to $2.1
billion in January 2000. 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 June 30, 2000, the Company had drawn approximately
$1.3 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 $800 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, 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.
(6) 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.
(7) 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 Six Months
Ended June 30, Ended June 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................ $ (29.5) $ 27.6 $ (85.1) $ 51.6
Income from discontinued operations..................... .2 .7 .3 1.4
---------- --------- -------- --------
Net Income (loss)....................................... (29.3) 28.3 (84.8) 53.0
Dividends and accretion applicable to preferred stock... 2.6 -- 2.9 --
---------- --------- -------- --------
Numerator for basic EPS and EPS assuming dilution -
income applicable to common shareowners............... $ (31.9) $ 28.3 $ (87.7) $ 53.0
========== ========= ======== ========
Denominator:
Denominator for basic EPS - weighted average
common shares......................................... 213.9 136.9 208.1 136.7
Potential Dilution:
Stock options......................................... -- 3.3 -- 3.2
Stock based compensation arrangements................. -- .8 -- .8
---------- ---------- -------- --------
Denominator for diluted EPS................................ 213.9 141.0 208.1 140.7
========== ========== ======== ========
Basic EPS.................................................. $ (.15) $ .21 $ (.42) $ .39
========== ========= ======== ========
EPS assuming dilution...................................... $ (.15) $ .20 $ (.42) $ .38
========== ========= ======== ========
</TABLE>
10
<PAGE>
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Weighted average common shares outstanding at June 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 46 million.
(8) BUSINESS SEGMENT INFORMATION - Effective January 1, 2000, the
Company changed its definition and composition of strategic
operating segments and the related reporting framework. The
operating segment changes are described below:
BROADBAND
Includes Broadwing Communications, Broadwing IT Consulting
(formerly EnterpriseWise IT Consulting) and amounts associated
with an agreement between the Company and Cincinnati Bell Long
Distance ("CBLD") to service the customers of CBLD outside the
Cincinnati, Ohio area. Broadwing IT Consulting and the CBLD
service agreement amounts were previously in Other Communications.
LOCAL COMMUNICATIONS
Includes Cincinnati Bell Telephone. The Company's public payphone
business and Zoomtown.com's content and web hosting business have
moved to Other Communications. ADSL transport continues to be
included in Cincinnati Bell Telephone's results.
WIRELESS
Includes Cincinnati Bell Wireless and is unchanged.
OTHER COMMUNICATIONS
Includes Cincinnati Bell Directory, Cincinnati Bell Long Distance
(currently doing business as Cincinnati Bell Any Distance in the
Cincinnati market), ZoomTown.com and the Company's public payphone
subsidiary. Cincinnati Bell Directory comprised the former
Directory Services segment. Both ZoomTown.com and the public
payphone business were previously in Local Communications.
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:
11
<PAGE>
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
MILLIONS OF DOLLARS
REVENUES
Broadband.............................................. $ 241.1 $ 18.1 $ 454.1 $ 35.3
Local Communications................................... 196.9 183.1 389.7 362.2
Wireless............................................... 43.0 20.7 79.6 35.9
Other Communications................................... 36.2 28.2 65.7 55.2
Intersegment........................................... (17.2) (3.0) (27.8) (6.4)
----------- ---------- ---------- -----------
Total.................................................. $ 500.0 $ 247.1 $ 961.3 $ 482.2
=========== =========== ========== ===========
INTERSEGMENT REVENUES
Broadband.............................................. $ 9.1 $ -- $ 13.7 $ --
Local Communications................................... 8.0 3.0 13.8 6.2
Wireless............................................... -- -- -- --
Other Communications................................... .1 -- .3 .2
----------- ----------- ---------- -----------
Total.................................................. $ 17.2 $ 3.0 $ 27.8 $ 6.4
=========== =========== ========= ==========
EBITDA
Broadband.............................................. $ 26.2 $ .7 $ 24.0 $ 2.2
Local Communications................................... 96.7 78.1 187.2 151.8
Wireless............................................... 5.8 (5.0) 7.4 (11.1)
Other Communications................................... .7 7.5 (3.7) 13.7
Corporate and Eliminations............................. .3 1.9 (.2) 3.0
----------- ----------- ---------- -----------
Total.................................................. $ 129.7 $ 83.2 $ 214.7 $ 159.6
=========== =========== ========== ===========
ASSETS
Broadband.............................................. $ 5,052.8 $ 10.3 $ 5,052.8 $ 10.3
Local Communications................................... 838.2 765.9 838.2 765.9
Wireless............................................... 297.8 236.8 297.8 236.8
Other Communications................................... 92.1 67.4 92.1 67.4
Corporate and Eliminations............................. 101.4 53.1 101.4 53.1
----------- ----------- ---------- -----------
Total.................................................. $ 6,382.3 $ 1,133.5 $ 6,382.3 $ 1,133.5
=========== =========== ========== ===========
CAPITAL ADDITIONS (excluding acquisitions)
Broadband.............................................. $ 112.5 $ .3 $ 201.4 $ .6
Local Communications................................... 45.7 40.9 89.7 69.0
Wireless............................................... 5.7 12.3 23.6 30.8
Other Communications................................... 3.8 4.1 6.6 6.4
Corporate and Eliminations............................. .5 2.0 .5 2.0
----------- ----------- ---------- -----------
Total.................................................. $ 168.2 $ 59.6 $ 321.8 $ 108.8
=========== =========== ========== ===========
DEPRECIATION AND AMORTIZATION
Broadband.............................................. $ 72.0 $ 1.4 $ 146.8 $ 2.8
Local Communications................................... 30.1 27.5 59.5 54.9
Wireless............................................... 5.1 3.4 9.6 6.7
Other Communications................................... 2.0 .3 3.9 .5
Corporate and Eliminations............................. -- -- -- --
----------- ----------- ---------- -----------
Total.................................................. $ 109.2 $ 32.6 $ 219.8 $ 64.9
=========== =========== ========== ===========
</TABLE>
12
<PAGE>
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9) 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 Six Months
Ended June 30, Ended June 30,
-------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
MILLIONS OF DOLLARS
Revenues............................................... $ 196.9 $ 186.1 $ 389.7 $ 367.7
Costs and Expenses..................................... 130.4 135.3 262.1 271.0
----------- ----------- ----------- -----------
Operating Income....................................... 66.5 50.8 127.6 96.7
----------- ----------- ----------- -----------
Net Income............................................. $ 39.8 $ 29.5 $ 75.6 $ 56.1
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
MILLIONS OF DOLLARS
Current Assets............................................ $ 191.8 $ 148.5
Telephone Plant-Net....................................... 626.6 606.9
Other Noncurrent Assets................................... 19.8 26.0
----------- -----------
Total Assets.............................................. $ 838.2 $ 781.4
=========== ===========
Current Liabilities....................................... $ 209.3 $ 161.6
Noncurrent Liabilities.................................... 47.6 45.1
Long-Term Debt............................................ 324.0 322.0
Shareowner's Equity....................................... 257.3 252.7
----------- -----------
Total Liabilities and Shareowner's Equity................. $ 838.2 $ 781.4
=========== ===========
</TABLE>
(10) 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.
(11) 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.
The Company, as well as certain former members of IXC's board of
directors, had been named as a defendant in five stockholder class
action suits filed in the Delaware Court of Chancery ("the Court").
These suits were filed in July 1999 and related to the Company's merger
with IXC. The complaints alleged, among other things, that the
defendants breached their fiduciary duties to IXC's former stockholders
by failing to maximize stockholder value in connection with entering
into the merger agreement and sought a court order enjoining completion
of the Merger. In an October 27, 1999 ruling, the Court denied
plaintiffs' request for a preliminary injunction. The Merger has since
closed and management believes that the performance of the Company's
share price rendered plaintiffs' arguments moot. In early May 2000, the
parties entered into a settlement agreement disposing of all
outstanding issues in these cases. On June 29, 2000, the Court issued
an entry dismissing the cases.
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.
13
<PAGE>
Form 10-Q Part I Broadwing Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 reflected in the consolidated financial statements
would not likely have a materially adverse effect on the Company's
financial condition.
(12) 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, although it
does not hold or issue derivative financial instruments for
trading purposes or enter into interest rate transactions for
speculative purposes.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements". In SAB 101, the SEC
Staff expressed its views regarding the appropriate recognition of
revenue with regard to a variety of circumstances, some of which are of
particular relevance to the Company. In June 2000, the SEC issued SAB
101B which delayed the effective date of application of SAB 101 until
the fourth quarter of 2000. The Company is currently evaluating SAB 101
to determine its impact on the 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 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 six-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 will be 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 June 30, 1999:
<TABLE>
<CAPTION>
PRO FORMA
---------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
($ Millions) 2000 1999 Change % 2000 1999 Change %
------------ ---- ---- ------ - ---- ---- ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Broadband $ 241.1 $ 176.0 $ 65.1 37 $ 454.1 $ 354.5 $ 99.6 28
Local communications 196.9 183.1 13.8 8 389.7 362.2 27.5 8
Wireless 43.0 20.7 22.3 107 79.6 35.9 43.7 122
Other communications 36.2 28.2 8.0 28 65.7 55.2 10.5 19
Intersegment (17.2) (3.0) (14.2) -- (27.8) (6.3) (21.5) --
--------- -------- ------- -------- --------- --------
Total 500.0 405.0 95.0 23 961.3 801.5 159.8 20
Costs and expenses:
Cost of providing services and
products sold 231.3 214.0 17.3 8 450.2 421.8 28.4 7
Selling, general and administrative 139.0 119.1 19.9 17 296.4 226.7 69.7 31
--------- -------- ------- ----- ------ -----
Total 370.3 333.1 37.2 11 746.6 648.5 98.1 15
EBITDA 129.7 71.9 57.8 80 214.7 153.0 61.7 40
Depreciation 81.1 66.3 14.8 22 163.6 127.1 36.5 29
Amortization 28.1 28.5 (.4) (1) 56.2 57.1 (.9) (2)
Restructuring Charges (Credits) (.2) 13.1 (13.3) (102) (.2) 13.1 (13.3) (102)
Other Infrequent Costs - 12.8 (12.8) -- - 12.8 (12.8) --
--------- -------- ------- -------- --------- --------
Operating Income (Loss) 20.7 (48.8) 69.5 142 (4.9) (57.1) 52.2 91
Other Income (Expense), Net (.1) (10.9) 10.8 99 6.9 (5.0) 11.9 --
Equity Loss in Unconsolidated Entities 4.0 13.1 (9.1) (69) 6.0 16.0 (10.0) (63)
Minority Interest Expense 11.0 10.3 .7 7 21.9 19.6 2.3 12
Interest Expense 40.2 25.2 15.0 60 76.6 51.7 24.9 48
--------- -------- ------- -------- --------- --------
Loss from Continuing Operations
Before Income Taxes (34.6) (108.3) 73.7 68 (102.5) (149.4) 46.9 31
Income Tax Provision (Benefit) (5.1) 18.4 (23.5) (128) (17.4) 33.4 (50.8) (152)
---------- -------- ------- ----------- --------- --------
Loss from Continuing Operations (29.5) (126.7) 97.2 77 (85.1) (182.8) 97.7 53
Income from Discontinued Operations,
Net of Taxes .2 .7 (.5) (66) .3 1.4 (1.1) (78)
---------- -------- ------- -------- --------- --------
Net Loss (29.3) (126.0) 96.7 77 (84.8) (181.4) 96.6 53
Dividends and Accretion Applicable
to Preferred Stock 2.6 1.6 1.0 63 2.9 3.2 (.3) (9)
---------- -------- ------- -------- --------- --------
Net Loss Attributable to
Common Shareowners $ (31.9) $(127.6) $ 95.7 75 $ (87.7) $ (184.6) $ 96.9 52
========== ======== ======= =========== ========== ========
Loss per Common Share
(Basic and Diluted) $ (.15) $ (.62) $ .47 76 $ (.42) $ (.90) $ .48 53
========== ======== ======= ======== ========= ========
</TABLE>
15
<PAGE>
Form 10-Q Part I Broadwing Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 23% and 20% 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 60% of the increase
for both periods. Broadband segment revenues of $241 million for the current
quarter were 37% higher than in the prior year quarter, while year-to-date
revenues of $454 million were 28% higher than in the first six 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 its strong revenue growth with increases of 8% in both periods.
Revenues of $197 million for the quarter and $390 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, increasing
107%, or $22 million during the current quarter and 122%, or $44 million,
year-to-date. Wireless segment revenues continue to increase on the basis of
both postpaid and prepaid subscriber growth. Revenues for the Other
Communications segment increased 28% in the current quarter and 19%
year-to-date, growing to $36 million and $66 million, respectively. These
revenue increases are primarily the result of the new residential long distance
offering at Cincinnati Bell Any Distance ("CBAD"), higher directory advertising
revenues and new web hosting revenues.
Costs of providing services and products sold were $231 million for the current
quarter and $450 million year-to-date, increases of $17 million and $28 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 8% over prior periods, it compares
favorably with revenue growth. As a result, the Company's gross profit
margin increased significantly, rising a full six points to approximately 54% in
both periods.
Selling, general and administrative ("SG&A") expenses of $139 million in the
current quarter and $296 million year-to-date increased $20 million and $70
million, respectively, over the prior year. These increases of 17% and 31%,
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 costs and expenses associated with the rapid growth of the
Company's wireless business.
In the current quarter, EBITDA of $130 million represented an 80% improvement
over the prior year quarter. On a year-to-date basis, EBITDA of $215 million
increased 40% over the prior year period. Current quarter and year-to-date
EBITDA margin expanded to 26% and 22% for the quarter and six-month periods,
respectively, from 18% and 19% 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 its CBAD offering and the Company's ZoomTown.com web
hosting business.
Depreciation and amortization expenses of $109 million in the current quarter
represented a $14 million increase over the prior year quarter, with
year-to-date totals increasing $36 million to $220 million. Current quarter and
year-to-date increases of 15% and 19%, respectively, were incurred primarily by
the Broadband segment and reflects the continued buildout of its national
network infrastructure. Higher depreciation and amortization expenses were also
incurred by the Local Communications and Wireless segments as both continued
construction of their regional network infrastructures.
Operating income of $21 million in the current quarter represents a $70 million
improvement over the $49 million operating loss recorded in the prior year
quarter. The operating loss of $5 million reported in the first six months of
16
<PAGE>
Form 10-Q PART I Broadwing Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2000 was $52 million better than the $57 million operating loss reported in the
prior year period, with improvements being provided by the Broadband, Wireless
and Local Communications segments.
Minority interest expense of $11 million represented a small increase in
comparison to the prior year quarter, with year-to-date totals increasing by $2
million to $22 million. 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.
Interest expense increased $15 million for the quarter and $25 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).
The Company realized a gain of $7 million in the current year on the sale of
approximately 100,000 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 $6 million
year-to-date relating to an equity investment accounted for under the equity
method, significantly better than the $16 million equity loss recorded during
the first six months of 1999.
Income tax expense decreased $24 million for the quarter and $51 million
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 $.2
million in income (net of tax) in the current quarter and $.3 million
year-to-date. Comparable amounts in the prior year periods were approximately $1
million.
The Company reported a net loss of $29 million during the second quarter and $85
million for the first six months, representing a $97 million improvement over
the respective prior year periods. Similar improvement was experienced with
regard to the net loss applicable to common shareholders, which improved $96
million during the current quarter to $32 million, a $.15 loss per common share.
On a year-to-date basis, the net loss applicable to common shareholders of $88
million resulted in a $.42 loss per common share.
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 $500 million in the current quarter and $961 million year-to-date
were $253 million and $479 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 $370 million for the
quarter and $747 million for the first six months were $206 million and $424
million higher than in the same periods in 1999. Regarding the increase in costs
and expenses, over 90%, or approximately $200 million in each of the first two
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 $25
million and $28 million, respectively), the Local Communications segment was
successful in reducing expenses despite a $28 million increase in year-to-date
revenues. Further discussion of these results can be found in the discussion of
pro forma results above.
For the current quarter, EBITDA improved $47 million to $130 million, a gain of
56%. On a year-to-date basis, EBITDA increased $55 million to $215 million,
representing improvement of 35%. 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 22% in the six-month
period due to higher maintenance to support the fiber-optic network and to
introduce the Company's new brand name, nationwide presence and new products and
services. The Company is experiencing an improvement in EBITDA as it begins to
better leverage its network infrastructure and back-office systems.
17
<PAGE>
Form 10-Q Part I Broadwing Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income from discontinued operations, comprising the operations of the Company's
former CBS subsidiary, contributed an additional $.2 million in income (net of
tax) in the current quarter and $.3 million year-to-date. Comparable amounts in
the prior year periods were approximately $1 million.
The Company reported a net loss of $29 million during the second quarter and $85
million year-to-date, a $58 million and $138 million decline versus the prior
year, respectively. The net losses applicable to common shareholders were $32
million in the second quarter, or a $.15 loss per common share and $88 million
in the first six months, or $.42 per common share. In the prior year quarter,
net income applicable to common shareholders was $28 million, resulting in basic
and diluted earnings per common share of $.21 and $.20, respectively.
BROADBAND
<TABLE>
<CAPTION>
Pro Forma
--------------------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30
---------------------------------------- -------------------------------------
($ Millions) 2000 1999 Change % 2000 1999 Change %
------------ ---- ---- ------ - ---- ---- ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Broadband transport $ 97.1 $ 73.6 $ 23.5 32 $ 187.6 $ 144.4 $ 43.2 30
Switched services 97.4 89.8 7.6 8 201.2 182.6 18.6 10
Data and Internet 12.0 5.4 6.6 122 21.6 10.6 11.0 104
Other 34.6 7.2 27.4 -- 43.7 16.9 26.8 159
--------- -------- ------- -------- --------- --------
Total 241.1 176.0 65.1 37 454.1 354.5 99.6 28
Costs and expenses:
Cost of providing services
and products sold 140.8 119.2 21.6 18 267.0 234.0 33.0 14
Selling, general and administrative 74.1 67.5 6.6 10 163.1 124.9 38.2 31
--------- -------- ------- -------- --------- --------
Total 214.9 186.7 28.2 15 430.1 358.9 71.2 20
EBITDA 26.2 (10.7) 36.9 -- 24.0 (4.4) 28.4 --
EBITDA margin 10.9% (6.1)% +17 pts 5.3% (1.2)% +7 pts
<CAPTION>
As Reported
----------------------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------------------- ----------------------------------------
($ Millions) 2000 1999 CHANGE % 2000 1999 Change %
------------ ---- ---- ------ - ---- ---- ------ -
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Broadband transport $ 97.1 $ -- $ 97.1 -- $ 187.6 $ -- $ 187.6 --
Switched services 97.4 14.9 82.5 -- 201.2 30.0 171.2 --
Data and Internet 12.0 .1 11.9 -- 21.6 .1 21.5 --
Other 34.6 3.1 31.5 -- 43.7 5.2 38.5 --
--------- -------- ------- -------- --------- --------
Total 241.1 18.1 223.0 -- 454.1 35.3 418.8 --
Costs and expenses:
Cost of providing services
and products sold 140.8 10.9 129.9 -- 267.0 20.9 246.1 --
Selling, general and administrative 74.1 6.5 67.6 -- 163.1 12.1 151.0 --
--------- -------- ------- -------- --------- --------
Total 214.9 17.4 197.5 -- 430.1 33.0 397.1 --
EBITDA 26.2 .7 25.5 -- 24.0 2.3 21.7 --
EBITDA margin 10.9% 3.9% +15 pts 5.3% 6.5% +12 pts
</TABLE>
BROADBAND ON A PRO FORMA BASIS:
The Broadband segment utilizes its advanced fiber-optic network consisting of
more than 17,000 route miles to provide broadband transport (previously referred
to as "private line"), data transport, Internet services, switched long
distance, network integration and 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.
Broadband transport services are comprised of the lease of dedicated circuits
that customers use to transmit traffic.
18
<PAGE>
Form 10-Q Part I Broadwing Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, web hosting and collocation services. Other is
comprised of network integration and consulting services and the sale of the
related equipment, network construction services, revenues earned for trials of
vendor-supplied equipment and, in 1999, revenues from the Company's now
completed Vyvx project.
Revenues increased $65 million in the current quarter and nearly $100 million
year-to-date, growing 37% and 28% versus the respective prior periods. These
increases were primarily due to growth in broadband transport revenues, which
contributed $24 million of the increase over the prior year quarter and $43
million on a year-to-date basis. Broadband transport revenues increased 32% over
the prior year quarter and 30% 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 $19
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. Wholesale revenues
represented approximately 40% of total switched services revenue for the first
six months of 2000, in comparison to approximately 50% a year ago. The Company
has improved it margins on switched wholesale revenues in the current year,
achieving a small positive margin for the first six months. By contrast, gross
profit margins on switched wholesale minutes were negative in the prior year
periods.
Data and Internet revenues more than doubled in both periods, contributing an
additional $7 million and $11 million versus the prior year periods. Data and
Internet revenues continue to grow on the strength of demand for Internet-based,
ATM/frame relay, web hosting and collocation services. The Company fulfilled
demand for these services through the construction of six new data centers in
the second quarter, bringing its total of fully operational data centers to nine
nationwide.
Other revenues increased significantly, growing by more than $27 million versus
the prior year quarter and year-to-date. Network integration, consulting and
hardware revenues increased by $12 million in the current quarter and $19
million year-to-date. The Company also earned approximately $10 million in
revenues this quarter related to a field trial of new optical network equipment
that will serve as the basis for the Company's optical switched network. Current
quarter results also include approximately $10 million in revenues from network
construction projects. Somewhat offsetting this was approximately $7 million in
revenues earned on the Vyvx project in the prior year.
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 $141 million, an 18% increase over the second
quarter of 1999. For the six-month period, the $267 million incurred
represented a 14% 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 expense is
expected to continue to grow as a function of revenue, but decline somewhat
as a percentage of revenue as more of the traffic is carried on the Company's
network. The gross profit margin continued to rise, with both current quarter
and year-to-date gross margin percentages in excess of 40%. This compares
favorably with the 32% recorded in the prior year quarter and 34% for the
first six months of 1999.
Selling, general and administrative expenses were higher in the current quarter,
with expenses of $74 million representing a 10% increase over the prior year
quarter. For the six-month period, SG&A expenses of $163 million were 31% higher
than in the respective prior period. Although current quarter SG&A expenses were
10% higher than in the prior year, they represented a considerable improvement
over the $89 million recorded in the first quarter of 2000. This sequential
quarter decrease was attributable to the conclusion of the initial nationwide
advertising campaign to launch the new "Broadwing" brand. Advertising
expenditures amounted to only $4 million in the current quarter, a considerable
decrease versus the $19 million recorded in the prior quarter. However,
advertising expenditures are higher than in the respective prior year periods,
with the $4 million in expenditures for the current quarter representing a $1
million increase over that of the prior year quarter and $23 million in
year-to-date spending increasing $20 million over the first six months of 1999.
The remainder of the increase in SG&A expenses was primarily salary-related
costs as the Company added approximately 700 employees resulting from the
acquisition of Coastal and the expansion of the retail and IT consulting
businesses.
In the current quarter, EBITDA of $26 million represented a $37 million
improvement over the $11 million in negative EBITDA recorded during the second
quarter of 1999. Similarly, EBITDA of $24 million for the six-month period was
$28 million higher than that reported in the first six months of 1999.
Significant improvements in EBITDA margin were also experienced, as current
quarter and year-to-date EBITDA margins increased to 11% and 5%, respectively.
19
<PAGE>
Form 10-Q Part I Broadwing Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This compares favorably with the negative EBITDA margins recorded in the prior
year periods.
BROADBAND ON AN AS REPORTED BASIS:
Revenues of $241 million in the current quarter were $223 million higher than in
the prior year quarter while year-to-date revenues of $454 million were $419
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 $12 million
higher in the current quarter and $19 million year-to-date versus the prior
year periods.
Cost of providing services and products sold increased $130 million during the
current quarter and $246 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 $68 million and $151 million,
respectively.
In the current quarter, EBITDA of $26 million was $25 million higher than during
the same quarter last year. Similarly, year-to-date EBITDA of $24 million was
$22 million higher than during the first six months of 1999.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------------------- --------------------------------------
2000 1999 Chg. % 2000 1999 Chg. %
---- ---- ---- - ---- ---- ---- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOCAL COMMUNICATIONS
($ Millions)
Revenues
Local service.......................... $ 112.1 $ 105.3 $ 6.8 6 $ 223.4 $209.5 $ 13.9 7
Network access......................... 49.3 46.4 2.9 6 97.6 92.1 5.5 6
Other services......................... 35.5 31.4 4.1 13 68.7 60.6 8.1 13
-------- --------- ------- -------- ------ ------
Total.................................. 196.9 183.1 13.8 8 389.7 362.2 27.5 8
Costs and Expenses:
Cost of providing services and
products sold.......................... 64.5 68.8 (4.3) (6) 130.9 139.3 (8.4) (6)
Selling, general and administrative ... 35.7 36.2 (.5) (1) 71.6 71.1 .5 1
-------- --------- ------- -------- ------ ------
Total.................................. 100.2 105.0 (4.8) (5) 202.5 210.4 (7.9) (4)
EBITDA.................................... $ 96.7 $ 78.1 $ 18.6 24 $ 187.2 $151.8 $ 35.4 23
EBITDA margin............................. 49.1% 42.7% +6 pts 48.0% 41.9% +6 pts
Access lines (In thousands)............... 1,051 1,051 -- -- 1,051 1,051 -- --
Voice grade equivalents (In thousands).... 608 438 170 39 608 438 170 39
</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 7% year-to-date ($7 million and $14 million, respectively). Nearly 18,000
new subscribers were added for the Company's Complete Connections calling
service bundle during the second quarter, bringing total residential
subscribership and penetration rates to 156,000 and 22%, respectively. Over
3,000 of the 18,000 new subscribers chose CBT's latest product bundling
offer, Complete Connections Universal-Registration Mark- (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 29,000 as a result of the 5,000 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
20
<PAGE>
Form 10-Q Part I Broadwing Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $49 million for the quarter and $98 million
year-to-date represented 6% increases over the respective prior year periods.
The sale of high capacity digital services (expressed in voice grade
equivalents, or "VGEs") increased 39%, resulting in approximately $4 million in
new revenues for the quarter and $8 million year-to-date. The Company also
realized additional revenues due to the recovery of mandated telecommunications
costs. In spite of a 6% increase in access minutes of use, current year switched
access revenues were approximately $2 million lower due to decreased per-minute
rates as part of the optional incentive rate regulation at the Federal level in
July 1999.
Other services revenue grew 13% in the current quarter and year-to-date,
increasing to $36 million and $69 million, respectively. The Company's
competitive pricing structure for the high-speed Internet access
(ZoomTown-SM-) and Internet service provider (FUSE) bundle resulted in
increased subscribership for FUSE, which added 9,000 new subscribers in the
quarter and nearly 20,000 subscribers since the second quarter of last year.
FUSE revenues have grown nearly $2 million since the second quarter of last
year. Other increases in the category are attributable to agency fees from
interexchange carriers and sales of long-distance services, higher rent and
facilities collocation revenue and a lower loss on receivables versus the
prior year quarter.
Costs and expenses (excluding depreciation and amortization) of $100 million
for the quarter and $203 million year-to-date were $5 million and $8 million
less than in the prior year periods, respectively. This expense decrease was
primarily related to a 6% decrease in costs of providing services and
products sold, which dropped $4 million and $8 million versus the respective
prior periods. The decrease in costs of providing services and products sold
was the result of lower employee costs and operating taxes. Gross profit
margin also continues to improve, increasing to 67% in the current quarter
and 66% year-to-date and comparing favorably with the 62% gross profit margin
recorded in the prior year periods.
Selling, general and administrative expenses were slightly lower in the
quarter and during the six-month period with higher advertising and customer
care expenses associated with new calling service bundles and the Company's
ZoomTown-SM- ADSL service being more than offset by lower Year 2000
programming costs.
As a result of the above, EBITDA grew to $97 million in the current quarter
and $187 million year-to-date, providing EBITDA margin increases of six
points in each period. Current quarter results represent the eighth
consecutive quarter of EBITDA margin improvement for the Local Communications
segment. Cincinnati Bell Telephone continues to improve its EBITDA,
profitability and margins by leveraging the fixed investment in its
telecommunications network to offer new products and services without
significant incremental costs. Furthermore, CBT is able to offer a wide
variety of telecommunications services at attractive prices and with the
added convenience of one customer bill. Also, CBT's access line losses to
competitive carriers have been minimal.
21
<PAGE>
Form 10-Q Part I Broadwing Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------------------- -------------------------------------
WIRELESS 2000 1999 Chg. % 2000 1999 Chg. %
-------- ---- ---- ---- - ---- ---- ---- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ Millions)
Revenues
Service................................ $ 41.2 $ 18.3 $ 22.9 125 $ 75.0 $ 31.1 $ 43.9 141
Equipment.............................. 1.8 2.4 (0.6) (25) 4.6 4.8 (0.2) (4)
-------- --------- ------- -------- ------ ------
Total..................................... 43.0 20.7 22.3 107 79.6 35.9 43.7 122
Costs and Expenses:
Cost of providing services and
products sold.......................... 19.2 14.7 4.5 31 36.8 26.0 10.8 42
Selling, general and administrative ... 18.0 11.0 7.0 64 35.4 21.1 14.3 68
-------- --------- ------- -------- ------ ------
Total.................................. 37.2 25.7 11.5 45 72.2 47.1 25.1 53
EBITDA.................................... $ 5.8 $ (5.0) $ 10.8 -- $ 7.4 $(11.2) $ 18.6 --
EBITDA margin............................. 13.5% (24.2)% +38 pts 9.3% (31.2)% +41 pts
Number of subscribers (in thousands)...... 238.9 88.8 150.1 169
Customer churn, postpaid
(quarterly average)..................... 1.29% 1.37% -- 6
Average revenue per unit, postpaid
customers (ARPU)........................ $70 $77 $(7) (9)
</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.
Wireless segment revenues increased approximately $22 million in each of the
first two quarters of the current year, more than doubling in both periods. In
the current quarter, revenues of $43 million represented a 107% increase over
the prior year period with year-to-date revenues increasing 122% to $80 million.
Growth is coming primarily from service revenues, which more than doubled on the
basis of increased subscribership, consistent average revenue per unit ("ARPU")
and low customer churn. Remaining revenues resulted from the sale of handsets
and associated accessories.
Approximately 39,000 subscribers were added during the quarter, with
significant growth from both the postpaid and prepaid categories (20,000 and
19,000, respectively). Total subscribership now stands at approximately
239,000, a 169% increase versus the prior year quarter. Average revenue per
unit from postpaid subscribers was $70 for the quarter; 9% less than in the
prior year quarter but a 5% improvement over the $67 generated in the first
quarter of 2000. Average customer churn in the current quarter remained low
and was among the best in the industry at 1.29% per month for postpaid
subscribers. Additionally, prepaid subscribership grew from approximately
28,000 subscribers at the end of the prior quarter to approximately 47,000 at
the end of the current quarter. This is significant because i-wireless-SM-
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-SM- subscribers is approximately half that of postpaid subscribers.
Costs and expenses (excluding depreciation and amortization) of $37 million
increased 45% versus the prior year quarter. The year-to-date total of $72
million represented a 53% increase versus the $47 million recorded during the
first six months of 1999 and was primarily a function of increasing
subscribership.
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 six months of 2000, considerably
better than the 72% incurred during the same period in the prior year. In
total, costs of
22
<PAGE>
Form 10-Q Part I Broadwing Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
providing services and products sold increased 31% in the current quarter to
$19 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
$24 million for the current quarter and $43 million year-to-date represents
gross profit margins of approximately 55%, considerably better than the 29%
gross profit margins in the prior year period.
Selling, general and administrative expenses include the cost of customer
acquisition, which primarily consists of the subsidy of customer handsets,
advertising, distribution and promotional expenses. These costs increased more
than 60% to $18 million for the quarter and $35 million year-to-date in support
of significant growth in subscribership. The CPGA for postpaid customers
continued to decrease, dropping to $339 in the current quarter. This is
significantly less than the CPGA of $385 in the first quarter of 2000 and $395
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 in the prior year to 44% 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 $6 million represented an $11
million improvement over the prior year quarter. Similarly, year-to-date EBITDA
of $7 million was $19 million higher than in the prior year period. Also
increasing was EBITDA margin, expanding to 14% for the current quarter and 9%
year-to-date, improvements of approximately 40 points over the negative EBITDA
margins reported in the prior year periods.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
OTHER COMMUNICATIONS ------------------------------------------ ---------------------------------------
-------------------- 2000 1999 Chg. % 2000 1999 Chg. %
---- ---- ---- --- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ Millions)
Revenues.................................. $ 36.2 $ 28.2 $ 8.0 28 $ 65.7 $ 55.2 $ 10.5 19
Costs and Expenses:
Cost of providing services and
products sold.......................... 21.6 14.0 7.6 54 38.8 28.3 10.5 37
Selling, general and administrative ... 13.9 6.6 7.3 111 30.6 13.2 17.4 132
-------- --------- ------- -------- ------ ------
Total.................................. 35.5 20.6 14.9 72 69.4 41.5 27.9 67
EBITDA.................................... $ .7 $ 7.6 $ (6.9) (91) $ (3.7) $ 13.7 $(17.4) (127)
EBITDA margin............................. 1.9% 27.0% -25 pts (5.6)% 24.8% -30 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 $36 million for the quarter and $66 million year-to-date
represented 28% and 19% increases versus the respective prior year periods.
Producing the majority of the revenue increase was CBAD, gaining $9 million
in the quarter and $12 million year-to-date on the success of its new "Any
Distance" service offering. This offer was successful in capturing
approximately 300,000 subscribers, including a 50% residential market share
by the end of the first six months. Accounting for approximately 30% of the
revenues for this segment was CBD, recording $19 million in revenues in the
current quarter and $38 million year-to-date. In the first two quarters,
revenues increased $1 million, or 6%, 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 year-to-date.
Costs and expenses (excluding depreciation and amortization) were
approximately 70% higher in the current quarter and year-to-date, increasing
by $15 million and $28 million, respectively. Costs of providing services and
products sold were approximately $8 million higher for the quarter and $10
million year-to-date, with all subsidiaries in the segment reporting
23
<PAGE>
Form 10-Q Part I Broadwing Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increases. This was primarily the result of the Any Distance offer and the
operations of the Company's ZoomTown.com subsidiary. Cincinnati Bell
Directory also reported an 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 40% for
the quarter and year-to-date versus approximately 50% in the prior year
periods.
Selling, general and administrative expenses were also higher for each
subsidiary, increasing by $7 million versus the prior year quarter and $17
million year-to-date. Advertising and promotional efforts in support of the Any
Distance offer were primarily responsible for the increases, amounting to $2
million in the current quarter and $8 million year-to-date. The Company's
ZoomTown.com subsidiary reported a $1 million increase in SG&A expenses in the
current quarter and $3 million year-to-date (consisting largely of customer
care, consulting and other operational expenses).
As a result of the above, EBITDA declined to less than $1 million for the
current quarter, a 91% decrease versus the approximately $8 million recorded in
the prior year period. Six-month results were similar, with EBITDA dropping to a
negative $4 million; $17 million less than in the first six months of 1999.
Experiencing a similar decline was EBITDA margin, which dropped to slightly less
than 2% in the current quarter and a negative 6% for the six-month period. Prior
year EBITDA margins were approximately 27% and 25%, respectively.
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
telecommunications 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 recently obtained a $2.1 billion credit facility from 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 June 30, 2000, the
Company had drawn approximately $1.3 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 $800 million in additional borrowing capacity under this facility
as of the date of this report.
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 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 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>
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 $400 million as of June 30, 2000, net of
amounts collateralized on the PSINet forward sale of stock discussed in Note 5.
The value of this portfolio has increased substantially subsequent to June 30,
2000 following the initial
24
<PAGE>
Form 10-Q Part I Broadwing Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
public offering of the common stock of Corvis Corporation ("Corvis"). As of
August 9, 2000, the Company has purchased $44 million in equity instruments
of Corvis, the value of which has increased to approximately $772 million.
The future sale of these securities is subject to certain SEC rules and
contractual limitations.
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 six months of 2000, cash provided by operating activities was $109
million, $47 million higher than the $62 million generated for the first six
months of 1999.
The Company's significant investing activities were capital expenditures and
equity investments. Capital expenditures for the six-month period were
approximately $322 million, considerably higher than the $109 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 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 equity investments in certain strategic partners. During
the current quarter, the Company invested $30 million in the preferred stock
of Corvis Corporation prior to its initial public offering (an additional $14
million in equity instruments of Corvis were purchased following the close of
the current quarter), bringing to $58 million its investment in equity
securities during the six-month period. Nearly $16 million in cash was
provided through the sale of a portion of the Company's equity investments.
In contrast to the first six months of 1999 when $27 million in common stock
dividends were paid to shareowners, no dividends were paid on common stock in
the first six months of 2000. However, approximately $5 million in preferred
stock dividends were paid to holders of the 7 1/4% preferred stock during the
current six-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 $25 million in dividends were paid on this preferred stock
in the first six months of 2000. This amount is included in the "Minority
Interest Expense (Income)" caption in the Condensed Consolidated Statements
of Income and Retained Earnings. 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 six-month period, the Company has increased
its net borrowings by $160 million. An additional $50 million in cash was
generated through the issuance of additional common shares as a result of
stock option exercises during the first six 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 decreased primarily as a result
of amortization expense (see Note 2). Restructuring liabilities recorded in
conjunction with the 1999 restructuring plan decreased as a result of cash
expenditures during the first six months of 2000. Redeemable preferred stock
decreased due to the conversion of 7 1/4% convertible preferred stock into
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 six months of 2000. Accumulated other comprehensive income decreased in
response to changes in the market value of the Company's equity investment
portfolio.
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Form 10-Q Part I Broadwing Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Cincinnati Bell Telephone's
initial brief was filed on June 19, 2000. The PUCO's brief was due on August
8, 2000. Cincinnati Bell Telephone may file a reply brief by August 28, 2000.
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.
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 due to better business execution. 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 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.
26
<PAGE>
Form 10-Q Part I Broadwing Inc.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes. To manage its
exposure to interest rate changes, the Company uses a combination of variable
rate short-term and fixed rate long-term financial instruments. The Company may,
from time to time, employ a small number of financial instruments to manage its
exposure to fluctuations in interest rates. The Company does not hold or issue
derivative financial instruments for trading purposes or enter into interest
rate transactions for speculative purposes. Management is reviewing steps
necessary to mitigate this exposure.
Interest Rate Risk Management - The Company's objective in managing its exposure
to interest rate changes is to limit the impact of interest rate changes on
earnings and cash flows and to lower its overall borrowing costs.
27
<PAGE>
Form 10-Q Part II Broadwing Inc.
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in Note 11 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 in this Report on Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was conducted on April 19, 2000. At
this meeting, shareholders voted on the election of directors and certain other
proposals. The results of such votes were provided in the Company's Form 10-Q
for the three months ended March 31, 2000, as filed with the Securities and
Exchange Commission on May 15, 2000.
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:
Exhibit
Number
-------
(3)(a) Amended Articles of Incorporation of Broadwing Inc.
(10)(iii)(A)(1) Broadwing Inc. 1997 Long Term Incentive Plan, as
amended and restated effective July 24, 2000.
(10)(iii)(A)(2) Broadwing Inc. Short Term Incentive Plan, as amended
and restated effective July 24, 2000.
(10)(iii)(A)(3) Broadwing Inc. Deferred Compensation Plan for
Outside Directors, as amended and restated
effective July 24, 2000.
(10)(iii)(A)(4) Broadwing Inc. Pension Program, as amended and
restated effective July 24, 2000.
(10)(iii)(A)(5) Broadwing Inc. Executive Deferred Compensation Plan,
as amended and restated effective July 24, 2000.
(27) Financial Data Schedule
(b) Reports on Form 8-K.
(i) Form 8-K, date of report May 23, 2000, reporting that John F.
Cassidy became President and Chief Operating Officer of all Cincinnati
Bell operations of Broadwing Inc. The Company also reported that it had
completed the sale of substantially all of the assets used in
connection with the operation of its Cincinnati Bell Supply subsidiary
on May 23, 2000.
28
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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: August 11, 2000 /s/ Kevin W. Mooney
----------------- ---------------------------------------
Kevin W. Mooney
Chief Financial Officer
29
