SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 April 30, 2000, 213,513,638 common shares were outstanding.
TABLE OF CONTENTS
PART I. Financial Information
Description Page
- ----------- ----
Item 1. Financial Statements
Condensed Consolidated Statements of Income, Comprehensive Income and
Retained Earnings (Unaudited)
Three Months Ended March 31, 2000 and 1999 3
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. Other Information
Description Page
- ----------- ----
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Form 10-Q Part I Broadwing Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND
RETAINED EARNINGS
(Millions of Dollars, Except Per Common Share Amounts)
(Unaudited)
Three Months
Ended March 31,
----------------------
2000 1999
------- -------
Revenues............................................................................
Broadband......................................................................... $213.0 $ 17.2
Local communications.............................................................. 192.8 179.1
Wireless.......................................................................... 36.6 15.2
Other communications.............................................................. 39.1 35.8
Intersegment...................................................................... (11.3) (5.1)
------- -------
Total Revenues ................................................................ 470.2 242.2
Costs and Expenses..................................................................
Cost of providing services and products sold...................................... 226.2 107.9
Selling, general and administrative............................................... 158.9 56.7
Depreciation and amortization..................................................... 110.6 32.3
------- -------
Total Costs and Expenses........................................................ 495.7 196.9
------- -------
Operating Income (Loss)............................................................. (25.5) 45.3
Other Income........................................................................ 7.0 ---
Minority Interest Expense (Income).................................................. 10.9 (2.3)
Equity Loss in Unconsolidated Entities.............................................. 2.0 ---
Interest Expense.................................................................... 36.4 8.7
------- -------
Income (Loss) Before Income Taxes................................................... (67.8) 38.9
Income Tax Provision (Benefit)...................................................... (12.4) 14.2
------- -------
Net Income (Loss)................................................................... (55.4) 24.7
Dividends and Accretion Applicable to Preferred Stock............................... 0.3 -
------- -------
Net Income (Loss) Applicable to Common Shareholders................................. $(55.7) $ 24.7
======= =======
Other Comprehensive Income (Loss), Net of Tax:
Unrealized loss on investments.................................................... 16.3 -
------- -------
Comprehensive Income (Loss)......................................................... $(72.0) $ 24.7
======= =======
Earnings (Loss) Per Common Share
Basic ............................................................................ $ (.28) $ .18
Diluted .......................................................................... $ (.28) $ .18
Dividends Declared Per Common Share................................................. $ - $ .10
Average Common Shares Used for Earnings Per Share Calculations
Basic............................................................................. 202.3 136.4
Diluted.......................................................................... 202.3 140.1
Retained Earnings ..................................................................
Beginning of period .............................................................. $ - $ -
Net income (loss)................................................................. (55.7) 24.7
Common share dividends declared................................................... - (13.7)
Other............................................................................. - .2
------- -------
End of period..................................................................... $(55.7) $ 11.2
======= =======
Accumulated Other Comprehensive Income (Loss)
Beginning of period............................................................... $ 166.9 $(6.7)
Unrealized loss on investments.................................................... 16.3 -
------- -------
End of period.................................................................... $ 150.6 $(6.7)
======= =======
See Notes to Financial Statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
March 31, December 31,
2000 1999
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents......................................................... $ 19.7 $ 80.0
Receivables, less allowances of $54.5 and $53.6................................... 250.5 231.0
Material and supplies............................................................. 31.7 30.3
Deferred income tax benefits...................................................... 32.9 35.9
Prepaid expenses and other current assets......................................... 23.8 36.2
------------ ------------
Total current assets...................................................... 358.6 413.4
Property, plant and equipment, net.................................................. 2,526.3 2,500.9
Goodwill and other intangibles, net................................................. 2,637.3 2,679.9
Investments in other entities....................................................... 866.3 843.3
Deferred charges and other assets................................................... 72.9 71.1
------------ ------------
Total Assets.............................................................. $ 6,461.4 $ 6,508.6
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREOWNERS' EQUITY
Current Liabilities
Short-term debt................................................................... $ 10.5 $ 9.2
Accounts payable.................................................................. 162.5 230.5
Current portion of unearned revenue and customer deposits......................... 80.2 82.6
Accrued taxes..................................................................... 4.2 88.3
Other current liabilities......................................................... 163.8 157.5
------------ ------------
Total current liabilities................................................. 421.2 568.1
Long-term debt, less current portion................................................ 2,209.1 2,136.0
Unearned revenue, less current portion.............................................. 634.7 633.5
Deferred income taxes............................................................... 264.1 221.8
Other long-term liabilities......................................................... 155.2 153.8
------------ ------------
Total liabilities......................................................... 3,684.3 3,713.2
------------ ------------
Minority interest................................................................... 425.9 434.0
7 1/4% Convertible Preferred Stock, redeemable, $.01 par value, 5,000,000
shares authorized, aggregate liquidation preference of $105.8, 1,058,380
shares issued and outstanding at March 31, 2000 and December 31, 1999 224.5 228.6
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 March 31,
2000 and December 31, 1999...................................................... 129.4 129.4
Common shares, $.01 par value; 480,000,000 shares authorized;
211,493,352 and 208,678,058 shares issued at March 31, 2000
and December 31, 1999.......................................................... 2.1 2.1
Additional paid-in capital........................................................ 2,045.4 1,979.5
Retained earnings (deficit)....................................................... (55.7) -
Accumulated other comprehensive income ........................................... 150.6 166.9
Common stock in treasury, at cost: 7,805,800 shares issued and
outstanding at March 31, 2000 and December 31, 1999............................. (145.1) (145.1)
------------- ------------
Total shareowners' equity................................................. 2,126.7 2,132.8
------------- ------------
Total Liabilities, Redeemable Preferred Stock and Shareowners' Equity............... $ 6,461.4 $ 6,508.6
============= ============
See Notes to Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
Three Months
Ended March 31,
-------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................................................ $ (55.7) $ 24.7
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization................................................................. 110.6 32.3
Provision for loss on receivables............................................................. 11.3 3.7
Non-cash interest expense..................................................................... 8.5 --
Realized gain from the sale of marketable securities.......................................... (7.3) --
Other, net.................................................................................... 3.4 (2.3)
Changes in assets and liabilities:
Increase in receivables....................................................................... (30.1) (1.1)
Decrease (increase) in other current assets................................................... (.1) 4.8
Decrease in accounts payable.................................................................. (38.4) (16.5)
Increase (decrease) in other current liabilities.............................................. (53.2) 5.0
Decrease in unearned revenues................................................................. (1.2) --
Increase (decrease) in deferred income taxes and unamortized investment tax credits........... 50.5 .1
Decrease (increase) in other assets and liabilities-net....................................... 6.5 (10.0)
-------- ---------
Net cash provided by operating activities................................................... 4.8 40.7
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................................................................... (153.9) (37.1)
Proceeds from sale of marketable securities and ownership interest in joint venture........... 15.7 --
Purchase of equity securities................................................................. (16.0) --
Other investing activities, net............................................................... .5 --
--------- --------
Net cash used in investing activities......................................................... (153.7) (37.1)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in short-term debt............................................................... 1.4 4.1
Borrowings of long-term debt.................................................................. 470.4 --
Repayment of long-term debt................................................................... (404.1) (.3)
Issuance of common shares..................................................................... 37.8 3.9
Minority interest dividends paid.............................................................. (12.4) --
Cash dividends paid........................................................................... (4.5) (13.7)
-------- ---------
Net cash provided by (used in) financing activities......................................... 88.6 (6.0)
-------- ---------
Net decrease in cash and cash equivalents........................................................ (60.3) (2.4)
Cash and cash equivalents at beginning of period................................................. 80.0 10.1
-------- --------
Cash and cash equivalents at end of period....................................................... $ 19.7 $ 7.7
======== ========
Cash paid for:
Interest (net of amount capitalized)........................................................... $ 41.3 $ 3.6
======== ========
Income taxes (net of refunds).................................................................. $ -- $ 6.4
======== ========
Non-cash Investing and Financing Activities:
Accretion of preferred stock.................................................................. $ 4.2 $ --
======== ========
Fiber barter agreements.......................................................................... $ 4.8 $ --
======== ========
See Notes to Financial Statements.
5
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 to
provide broadband transport (previously referred to as "private line"),
data transport, Internet services, switched access, network integration
and consulting, and other services. This segment also leases network
capacity in the form of indefeasable right-to-use agreements ("IRUs").
These services are offered nationally through the Company's new
Broadwing Communications, Inc. subsidiary.
The Local Communications segment provides local service, network access
(including high-speed data transport), long distance, data and
Internet, 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
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 Services segment comprises the operations of
the Company's Cincinnati Bell Directory (CBD), Cincinnati Bell Long
Distance (doing business as Cincinnati Bell Any Distance, or CBAD),
Cincinnati Bell Supply (CBS) and ZoomTown.com subsidiaries, as well as
its public payphone operations. CBD publishes Yellow Page directories
and sells directory advertising and informational services to customers
primarily in its Local Communications' segment service area. CBAD
resells voice long distance service primarily to small and medium-sized
residence and business customers in the same Local Communications
segment service area. CBS resells telecommunications and computer
equipment in the secondary market. ZoomTown.com provides Web hosting
and other Internet-based products and services. The Company is
currently evaluating plans to sell, or exit, the CBS business because
it does not fit with the Company's long-term strategic plan.
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 and 5. Certain prior year amounts have been
reclassified to conform to the current classifications with no effect
on financial results. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to SEC rules and regulations. The December 31, 1999 condensed
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, the Company merged with IXC Communications, Inc.
(the Merger). 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 68
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 14 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. These
options were granted on the same terms and conditions as the IXC
options, except that the exercise price and the number of shares
issuable upon exercise were divided and multiplied, respectively, by
2.0976. The
6
Merger was accounted for as a purchase and, accordingly,
the operating results of IXC (Broadwing Communications) have been
included in the Company's consolidated financial statements since the
Merger date of November 9, 1999.
The cost of the Merger has been preliminarily allocated to the assets
acquired and liabilities assumed according to their estimated fair
values at the acquisition date and is subject to adjustment as the
assumptions relating to the asset and liability valuations are
finalized. In addition, the allocation may be impacted by changes in
pre-acquisition contingencies identified during the allocation period
by the Company relating to certain environmental, litigation, and other
matters. As a result, amounts preliminarily allocated to goodwill were
decreased by approximately $20.7 million during the first quarter of
2000.
The amount allocated to goodwill represents the excess of price paid
over the fair value of assets realized and liabilities assumed in the
Merger. These amounts are being amortized to expense over a 30-year
period.
The following summarized unaudited pro forma financial information
assumes the Merger occurred at the beginning of each year:
Millions of dollars (except per share amounts) Three months ended March 31 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Revenues $470.2 $403.6
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) $ 85.1 $ 82.3
Net Loss Applicable to Common Shareholders $(55.7) $(57.0)
Loss per common share (basic and diluted) $ (.28) $ (.28)
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) 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 March 31, 2000, approximately 41% 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:
Balance Balance
Type of costs (in millions): December 31, 1999 Expenditures March 31, 2000
---------------------------- ----------------- ------------ --------------
Employee separations $ 8.2 $ (3.4) $ 4.8
Facility closure costs 4.4 (1.8) 2.6
Relocation .2 -- .2
Other exit costs 4.4 (.2) 4.2
-------- ---------- ---------
Total $ 17.2 $ (5.4) $ 11.8
======= ========== =========
7
In total, the Company expects these restructuring plans to result in
cash outlays of $14.8 million and non-cash items of $3.8 million.
Management believes that the remaining balance of $ 11.8 million at
March 31, 2000 is adequate to complete the restructuring plan and that
most of the related actions will be completed by December 31, 2000.
(4) DEBT - The Company's indebtedness consists of the following:
Millions of dollars March 31, 2000 December 31, 1999
------------------------------------------------------------------------------------------------
Short-Term Debt:
Current maturities of long-term debt $ 10.5 $ 9.2
------------ -----------
Total short-term debt $ 10.5 $ 9.2
============ ===========
Long-Term Debt:
Bank notes $ 1,205.0 $ 755.0
9.0% Senior subordinated notes 46.0 450.0
6 3/4% Convertible subordinated debentures 418.9 412.0
Various CBT notes 290.0 290.0
7 1/4% Senior subordinated notes 50.0 50.0
PSINet forward sale 153.2 133.9
Capital lease obligations 38.4 37.0
Other 7.6 8.1
----------- -----------
Total long-term debt $ 2,209.1 $ 2,136.0
=========== ===========
9% Senior Subordinated Notes
In 1998, IXC issued $450 million of 9% senior subordinated notes due
2008 ("the 9% Notes"). In January 2000, $404 million of these 9% Notes
were redeemed through a tender offer as a result of the change of
control terms of the bond indenture. 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 March 31, 2000, the Company has recorded $18.9 million
in interest expense and has adjusted the carrying amount of the debt
accordingly.
PSINet Forward Sale
The Company's investment in PSINet consists of 20.5 million 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.
8
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 March 31, 2000, the Company had
drawn approximately $1,205 million 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 $900 million
in additional borrowing capacity under this facility as of the
date of this report. This facility's financial covenants require
that the Company maintain certain debt to EBITDA ratios, debt to
capitalization ratios, fixed to floating rate debt ratios and
interest coverage ratios. This facility also contains covenants
which, among other things, may restrict the Company's ability to
incur additional debt, pay dividends, repurchase Company common
stock, sell assets or merge with another company.
The interest rates to be charged on borrowings from this credit
facility can range from 100 to 225 basis points above the London
Interbank Offering Rate (LIBOR), depending on the Company's credit
rating. The current borrowing rate is approximately 200 basis points.
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.
(5) 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 cash to complete the Company's obligations related to this
preferred stock.
(6) EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per share is based
upon the average number of common shares outstanding during the period.
Diluted earnings (loss) per share reflect 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 earnings (loss) per share computations for net income
(loss):
Share and dollars in millions March 31, March 31,
(except per share amounts) Three months ended 2000 1999
-------------------------------------------------------------------------------------------------------------
Numerator:
Net Income (loss) $ (55.4) $ 24.7
Dividends and accretion applicable to preferred stock (.3) ---
-------- --------
Numerator for basic earnings per common share and
earnings per common share assuming dilution -
income applicable to common shareowners $ (55.7) $ 24.7
======== ========
Denominator:
Denominator for basic earnings per common
share - weighted average common shares 202.3 136.4
Potential Dilution:
Stock options --- 2.9
Stock based compensation arrangements --- .8
-------- --------
Denominator for diluted earnings per common share 202.3 140.1
======== ========
Basic earnings (loss) per common share $ (.28) $ .18
======== ========
Earnings (loss) per common share assuming dilution $ (.28) $ .18
======== ========
9
Options to purchase approximately 2.3 million weighted average shares
of common stock at an average of $35.64 per share were outstanding
during the three months ended March 31, 2000, but were not included in
the computation of diluted EPS because they were anti-dilutive. The 6
3/4% convertible subordinated debentures and 7 1/4% convertible
preferred stock were excluded from the diluted EPS calculation because
they are anti-dilutive. The inclusion of the convertible debentures and
preferred stocks would have added 13.8 million and 9.5 million shares,
respectively, to the denominator of the EPS calculation at March 31,
2000.
On April 6, 2000, the Company converted approximately 1.1 million
shares of the aforementioned 7 1/4% convertible preferred stock into
approximately 9.5 million shares of its common stock. Accordingly,
these 9.5 million shares will be added to the denominator of the EPS
calculation during the second quarter of 2000.
(7) 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 SERVICES
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 Cincinati, Ohio area. IT Consulting and the CBLD service
agreement amounts were previously in Other Communications
Services.
LOCAL COMMUNICATIONS SERVICES
Includes Cincinnati Bell Telephone. The Company's public payphone
business has moved to Other Communications Services. Also,
ZoomTown.com's content and web hosting business has moved to Other
Communications Services. ADSL transport continues to be included
in Cincinnati Bell Telephone's results.
WIRELESS SERVICES
Includes Cincinnati Bell Wireless and is unchanged.
OTHER COMMUNICATIONS SERVICES
Includes Cincinnati Bell Supply, Cincinnati Bell Directory,
Cincinnati Bell Any Distance (including the portion of the former
CBLD that provided voice services to the Cincinnati market),
ZoomTown.com and the public payphone business. Cincinnati Bell
Directory was formerly the Directory Services segment. Both
ZoomTown.com and the public payphone business were previously in
Local Communications Services.
Certain corporate administrative expenses have been allocated to
segments based upon the nature of the expense. Assets are those assets
used in the operations of the segment.
The Company's business segment information is as follows:
Three Months
Millions of Dollars Ended March 31,
------------------- ----------------------------
2000 1999
-------- --------
REVENUES
Broadband $ 213.0 $ 17.2
Local Communications 192.8 179.1
Wireless 36.6 15.2
Other Communications 39.1 35.8
Intersegment (11.3) (5.1)
--------- --------
$ 470.2 $ 242.2
========= ========
INTERSEGMENT REVENUES
Broadband $ .4 $ --
Local Communications .8 1.5
Wireless .4 .2
Other Communications 9.7 3.4
--------- --------
$ 11.3 $ 5.1
========= ========
10
EBITDA
Broadband $ (2.2) $ 1.5
Local Communications 90.5 73.7
Wireless 1.6 (6.1)
Other Communications (4.4) 7.7
Corporate and Eliminations (.4) .8
---------- --------
$ 85.1 $ 77.6
========= ========
ASSETS
Broadband $ 5,152.9 $ 8.0
Local Communications 779.0 762.4
Wireless 280.3 221.4
Other Communications 79.1 64.7
Corporate and Eliminations 170.1 16.6
--------- --------
$ 6,461.4 $1,073.1
========= ========
CAPITAL ADDITIONS (excluding Acqusitions)
Broadband $ 91.7 $ .3
Local Communications 43.9 28.1
Wireless 18.0 6.7
Other Communications .3 2.0
Corporate and Eliminations -- --
--------- --------
$ 153.9 $ 37.1
========= ========
DEPRECIATION AND AMORTIZATION
Broadband $ 74.8 $ 1.3
Local Communications 29.4 27.4
Wireless 4.5 3.3
Other Communications 1.9 .3
Corporate and Eliminations -- --
--------- --------
$ 110.6 $ 32.3
========= ========
(8) CINCINNATI BELL TELEPHONE COMPANY - The following summarized financial
information is for the Company's consolidated wholly owned subsidiary,
Cincinnati Bell Telephone Company:
Three Months
Ended March 31,
---------------------
Millions of Dollars 2000 1999
------------------- -------- -------
Revenues....................................................... $ 192.8 $ 181.6
Costs and Expenses............................................. 131.7 135.7
------- -------
Operating Income............................................... $ 61.1 $ 45.9
======= =======
Net Income..................................................... $ 35.8 $ 26.6
======= =======
Results for the three months ended March 31, 1999 include $2.4 million
of Year 2000 programming costs which decreased net income by $1.6
million for the three months ended March 31, 1999.
March 31, December 31,
Millions of Dollars 2000 1999
------------------- ---------- ------------
Current Assets............................................................ $ 137.8 $ 148.5
Telephone Plant-Net....................................................... 617.0 606.9
Other Noncurrent Assets................................................... 24.2 26.0
---------- ----------
Total Assets.............................................................. $ 779.0 $ 781.4
========== =========
Current Liabilities....................................................... $ 151.0 $ 161.6
Noncurrent Liabilities.................................................... 50.0 45.1
Long-Term Debt............................................................ 323.4 322.0
Shareowner's Equity....................................................... 254.6 252.7
---------- ----------
Total Liabilities and Shareowner's Equity................................. $ 779.0 $ 781.4
========== ===========
11
(9) CONTINGENCIES - In the normal course of business, the Company is
subject to various regulatory proceedings, lawsuits, claims and other
matters. Such matters are subject to many uncertainties and outcomes
are not predictable with assurance.
The Company, as well as certain former members of IXC's board of
directors, has 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 pertain to the Company's recently
completed merger with IXC. The complaints allege, 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 has rendered plaintiffs' arguments moot.
While these suits currently remain outstanding and subject to further
litigation, the Company does not believe any of plaintiffs' arguments
have merit. The Company is in the process of negotiating a possible
settlement.
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. The Company is
continuing its investigation of these charges and is cooperating with
the EEOC. The Company and the various complainants are currently
engaged in a voluntary mediation proceeding to attempt to resolve this
matter.
In the course of closing the Company's recently completed 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 has since been extended to June 15, 2000 and the Company
is currently in the process of completing the audit and implementing
the steps necessary to correct violations discovered in the course of
the audit. The Company intends to complete its environmental audit of
these facilities within the time frame established by U.S. EPA and
undertake corrective actions necessary to promptly achieve 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.
(10) RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133 establishes accounting and reporting
standards requiring that a derivative instrument may need to be
recorded in the balance sheet as either an asset or liability, measured
at its fair value. SFAS 133 has been subsequently amended through the
release of SFAS 137, which provides for a deferral of the effective
date of SFAS 133 to all fiscal years beginning after June 15, 2000. As
a result, implementation of SFAS 133 is not mandatory for the Company
until January 1, 2001. Management is currently assessing the impact of
SFAS 133 on the Company's results of operations, cash flows and
financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial
Statements". In SAB 101 (which will be effective for and applicable to
the Company's operating results in the second quarter of 2000), 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. The Company is currently
evaluating SAB 101 to determine its impact on the financial statements.
12
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 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
the Merger did not take place until November 9, 1999, comparisons of current
quarter results with that of the prior year may not yield meaningful results
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 at the beginning
of each year) to aid in the reader's understanding of the financial results
presented in this Form 10-Q. In these instances, financial results and
management's discussion thereof will be labeled as "pro forma". The following
table summarizes the Company's reported and pro forma financial results for
the quarterly periods ending March 31, 2000 and 1999:
AS REPORTED PRO FORMA
Three Months Three Months
Ended March 31, Ended March 31,
---------------------------- ---------------------------
($ Millions) 2000 1999 Change % 2000 1999 Change %
-------- -------- ------ - ------ -------- ------ -
Revenues:
Broadband $ 213.0 $ 17.2 $ 195.8 -- $ 213.0 $ 178.5 $ 34.5 19
Local communications 192.8 179.1 13.7 8 192.8 179.1 13.7 8
Wireless 36.6 15.2 21.4 141 36.6 15.2 21.4 141
Other communications 39.1 35.8 3.3 9 39.1 35.8 3.3 9
Intersegment (11.3) (5.1) (6.2) 122 (11.3) (5.0) (6.3) 126
----- ---- ---- ----- ---- ----
Total 470.2 242.2 228.0 94 470.2 403.6 66.6 17
Costs and expenses:
Cost of providing services and products sold 226.2 107.9 118.3 110 226.2 212.8 13.4 6
Selling, general and administrative 158.9 56.7 102.2 180 158.9 108.5 50.4 47
----- ---- ---- ----- ---- ----
Total 385.1 164.6 220.5 134 385.1 321.3 63.8 20
EBITDA 85.1 77.6 7.5 10 85.1 82.3 2.8 3
Depreciation and Amortization 110.6 32.3 78.3 242 110.6 89.3 21.3 24
----- ---- ---- ----- ---- ----
Operating Income (Loss) (25.5) 45.3 (70.8) -- (25.5) (7.0) (18.5) --
Other Income, Net 7.0 -- 7.0 -- 7.0 5.8 1.2 21
Equity Loss in Unconsolidated Entities 2.0 -- 2.0 -- 2.0 2.9 (0.9) (31)
Minority Interest Expense (Income) 10.9 (2.3) 13.2 -- 10.9 9.4 1.5 16
Interest Expense 36.4 8.7 27.7 318 36.4 26.4 10.0 38
----- ---- ---- ----- ---- ----
Income (Loss) Before Income Taxes (67.8) 38.9 (106.7) -- (67.8) (39.9) (27.9) --
Income Tax Provision (Benefit) (12.4) 14.2 (26.6) -- (12.4) 15.5 (27.9) --
----- ---- ---- ----- ---- ----
Net Income (Loss) (55.4) 24.7 (80.1) -- (55.4) (55.4) -- --
Dividends and Accretion Applicable
to Preferred Stock 0.3 -- 0.3 -- 0.3 1.6 (1.3) --
----- ---- ---- ----- ---- ----
Net Income (Loss) Attributable to
Common Shareowners $ (55.7) $ 24.7 $ (80.4) -- $ (55.7) $ (57.0) $ (1.3) --
===== ==== ==== ===== ==== ====
Income (Loss) per Common Share
(Basic and Diluted) $ (0.28) $ .18 $ (.46) -- $ (0.28) $ (0.28) $ -- --
===== ==== ==== ===== ==== ====
13
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED OVERVIEW
The discussion and analysis of the Company's Consolidated and Broadband
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.
Revenues of $470 million were $67 million higher than in the first quarter of
1999, owing largely to the growth of the Broadband, Wireless and Local
Communications segments. The Broadband segment, encompassing the operations of
the Company's new Broadwing Communications Inc. subsidiary, produced more than
half of the increase, or $35 million, as a result of growth in broadband
transport, data and Internet and network integration and consulting revenues.
Revenues from the Wireless segment increased 141%, or $21 million, and were the
result of growth in subscribership. The Local Communications segment provided
nearly $14 million in additional revenues, representing an 8% increase that came
largely from data and broadband transport and value-added services. The Other
Communications segment provided a $3 million increase, with growth coming from
the new residential long distance offering at Cincinnati Bell Any Distance
(CBAD), directory advertising and equipment sales.
Costs and expenses of $385 million (less depreciation and amortization) were $64
million higher than in the first quarter of 1999, of which $23 million was due
to advertising to launch the new brand and new products and services. An
additional $14 million in costs and expenses resulted from the growth of the
Wireless segment. Costs of providing services and products sold was $226
million, a $13 million increase, nearly all of which was attributable to
maintenance of the fiber-optic network and revenue growth within the Broadband
segment. Selling, general and administrative (SG&A) expenses of $159 million
increased $50 million over the prior year as a result of heavy spending on the
Company's advertising campaigns mentioned above and an increased sales force to
support existing and new products and services.
Earnings before interest, taxes, depreciation and amortization (EBITDA) of $85
million represented a modest improvement over the prior year. Significant EBITDA
improvements by the Local Communications and Wireless segments were somewhat
offset by the declining EBITDA of the Other Communications segment and a small
EBITDA loss for the Broadband segment. The declining EBITDA of the Broadband and
Other Communications segments are largely attributable to advertising
expenditures of $17 million to launch the Company's nationwide presence and $6
million related to its Any Distance long-distance offer. The Company anticipates
an improvement in EBITDA as the focus of these advertising efforts shift from
general informational advertising to a more product-oriented approach.
Depreciation and amortization expenses increased $21 million for the first three
months of 2000, $16 million of which was the result of the continued
construction of the fiber-optic network. Higher depreciation and amortization
expenses were also incurred by the Local Communications and Wireless segments as
each continues to add to its respective network infrastructure.
An operating loss of $26 million represented a $19 million decline in comparison
to the prior year quarter, with decreases by the Broadband and Other
Communications segments being slightly offset by the improvements of the Local
Communications and Wireless segments.
Minority interest expense of $11 million represented a $2 million increase
versus the prior year quarter. This was the result of AT&T PCS' 19.9% minority
interest in the operating loss of the Company's wireless business (an income
item to the Company) being slightly less than in the prior year quarter, and
higher dividends and accretion on the 12 1/2% preferred stock of Broadwing
Communications (an expense item).
Interest expense increased $10 million due to higher average debt levels
necessary to fund continued construction of the fiber-optic network (see further
discussion of indebtedness under "Financial Condition" and in the Notes to
Financial Statements).
The Company realized a gain of $7 million on the sale of approximately 100,000
shares of the common stock of an investee that the Company classifies as an
"available for sale" security under SFAS 115.
The Company had a $2 million loss resulting from an equity investee accounted
for under the equity method.
14
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income taxes decreased $28 million 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 Company's previous
effective tax rate of approximately 35% will not be sustainable to future
periods due to significant levels of non-deductible expense such as goodwill
amortization and minority interest dividends.
The Company reported a net loss of $55 million during the first quarter, equal
to the amount reported in the prior year. The net loss applicable to common
shareholders and loss per common share was $56 million or $.28 per common share,
respectively, and virtually equal to the $57 million and $.28 reported in the
prior year quarter.
CONSOLIDATED OVERVIEW ON AN AS REPORTED BASIS:
Revenues of $470 million were $228 million higher than in the first quarter of
1999, owing largely to acquisitions and growth of the company's wireless
business. Costs and expenses of $385 million (less depreciation and
amortization) were $221 million higher than in the first quarter of 1999, nearly
90% of which (or $199 million) was attributable to the operations of the
recently acquired Broadband segment. Increases in addition to the Merger are
explained in the pro forma results above.
Earnings before interest, taxes, depreciation and amortization (EBITDA) of $85
million represented a 10% improvement over the prior year. Significant EBITDA
improvements by the Local Communications and Wireless segments were somewhat
offset by the declining EBITDA of the Other Communications segment and the
inclusion of the Broadband segment for the first full quarter. EBITDA margin
experienced a significant decline, decreasing to 18% in the current quarter 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 anticipates an improvement in EBITDA as the focus of its advertising
effort shifts from general informational advertising to a more product-oriented
approach.
The Company reported a net loss of $55 million during the first quarter, an $80
million decline versus the prior year. The net loss applicable to common
shareholders was $56 million in the first quarter, or a $.28 loss per common
share. In the prior year quarter, net income applicable to common shareholders
and basic and diluted earnings per common share was $25 million and $.18
respectively.
BROADBAND ON A PRO FORMA BASIS
As Reported Pro Forma
----------- ---------
Three Months Three Months
Ended March 31, Ended March 31,
--------------------------- --------------------------------
($ Millions) 2000 1999 Change % 2000 1999 Change %
---- ---- ------ - ---- ---- ------ -
Revenues:
Broadband transport $ 91.3 $ --- $ 91.3 n/m $ 91.3 $ 70.9 $ 20.4 29
Switched services 103.1 15.1 88.0 n/m 103.1 92.8 10.3 11
Data and Internet 9.6 --- 9.6 n/m 9.6 5.2 4.4 85
Other 9.0 2.1 6.9 n/m 9.0 9.6 (0.6) (6)
-------- ------ ------- ------- ------- ------
Total 213.0 17.2 195.8 n/m 213.0 178.5 34.5 19
Costs and expenses:
Cost of providing services and products sold 126.2 10.0 116.2 n/m 126.2 114.8 11.4 10
Selling, general and administrative 89.0 5.7 83.3 n/m 89.0 57.4 31.6 55
-------- ------ ------- ------- ------- ------
Total 215.2 15.7 199.5 n/m 215.2 172.2 43.0 25
EBITDA $ (2.2) $ 1.5 $ (3.7) n/m $ (2.2) 6.3 (8.5) (135)
The Broadband segment comprises the operations of the Company's Broadwing
Communications Inc. subsidiary, a leading provider of telecommunications
transmission and switched long-distance services with a coast-to-coast fiber
optic network containing approximately 16,000 fiber route miles at March 31,
2000. The Company utilizes its advanced fiber-optic national network to provide
data and voice services through its network, using both wholesale and retail
channels. Broadband transport services are comprised of the lease of dedicated
circuits that customers use to transmit voice and data traffic, indefeasible
right-to-use ("IRU") agreements and network construction services.
15
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Switched services represents the transmission of long-distance switched
traffic to resellers and retail business customers through the Company's
switches. Data/Internet services include providing frame relay and ATM-based
data services, Web hosting and collocation. Other is comprised of Network
integration and consulting services along with the sale of the related
equipment and, in 1999, revenues from the Company's now completed Vyvx
project.
Revenues increased $35 million, or 19%. The increase was due to a $24 million
improvement in data services (which includes Broadband transport, Data and
Internet and Other), and a $10 million increase in switched services. Broadband
transport improvement was mainly comprised of increases in circuit-lease revenue
and IRU revenue. Switched service revenue grew 11% year over year to $103
million. Increases in the switched services revenues, including the traffic
associated with the May 10, 1999 acquisition of Coastal Telcom Limited Company
and other related companies under common control ("Coastal"), were partially
offset by the decrease in the wholesale portion of switched services revenues as
a result of the decision to de-emphasize this business. At March 31, 2000,
wholesale revenues are now less than 40% of the switched services, whereas they
comprised more than 50% a year ago. Data and Internet, while only a small
percentage of total revenues today, grew 86%. Other revenues grew more than 300%
due to network integration and consulting sales, but this was offset by the
completion of the Vyvx project which provided $7 million of revenues in 1999.
Cost of services primarily reflects access charges paid to LECs, transmission
lease payments to other carriers and employee and hardware costs in the
data-consulting arena. The increase was driven by revenue growth, and was held
to a minimum as much of the year-over-year increase in data revenue and voice
traffic was carried on the Company's network. The gross profit margin increased
from 36% to 41% in the first quarter of 2000 versus the prior year. Going
forward, cost of service expense is expected to continue to grow with revenue,
but decline as a percentage of revenue as more of the traffic is carried on the
Company's network.
Selling, general and administrative costs for the quarter increased $32 million,
or 55%. Advertising increased $17 million over the first quarter of 1999 due to
the national advertising campaign to launch the "Broadwing" brand. The remainder
of the increase was primarily salary-related costs as the Company added
approximately 600 employees from March 1999 to March 2000 mainly due to the
inclusion of the Coastal and the expansion of the retail and IT consulting
businesses. Selling, general and administrative expenses are expected to decline
due to the completion of the initial branding campaign.
An EBITDA loss of $2 million was $9 million less than in the prior year and is
the result of the items discussed above.
BROADBAND ON AN AS REPORTED BASIS:
Revenues increased $196 million to $213 million in current quarter due to
increases in all categories resulting from the Merger. Additional growth came
from network integration and consulting revenues provided by the IT Consulting
subsidiary.
Cost of providing services and products sold increased $116 million due to the
Merger and growth in the IT Consulting business. SG&A expenses increased for the
same reasons as well as the increased advertising, resulting in an $83 million
increase.
An EBITDA loss of $2 million is $4 million less than in the prior year quarter
and is a result of the items discussed above.
16
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LOCAL COMMUNICATIONS
Three Months Ended March 31,
---------------------------------------
($ Millions) 2000 1999 Change %
---- ---- ------ -
Revenues
Local service $ 111.3 $ 104.1 $ 7.2 7
Network access 48.3 45.7 2.6 6
Other services 33.2 29.3 3.9 13
-------- -------- --------
Total 192.8 179.1 13.7 8
Costs and Expenses:
Cost of providing services and products sold 66.4 70.5 (4.1) (6)
Selling, general and administrative 35.9 34.9 1.0 3
-------- -------- --------
Total 102.3 105.4 (3.1) (3)
EBITDA $ 90.5 $ 73.7 $ 16.8 23
Access lines (In thousands) 1,049 1,044 5 1
Voice grade equivalents (In thousands) 558 416 142 34
The Local Communications segment provides local service, network access
(including high-speed data transport), long distance, data and Internet, ADSL
transport, sales and installation of communications equipment and other
ancillary telecommunications services through its Cincinnati Bell Telephone
subsidiary.
Total revenues of $193 million were 8% higher than the $179 million recorded in
the prior year quarter, owing to growth in all categories. The local service
category provided most of the revenue growth for the segment, increasing 7% for
the quarter, or $7 million. For local services, growth came primarily from data
transport and value-added services. These services, in the aggregate,
contributed more than 80% of the increase for this category, or $6 million. CBT
added nearly 40,000 new subscribers for its Complete Connections(R) calling
service bundle during the first quarter, bringing total subscribership and
penetration rates to 139,000 and 20%, respectively. Similar success was achieved
with regard to the Company's ZoomTownSM ADSL product, with subscribership now
topping 24,000 as a result of the 6,000 subscribers added this quarter. The
growth of the ZoomTownSM service resulted in $1 million in added revenues in
comparison to the prior year quarter. A small increase in access lines
contributed the remainder of the increase for the category.
Network access revenues were 6% higher, or $3 million. The sale of high capacity
digital services (expressed in voice grade equivalents, or VGEs) increased 34%,
resulting in approximately $4 million in new revenues for the network access
category. The Company also realized approximately $1 million in additional
revenues due to the recovery of mandated telecommunications costs. In spite of a
9% increase in access minutes of use, 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 increased 13% over the prior year quarter, or $4 million.
The Company's competitive pricing structure for the high-speed Internet access
(ZoomTownSM) and Internet service provider (FUSE(R)) bundle resulted in
increased subscribership for FUSE(R), which added 5,000 new subscribers for the
quarter. FUSE(R) revenues have grown nearly $1 million since the first quarter
of last year. Other increases in the category are attributable to agency fees
for sales of CBAD services, higher rent and facilities collocation revenue and a
lower loss on receivables versus the prior year quarter.
CBT 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.
Costs and expenses of $102 million (excluding depreciation and amortization)
were $3 million less than in the prior year, representing a 3% decrease and the
lowest quarterly total in more than a year. Costs of providing services
decreased by $4 million versus the prior year quarter, as lower spending for
network switching right-to-use fees and lower operating taxes were partially
offset by an increase in customer care expenses incurred in support of new
products and services.
17
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, general and administrative expenses increased by $1 million in
comparison to the prior year quarter as decreases in Y2K spending were more than
offset by additional advertising and call center expenses incurred in support of
new calling service bundles and the Company's ZoomTownSM ADSL service.
As a result of the revenue increase and expense decrease detailed above, EBITDA
grew from $74 million in the prior year quarter to the current quarter total of
$91 million, a 23% increase.
WIRELESS
Three Months Ended March 31,
-----------------------------------
($ Millions) 2000 1999 Change %
---- ---- ------ -
Revenues:
Service $ 33.2 $ 12.5 $ 20.7 166
Equipment 3.4 2.7 .7 26
------ ------ ------
Total 36.6 15.2 21.4 141
Costs and expenses:
Cost of providing services and products sold 17.6 11.3 6.3 56
Selling, general and administrative 17.4 10.0 7.4 74
------ ------ ------
Total 35.0 21.3 13.7 64
EBITDA $ 1.6 $ (6.1) $ 7.7 126
Number of subscribers (thousands) 199.5 70.5 129.0 183
Customer churn 1.1% 1.4% (21)
Average revenue per unit, postpaid customers (ARPU) $ 66 $ 67 $ (1) (1)
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.
Revenues of $37 million far exceeded that of the prior year quarter, gaining
141% versus the $15 million recorded in the prior year quarter. The vast
majority of revenues for this segment, or approximately $33 million, were
derived from service revenues. Remaining revenues resulted from the sale of
handsets and associated accessories. Service revenues are growing on the basis
of increasing subscribership, consistent ARPU and low customer churn.
Approximately 37,000 subscribers were added during the quarter, with significant
growth from both the postpaid and prepaid categories (20,000 and 17,000,
respectively). ARPU from postpaid subscribers was $66 for the quarter;
approximately equal to the $67 generated in the prior year quarter. Customer
churn remains low and is among the best in the industry, decreasing to 1.1% of
postpaid subscribers for the first quarter. The launch of CBW's new i-wirelessSM
prepaid service in the fourth quarter of 1999 resulted in $2 million in new
revenues in comparison to the prior year as subscribership grew from
approximately 11,000 subscribers at the end of 1999 to more than 28,000 at the
end of the current quarter. i-wirelessSM also represents an efficient use of the
Company's wireless network due to its use of off-peak minutes.
Costs and expenses of $35 million (excluding depreciation and amortization)
increased 64% versus the prior year quarter, largely as a function of
increasing subscribership. Costs and expenses were divided equally between
costs of providing services and products sold and selling, general and
administrative expenses, totaling approximately $18 million each in the
current quarter.
Cost of providing services 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 34% of
revenue in the first three months of 2000, considerably better than the 56%
reported during the same period in the prior year.
Selling, general and administrative expenses include the high cost of customer
acquisition and include the subsidy of customer handsets, advertising,
distribution and promotional expenses. These costs totaled $17.4 million for the
quarter due to the significant growth in subscribership. The cost per gross
addition (CPGA) was $385 for postpaid
18
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
subscribers. Selling, general and administrative costs dropped significantly as
a percentage of total revenue, decreasing from 66% in the prior year quarter to
48% for the first three months of 2000.
A significant improvement in EBITDA was achieved during the first quarter as a
function of increasing revenues and the expense controls noted above. EBITDA was
positive for the first time in the relatively short existence of the wireless
business, which exceeded the Company's projections by approximately one year.
(CBW began operations in May 1998). EBITDA of $2 million represented a $8
million improvement over the prior year quarter, with a similar effect on EBITDA
margin. EBITDA margin increased to 4.3%, a significant increase over the
negative 40.1% margin reported for the prior year quarter.
OTHER COMMUNICATIONS
Three Months Ended March 31,
-----------------------------------
($ Millions) 2000 1999 Change %
---- ---- ------ -
Revenues $ 39.1 $ 35.8 $ 3.3 9
Costs and expenses:
Cost of providing services and products sold 25.3 20.6 4.7 23
Selling, general and administrative 18.2 7.5 10.7 143
------- ------- -------
Total 43.5 28.1 15.4 55
EBITDA $ (4.4) $ 7.7 $ (12.1) (157)
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, or CBAD), Cincinnati Bell
Supply (CBS) and ZoomTown.com subsidiaries, as well as its public payphone
operations. CBD publishes Yellow Page directories and sells directory
advertising and informational services to customers primarily in its Local
Communications' segment service area. CBAD resells voice long distance
service primarily to small and medium-sized residence and business customers
in the same Local Communications segment service area. CBS resells
telecommunications and computer equipment in the secondary market.
ZoomTown.com provides Web hosting and other Internet-based products and
services. The Company is currently evaluating plans to sell, or exit, the CBS
business because it does not fit with the Company's long-term strategic plan.
Revenues of $39 million for the quarter represented a 9% increase, or $3
million, versus the prior year quarter. CBAD produced the majority of the
revenue increase, gaining $2 million on the success of its new "Any Distance"
service offering. This offer was successful in capturing a 40% market share
by the end of the first quarter, representing 252,000 subscribers. CBD (which
accounts for approximately 50% of the revenues for this segment) also
reported higher revenues, increasing $1 million (or 6%) on the strength of
the successful 1999 sales campaign. CBS contributed an additional $1 million
revenue increase versus the prior year quarter due to higher sales of
telecommunications equipment.
Costs and expenses (excluding depreciation and amortization) increased $15
million, or 55%. Costs of providing services were approximately $5 million
higher, with all subsidiaries reporting increases. These increases were
primarily the result of the Any Distance offer, higher sales volumes at CBS and
the operations of the Company's new ZoomTown.com subsidiary. CBD also reported
an increase in direct costs resulting from higher sales commissions and printing
costs for its directories. SG&A expenses were also higher for each subsidiary,
increasing by nearly $11 million in total versus the prior year quarter. Of the
increase for the category, $6 million was the result of advertising and
promotional efforts in support of the Any Distance offer. Versus the prior year
when it did not have operations, the Company's new ZoomTown.com subsidiary
reported a $1 million increase in SG&A expenses (consisting largely of customer
care, consulting and other operational expenses). CBS reported a $1 million
increase, reflecting higher employee costs and the move to a new facility.
EBITDA was reduced to a negative $4 million as a result of the above, nearly $12
million less than in the prior year. The Company anticipates improvement in
EBITDA and EBITDA margin once it begins to fully realize the benefits of the
advertising and promotional efforts necessary to advance the Any Distance offer,
and leverage its existing billing, customer care and network infrastructure.
19
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
The Company's continued transformation from a wireline voice communications
provider focused on its local franchise to a nationwide provider of data and
voice communications 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.
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. In January 2000,
pursuant to a tender offer, the Company borrowed approximately $400 million in
order to redeem the majority of the outstanding 9% senior subordinated notes
assumed during the Merger. This tender offer was required under the terms of the
note indenture due to a change in control provision. At March 31, 2000, the
Company had drawn approximately $1.2 billion from the credit facility in order
to refinance its existing debt and debt assumed as part of the Merger.
Accordingly, the Company has approximately $900 million in additional borrowing
capacity under this facility as of the date of this report. Separately, the
Company also has ownership position in four publicly traded companies which were
valued at $864 million as of March 31, 2000. The sale of these securities is
subject to limitations including registration rights.
On April 6, 2000, the Company completed the 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 dividend payment requirements.
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 is
approximately 200 basis points. 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:
Duff & Phelps Moody's
Entity Description Standard and Poor's Credit Rating Service Investor Service
- -----------------------------------------------------------------------------------------------------------
BRW Corporate Credit Rating BB+ BB+ Ba2
CBT Corporate Credit Rating BB+ BBB+ Baa3
CASH FLOW
For the first three months of 2000, cash provided by operating activities was $5
million, compared to $41 million in 1999 due to lower earnings. Decreases in
other current assets and increases in other current liabilities were more than
offset by decreases in accounts payable and accrued liabilities, and increases
in other assets and liabilities.
20
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's significant investing activities are capital expenditures and
equity investments. Capital expenditures for the quarter were approximately $154
million, considerably higher than the $37 million spent in the prior year
period. This increase is attributable to expenditures associated with continued
construction of the Company's nationwide fiber-optic network, additional
equipment purchases by CBT, and higher levels of capital investment at CBW.
Capital expenditures to maintain and grow the nationwide fiber network, complete
the wireless network expansion, and maintain the local Cincinnati network are
expected to be approximately $805 million in 2000, consistent with amounts spent
by the Company on a pro forma basis in 1999.
In contrast to the first three months of 1999 (when $14 in common stock
dividends were paid to shareowners), no dividends were paid on common stock in
the first three months of 2000. Approximately $5 million in preferred stock
dividends were paid to shareowners during the first quarter of 2000 (this amount
was offset by approximately $4 million in accretion that was neither a source
nor use of cash). The Company switched to cash payments of dividends on its 12
1/2% preferred stock in February 2000 and approximately $12 million in dividends
were paid on this preferred stock in the first quarter of 2000. This amount is
included in the "Minority Interest (Income) Expense" caption in the Consolidated
Statements of Income and Retained Earnings.
BALANCE SHEET
The following comparisons are relative to December 31, 1999.
The change in cash and cash equivalents and capital expenditures are discussed
above. Accounts receivable increased as a result of increased revenues.
Increased inventory levels are attributable to equipment requirements associated
with new product offerings. Goodwill and other intangibles decreased as a result
of adjustments relating to the Merger and 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 quarter of
2000. Increases to common stock outstanding and additional paid in capital are
due to stock option exercises in the first quarter of 2000.
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 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. CBT's initial brief is
due May 30, 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.
KENTUCKY - On June 29, 1998, CBT filed an application with the Public Service
Commission of Kentucky (PSCK) seeking approval of an alternative regulation plan
similar to the Commitment 2000 plan approved by the PUCO in Ohio. On January 25,
1999, the PSCK issued an order approving the Kentucky alternative regulation
plan with certain modifications. One of the modifications was the adoption of an
earnings-sharing provision whereby customers would receive one-half of earnings
on equity in excess of 13.5%. The PSCK also ordered that residential rates be
frozen for three years and required rate reductions of approximately $3 million
per year versus current rates. On February 12, 1999, CBT filed a petition
seeking rehearing of the PSCK's January 25, 1999 order. On July 26, 1999, the
PSCK issued an order that eliminated the automatic earnings-sharing provision
and revised the required rate reductions to $2.3 million per year, instead of
the $3 million per year previously ordered.
21
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OUTLOOK
Evolving technology, the preferences of consumers, the legislative and
regulatory initiatives of policy makers and the convergence of other industries
with the 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.
CBT'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, blend or even move, 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. CBW is one of six active wireless service providers in the
Cincinnati and Dayton, Ohio metropolitan market areas. CBD's competitors are
directory services companies, newspapers and other media advertising services
providers in the Cincinnati metropolitan market area and now competes with its
former sales representative for Yellow Pages directory customers. This
competition may affect CBD's ability to grow or maintain profits and revenues.
CBS's competitors include vendors of new and used computer and communications
equipment operating regionally and across the nation.
Cincinnati Bell Any Distance captured considerable market share in the Greater
Cincinnati area during this quarter, 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.
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.
22
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
23
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in Note 9 of the notes to the
condensed consolidated financial statements on page 12 of this quarterly report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 6, 2000, the Company converted approximately 1.1 million shares of its
7 1/4% convertible preferred stock into approximately 9.5 million shares of its
common stock, based on a conversion factor of 8.945 common shares for each share
of convertible preferred stock. Holders had the option to convert their shares
of preferred stock into shares of the Company's common stock, or accept a cash
payment in lieu of this conversion feature. A cash payment was made for
approximately 100 preferred shares that were not converted by the holders.
The Company is restricted as to the payment of certain dividends as defined in
the Credit Agreement that is filed as Exhibit (3)(a) to this Report on Form
10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the first
quarter of 2000.
The Company's annual meeting of shareholders was conducted on April 19, 2000. At
this meeting, shareholders voted on:
i. Election of three directors for three-year terms expiring in 2003,
ii. Amendment of the Company's Articles of Incorporation to change the
Company's official name to Broadwing Inc.,
iii. Approval of the amended Broadwing Inc. 1997 Long Term Incentive Plan,
iv. Approval of the amended Broadwing Inc. Short Term Incentive Plan, and
v. Appointment of PricewaterhouseCoopers LLP as independent accountants
for audit of the Company's financial statements for the year 2000.
The results of such votes were as follows:
i. Richard G. Ellenberger was elected as a director with 171,558,492
common shares voting for election and 1,919,895 shares voting against
election. Karen M. Hoguet was elected as a director with 171,634,748
common shares voting for election and 1,843,639 shares voting against
election. David B. Sharrock was elected as a director with 171,643,140
common shares voting for election and 1,835,247 shares voting against
election.
ii. The proposal to amend the Company's Articles of Incorporation to change
the Company's official name to Broadwing Inc. was approved with
170,847,428 common shares voting for the proposal, 1,784,879 common
shares voting against the proposal, and 846,080 common shares which
were abstentions or broker non-votes.
iii. The proposal to approve the amended Broadwing Inc. 1997 Long Term
Incentive Plan was approved with 153,924,278 common shares voting for
the proposal, 18,292,191 common shares voting against the proposal, and
1,261,918 common shares which were abstentions or broker non-votes.
iv. The proposal to approve the amended Broadwing Inc. Short Term Incentive
Plan was approved with 164,674,785 common shares voting for the
proposal, 7,446,374 common shares voting against the proposal, and
1,357,228 common shares which were abstentions or broker non-votes.
24
v. PricewaterhouseCoopers LLP was ratified as the Company's independent
accountants with 171,966,558 common shares voting for ratification,
874,495 common shares voting against ratification, and 637,334 common
shares which were abstentions or broker non-votes.
A shareholder proposal recommending a change to the method of executive
incentive compensation was included in the Company's proxy statement, but was
not submitted for shareholder vote because the item was not properly presented
at the shareholder meeting.
ITEM 5. OTHER INFORMATION
See Item 2 above for a discussion regarding the conversion of the Company's 7
1/4% convertible preferred stock into common shares of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following are filed as Exhibits to Part I of this Form 10-Q:
Exhibit
Number
-------
(10)(i)(1) Credit Agreement dated as of January 12, 2000 among
Cincinnati Bell Inc. (aka Broadwing Inc.) and IXCS as
Borrowers, Cincinnati Bell Inc. as Parent Guarantor,
the Initial Lenders, Initial Issuing Banks and Swing
Line Banks named herein, Bank of America, N.A., as
Syndication Agent, Citicorp USA, Inc., as
Administrative Agent, Credit Suisse First Boston and
The Bank of New York, as Co-Documentation Agents, PNC
Bank, N.A., as Agent and Salomon Smith Barney Inc.
and Banc of America Securities LLC, as Joint Lead
Arrangers.
(10)(iii)(A)(1) Short Term Incentive Plan of Broadwing Inc., as
amended and restated effective January 1, 2000.
(10)(iii)(A)(2) Broadwing Inc. Long Term Incentive Plan, as amended
and restated effective January 1, 2000.
(27) Financial Data Schedule
(b) Reports on Form 8-K.
None.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Broadwing Inc.
Date: May 12, 2000 /s/ Kevin W. Mooney
-------------- --------------------------------------
Kevin W. Mooney
Chief Financial Officer
26