SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-20803
BROADWING COMMUNICATIONS INC.
Incorporated under the laws of the State of Delaware
1122 Capital of Texas Highway South, Austin, Texas 78746-6426
I.R.S. Employer Identification Number 74-2644120
Telephone - Area Code 512 328-1112
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
All outstanding shares of the Registrant's common stock are owned by
Broadwing Inc.
The number of shares of Preferred Stock outstanding was 395,210 on April 30,
2001.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
DESCRIPTION PAGE
Item 1. Financial Statements
Condensed Consolidated Statements of Income and
Comprehensive Income (Loss) (Unaudited) Three Months Ended
March 31, 2001 and 2000 1
Condensed Consolidated Balance Sheets
March 31, 2001 (Unaudited) and December 31, 2000 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2001 and 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
DESCRIPTION PAGE
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
Form 10-Q Part I Broadwing Communications Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(Millions of Dollars)
(Unaudited)
Three Months
Ended March 31,
---------------------------
2001 2000
--------- --------
REVENUES
Broadband transport $ 111.7 $ 90.3
Switched services 103.9 103.0
Data and Internet 27.0 9.7
Other services 54.0 9.0
--------- --------
Total revenues 296.6 212.0
--------- --------
COSTS AND EXPENSES
Cost of providing services
and products sold 178.8 125.2
Selling, general and administrative 84.7 89.0
Depreciation 59.2 47.6
Amortization 27.6 27.1
--------- --------
Total costs and expenses 350.3 288.9
--------- --------
OPERATING LOSS (53.7) (76.9)
Gain on investments, net 15.5 --
Equity loss in unconsolidated entities 3.3 2.0
Interest expense 19.2 12.9
Other income (expense), net (0.5) 0.2
--------- --------
Loss before income taxes (61.2) (91.6)
Income tax benefit (15.3) (30.4)
--------- --------
NET LOSS (45.9) (61.2)
Other comprehensive income, net of tax:
Unrealized gain on investments -- 27.3
--------- --------
COMPREHENSIVE LOSS $ (45.9) $ (33.9)
========= ========
See Notes to Financial Statements.
1
Form 10-Q Part I Broadwing Communications Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
March 31, December 31,
2001 2000
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 13.8 $ 30.4
Receivables, less allowances of $40.7 and $32.2, respectively 232.4 189.5
Prepaid expenses and other current assets 18.3 20.1
------------ ------------
Total current assets 264.5 240.0
Property, plant and equipment, net 2,194.4 2,103.9
Goodwill and other intangibles, net 2,440.9 2,467.6
Investments in other entities 6.4 26.4
Deferred income tax benefits 168.2 152.8
Other noncurrent assets 3.2 3.5
------------ ------------
Total Assets $ 5,077.6 $ 4,994.2
============ ============
LIABILITIES AND SHAREOWNER'S EQUITY
Current Liabilities
Short-term debt $ 4.4 $ 8.3
Accounts payable 194.1 180.6
Accrued service cost 53.1 67.6
Accrued taxes. 45.0 48.5
Current portion of unearned revenue and customer deposits 54.8 54.6
Deferred income tax liabilities 2.1 2.6
Other current liabilities 77.8 74.0
------------ ------------
Total current liabilities 431.3 436.2
Long-term debt, less current portion 50.3 54.0
Unearned revenue, less current portion 597.4 611.0
Intercompany payable to Parent Company 1,120.1 994.8
Other long-term liabilities 80.9 83.2
------------ ------------
Total liabilities 2,280.0 2,179.2
12 1/2% Junior Exchangeable Preferred Stock; $.01 par value;
authorized - 3,000,000 shares of all classes of preferred stock;
395,210 shares issued and outstanding and aggregate liquidation
preference of $401.4 at March 31, 2001 and December 31, 2000 422.8 421.0
Commitments and Contingencies
Shareowner's Equity
Common shares, $.01 par value, 1,000,000 shares authorized;
500,000 shares issued and outstanding -- --
Additional paid-in capital 2,929.5 2,902.8
Accumulated deficit (554.7) (508.8)
------------ ------------
Total shareowner's equity 2,374.8 2,394.0
------------ ------------
Total Liabilities and Shareowner's Equity $ 5,077.6 $ 4,994.2
============ ============
See Notes to Financial Statements.
2
Form 10-Q Part I Broadwing Communications Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
Three Months
Ended March 31,
------------------------
2001 2000
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (45.9) $ (61.2)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 59.2 47.6
Amortization 27.6 27.1
Provision for loss on receivables 29.8 6.5
Gain on investments, net (15.5) --
Deferred income taxes (22.2) (30.4)
Equity loss in unconsolidated entities 3.3 2.0
Other, net 0.9 1.9
Changes in operating assets and liabilities
Increase in receivables (72.7) (31.4)
Decrease in other current assets 1.9 5.3
Increase in accounts payable 13.5 2.2
Decrease in other current liabilities (8.1) (6.6)
Decrease in unearned revenue (13.4) --
Decrease in other assets and liabilities, net -- (3.1)
--------- --------
Net cash used in operating activities (41.6) (40.1)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (150.3) (88.9)
Proceeds from sale of investments 28.9 8.2
--------- --------
Net cash used in investing activities (121.4) (80.7)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Parent Company loan 163.4 485.1
Repayment of long-term debt (5.1) (409.4)
Preferred stock dividends paid (12.4) (12.4)
Other, net 0.5 1.3
--------- --------
Net cash provided by financing activities 146.4 64.6
--------- --------
Net decrease in cash and cash equivalents (16.6) (56.2)
Cash and cash equivalents at beginning of period 30.4 56.2
--------- --------
Cash and cash equivalents at end of period $ 13.8 $ --
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 0.2 $ --
========= ========
Interest, net of amount capitalized $ 3.7 $ 4.3
========= ========
Non-cash investing and financing activities:
Accretion of preferred stock $ 0.7 $ 0.5
========= ========
See Notes to Financial Statements
3
Form 10-Q Part I Broadwing Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Broadwing Communications Inc. ("the Company") is an Austin, Texas based
provider of communications services. The Company utilizes its advanced
optical network consisting of more than 18,250 route miles to provide
broadband transport, Internet services and long distance. The Company also
offers data collocation, information technology consulting, network
construction and other services and provides network capacity and fibers in
the form of indefeasible right of use ("IRU") agreements. The Company is a
wholly-owned subsidiary of Broadwing Inc. ("the Parent Company").
The consolidated financial statements of the Company 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 Note 3. Certain
prior year amounts have been reclassified to conform to the current
classifications with no effect on financial results. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules and regulations. The December
31, 2000 condensed balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. It is suggested that these financial
statements be read in conjunction with financial statements and notes
thereto included in the Company's 2000 Annual Report on Form 10-K.
2. INVESTMENTS IN OTHER ENTITIES
PSINET, INC.
The Company liquidated its entire investment in PSINet during the first
quarter of 2001. Proceeds from the sale of this investment totaled $29
million and resulted in recognition of a gain of $17 million during the
quarter.
APPLIED THEORY, INC.
The Company holds a 21.5% ownership interest in Applied Theory
Communications Inc., a New York-based Internet service provider.
The market value of the Company's investment at the beginning of 2001 was
approximately $12 million, following the write-off of a portion of the
investment in the fourth quarter of 2000 due to an impairment that was
deemed to be "other than temporary." During the first quarter of 2001, the
Company recognized an additional impairment charge of $2 million as a
result of a further decline in the market value of the investment. The
Company also recognized approximately $3 million in equity losses
pertaining to its investment in Applied Theory, which is reflected in the
Condensed Consolidated Statement of Income and
4
Form 10-Q Part I Broadwing Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Comprehensive Income (Loss) under the caption "Equity loss in
unconsolidated entities." In addition, during the first quarter of 2001,
the Company sold 178,300 shares of Applied Theory at an average price of
$1.22 per share, resulting in a loss of approximately $0.2 million.
The combination of the impairment charge, equity losses and investment
sales reduced the carrying value of this investment to $6 million as of
March 31, 2001.
3. RESTRUCTURING CHARGES
In the second quarter of 1999, the Company recorded a charge of
approximately $13.9 million to exit certain operations in the switched
wholesale business. The restructuring charge consisted of severance and
various other costs associated with workforce reduction, network
decommissioning, and various terminations. The workforce reduction of 94
people included employees contributing to the sales and network operations
functions. The remaining reserve of $0.6 million related to network
decommissioning is expected to be paid by June 30, 2001.
In the third quarter of 1999, the Company recorded a charge of
approximately $8.3 million relating to the restructuring of the
organization and the exit certain foreign operations. The plan was
developed prior to the merger with the Parent Company, by the previous
Chief Executive Officer, after reviewing the Company's operations. The
workforce reduction of 15 employees included management, administrative and
foreign sales personnel. The remaining severance reserve of $1.9 million is
expected to be paid by September 30, 2002.
Included in the allocation of the cost to acquire the Company in the fourth
quarter of 1999, were restructuring costs associated with initiatives to
integrate operations of the Company with its Parent Company. The
restructuring costs recorded in 1999 included the costs of involuntary
employee separation benefits related to 263 employees of the Company. As of
March 31, 2001, all of the employee separations had been completed. The
restructuring plans also included costs associated with the closure of a
number of technical and customer support facilities, the decommissioning of
certain switching equipment, and the termination of contracts with vendors.
The Company expects that most of these restructuring actions will be
complete by September 30, 2001, and will result in cash outlays of $3.2
million over the next two quarters.
Activity in the first quarter of 2001 related to the accrued restructuring
liabilities was as follows (in millions):
5
Form 10-Q Part I Broadwing Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Balance at Balance at
December 31, 2000 Expenditures March 31, 2001
----------------- ------------ --------------
SECOND QUARTER RESTRUCTURING:
Employee separations $ -- $ -- $ --
Network decommissioning 0.7 0.1 0.6
Terminate contractual obligations
and exit facilities -- -- --
------- ------ ------
Total $ 0.7 $ 0.1 $ 0.6
======= ====== ======
THIRD QUARTER RESTRUCTURING:
Employee separations $ 2.0 $ 0.1 $ 1.9
Terminate contractual obligations
and exit facilities -- -- --
------- ------ ------
Total $ 2.0 $ 0.1 $ 1.9
======= ====== ======
FOURTH QUARTER RESTRUCTURING:
Employee separations $ -- $ -- $ --
Facility closure costs 1.8 0.2 1.6
Relocation 0.1 -- 0.1
Other exit costs 1.5 -- 1.5
------- ------ ------
Total $ 3.4 $ 0.2 $ 3.2
======= ====== ======
4. DEBT
The Company's debt consists of the following at March 31, 2001 and
December 31, 2000 (in millions):
March 31, December 31,
2001 2000
---------- ------------
9% Senior Subordinated Notes $ 46.0 $ 46.0
Capital lease obligations 7.9 9.1
PSINet Forward Sale -- 3.0
Intercompany payable to Parent Company, net 1,120.1 994.8
12 1/2% Senior Notes 0.8 0.8
Other debt -- 3.4
---------- ------------
Total long-term debt $ 1,174.8 $ 1,057.1
Less current portion 4.4 8.3
---------- ------------
Long-term debt $ 1,170.4 $ 1,048.8
========== ============
9% SENIOR SUBORDINATED NOTES
In 1998, the Company issued $450 million of 9% senior subordinated
notes due 2008 ("the 9% notes"). The 9% notes are general unsecured
obligations and are subordinate in right of payment to all existing and
future senior indebtedness and other liabilities of the Company's
subsidiaries. The indenture related to the 9% notes requires the Company to
6
Form 10-Q Part I Broadwing Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
comply with various financial and other covenants and restricts the Company
from incurring certain additional indebtedness. In January 2000, $404
million of the 9% senior subordinated notes were redeemed through a tender
offer due to the change of control terms in the bond indenture.
Accordingly, $46 million of the 9% notes remain outstanding at March 31,
2001.
CAPITAL LEASE OBLIGATIONS
The Company leases facilities and equipment used in its operations, some of
which are required to be capitalized in accordance with Statement of
Financial Accounting Standard No. 13, "Accounting for Leases" ("SFAS 13").
SFAS 13 requires the capitalization of leases meeting certain criteria,
with the related asset being recorded in property, plant and equipment and
an offsetting amount recorded as a liability.
PSINET FORWARD SALE
In June and July 1999, Broadwing Communications received approximately
$111.8 million from a financial institution in connection with two prepaid
forward sale contracts on six million shares of PSINet common stock. This
amount was accounted for as notes payable and was collateralized by six
million shares of PSINet common stock owned by the Company. Given the
significant decline in the value of PSINet common stock during 2000, this
liability could be settled for approximately $3 million at December 31,
2000. Accordingly, the Company adjusted the carrying value of this
liability to approximately $3 million during the fourth quarter of 2000.
During the first quarter of 2001, the Company settled the forward sale
liability for approximately 5.8 million shares of PSINet common stock. The
difference between the six million shares collateralized and the 5.8
million shares required to settle the liability were sold in the open
market, generating a pretax gain of $0.5 million.
INTERCOMPANY PAYABLE TO PARENT COMPANY
The Company relies on advances from the Parent Company for the funding of
operating and investing activities in excess of cash generated by its own
operations. Advances from the Parent Company bear interest at market rates,
with the related interest expense being included in "Interest expense" on
the Condensed Consolidated Statements of Income and Comprehensive Income
(Loss). The average interest rate on these advances during the first
quarter of 2001 was approximately 7.9%. The Company also provides services
to other subsidiaries of the Parent Company. The amounts due to the Parent
Company of $1,120 million at March 31, 2001 are presented net of the
amounts due from these other subsidiaries.
OTHER
Pursuant to the Company's May 10, 1999 acquisition of Coastal Telecom
Limited Company, the Company assumed $10 million in notes payable, which
were paid in full during the first quarter of 2001.
7
Form 10-Q Part I Broadwing Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In addition, $0.8 million remains outstanding on the 12 1/2% senior notes
(original indebtedness of $285.0 million) that were largely eliminated
through a tender offer in 1998.
5. FINANCIAL INSTRUMENTS
The Company adopted Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
on January 1, 2001. SFAS 133 requires that all derivative instruments be
recognized on the balance sheet at fair value. Fair values are determined
based on quoted market prices of comparable instruments, if available, or
on pricing models using current assumptions. On the date the financial
instrument is entered into, the Company designates it as either a fair
value or cash flow hedge.
Upon adoption of SFAS 133, on January 1, 2001, offsetting transition
adjustments were reclassified from other comprehensive income to net income
related to the PSINet forward sale and the underlying six million shares of
PSINet further described in Note 4 of the Notes to Condensed Consolidated
Financial Statements. Accordingly, there was no net cumulative effect
adjustment on either net income or other comprehensive income.
Unrealized gains and losses of highly effective cash flow hedges are
recorded in other comprehensive income until the underlying transaction is
executed.
MARKETABLE EQUITY FORWARD CONTRACTS
From time to time the Company enters into forward contracts on the sale of
marketable equity securities with the intent of managing its exposure to
fluctuations in U.S. equity markets. Forward contracts are contractual
agreements between two parties for the sale of borrowed shares to be
settled by delivery of the equivalent number of shares owned by the
Company, at an agreed upon future date. As of March 31, 2001, the Company
was not a party to any such contracts.
6. CONTINGENCIES
In the normal course of business, the Company is subject to various
regulatory proceedings, lawsuits, claims and other matters. Such matters
are subject to many uncertainties and outcomes are not predictable with
assurance.
In the course of closing the Company's merger with the Parent Company, the
Parent Company became aware of the former IXC Communications Inc.'s ("IXC")
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
8
Form 10-Q Part I Broadwing Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. The EPA determined that IXC
appears to have satisfied the "prompt disclosure" requirement of the
Self-Policing Policy for the Company to complete its environmental audit of
all IXC facilities and report any violations to the Agency. The Company has
filed its preliminary environmental audit report with the EPA and is
currently working with the EPA and several state environmental protection
agencies to bring the Company into compliance with all applicable
regulations, and to develop internal procedures to ensure future
compliance.
The Company believes that the resolution of such matters for amounts in
excess of those reflected in the consolidated financial statements would
not likely have a materially adverse effect on the Company's financial
condition.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted SFAS 133. The adoption of
SFAS 133 did not have a material effect on the Company's financial position
or results of operations. The Company does not invest in derivatives for
trading purposes, nor does it enter into interest rate transactions for
speculative purposes. See Note 5 of the Notes to Condensed Consolidated
Financial Statements for a detailed discussion of the Company's derivative
instruments.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." In SAB 101, the SEC
Staff expresses 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. As required, the Company adopted SAB 101 in the
fourth quarter of 2000 and modified its revenue recognition policies
retroactive to January 1, 2000 to recognize service activation revenues and
associated direct incremental costs over their respective average customer
lives. As a result, the previously reported quarterly results have been
restated. The adoption of SAB 101 did not have a material effect on the
Company's financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information included in this Quarterly Report on Form 10-Q contains certain
forward-looking statements that involve potential risks and uncertainties. The
Company's future results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed herein, and those discussed in the Form 10-K for the
year ended December 31, 2000. Readers are cautioned not to place undue reliance
on these forward-looking statements that speak only as of the date thereof.
9
Form 10-Q Part I Broadwing Communications Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. Results for interim periods may not
be indicative of the results for the full years. The symbol "n/m" is used to
refer to calculations in which the result is not meaningful.
Results of operations are as follows:
(Unaudited)
Three Months Ended March 31,
-------------------------------------------
($ Millions) 2001 2000 Change %
--------- -------- -------- ------
Revenues:
Broadband transport $ 111.7 $ 90.3 21.4 24%
Switched services 103.9 103.0 0.9 1%
Data and Internet 27.0 9.7 17.3 178%
Other services 54.0 9.0 45.0 n/m
--------- -------- -------- ------
Total revenues 296.6 212.0 84.6 40%
--------- -------- -------- ------
Costs and expenses:
Cost of providing services and products sold 178.8 125.2 53.6 43%
Selling, general and administrative 84.7 89.0 (4.3) (5%)
--------- -------- -------- ------
Total costs and expenses 263.5 214.2 49.3 23%
--------- -------- -------- ------
EBITDA 33.1 (2.2) 35.3 n/m
Depreciation 59.2 47.6 11.6 24%
Amortization 27.6 27.1 0.5 2%
--------- -------- -------- ------
Operating loss (53.7) (76.9) 23.2 (30%)
Gain on investments, net 15.5 -- 15.5 n/m
Equity loss in unconsolidated entities 3.3 2.0 1.3 65%
Interest expense 19.2 12.9 6.3 49%
Other income (expense), net (0.5) 0.2 (0.7) n/m
--------- -------- -------- ------
Loss before income taxes (61.2) (91.6) 30.4 (33%)
Income tax benefit (15.3) (30.4) 15.1 (50%)
--------- -------- -------- ------
Net loss $ (45.9) $ (61.2) 15.3 (25%)
========= ======== ======== ======
10
Form 10-Q Part I Broadwing Communications Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
REVENUES
Revenues increased $85 million, or 40%, to $297 million compared to the first
quarter of 2000, with all revenue categories contributing to the increase.
The broadband transport category contributed $21 million in incremental
revenue, growing 24% to $112 million. Seventy-two percent of the revenue
growth was generated by data services, as the Company experienced continued
growth in higher-bandwidth services. Improved revenues were offset by an
increase in the provision for loss on receivables.
Switched services revenue increased 1% over the first quarter of 2000 to $104
million as higher minutes of use in both wholesale and retail were offset by
a reduction in the average rate per minute of both products.
Data and Internet revenues nearly tripled during the first quarter of 2001,
increasing $17 million, or 178%, to $27 million. These revenues continue to
grow on the strength of demand for Internet-based, ATM/frame relay, data
collocation and web hosting services, along with higher equipment sales. Data
collocation and web hosting services are provided via the Company's data
centers, of which it now operates eleven throughout the United States. These
data centers can be expanded as demand for these services grows.
Other revenues rose six-fold, or $45 million, during the first quarter,
increasing from $9 million to $54 million on the strength of an additional
$22 million in network construction project revenue for El Paso Energy and
$23 million in additional revenues from information technology consulting.
COSTS AND EXPENSES
Costs of providing services and products sold consists primarily of access
charges paid to local exchange carriers, transmission lease payments to other
carriers, costs incurred for network construction projects, and personnel and
hardware costs for information technology consulting. In the first quarter of
2001, costs of providing services and products sold amounted to $179 million,
a 43%, or $54 million, increase over the prior year. These increases were
driven primarily by the revenue growth of information technology consulting
and network construction, causing an increase of $37 million, in addition to
a $15 million increase in transmission and access charges from other carriers
due to increased traffic.
Selling, general and administrative ("SG&A") expenses declined $4 million, or
5%, to $85 million for the quarter. Advertising expenses decreased $14
million from the first quarter of 2000, as the national advertising campaign
to launch the "Broadwing" brand in 2000 was not repeated in 2001. The
advertising decrease was offset by an increase in wages and benefits as
approximately 700 employees were added in support of new products and
services primarily for broadband transport and information technology
consulting.
11
Form 10-Q Part I Broadwing Communications Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's EBITDA improved significantly from a loss of $2 million in the
first quarter of 2000 to a positive $33 million in the first quarter of 2001,
as a 40% increase in sales was only partially offset by an aggregate increase
of 23% in the cost of providing services and products sold and SG&A.
Depreciation expense of $59 million totaled $12 million, or 24%, higher than
the first quarter of 2000, due primarily to depreciation of the national
network. The Company expects depreciation expense to continue to increase in
the short-term due to the continued expansion of the optical network.
Amortization expense remained flat at approximately $28 million compared to
$27 million in the first quarter of 2000.
The operating loss for the quarter narrowed to $54 million from $77 million
in the first quarter of 2000 on the strength of increased sales and
controlled expense growth.
The gain on investments increased to $16 million from zero in the first
quarter of 2000. The increase is due to recognized gains of $17 million on
the sale of PSINet stock offset by recognized losses on the sale of a portion
of the Company's investment in Applied Theory.
Equity losses in unconsolidated entities increased to $3 million in the
current quarter compared to $2 million in the same quarter in 2000. These
losses relate to the equity investment in Applied Theory and increased due to
increased losses generated by Applied Theory.
Interest expense increased 49% in the first quarter of 2001 to $19 million
from $13 million in the first quarter of 2000, as the Company continued to
fund the expansion of its optical network through borrowings from its Parent
Company. Of the $6 million increase in interest expense, $10 million was due
to additional borrowings, offset by a $4 million decrease related to an
increase in capitalized interest for construction projects, which reduces
interest expense. The interest rate remained constant.
Other income (expense) was minimal in both periods presented.
The income tax benefit decreased to $15 million from $30 million,
representing a 50% reduction in the first quarter of 2001 due to improved
operating results.
As a result of the above, the Company reported a net loss of $46 million for
the first quarter of 2001, 25% lower than the $61 million reported in 2000.
SEGMENT INFORMATION
In accordance with Statement of Financial Accounting Standard No. 131,
"Disclosures About Segments of an Enterprise and Related Information," the
operations of the Company comprise a single segment and are reported as such
to the Chief Executive Officer of the Parent Company, who functions in the
role of chief operating decision maker for the Company.
12
Form 10-Q Part I Broadwing Communications Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
CAPITAL INVESTMENT, RESOURCES AND LIQUIDITY
CAPITAL INVESTMENT
The Company has spent significant amounts of capital to develop its
nationwide optical network. Capital expenditures were $150 million during the
first quarter of 2001. The Company estimates that it will incur nearly $500
million in capital spending in 2001 for fiber expansion and the deployment of
additional optronics and data switches required to increase capacity on its
network.
LIQUIDITY AND CAPITAL RESOURCES
Since the merger with the Parent Company, the Company has relied on the
credit facility secured by the Parent Company in order to support its cash
deficit. In order to provide for the Company's cash requirements, the Parent
Company maintains a $2.1 billion credit facility with a group of lending
institutions. The credit facility consists of $900 million in revolving
credit, $750 million in term loans from banking institutions and $450 million
in term loans from non-banking institutions. At March 31, 2001, the Parent
Company had drawn approximately $1,730 million from the credit facility in
order to refinance its existing debt and debt assumed as part of the merger
with the Company and to provide for the Parent Company's business needs. At
March 31, 2001, the Parent Company had approximately $370 million in
additional borrowing capacity from this facility. The Company believes that
this will be sufficient to provide for financing requirements in excess of
amounts generated from its operations.
CASH FLOW
Cash used in operating activities of $42 million is 4% higher than the $40
million in cash used in the same quarter of 2000. The change is the net
result of realized gains on investments, an increase in accounts receivable
and a decrease in unearned revenues, offset by a lower net loss and an
increase in the provision for doubtful accounts.
Cash used in investing activities increased $41 million to $121 million in
the current quarter, due primarily to a $61 million increase in capital
expenditures. This increase is a function of timing, as the Company is
projecting capital expenditures of nearly $500 million in 2001. The $61
million increase in capital spending previously discussed was offset by a $21
million increase in cash proceeds from the sale of PSINet and Applied Theory
investments.
Cash provided by financing activities of approximately $146 million increased
$81 million in the current quarter, compared to $65 million in cash provided
in the first quarter of 2000. The increase was due to proceeds from loans
provided by the Parent Company to fund investing and
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Form 10-Q Part I Broadwing Communications Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
operating activities. Approximately $12 million in cash was required in order
to pay dividends on the Company's 12 1/2% Junior Exchangeable Preferred Stock
("12 1/2% Preferred Stock").
As of March 31, 2000, the Company had $14 million in cash and cash
equivalents. In addition to cash on hand, the primary sources for cash will
be cash generated by operations, proceeds of fiber use sales and borrowings
from the Parent Company. The primary uses of cash will be for funding
expansion of the network and working capital.
Quarterly dividend payments on the 12 1/2% Preferred Stock and semi-annual
interest payments on the remaining 9% subordinated notes and 12 1/2% senior
notes, totaling approximately $54 million per year will also be required.
The forward-looking statements set forth above with respect to the estimated
cash requirements relating to capital expenditures, the Company's ability to
meet such cash requirements and service debt are based on the following
assumptions as to future events: (i) there will be no significant delays with
respect to our network expansion; (ii) contractors and partners in
cost-saving arrangements will perform their obligations; (iii) rights-of-way
can be obtained in a timely, cost-effective basis; and (iv) the Company will
continue to increase traffic on its network. If these assumptions are
incorrect, the Company's ability to achieve satisfactory results could be
adversely affected.
CONTINGENCIES
In the normal course of business, the Company is subject to various
regulatory proceedings, lawsuits, claims and other matters. Such matters are
subject to many uncertainties and outcomes are not predictable with assurance.
In the course of closing the Company's merger with the Parent Company, the
Parent Company became aware of the former IXC Communications Inc.'s ("IXC")
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. The EPA determined that IXC appears to have
satisfied the "prompt disclosure" requirement of the Self-Policing Policy for
the Company to complete its environmental audit of all IXC facilities and
report any violations to the Agency. The Company has filed its preliminary
environmental audit report with the EPA and is currently working with the EPA
and several state environmental protection agencies to bring the Company into
compliance with all applicable regulations, and to develop internal
procedures to ensure future compliance.
The Company believes that the resolution of such matters for amounts in
excess of those reflected in the consolidated financial statements would not
likely have a materially adverse effect on the Company's financial condition.
ITEM 3. QUALITATIVE AND QUANTITIVE DISCLOSURES ABOUT MARKET RISK
Effective with the retirement of the Company's previously existing revolving
credit facility and with new debt being assumed by the Parent Company, the
Company is not currently subject to market risk associated with changes in
interest rates. The Company does not hold or issue derivative financial
instruments for trading purposes or enter into interest rate transactions for
speculative purposes.
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Form 10-Q Part I Broadwing Communications Inc.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in Note 6 of the Notes to
Condensed Consolidated Financial Statements on page 8 of this quarterly
report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 26, 2001, pursuant to a Notice of Action by Written Consent of
Stockholder, Company security holders were informed in writing of the
election of Richard G. Ellenberger as a director of the Company for a
one-year term. Broadwing Inc. is the holder of all outstanding shares of
common stock of the Company and has consented in writing to the election of
Mr. Ellenberger as a director of the Company. The election of Mr. Ellenberger
becomes effective not less than 20 days from the date of mailing of the
Notice of Action of Written Consent of Stockholder.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits identified in parenthesis below, on file with the Securities and
Exchange Commission are incorporated herein by reference as exhibits hereto:
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BROADWING COMMUNICATIONS INC.
May 14, 2001 By: /s/ Kevin W. Mooney
---------------------------
Kevin W. Mooney
Chief Financial Officer
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