e8vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant To Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 11, 2006
BROADWING CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
|
|
|
|
|
|
52-2041343 |
DELAWARE
|
|
0-30989
|
|
(I.R.S. Employer of Incorporation |
(State or other jurisdiction)
|
|
(Commission File Number)
|
|
Identification No.) |
1122 Capital of Texas Highway
Austin, Texas 78746
(Address of principal executive offices)
Registrants telephone number, including area code: (512) 742-3700
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
TABLE OF CONTENTS
Item 8.01. Other Events
To allow for incorporation into the Registrants Registration Statement on Form S-3, to be
filed on or around August 11, 2006 with the Securities and Exchange Commission (SEC), and into
other applicable SEC filings, if any, attached are:
|
|
|
Report of KPMG LLP, Independent Registered Public Accountants; |
|
|
|
|
Consolidated Balance Sheets December 31, 2004 and December 31, 2005; |
|
|
|
|
Consolidated Statements of Operations Fiscal years ended December
31, 2003, December 31, 2004 and December 31, 2005; |
|
|
|
|
Consolidated Statements of Stockholders Equity Fiscal years ended
December 31, 2003, December 31, 2004 and December 31, 2005; |
|
|
|
|
Consolidated Statements of Cash Flows Fiscal years ended December
31, 2003, December 31, 2004 and December 31, 2005; and |
|
|
|
|
Notes to Consolidated Financial Statements. |
These consolidated financial statements, as contained herein, are the financial statements
included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 filed on
March 6, 2006, with the addition of Note 20 Financial Information for Debt Issuer and Guarantor
Subsidiaries and Non-Guarantor Subsidiaries. There has been no change to the previously filed
consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005, filed with SEC on March 6, 2006 other than the addition of Note 20 Financial
Information for Guarantor and Non-Guarantor Subsidiaries.
Item 9.01. Financial Statements and Exhibits
(c) Exhibits.
|
|
|
Exhibit |
|
Description |
23.1
|
|
Consent of KPMG LLP, Independent Registered Public Accounting Firm |
2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
Report of Independent Registered Public Accounting FirmKPMG LLP |
|
|
4 |
|
|
|
|
|
|
Consolidated Balance SheetsDecember 31, 2004 and December 31, 2005 |
|
|
5 |
|
|
|
|
|
|
Consolidated Statements of Operations Fiscal years ended December
31, 2003, December 31, 2004 and December 31, 2005 |
|
|
6 |
|
|
|
|
|
|
Consolidated Statements of Stockholders Equity Fiscal years ended December 31, 2003, December 31, 2004 and
December 31, 2005 |
|
|
7 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows Fiscal years ended December
31, 2003, December 31, 2004 and December 31, 2005 |
|
|
8 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
9 |
|
3
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Broadwing Corporation:
We have audited the accompanying consolidated balance sheets of Broadwing Corporation and
subsidiaries (Broadwing) as of December 31, 2005 and 2004, and the related consolidated statements
of operations, stockholders equity, and cash flows for each of the years in the three-year period
ended December 31, 2005. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Broadwing Corporation and subsidiaries as of
December 31, 2005 and 2004, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Broadwings internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated March 4, 2006 expressed an unqualified opinion on managements assessment of, and the
effective operation of, internal control over financial reporting.
Austin, Texas
March 4, 2006, except as to note 20,
which is as of August 11, 2006.
4
BROADWING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2004 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
124,540 |
|
|
$ |
66,706 |
|
Short-term investments |
|
|
100,139 |
|
|
|
42,648 |
|
Trade accounts receivable, net of allowances of $50,136 and $36,977 at December 31,
2004 and 2005, respectively |
|
|
94,731 |
|
|
|
75,579 |
|
Prepaids and other current assets |
|
|
24,027 |
|
|
|
18,565 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
343,437 |
|
|
|
203,498 |
|
Restricted cash, non-current |
|
|
13,911 |
|
|
|
14,606 |
|
Long-term investments |
|
|
49,676 |
|
|
|
|
|
Property and equipment, net |
|
|
286,038 |
|
|
|
260,681 |
|
Goodwill |
|
|
48,696 |
|
|
|
58,354 |
|
Intangible assets, net |
|
|
30,152 |
|
|
|
24,820 |
|
Other non-current assets, net |
|
|
9,080 |
|
|
|
11,545 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
780,990 |
|
|
$ |
573,504 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Notes payable, net of discounts, and capital lease obligations, current portion |
|
$ |
117,324 |
|
|
$ |
33,072 |
|
Accounts payable |
|
|
12,452 |
|
|
|
32,221 |
|
Accrued expenses and other liabilities |
|
|
45,882 |
|
|
|
42,113 |
|
Accrued payroll |
|
|
8,057 |
|
|
|
12,231 |
|
Accrued communication service costs |
|
|
41,089 |
|
|
|
25,441 |
|
Deferred revenue, current portion |
|
|
7,072 |
|
|
|
6,941 |
|
Accrued restructuring and other charges |
|
|
8,620 |
|
|
|
3,965 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
240,496 |
|
|
|
155,984 |
|
Notes payable, net of discounts, and capital lease obligations, net of current portion |
|
|
52,218 |
|
|
|
20,819 |
|
Deferred revenue, net of current portion |
|
|
18,288 |
|
|
|
17,939 |
|
Other long-term liabilities |
|
|
14,949 |
|
|
|
13,750 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
325,951 |
|
|
|
208,492 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock$0.01 par value; 1,900,000,000 shares authorized; 68,424,060 shares
issued and 67,195,880 shares outstanding as of December 31, 2004; 75,266,437 shares
issued and 74,038,257 shares outstanding as of December 31, 2005 |
|
|
679 |
|
|
|
747 |
|
Treasury Stock (1,228,180 shares at December 31, 2004 and December 31, 2005, at cost) |
|
|
(9,512 |
) |
|
|
(9,512 |
) |
Additional paid-in capital |
|
|
3,137,928 |
|
|
|
3,180,764 |
|
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
Unrealized investment losses |
|
|
(717 |
) |
|
|
(220 |
) |
Accumulated deficit |
|
|
(2,673,339 |
) |
|
|
(2,806,767 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
455,039 |
|
|
|
365,012 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
780,990 |
|
|
$ |
573,504 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
BROADWING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
Revenue |
|
$ |
314,314 |
|
|
$ |
672,280 |
|
|
$ |
879,106 |
|
Total cost of revenue: |
|
|
265,019 |
|
|
|
455,429 |
|
|
|
580,441 |
|
Research and development (including equity
based expense of $12,659, $3,776, and $645 for
the year ended December 31, 2003, 2004, and
2005, respectively) |
|
|
59,461 |
|
|
|
18,771 |
|
|
|
6,817 |
|
Sales, general and administrative (including
equity based expense of $7,938, $4,858, and
$3,844 for the year ended December 31 2003,
2004, and 2005, respectively) |
|
|
159,673 |
|
|
|
260,640 |
|
|
|
308,882 |
|
Litigation settlement |
|
|
|
|
|
|
|
|
|
|
2,000 |
|
Depreciation |
|
|
34,529 |
|
|
|
56,928 |
|
|
|
96,075 |
|
Amortization |
|
|
6,913 |
|
|
|
4,632 |
|
|
|
5,631 |
|
Restructuring and other charges |
|
|
59,381 |
|
|
|
3,946 |
|
|
|
1,361 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
584,976 |
|
|
|
800,346 |
|
|
|
1,001,207 |
|
Operating loss |
|
|
(270,662 |
) |
|
|
(128,066 |
) |
|
|
(122,101 |
) |
Other income, net |
|
|
10,308 |
|
|
|
7,160 |
|
|
|
7,032 |
|
Interest expense, net of capitalized amounts |
|
|
(504 |
) |
|
|
(31,275 |
) |
|
|
(18,359 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss before minority interest |
|
|
(260,858 |
) |
|
|
(152,181 |
) |
|
|
(133,428 |
) |
Minority interest |
|
|
387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(260,471 |
) |
|
$ |
(152,181 |
) |
|
$ |
(133,428 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(6.05 |
) |
|
$ |
(2.86 |
) |
|
$ |
(1.83 |
) |
Basic and diluted weighted average common shares |
|
|
43,060 |
|
|
|
53,217 |
|
|
|
72,894 |
|
See accompanying notes to consolidated financial statements.
6
BROADWING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Stockholder |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Paid-in- |
|
|
Note |
|
|
Treasury |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Receivable |
|
|
Stock |
|
|
Income (Loss) |
|
|
Deficit |
|
|
Equity |
|
Balance at December 28, 2002 |
|
|
41,311,360 |
|
|
$ |
414 |
|
|
$ |
2,812,979 |
|
|
$ |
(32 |
) |
|
$ |
(4,405 |
) |
|
$ |
(8,191 |
) |
|
$ |
(2,260,687 |
) |
|
$ |
540,078 |
|
Exercise of stock options and
employee stock purchase plan |
|
|
1,013,435 |
|
|
|
10 |
|
|
|
4,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,622 |
|
Private Placement |
|
|
6,727,828 |
|
|
|
66 |
|
|
|
73,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,794 |
|
Acquisition of minority interest in
Broadwing Communications, LLC |
|
|
275,000 |
|
|
|
3 |
|
|
|
11,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,917 |
|
Collection of shareholder note |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
Equity-based expense |
|
|
|
|
|
|
|
|
|
|
24,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,604 |
|
Foreign exchange adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,215 |
|
|
|
|
|
|
|
8,215 |
|
Unrealized gains on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
(15 |
) |
Treasury stock purchase, 636,750
shares at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,107 |
) |
|
|
|
|
|
|
|
|
|
|
(5,107 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260,471 |
) |
|
|
(260,471 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
49,327,623 |
|
|
|
493 |
|
|
|
2,927,837 |
|
|
|
|
|
|
|
(9,512 |
) |
|
|
9 |
|
|
|
(2,521,158 |
) |
|
|
397,669 |
|
Exercise of stock options, warrants,
and employee stock purchase plan |
|
|
804,680 |
|
|
|
8 |
|
|
|
6,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,039 |
|
Warrants issued with convertible notes |
|
|
|
|
|
|
|
|
|
|
33,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,222 |
|
Repayment of convertible notes and
accrued interest with common stock |
|
|
9,649,928 |
|
|
|
92 |
|
|
|
67,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,687 |
|
Equity-based expense |
|
|
|
|
|
|
|
|
|
|
9,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,261 |
|
Acquisition of Focal |
|
|
8,641,829 |
|
|
|
86 |
|
|
|
93,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,068 |
|
Unrealized loss on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(726 |
) |
|
|
|
|
|
|
(726 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152,181 |
) |
|
|
(152,181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
68,424,060 |
|
|
|
679 |
|
|
|
3,137,928 |
|
|
|
|
|
|
|
(9,512 |
) |
|
|
(717 |
) |
|
|
(2,673,339 |
) |
|
|
455,039 |
|
Exercise of stock options, warrants,
and employee stock purchase plan |
|
|
542,737 |
|
|
|
5 |
|
|
|
1,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,562 |
|
Repayment of convertible notes and
accrued interest with common stock |
|
|
6,299,640 |
|
|
|
63 |
|
|
|
36,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,853 |
|
Unrealized loss on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
497 |
|
|
|
|
|
|
|
497 |
|
Equity-based expense |
|
|
|
|
|
|
|
|
|
|
4,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,489 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133,428 |
) |
|
|
(133,428 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
75,266,437 |
|
|
$ |
747 |
|
|
$ |
3,180,764 |
|
|
$ |
|
|
|
$ |
(9,512 |
) |
|
$ |
(220 |
) |
|
$ |
(2,806,767 |
) |
|
$ |
365,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
7
BROADWING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(260,471 |
) |
|
$ |
(152,181 |
) |
|
$ |
(133,428 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
41,442 |
|
|
|
60,291 |
|
|
|
101,707 |
|
Equity-based expense |
|
|
20,597 |
|
|
|
8,634 |
|
|
|
4,489 |
|
Provision for bad debt and sales allowances |
|
|
15,412 |
|
|
|
22,848 |
|
|
|
37,794 |
|
Deferred financing, original issue discount amortization, and accretion
of interest |
|
|
|
|
|
|
21,477 |
|
|
|
10,827 |
|
Amortization of deferred revenue and other |
|
|
|
|
|
|
(3,016 |
) |
|
|
(1,520 |
) |
Non-cash restructuring, goodwill and asset impairments, inventory
write-downs and other charges |
|
|
71,455 |
|
|
|
|
|
|
|
(797 |
) |
Minority interest |
|
|
(387 |
) |
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, excluding acquired amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
8,467 |
|
|
|
(30,872 |
) |
|
|
(15,617 |
) |
Inventories |
|
|
(21,921 |
) |
|
|
(228 |
) |
|
|
1,179 |
|
Other current and non-current assets |
|
|
8,789 |
|
|
|
(245 |
) |
|
|
4,199 |
|
Accounts payable |
|
|
(40,182 |
) |
|
|
(32,376 |
) |
|
|
19,657 |
|
Other accrued expenses and deferred revenue |
|
|
(26,595 |
) |
|
|
(7,157 |
) |
|
|
(29,741 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(183,394 |
) |
|
|
(112,825 |
) |
|
|
(1,251 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(12,243 |
) |
|
|
(74,724 |
) |
|
|
(55,255 |
) |
Ciena equipment deposit |
|
|
|
|
|
|
|
|
|
|
(11,000 |
) |
Proceeds from the sale of property and equipment |
|
|
|
|
|
|
1,720 |
|
|
|
788 |
|
Purchase of investments |
|
|
(86,772 |
) |
|
|
(216,519 |
) |
|
|
(512,479 |
) |
Sale of investments |
|
|
95,543 |
|
|
|
128,778 |
|
|
|
619,852 |
|
Decrease in deposits and other long-term assets |
|
|
2,850 |
|
|
|
|
|
|
|
|
|
Cash acquired in business combinations, net of acquisition costs |
|
|
|
|
|
|
10,510 |
|
|
|
|
|
Broadwing Communication Services, Inc. acquisition |
|
|
(81,097 |
) |
|
|
10,000 |
|
|
|
|
|
Purchase of minority interest in Broadwing Communications, LLC |
|
|
(1,789 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(83,508 |
) |
|
|
(140,235 |
) |
|
|
41,906 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in restricted cash and deferred financing costs |
|
|
(4,704 |
) |
|
|
(4,269 |
) |
|
|
(2,185 |
) |
Proceeds from private placement of common stock |
|
|
73,794 |
|
|
|
|
|
|
|
|
|
Proceeds from stock options and warrants exercised |
|
|
4,622 |
|
|
|
6,016 |
|
|
|
1,529 |
|
Proceeds from repayment of shareholder note |
|
|
32 |
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of convertible notes and associated warrants |
|
|
|
|
|
|
217,750 |
|
|
|
|
|
Repayment of notes payable and capital lease obligations |
|
|
(1,055 |
) |
|
|
(76,887 |
) |
|
|
(97,833 |
) |
Purchase of treasury stock |
|
|
(5,107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
67,582 |
|
|
|
142,610 |
|
|
|
(98,489 |
) |
|
|
|
|
|
|
|
|
|
|
Cash effect of foreign exchange adjustment |
|
|
477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(198,843 |
) |
|
|
(110,450 |
) |
|
|
(57,834 |
) |
Cash and cash equivalentsbeginning of period |
|
|
433,833 |
|
|
|
234,990 |
|
|
|
124,540 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsend of period |
|
$ |
234,990 |
|
|
$ |
124,540 |
|
|
$ |
66,706 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
410 |
|
|
$ |
3,241 |
|
|
$ |
5,890 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of convertible notes with common stock |
|
$ |
|
|
|
$ |
67,687 |
|
|
$ |
32,080 |
|
Assets acquired through capital lease |
|
|
|
|
|
|
679 |
|
|
|
2,266 |
|
Deposit with Ciena converted to equipment |
|
|
|
|
|
|
|
|
|
|
7,613 |
|
Purchase business combination consideration paid with common stock |
|
|
|
|
|
|
94,068 |
|
|
|
|
|
Inventory installed as fixed assets |
|
$ |
13,685 |
|
|
$ |
1,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
8
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Nature of Business and Basis of Presentation
Broadwing Corporation and subsidiaries (Broadwing or the Company), formerly known as
Corvis Corporation, operates within the communications industry. The consolidated financial
statements include Broadwing Corporation and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company is based in Austin, Texas, and it is a provider of data and Internet,
broadband transport, and voice communications services throughout the United States. On June 13,
2003 the Company acquired most of the assets and certain of the liabilities of Broadwing
Communication Services, Inc., which had been one of the Companys largest communications equipment
customers. Excluding post-acquisition intercompany sales, Broadwing Communications Services, Inc.
represented 43% and 12% of the Companys total annual revenue in 2002 and 2003, respectively.
In April 2005, we began exploring strategic alternatives associated with our OCS product
in an effort to more closely focus our resources on our communications services operations. During
the second quarter of 2005, we committed to a plan to curtail our OCS production and development.
In addition, our remaining equipment division operations will focus solely on supporting our
communications services division.
On September 1, 2004, the Company consummated its acquisition of Focal Communications
Corporation (Focal). Focal was a Chicago-based competitive local exchange carrier that provides
voice and data solutions to enterprises, carriers and resellers. The results of Broadwing
Communication Services, Inc. and Focal have been included in the consolidated financial statements
from the dates of their respective acquisitions.
Effective June 30, 2003, the Company changed its accounting reporting cycle from a 52- or
53-week fiscal year-end, ending on the Saturday closest to December 31, to a calendar quarter and
year-end.
(b) Cash and Cash Equivalents
The Company considers short-term, highly liquid investments with an original maturity of
three months or less to be cash equivalents. Any such securities are stated at fair market value
and unrealized holding gains and losses are recognized as a component of other comprehensive income
(loss).
(c) Restricted Cash
Restricted cash primarily relates to escrow accounts established in conjunction with
outstanding irrevocable letters of credit associated with lease obligations for various business
arrangements. As of December 31, 2005 and 2004, restricted cash totaled $14.6 million and $13.9
million, respectively.
(d) Short-term and Long-term Investment Securities
Short-term and long-term investment securities at December 31, 2005 and 2004 consist of
U.S. corporate obligations with an original maturity greater than three months and all auction
rates securities. The Company classifies these securities as available-for-sale securities.
Available-for-sale securities are recorded at fair market value and unrealized holding gains and
losses are excluded from operations and are reported as a separate component of other comprehensive
income (loss) until realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis.
A decline in the market value of any available-for-sale security below cost that is
deemed to be other than temporary results in a reduction in the carrying amount to fair market
value. The impairment is charged to operations and a new cost basis for the security is
established. Premiums and discounts are amortized or accreted over the life of the related
available-for-sale security as an adjustment to yield the effective interest method. Dividend and
interest income are recognized when earned.
9
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(e) Revenue and Cost of Revenue
Revenue and related reserves from services are recognized when the services are provided.
Payments received in advance are deferred until the service is provided. Up-front fees received,
primarily activation fees and installation charges, as well as the associated customer acquisition
costs, are deferred and recognized over the expected customer relationship.
The Company records specific reserves to reduce revenue and related trade accounts
receivable when significant uncertainties exist related to the collectibility of service billings.
The Company also records reserves associated with routine service credits granted to customers.
At December 31, 2005, a significant portion of these reserves primarily relate to
reciprocal compensation and carrier access billings (CABS), associated with disputed contracts
acquired in the Focal purchase. These disputed amounts relate to service periods both before and
after the acquisition date. Certain carriers have disputed certain charges as inappropriate or
outside the scope of existing tariffs or contractual agreements. Trade accounts receivable from
reciprocal compensation and carrier access billing totaled $31.4 million with associated credit
allowances totaling $20.3 million.
Indefeasible right-of-use (IRU) agreements represent the lease of network capacity or
dark fiber and are recorded as deferred revenue at the earlier of the acceptance of the applicable
portion of the network by the customer or the receipt of cash. The buyer of IRU services typically
pays cash upon execution of the contract, and the associated IRU revenue is then recognized over
the life of the agreement as the services are provided, beginning on the date of customer
acceptance. In the event the buyer of an IRU terminates a contract prior to the contract expiration
and releases the Company from the obligation to provide future services, the remaining unamortized
deferred revenue is recognized in the period in which the contract is terminated. Non-cash IRU
revenue for the years ended, December 31, 2003, 2004 and 2005 comprised approximately 1%, 3% and 2%
of revenue, respectively.
Cost of revenue primarily reflects access charges paid to local exchange carriers and
other providers as well as transmission lease payments to other carriers. Cost of revenue excludes
depreciation and amortization expense. Additionally, as a result of the Focal acquisition,
communications services cost of revenue now includes inter-carrier compensation paid to carriers to
terminate or originate traffic on their networks. inter-carrier compensation rates are subject to
regulatory oversight. There are two primary forms of inter-carrier compensation: access charges and
reciprocal compensation. The Company is subject to access charges, which are related to the
origination and termination of long distance calls, and reciprocal compensation, which is related
to the termination of local calls. Inter-carrier compensation charges are based on minutes of use
and vary based on customer calling patterns.
The Company performs bill verification procedures to ensure that there are no errors in
access vendors billed invoices. The bill verification procedures include the examination of bills,
the comparison of rates between billed rates with rates used by the Companys expense estimation
systems, the comparison of circuits billed to a database of active circuits, and evaluating the
trend of invoiced amounts by vendors, including the types of charges being assessed. If the Company
concludes that it has been billed inaccurately, it will dispute the charge with the vendor and
begin resolution procedures. The Company records a charge to cost of revenue and a corresponding
increase to the accrued communication service costs for the disputed amounts, unless past
experience or other corroborating evidence indicates that it is not probable that it will
ultimately be required to pay. If an agreement is reached with a vendor in which the Company
settles a disputed amount for less than the corresponding accrual, a gain is recognized in the
period in which the settlement is reached. Previously unaccrued disputes are reviewed periodically
to assess whether a loss has become probable and estimable, in which case an accrual is
established.
(f) Accounts Receivable Allowances
The Company records specific reserves to reduce revenue and related trade accounts
receivable when significant uncertainties exist related to the recoverability of certain service
billings. The Company also records estimates of reserves for routine service credits granted to
customers. The Company maintains allowances for doubtful accounts for estimated losses resulting
from the inability of customers to make required payments. The
10
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Company determines the estimate of the allowance for doubtful accounts based on a variety of
factors, including the length of time receivables are past due, the customers financial condition
and historical experience. The following is a summary of accounts receivable allowances for
activity and balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
beginning of Period |
|
|
Other |
|
|
Provisions |
|
|
Deductions |
|
|
End of Period |
|
Year ended December 31, 2003 |
|
$ |
|
|
|
$ |
27,072 |
(a) |
|
$ |
15,412 |
|
|
$ |
(22,491 |
) |
|
$ |
19,993 |
|
Year ended December 31, 2004 |
|
$ |
19,993 |
|
|
$ |
34,467 |
(b) |
|
$ |
22,848 |
|
|
$ |
(27,172 |
) |
|
$ |
50,136 |
|
Year ended December 31, 2005 |
|
$ |
50,136 |
|
|
$ |
|
|
|
$ |
37,794 |
|
|
$ |
(50,953 |
) |
|
$ |
36,977 |
|
|
|
|
(a) |
|
Amounts acquired in the June 13, 2003 acquisition of Broadwing Communication Services,
Inc. |
|
(b) |
|
Amounts acquired in the September 1, 2004 acquisition of Focal Communications Corporation |
|
(g) |
|
Property and Equipment |
Property and equipment is recorded at cost, or fair value if acquired in a business
combination. Depreciation and amortization is provided for using the straight-line method over the
estimated useful life. Repairs and maintenance are charged to expense as incurred. Costs associated
with uncompleted portions of the Companys network, including components inventory awaiting
installation, are classified as construction in process in the accompanying consolidated financial
statements.
Leasehold improvements are amortized over the shorter of the useful lives of the assets
or the lease term. Expenditures for maintenance and repairs are expensed as incurred. Interest is
capitalized during the construction phase of network and other internal-use capital projects.
Employee-related costs directly related to construction of internal use assets are also capitalized
during the construction phase. Property, plant and equipment supplies used internally are carried
at average cost, except for significant individual items for which cost is based on specific
identification.
|
(h) |
|
Goodwill and Other Intangible Assets |
Intangible assets with finite lives are amortized on a straight-line basis over that
life. Where there are no legal, regulatory, contractual or other factors that would reasonably
limit the useful life of an intangible asset, we classify the intangible asset as indefinite lived
and such intangible assets are not amortized.
Goodwill and intangible assets not subject to amortization are tested annually in the
fourth quarter for impairment, and are tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss is recognized to the
extent that the carrying amount exceeds the assets fair value.
|
(i) |
|
Recoverability of Long-lived Assets |
In accordance with SFAS No. 144, long-lived assets, such as property and equipment and
purchased intangibles subject to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment
charge is recognized for the amount by which the carrying amount of the asset exceeds the fair
value of the asset. The fair value of an asset is estimated by an analysis of discounted projected
cash flows to be generated by the asset. Assets to be disposed of are separately presented in the
consolidated balance sheets and reported at the lower of the carrying amount or fair value less
selling costs, and are no longer depreciated.
|
(j) |
|
Accounting for Asset Retirement Obligations |
SFAS No. 143, Accounting for Asset Retirement Obligations, addresses financial
accounting and reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs, generally referred to as asset retirement
obligations. SFAS No. 143 requires entities to record the fair value of a legal
11
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
liability for an asset retirement obligation required to be settled under law or written or oral
contract. If a reasonable estimate of fair value can be made, the fair value of the liability will
be recognized in the period it is incurred, otherwise in the period a reasonable estimate of fair
value can be made. This cost is initially capitalized and then amortized over the estimated
remaining useful life of the asset. The Company implemented SFAS No. 143 on January 1, 2003.
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations (FIN 47). FIN 47 clarifies that an entity must record a liability for
a conditional asset retirement obligation if the fair value of the obligation can be reasonably
estimated. The provision is effective no later than the end of the fiscal year ending after
December 15, 2005. The adoption of FIN 47 has not had a material impact on our consolidated results
of operations and financial condition.
The Company leases various facilities in which communication equipment is located.
Terminating and decommissioning these facilities requires the removal of any assets and restoration
of the lease space to its original condition. Accordingly, upon adoption of SFAS No. 143, the
Company recorded an estimated asset retirement obligation of $2.7 million, which was estimated
using managements, estimate of the expected future cash expenditures. In addition, the Company
recorded an asset retirement obligation related to Focals leased facilities in the amount of $1.9
million during the third quarter of 2004. During the fourth quarter 2004, the Company downwardly
revised prior reserve estimates by $1.6 million as actual closure costs incurred were at rates
below the Companys original estimates. The present value of all asset retirement obligations was
calculated using a discount rate of 8% over the estimated remaining life of the lease. The
following table displays the activity and balance of the liability account for the periods ended
December 31, 2005 (in thousands):
|
|
|
|
|
|
|
Asset |
|
|
|
Retirement |
|
|
|
Obligation |
|
Balance at December 31, 2003 |
|
|
2,857 |
|
Focal acquisition |
|
|
1,927 |
|
Accretion of interest |
|
|
422 |
|
Liabilities settled |
|
|
(283 |
) |
Additions |
|
|
11 |
|
Change in estimate |
|
|
(1,586 |
) |
Balance at December 31, 2004 |
|
$ |
3,348 |
|
Accretion of interest |
|
|
272 |
|
Liabilities settled |
|
|
|
|
Additions |
|
|
|
|
Change in estimate |
|
|
|
|
Balance at December 31, 2005 |
|
$ |
3,620 |
|
|
(k) |
|
Research and Development |
Research and development costs are expensed as incurred.
The Company accounts for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws in effect when the differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. Valuation allowances are established when necessary
to reduce deferred income tax assets to the amounts expected to be recovered.
12
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Costs related to advertising are expensed as incurred and are included in selling, general and
administrative in our consolidated statements of operations.
|
(n) |
|
Net Loss Per Common Share |
The computations of basic and diluted net loss per common share are based on the weighted
average number of common shares outstanding during the period. Dilutive earnings per share give
effect to all potentially dilutive common securities. Potentially dilutive securities include stock
options warrants and convertible debt.
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that the estimates,
judgments and assumptions made when accounting for items and matters such as customer retention
patterns, allowance for bad debts, depreciation, amortization, asset valuations, recoverability of
assets, impairment, reserves and other provisions and contingencies are reasonable, based on
information available at the time they are made. These estimates, judgments and assumptions can
affect the reported amounts of assets and liabilities as of the date of the consolidated financial
statements, as well as the reported amounts of revenue and expenses during the periods presented.
We also assess potential losses in relation to threatened or pending legal and tax matters. If a
loss is considered probable and the amount can be reasonably estimated, we recognize an expense for
the estimated loss. Actual results could differ from these estimates.
|
(p) |
|
Stock split and stock dividend |
On October 8, 2004, the Company completed a 1-for-20 reverse stock split, resulting in
every twenty shares of common stock to be combined into one share of common stock. Immediately
following the stock split, the Company enacted a one time, 1-for-1 stock dividend for all
shareholders of record as of October 8, 2004, effectively resulting in a 1-for-10 reverse stock
split. The stock split and stock dividend affects all of the Companys stock, stock options and
warrants outstanding on the record date. The consolidated financial statements have been
retroactively adjusted to reflect the stock split and stock dividend for all periods presented.
|
(q) |
|
Stock Options and Warrants |
The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to
account for its stock options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No.
123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based
method of accounting described above, and has adopted only the disclosure requirements of SFAS No.
123. The following table illustrates the effect on net loss if the fair-value based method had been
applied to all outstanding and unvested awards in each period (in thousands, except per share
data).
13
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year End |
|
|
|
December 28, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
Net loss |
|
$ |
(260,471 |
) |
|
$ |
(152,181 |
) |
|
$ |
(133,428 |
) |
Deduct total stock-based employee compensation
expense determined under the fair-value based
method for all awards |
|
|
(66,201 |
) |
|
|
(32,527 |
) |
|
|
(11,272 |
) |
Add back stock-based employee compensation
expense included in reported net loss |
|
|
24,604 |
|
|
|
8,264 |
|
|
|
4,489 |
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(302,068 |
) |
|
$ |
(176,444 |
) |
|
$ |
(140,211 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per common share |
|
$ |
(7.02 |
) |
|
$ |
(3.32 |
) |
|
$ |
(1.92 |
) |
|
|
|
|
|
|
|
|
|
|
(r) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation, including the reclassification of auction rate securities in the amount of $21.5
million and $25.4 million to short-term investments at December 31, 2003 and 2004, respectively.
Auction rate securities, because of the short duration of their reset periods, were previously
included in cash and cash equivalents for all periods presented. As a result of this
reclassification, the Companys cash flow from investing activities now includes the investments
and sales of auction rate securities for all periods presented. Additionally, equity based expense
was reclassified in the consolidated statements of operations in accordance with Staff Accounting
Bulletin No. 107. These reclassifications had no impact on previously reported total current
assets, total assets, or net loss and does not affect previously reported cash flows from operating
activities.
(s) New Accounting Standards
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS
No. 123R is a revision of FASB SFAS No. 123, Accounting for Stock-Based Compensation and supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123R establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are based on the fair
value of the entitys equity instruments or that may be settled by the issuance of those equity
instruments. SFAS No. 123R focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS No. 123R requires a public
entity to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to provide service in
exchange for the award. The provisions of SFAS No. 123R are effective for public entities that do
not file as small business issuers as of the beginning of the annual reporting period that begins
after June 15, 2005. We have previously issued employee stock options for which no expense has been
recognized, and which will not be fully vested as of the effective date of SFAS No. 123R. We
believe the impact of adopting SFAS No. 123R, based on our unvested options outstanding at December
31, 2005, will be to increase our pre-tax stock-based compensation expense in 2006 between $5.5
million and $7.5 million. The preceding excludes restricted stock based compensation, which is
estimated to be $3.8 million based on outstanding units at December 31, 2005.
In November 2004, the FASB issued SFAS No.151, Inventory Costs, amendment to ARB No. 43
Chapter 4, (SFAS No. 151) which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for
fiscal years beginning after June 15, 2005. We
do not expect the impact of SFAS No. 151 to have a material effect our financial position,
results of operations or liquidity.
14
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary AssetsAn Amendment
of APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS 153). SFAS 153 eliminates
the exception from fair value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it
with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. We are required to adopt SFAS 153 effective
January 1, 2006.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error CorrectionsA
Replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 provides
guidance on the accounting for and reporting of accounting changes and error corrections. SFAS 154
is effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005 which for us will be as of the beginning of fiscal 2007.
(2) Acquisitions
(a) Broadwing Communication Services, Inc.
On February 23, 2003, the Company entered into an agreement to invest approximately
$129.0 million, including acquisition costs, for most of the assets and certain of the liabilities
of Broadwing Communications Services, Inc. This purchase price was subject to a pre-closing
reduction of up to $14.3 million if Broadwing Communications Services, Inc. failed to reach certain
revenue and EBITDA targets, as defined in the agreement, and a post-closing reduction of an
additional $10.0 million if certain EBITDA targets, as defined in the agreement, were not reached
in a one-year period after the closing. The agreement also committed Broadwing Communications
Services, Inc. to make capital expenditures of $3.0 million each month, consistent with its
financial plan. On June 6, 2003, the parties agreed to reduce the purchase price by $7.2 million
due to failure to meet the revenue target and by an additional $7.2 million for failure to achieve
the targeted financial results. An additional reduction in the purchase price of approximately
$23.0 million was negotiated reflecting the sellers desire to forego making additional required
capital expenditures as required under the agreement, such as equipment and network upgrades, and
to accelerate the closing of the transaction. These reductions reduced the purchase price to $92.9
million, including acquisition costs. The Broadwing Communication Services, Inc. acquisition closed
on June 13, 2003. Subsequently, in November 2003, the parties agreed on an additional post-closing
reduction in the purchase price to $81.1 million, net of purchase adjustments and acquisitions
costs, as negotiated pursuant to working capital and receivable adjustment obligations set forth in
the agreement and the Companys release of certain warranties. In addition, during the third
quarter of 2004, the Company adjusted the value of its fixed assets purchased pursuant to the terms
of the original purchase agreement whereby the Company would receive an additional $10.0 million
reduction in price if certain EBITDA targets were not met for the period from July 1, 2003 to July
1, 2004. On November 3, 2004, the seller paid the $10.0 million purchase price adjustment in full.
At the date of acquisition, the Company held a 96% ownership interest and appointed four
of the six board members of a holding Company that in turn owned Broadwing Communications, LLC.
Cequel III, LLC (Cequel) contributed approximately $0.9 million for a 1% ownership interest and the
ability to appoint two of the six board members of the holding Company. Cincinnati Bell, previously
the parent company of Broadwing Communications Services, Inc., retained a 3% non-voting equity
interest in the venture. In addition, the Company entered into a management services agreement with
Cequel, in which Cequel would manage the day-to-day operations of Broadwing Communications, LLC.
On November 20, 2003, the Company acquired Cequels 1% equity stake and additional
interests in Broadwing Communications, LLC and terminated its management services agreement in
exchange for a combination of cash and equity. In addition, the Company entered into a new master
network services agreement to provide Cequel services over a four-year period at prices ranging
from cost reimbursement to current market pricing. As a result of this agreement, the Company
recorded restructuring charges of $18.5 million in the fourth quarter of 2003.
15
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(b) Focal
On September 1, 2004, the Company invested approximately $97.7 million, including
acquisition costs, and assumed $98.1 million in debt to acquire 100% of the voting equity interest
of Focal. Focal operating results subsequent to September 1, 2004 are included in the consolidated
financial statements.
The Merger Agreement, dated March 3, 2004, provided for a purchase price of $210.0
million, which was reduced by $76.1 million in assumed debt outstanding, $19.5 million in assumed
capitalized lease obligations, and a reduction of $14.2 million due to the stock price trading
below the low end of the range at the time of acquisition as explained below. The purchase price
was also increased by acquisition costs and an interest factor accruing from the date that Focal
satisfied the conditions to closing until the closing occurred.
At closing, the purchase price was determined to be $97.7 million, comprised of
approximately $94.1 million of the Companys common stock issued to Focals equity holders, of
which $0.2 million relates to interest, and $4.5 million paid in cash. Per the Merger Agreement,
the number of shares of common stock to be issued was determined based on the average closing price
for the 20-day period ending three days before closing not to exceed a range between $12.70 and
$29.50 per share. Because the 20-trading day average was less than $12.70 per share, the per share
valuation used at the closing was $12.70, with Focal stockholders receiving a total of 8,641,829
shares of the Companys common stock, of which 18,209 shares were issued at a settlement rate of
$10.20 related to interest. The closing price of common stock for the five day average ended
September 3, 2004 equaled $10.90 per share for determination of the purchase price.
The purchase price has been allocated to the assets and liabilities acquired, based on
the estimated fair value that was finalized in the third quarter of 2005. Certain accounts
receivable, accrued cost of service and other estimates have been contested and are subject to
dispute. The following table provides a purchase price allocation rollforward from estimates
recorded at September 30, 2004 to the final purchase price allocation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
September 30, 2004 |
|
|
Adjustments |
|
|
As Adjusted |
|
Current assets |
|
$ |
54,112 |
|
|
$ |
1,114 |
(a) |
|
$ |
55,226 |
|
Property and equipment |
|
|
155,865 |
|
|
|
|
|
|
|
155,865 |
|
Customer relationships |
|
|
9,900 |
|
|
|
300 |
|
|
|
10,200 |
|
Goodwill |
|
|
30,601 |
|
|
|
27,753 |
(b) |
|
|
58,354 |
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
250,478 |
|
|
|
29,167 |
|
|
|
279,645 |
|
Current liabilities |
|
|
54,600 |
|
|
|
15,496 |
(c) |
|
|
70,096 |
|
Long-term liabilities |
|
|
98,130 |
|
|
|
12,822 |
(d) |
|
|
110,952 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
152,730 |
|
|
|
28,318 |
|
|
|
181,048 |
|
|
|
|
|
|
|
|
|
|
|
Purchase price |
|
$ |
97,748 |
|
|
$ |
849 |
|
|
$ |
98,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The increase in current assets is attributable to a decrease in provisions for
preacquisition receivable disputes. |
|
(b) |
|
The increase in goodwill equals the decrease in the estimated fair value of net assets
acquired. |
|
(c) |
|
The increase in current liabilities is due to an increase in accrued service costs associated
with preacquisition vendor disputes. |
|
(d) |
|
The increase in long-term liabilities is due to finalization of the determination of the fair
values of acquired operating leases. |
The Focal purchase price is net of the elimination of certain deferred communications
services revenue associated with IRU agreements that were entered into between Focal and Broadwing
prior to the acquisition. At execution of the agreement, Focal maintained deferred revenue of $4.2
million associated with IRU sales to Broadwing and Broadwing maintained deferred revenue of $6.4
million associated with IRU sales to Focal.
16
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(3) Restructuring and Other Charges
Starting in 2001 conditions within the general economy and communications sector have
resulted in reduced capital expenditures by carriers and a reduced demand for communications
equipment. These declines have had a severe adverse impact on the Companys communications
equipment revenue and results of operations.
In response to these conditions, the communications equipment division has been
restructured through staff reductions and other consolidation efforts in an effort to decrease
operating expenses and to conserve financial resources. These restructuring initiatives have been
reflected in the results of operations in 2003, 2004, and 2005, and management will continue to
assess the need for additional restructurings in response to economic changes or strategic
initiatives in the future.
During the third quarter of 2004, the Company implemented certain staff reduction and
reorganization efforts within its communication services division primarily related to the
integration of Focal operations.
The Company recorded the following charges for the periods then ended (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
Communications equipment cost of revenueinventory-write
downs and other |
|
$ |
31,163 |
|
|
$ |
193 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other charges: |
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reductions and facilities consolidation |
|
|
24,943 |
|
|
|
3,946 |
|
|
|
1,064 |
|
Valuation and impairment of long-lived assets,
including goodwill |
|
|
15,950 |
|
|
|
|
|
|
|
416 |
|
Contract termination charges |
|
|
18,488 |
|
|
|
|
|
|
|
(119 |
) |
|
|
|
|
|
|
|
|
|
|
Total restructuring and other charges |
|
|
59,381 |
|
|
|
3,946 |
|
|
|
1,361 |
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), netimpairment of strategic
equity investments |
|
|
385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and related charges |
|
$ |
90,929 |
|
|
$ |
4,139 |
|
|
$ |
1,361 |
|
|
|
|
|
|
|
|
|
|
|
Communications equipment cost of revenueinventory-write-downs and other
The Company writes down inventory for estimated obsolete, excess and overvalued inventory
based on estimated sales projections and market values. As a result of the decline in spending by
communications carriers and the discontinuation of certain products, the Company recorded $31.2
million and $0.2 million in inventory write-downs during 2003 and 2004, respectively. Charges
recorded during 2003 relate to accruals for purchase commitments beyond inventory needs. Charges
recorded during 2004 relate to changes in previous estimates.
Workforce reductions and facilities consolidation
2003. During 2003, workforce reduction programs continued resulting in the elimination
of approximately 600 positions and charges of $15.6 million. In addition the Company recorded
approximately $9.3 million associated with facilities consolidation, including the closure of the
Companys French operations and write-off of accumulated translation losses.
17
2004. During 2004, the Company incurred approximately $2.9 million related to work
force reductions, of which $1.8 million relates to the integration of Focal operations. In
addition, the Company recorded $1.0 million related to lease terminations during the year.
Valuation and impairment of long-lived assets
2003. During 2003, under the provisions of SFAS No. 142 and SFAS No. 144, the Company
performed an analysis as to the recoverability of its long-lived and intangible assets, primarily
due to projected market conditions associated with its communications equipment division. As a
result, the Company recorded a write-down of fixed assets totaling $6.7 million and a write-down of
intangible assets totaling $9.3 million.
Contract termination charges
At the date of the Broadwing Communication Services, Inc. acquisition, the Company owned
a 96% interest and the ability to appoint four of the six board members in a holding company that
in turn owned Broadwing Communications, LLC. Cequel contributed approximately $0.9 million for a 1%
ownership interest and the ability to appoint two of the six board members. Cincinnati Bell,
previously the parent company of Broadwing Communications Services, Inc., retained a 3% non-voting
equity interest. In addition, the Company entered into a management services agreement with Cequel
under which Cequel would manage Broadwing Communications, LLC.
On November 20, 2003, the Company acquired Cequels 1% percent equity stake and
additional interests and terminated the management services agreement. In aggregate, the Company
paid $2.9 million in exchange for Cequels initial investment, as final payment for services
previously rendered, the termination of the Cequel management services agreement, and in exchange
for ongoing consulting services in the future. As additional consideration, the Company also
issued, and agreed to register with the Securities and Exchange Commission, 0.28 million shares of
its common stock to Cequel and granted them a warrant to purchase an additional 0.73 million shares
at prices ranging from $13.70, the closing price on November 20, to $22.50 per share. As part of
this agreement, the Company also entered into a 15-year network services agreement with Cequel
whereby it would provide network services at prices ranging from incremental cost reimbursement to
current market pricing. In addition, Cequel agreed to provide certain consulting services to the
Company over four-years and would act as a non-exclusive sales agent for its products and services,
for which they would receive sales commissions. During the fourth quarter of 2003, the Company
recorded a charge in the amount of $18.5 million equal to the excess of the fair value of the cash,
equity and services committed over the fair value of Cequels ownership interest and services
performed.
The following table displays the activity and balances of the restructuring accrual
account for the periods ended December 31, 2004 and December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of |
|
|
|
|
|
|
Revenue |
|
|
Restructuring and Other Charges |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Inventory |
|
|
Workforce |
|
|
Restructuring |
|
|
|
|
|
|
Write- |
|
|
and Facilities |
|
|
and Other |
|
|
|
|
|
|
downs |
|
|
Consolidation |
|
|
Charges |
|
|
Total |
|
Balance as of December 31, 2003 |
|
$ |
2,534 |
|
|
$ |
5,954 |
|
|
$ |
5,954 |
|
|
$ |
8,488 |
|
Restructuring and other charges |
|
|
193 |
|
|
|
3,946 |
|
|
|
3,946 |
|
|
|
4,139 |
|
Cash payments |
|
|
(2,254 |
) |
|
|
(6,379 |
) |
|
|
(6,379 |
) |
|
|
(8,633 |
) |
Accretion of interest |
|
|
|
|
|
|
46 |
|
|
|
46 |
|
|
|
46 |
|
Non cash charges and acquired restructuring liability |
|
|
(237 |
) |
|
|
4,817 |
|
|
|
4,817 |
|
|
|
4,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004 |
|
|
236 |
|
|
|
8,384 |
|
|
|
8,384 |
|
|
|
8,620 |
|
Restructuring and other charges |
|
|
|
|
|
|
1,361 |
|
|
|
1,361 |
|
|
|
1,361 |
|
Cash payments |
|
|
(50 |
) |
|
|
(6,980 |
) |
|
|
(6,980 |
) |
|
|
(7,030 |
) |
Accretion of interest |
|
|
|
|
|
|
29 |
|
|
|
29 |
|
|
|
29 |
|
Non cash charges |
|
|
|
|
|
|
985 |
|
|
|
985 |
|
|
|
985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
$ |
186 |
|
|
$ |
3,779 |
|
|
$ |
3,779 |
|
|
$ |
3,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) Financial Instruments
18
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Short-term and long-term investments as of December 31, 2004 are comprised of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Corporate bonds |
|
$ |
116,190 |
|
|
$ |
|
|
|
$ |
(348 |
) |
|
$ |
115,842 |
|
Euro Dollar bonds |
|
|
31,817 |
|
|
|
|
|
|
|
(136 |
) |
|
|
31,681 |
|
U.S. government and agency securities |
|
|
52,181 |
|
|
|
|
|
|
|
(233 |
) |
|
|
51,948 |
|
Auction rates securities |
|
|
30,375 |
|
|
|
|
|
|
|
|
|
|
|
30,375 |
|
Money market funds |
|
|
44,509 |
|
|
|
|
|
|
|
|
|
|
|
44,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
275,072 |
|
|
$ |
|
|
|
$ |
(717 |
) |
|
$ |
274,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents |
|
$ |
124,540 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
124,540 |
|
Included in short-term investments |
|
|
100,449 |
|
|
|
|
|
|
|
(310 |
) |
|
|
100,139 |
|
Included in long-term investments |
|
|
50,083 |
|
|
|
|
|
|
|
(407 |
) |
|
|
49,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
275,072 |
|
|
$ |
|
|
|
$ |
(717 |
) |
|
$ |
274,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term and long-term investments as of December 31, 2005 are comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Corporate bonds |
|
$ |
35,844 |
|
|
$ |
|
|
|
$ |
(93 |
) |
|
$ |
35,751 |
|
Commercial paper |
|
|
13,227 |
|
|
|
|
|
|
|
(4 |
) |
|
|
13,223 |
|
Euro Dollar bonds |
|
|
9,536 |
|
|
|
|
|
|
|
(23 |
) |
|
|
9,513 |
|
U.S. government and agency securities |
|
|
37,183 |
|
|
|
|
|
|
|
(99 |
) |
|
|
37,084 |
|
Auction rates securities |
|
|
1,000 |
|
|
|
|
|
|
|
(1 |
) |
|
|
999 |
|
Money market funds |
|
|
12,784 |
|
|
|
|
|
|
|
|
|
|
|
12,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
109,574 |
|
|
$ |
|
|
|
$ |
(220 |
) |
|
$ |
109,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents |
|
$ |
66,706 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
66,706 |
|
Included in short-term investments |
|
|
42,868 |
|
|
|
|
|
|
|
(220 |
) |
|
|
42,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
109,574 |
|
|
$ |
|
|
|
$ |
(220 |
) |
|
$ |
109,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of financial instruments. Our financial instruments consist of cash and
cash equivalents, accounts receivable, accounts payable and borrowings. The carrying values of cash
and cash equivalents, accounts receivable, auction rate securities, marketable debt securities,
accounts payable and short-term borrowings approximate their fair values because of their
short-term nature. The fair value of our long-term borrowings approximates carrying value.
(5) Property and Equipment
Starting in 2003 and continuing through 2005, the Company implemented a series of capital
projects to expand and improve its network. Costs associated directly with expansions and
improvements to the network, including employee related costs, have been capitalized, and interest
costs incurred during construction were capitalized based on the weighted average accumulated
construction expenditures and interest rates related to the Companys borrowings at the time.
During 2004 and 2005, approximately $4.1 and $7.0 million, respectively, of interest was
capitalized.
19
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
Depreciable |
|
|
|
2004 |
|
|
2005 |
|
|
Lives (years) |
|
Land |
|
$ |
7,950 |
|
|
$ |
7,950 |
|
|
Indefinite |
Buildings and leasehold improvements |
|
|
68,748 |
|
|
|
63,195 |
|
|
|
2-40 |
|
Transmission facilities |
|
|
184,223 |
|
|
|
293,049 |
|
|
|
3-20 |
|
Furniture, fixtures, vehicles and other |
|
|
24,694 |
|
|
|
24,802 |
|
|
|
2-15 |
|
Fiber usage rights |
|
|
14,513 |
|
|
|
16,133 |
|
|
|
5-20 |
|
Testing and manufacturing equipment |
|
|
74,226 |
|
|
|
71,892 |
|
|
|
3-5 |
|
Construction in process |
|
|
73,126 |
|
|
|
32,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
447,480 |
|
|
|
509,669 |
|
|
|
|
|
Less: Accumulated depreciation |
|
|
(161,442 |
) |
|
|
(248,988 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
286,038 |
|
|
$ |
260,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in construction in process is approximately $17.6 million and $13.2 million of
network spares inventory at December 31, 2005 and 2004, respectively. Interest is not capitalized
on network spares inventory.
During 2004, the Company adjusted the value of its fixed assets purchased as part of the
Broadwing Communication Services, Inc. acquisition pursuant to the terms of the original purchase
agreement as discussed in Note 2. This resulted in a decrease to the value of the assets acquired
in the amount of $10.7 million and a corresponding decrease in depreciation expense of $3.5 million
for the year.
(6) Goodwill and Other Intangible Assets
Goodwill
The Company recorded $58.4 million of goodwill related to the acquisition of Focal.
Other Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004 |
|
|
As of December 31, 2005 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships and in-place
contracts (3 to 7 years) |
|
$ |
34,150 |
|
|
$ |
6,908 |
|
|
$ |
34,450 |
|
|
$ |
12,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
48,696 |
|
|
|
|
|
|
$ |
58,354 |
|
|
|
|
|
Trademarks |
|
|
2,910 |
|
|
|
|
|
|
|
2,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,606 |
|
|
|
|
|
|
$ |
61,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded $10.2 million in intangible assets related to the Focal acquisition.
The intangible assets relate to customer relationships that will be amortized on a straight line
basis over a period of 7 years.
Intangible asset amortization expense was $6.9 million, $4.6 million and $5.6 million for
years ended December 31, 2003, 2004, and 2005, respectively. The Company estimates amortization
expense will be $4.6 million in 2006, $3.7 million in 2007, $3.8 million in 2008, $3.3 million in
2009 and $3.3 million in 2010 and $3.6 million thereafter.
During the fourth quarter of 2005, the Company performed an impairment analysis of the
intangible assets acquired as part of the Broadwing Communication Services, Inc. and Focal
Communications acquisitions pursuant
20
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
to SFAS 142 and SFAS 144. The Company did not recognize an impairment loss, as the carrying amount
of finite-lived intangible assets were determined to be recoverable.
(7) Notes Payable and Credit Facility
On February 19, 2004, the Company borrowed $225.0 million under unsecured convertible
notes in a private placement to institutional investors. The loans matured on and were paid in full
on February 20, 2006. Borrowings under the loans accrue interest at a stated rate of 5% payable
quarterly, while principal is scheduled for repayment in seven equal quarterly installments which
commenced on August 19, 2004. Provided certain conditions are met and at the election of the
Company, principal and interest are payable in either cash or common stock at a conversion price of
95% of the average stock price for the 20 days preceding conversion. If the average stock price
exceeds a specified threshold, principal and interest are payable in common stock. Provided certain
conditions are met, the notes can be prepaid in cash at any time at a premium of 103% if the
Companys common stock is trading at or above $13.50. Under certain conditions, the Companys
election to convert may require the issuance of additional warrants. The holders may convert at any
time.
In conjunction with the issuance of the notes, the Company issued warrants to purchase
2,732,838 shares of common stock. The warrants are immediately exercisable, have a strike price of
$23.70 per share, and have a three-year life. The warrants were valued at $33.2 million and were
recorded as original issue discount. Amortization of original issuance discount and debt issuance
costs results in an effective annual interest rate of 22%.
Under certain conditions, the holders can participate in subsequent rights offerings. The
noteholders have the right to approve the declaration of and participate in dividends. Unpaid
principal is redeemable by the holders at 115% of face value upon a change of control. The Company
has determined the early redemption and the change in control option to be embedded derivatives and
has determined the value of embedded derivatives to be immaterial. Under the terms of the notes,
the Company may incur additional indebtedness of up to $100.0 million, subject to certain
limitations.
In August and November 2004 and February 2005, the Company elected to pay principal and
interest due on the unsecured convertible notes issued in February 2004 primarily in shares of our
common stock, resulting in the issuance of 3,212,141, 6,437,787, and 6,299,640 shares of common
stock, respectively. All other payments in 2005 of principal and interest were made in cash.
The Company assumed $76.1 million in Senior Debt in the acquisition of Focal, which was
repaid in cash immediately upon closing.
A summary of notes payable as of December 31, 2005 and December 31, 2004 is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2004 |
|
|
2005 |
|
Leasehold improvements loan due May 2009, 10% interest rate |
|
$ |
691 |
|
|
$ |
560 |
|
Senior unsecured convertible notes, 5% interest rate due
February 2006, less unamortized debt discount of $12,837 and
$789 at December 31, 2004 and 2005, respectively |
|
|
147,877 |
|
|
|
31,354 |
|
Other |
|
|
707 |
|
|
|
455 |
|
|
|
|
|
|
|
|
|
|
|
149,275 |
|
|
|
32,369 |
|
Less: current portion |
|
|
(116,464 |
) |
|
|
(31,659 |
) |
|
|
|
|
|
|
|
Notes payable, net of discounts and current portion |
|
$ |
32,811 |
|
|
$ |
710 |
|
|
|
|
|
|
|
|
On October 18, 2005, Broadwing announced that it had entered into a revolving credit
facility that provides borrowing capacity to borrow up to $75 million subject to certain
limitations, commencing November 29, 2005 with a final maturity date of October 14, 2008. The
facility is secured by a pledge of accounts receivable. Borrowings will bear an interest rate, at
Broadwings option, at either LIBOR plus 3.75% or an alternate base rate, defined as the
21
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
higher of the prime or federal funds rate, plus 2.5%. If cash, investments, and undrawn
availability under the facility fall below $100.0 million while borrowings are outstanding,
Broadwing must deposit $25.0 million into a designated restricted account. Borrowing under the
facility will be limited by an amount of eligible accounts receivable available as collateral and
the amount of our Liquidity, as defined the agreement. As the available borrowing under the
facility is limited, the amount available at any point in time may be substantially less than $75.0
million and the facility could be unavailable in certain circumstances. The facility is subject to
an unused line fee of one-half of one percent (0.05%), an annual fee of $0.4 million and closing
costs of $1.5 million which will be amortized over the life of the facility. Broadwing intends to
use borrowings under the facility for general corporate purposes.
(8) Leases
The Company leases certain facilities, equipment and vehicles for use in its operations
under both capital and operating leases. Most lease terms include renewal options and/or escalating
rents. Total rent expense under operating leases amounted to $21.2 million in 2003, $34.5 million
in 2004, and $39.9 in 2005 (excluding restructuring costs associated with facilities
consolidation). Amortization charges applicable to capitalized assets have been included in
depreciation expense in the consolidated statements of operations for all periods presented.
During 2004, in conjunction with the Focal acquisition, the Company assumed capital lease
obligations related to an agreement Focal entered into during 1999 with certain carriers for the
acquisition of IRUs for dark fiber transport capacity. The lease term expires in June 2022.
Capital lease amounts included in property and equipment for the periods ended is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2004 |
|
|
2005 |
|
Fiber |
|
$ |
19,383 |
|
|
$ |
18,833 |
|
Vehicles and other equipment |
|
|
884 |
|
|
|
2,690 |
|
|
|
|
|
|
|
|
Total |
|
|
20,267 |
|
|
|
21,523 |
|
Less: current portion |
|
|
(860 |
) |
|
|
(1,414 |
) |
|
|
|
|
|
|
|
Capital leases, net of current portion |
|
$ |
19,407 |
|
|
$ |
20,109 |
|
|
|
|
|
|
|
|
As of December 31, 2005, the total cost and associated accumulated depreciation of assets
that were acquired under capital lease were $15.0 million and $2.9 million, respectively.
The aggregate minimum rental commitments under noncancelable leases for the periods shown
at December 31, 2005, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Years |
|
Capital leases |
|
|
Operating leases |
|
2006 |
|
$ |
3,459 |
|
|
$ |
34,177 |
|
2007 |
|
|
3,308 |
|
|
|
32,435 |
|
2008 |
|
|
3,162 |
|
|
|
29,133 |
|
2009 |
|
|
2,855 |
|
|
|
23,107 |
|
2010 |
|
|
2,431 |
|
|
|
19,352 |
|
Thereafter |
|
|
24,613 |
|
|
|
76,819 |
|
|
|
|
|
|
|
|
Total minimum rental commitments |
|
|
39,828 |
|
|
$ |
215,023 |
|
|
|
|
|
|
|
|
|
Less: interest and executory costs |
|
|
18,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments |
|
|
21,523 |
|
|
|
|
|
Less: current installments |
|
|
1,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations at December 31, 2005 |
|
$ |
20,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
22
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
As of December 31, 2005, the total minimum sublease rentals to be received in the future under
noncancelable operating and capital subleases were $5.0 million.
(9) Stock-based Compensation
In July 1997, the Company adopted the 1997 Stock Option Plan (the Plan) pursuant to
which the Companys Board of Directors may grant options to purchase common stock to employees,
officers, directors and consultants. Under the Plan 347,303 shares of the Companys common stock
are reserved for issuance as of December 31, 2005. Generally, stock options are granted with an
exercise price equal to the estimated fair value of the common stock at the date of grant. The
stock options have a 10-year term and ownership vests over four years from the date of grant.
In June 2000, the Company adopted the 2000 Long Term Incentive Plan (the 2000 Plan)
pursuant to which the Company may grant options to purchase common stock to employees, officers,
directors and consultants. Under the 2000 Plan, 1,155,064 shares of the Companys common stock are
reserved for issuance as of December 31, 2005. The number of shares authorized for issuance
increases annually on January 1, by the lesser of five percent of outstanding shares on that date
or such other number of shares as determined by the Board; however, incentive stock options
issuable under the 2000 Plan are not to exceed 4,000,000 shares. These options generally vest over
a four-year period and are exercisable once vested. Under the 2000 Plan, options may be incentive
stock options or non-qualified options, and the exercise price shall not be less than the grant
date fair market value for incentive stock options and not less than par value for non-qualified
options.
The per share weighted-average fair value of stock options granted during 2003, 2004 and
2005 was $8.70, $10.60, and $5.02 respectively, on the date of grant with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 28, |
|
December 31, |
|
December 31, |
|
|
2003 |
|
2004 |
|
2005 |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Risk-free interest rate |
|
|
2.00 |
% |
|
|
3.30 |
% |
|
|
3.60 |
% |
Expected life |
|
3 years |
|
4 years |
|
4 years |
Volatility |
|
|
96 |
% |
|
|
90 |
% |
|
|
82 |
% |
The following is a summary of common stock options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Number |
|
|
|
Number |
|
|
Average |
|
|
Vested and |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
Exercisable |
|
December 28, 2002 |
|
|
5,778,039 |
|
|
$ |
41.90 |
|
|
|
3,199,905 |
|
Granted |
|
|
2,280,332 |
|
|
|
9.50 |
|
|
|
|
|
Exercised |
|
|
(800,123 |
) |
|
|
7.20 |
|
|
|
|
|
Canceled. |
|
|
(2,378,424 |
) |
|
|
53.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003 |
|
|
4,879,824 |
|
|
|
26.60 |
|
|
|
2,593,259 |
|
Granted |
|
|
1,958,912 |
|
|
|
13.44 |
|
|
|
|
|
Exercised |
|
|
(482,606 |
) |
|
|
7.67 |
|
|
|
|
|
Canceled. |
|
|
(1,575,682 |
) |
|
|
33.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
4,780,448 |
|
|
|
20.54 |
|
|
|
2,344,300 |
|
Granted |
|
|
7,620 |
|
|
|
1.24 |
|
|
|
|
|
Exercised |
|
|
(76,294 |
) |
|
|
4.19 |
|
|
|
|
|
Canceled. |
|
|
(1,020,739 |
) |
|
|
20.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
3,691,035 |
|
|
$ |
20.95 |
|
|
|
2,586,385 |
|
|
|
|
|
|
|
|
|
|
|
|
23
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following table summarizes information about outstanding and exercisable stock options at
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
Number |
|
|
Average |
|
Actual Price Range |
|
Outstanding |
|
|
Contractual Life |
|
|
Exercise Price |
|
|
Exercisable |
|
|
Exercise Price |
|
$ 0.10-$ 3.40 |
|
|
70,587 |
|
|
|
3.81 |
|
|
$ |
1.64 |
|
|
|
70,587 |
|
|
$ |
1.64 |
|
$ 5.33-$ 7.50 |
|
|
662,190 |
|
|
|
7.20 |
|
|
|
5.84 |
|
|
|
473,367 |
|
|
|
5.90 |
|
$ 8.49-$ 12.60 |
|
|
296,546 |
|
|
|
6.70 |
|
|
|
10.80 |
|
|
|
222,608 |
|
|
|
10.75 |
|
$12.90-$ 19.20 |
|
|
1,912,333 |
|
|
|
7.60 |
|
|
|
13.97 |
|
|
|
1,099,402 |
|
|
|
13.95 |
|
$19.40-$ 33.58 |
|
|
568,288 |
|
|
|
4.97 |
|
|
|
31.22 |
|
|
|
539,330 |
|
|
|
31.70 |
|
$68.50-$910.00 |
|
|
181,091 |
|
|
|
4.59 |
|
|
|
141.84 |
|
|
|
181,091 |
|
|
|
141.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,691,035 |
|
|
|
6.83 |
|
|
$ |
20.95 |
|
|
|
2,586,385 |
|
|
$ |
24.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2004, the Company began issuing restricted stock under its 2000 Plan. Restricted
stock generally vests over a four year period, 25% of which, vest after the first year and the
remainder vests quarterly thereafter. Outstanding stock is entitled to vote and receive any
declared dividends. As of December 31, 2005 and December 31, 2004, 2,204,960 and 964,600,
respectively unvested restricted stock were outstanding and held in escrow.
(10) Employee Stock Purchase Plan
During 2000, the Company established the Broadwing Employee Stock Purchase Plan (the
Plan). Under the Plan, the Company may issue up to up to a total of 1,000,000 shares during the
life of the Plan. Eligible employees choose to participate in the Plan during offering periods by
authorizing payroll deductions of up to 15% of their salaries, subject to limitations imposed by
the Internal Revenue Code. The first offering period began in July 2000, with subsequent periods
being six months in duration beginning on January 1, 2001. As of the last business day of each
offering period, called an exercise date, the participants accumulated payroll deductions are
used to purchase shares of the Companys common stock. The purchase price per share purchased as of
this date is the lower of either (1) 85% of the fair market value of a share of common stock on the
first business day of the offering period or (2) 85% of the fair market value of a share of common
stock on the exercise date. During fiscal year 2003, 2004 and 2005, 176,178, 133,799, and 329,285
shares were purchased under the Plan, respectively, resulting in aggregate proceeds of $1.0
million, $1.8 million, and $1.3 million respectively.
The per share weighted average fair value of shares granted under the Plan during 2003,
2004 and 2005 was $3.20, $5.68, and $2.10 respectively, on the date of grant with the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2003 |
|
2004 |
|
2005 |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Risk-free interest rate |
|
|
1.18 |
% |
|
|
1.25 |
% |
|
|
3.04 |
% |
Expected life |
|
0.5 years |
|
0.5 years |
|
0.5 years |
Volatility |
|
|
84 |
% |
|
|
84 |
% |
|
|
84 |
% |
(11) Warrants
During 1999, in connection with certain debt facilities, the Company issued warrants to
purchase 869,416 shares of the Companys common stock with an exercise price of $7.60. During 2003
and 2004, 29,264 and 158,198 warrants were exercised, resulting in proceeds of $0.2 million and
$0.6 million, respectively. The remaining unexercised warrants expired as of June 30, 2004.
In November 1999, the Company issued warrants to purchase up to 527,085 shares of common
stock at $28.50 per share to a strategic investor. A certain percentage of the warrants were
immediately exercisable, while
24
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
the remaining amount became exercisable after the strategic investor purchased the Companys
products. Of the total 527,085 shares of common stock committed in this warrant, the rights to
purchase 263,543 shares expired during the fourth quarter of 2004 and the rights to purchase the
remaining 263,543 shares will expire in May 2006. During 1999, the Company recorded equity-based
sales and marketing expense of approximately $1.8 million for the estimated fair value at grant
date of the warrants that were immediately exercisable. In June 2000, the Company waived the
purchase requirements associated with the remaining warrants, resulting in an equity-based sales
and marketing expense of approximately $19.5 million for the estimated fair value at the date the
warrants became exercisable.
In connection with the restructuring of the Cequel agreement the Company granted
immediately exercisable warrants, expiring in November 2010, to purchase an additional 725,000
common shares at a weighted average exercise price of $15.40 per share. As of December 31, 2004,
all warrants associated with the agreement remain outstanding.
In conjunction with the February 2004 issuance of unsecured convertible notes the Company
issued warrants to purchase 2,732,838 shares of common stock. The warrants are immediately
exercisable, have a strike price of $23.70 per share, and have a three-year life. The warrants were
valued at $33.2 million and were recorded as original issue discount. Warrants were valued using
the Black-Scholes valuation model assuming expected dividend yield, risk-free interest rate,
expected life and volatility of 0%, 2.2%, three years and 94.4%, respectively. As of December 31,
2005, all warrants associated with the convertible notes remain outstanding.
(12) Private Placement
On August 28, 2003, the Company completed a private placement of 6.7 million shares of
common stock for proceeds of $73.8 million, net of offering costs. In addition, the Company granted
the investors additional investment rights to purchase up to an additional 1,245,566 shares, net of
exercises, of the Companys common stock at $13.00 per share. These additional investment rights
became exercisable on November 26, 2003, and expired on July 16, 2004.
Under the terms of the agreement, the Company was contractually committed to register
shares that investors bought in connection with the August 2003 private placement. However, the
Company was unable to do so due to Broadwing Communication Services, Inc. predecessor auditors
inability to consent to the Company referencing certain financial statements they audited relating
to the Broadwing Communication Services, Inc. business while it was owned by Cincinnati Bell.
During the first quarter of 2004, Cincinnati Bell restated its earnings, their auditors consented
to the Company referencing certain financial statements they audited, and the Company was able to
register the shares. With the registration of shares effective on April 19, 2004, contractual
interest payments of $0.8 million per month ceased. The Company incurred approximately $3.2 million
in interest associated with the delayed registration during 2004.
(13) Basic and Diluted Net Loss Per Common Share
Basic and diluted net loss per common share are computed as follows (in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2003 |
|
2004 |
|
2005 |
Net loss |
|
$ |
(260,471 |
) |
|
$ |
(152,181 |
) |
|
$ |
(133,428 |
) |
Basic and diluted weighted average common shares |
|
|
43,060 |
|
|
|
53,217 |
|
|
|
72,894 |
|
Basic and diluted net loss per common share |
|
$ |
(6.05 |
) |
|
$ |
(2.86 |
) |
|
$ |
(1.83 |
) |
Options and warrants outstanding as of December 31, 2003 to purchase 4,879,823 and
1,455,104 shares of common stock, respectively, and 8,338 unvested shares acquired through the
exercise of options were not included
in the computation of diluted net loss per common share for the year ended December 31, 2003,
as their inclusion would be anti-dilutive.
25
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Options unvested restricted stock and warrants outstanding as of December 31, 2004 to purchase
4,780,448, 964,600 and 3,743,108 shares of common stock, respectively, and 133 unvested shares
acquired through the exercise of options were not included in the computations of diluted net loss
per common share for the year ended December 31, 2004, as their inclusion would have been
anti-dilutive.
Options, unvested restricted stock and warrants outstanding as of December 31, 2005 to
purchase 3,691,035, 2,204,960 and 3,721,381 shares of common stock, respectively, were not included
in the computations of diluted net loss per common share for the year ended December 31, 2005, as
their inclusion would have been anti-dilutive.
(14) Income Taxes
The Company has incurred operating losses since its inception and has recognized no
current or deferred tax provision or benefit. The provision (benefit) for income taxes is different
from that which would be obtained by applying the statutory federal income tax rate to net loss
before income taxes. The items causing this difference are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
Expected tax benefit at statutory rate |
|
$ |
91,165 |
|
|
$ |
53,263 |
|
|
$ |
46,700 |
|
State tax, net of federal benefit |
|
|
12,694 |
|
|
|
6,122 |
|
|
|
6,641 |
|
Non-deductible goodwill amortization and
purchased research and development |
|
|
(1,607 |
) |
|
|
|
|
|
|
|
|
Research and development tax credits |
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible interest |
|
|
|
|
|
|
(9,959 |
) |
|
|
|
|
Other, net |
|
|
(102 |
) |
|
|
(419 |
) |
|
|
(198 |
) |
Increase in valuation allowance |
|
|
(102,150 |
) |
|
|
(49,007 |
) |
|
|
(53,143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Temporary differences and carry forwards that give rise to deferred tax assets and
liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2004 |
|
|
2005 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Capitalized start-up and organization costs |
|
$ |
8,092 |
|
|
$ |
4,589 |
|
Domestic net operating loss carry forward |
|
|
463,628 |
|
|
|
481,963 |
|
Foreign net operating loss carry forward |
|
|
43,964 |
|
|
|
43,777 |
|
Accrued expenses |
|
|
123,047 |
|
|
|
121,046 |
|
Research and development tax credit carry forwards |
|
|
14,764 |
|
|
|
14,764 |
|
Non-cash stock compensation |
|
|
105,449 |
|
|
|
107,244 |
|
Property and equipment |
|
|
64,256 |
|
|
|
71,109 |
|
Other |
|
|
(1,631 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
821,569 |
|
|
|
844,492 |
|
Valuation allowance |
|
|
(821,569 |
) |
|
|
(844,492 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or the entire amount of deferred tax assets will not be
realized. The ultimate realization of the deferred tax asset is dependent upon the generation of
future taxable income during the periods in which temporary
26
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
differences become deductible and credit carry forwards are available. Management considers
scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning
strategies that can be implemented by the Company in making this assessment. Based upon the lack of
historical taxable income, scheduled reversal of deferred tax liabilities, and projections for
future taxable income over the periods in which the temporary differences are deductible and tax
credits are available to reduce taxes payable, the Company has established a valuation allowance of
$821.6 million and $844.5 million as of December 31, 2004 and 2005, respectively.
The $22.9 million increase in the valuation allowance for the year ended December 31,
2005 is net of a $30.2 million adjustment to acquired deferred tax assets which were fully
reserved.
The domestic net operating loss carryforwards of $1,163.0 million will expire commencing
in 2012 through 2025. Foreign net operating loss carryforwards of $118.8 million will expire
commencing in 2006 through the year 2011. Further, as a result of certain financing and capital
transactions, an annual limitation on the future utilization of a portion of the net operating loss
carryforward may have occurred or could occur if we raised additional capital. As a result, the
utilization of the net operating loss carryforward could be limited.
The Companys domestic net operating loss carryforward has been increased for tax
benefits associated with exercises of stock options and warrants. The Company receives an income
tax benefit calculated as the difference between the fair value of the stock issued at the time of
the exercise and the option price, tax effected. These benefits will be credited directly to
shareholders equity when the net operating loss carryforwards are utilized against current tax
liabilities. The benefits increasing gross deferred tax assets amount to approximately $39.6
million as of December 31, 2005.
(15) Related Party Transactions
(a) Joint Venture
The Company has a 99% economic interest and a 49% voting interest in ACME Grating
Ventures, LLC (ACME LLC). The remaining economic interest and voting interest are owned by ACME
Gratings, Inc. (ACME Corp.). A Director of the Company owns 100% of ACME Corp. ACME Corp. has
contributed to ACME LLC certain licensed intellectual property and the Company has contracted with
ACME LLC for its use of the Companys facilities, personnel, equipment and certain intellectual
property. ACME LLC makes gratings that the Company purchases at a unit cost that is consistent with
the requirements of the licensed intellectual property, which require that the gratings made with
the licensed technology be sold for no less than the fair market value of comparable gratings that
are available in the commercial marketplace.
According to the operating agreement of ACME LLC, the Company receives 99% of the profits
and losses from the business, and ACME Corp. receives the remaining 1%; however, $0.3 million of
ACME LLC-related start up costs incurred by ACME Corp. will be returned to ACME Corp. out of the
net profits of ACME LLC before any distributions of net profits are made to the Company. Further,
ACME Corp. is responsible for paying royalties to the licensor of the licensed technology
contributed by ACME Corp., which vary in amounts ranging from 0.5% to 2.0% of the net invoice cost
of each grating sold by ACME LLC. In addition to 1% of the profits, ACME LLC is obligated to pay to
ACME Corp. an amount sufficient to pay the royalty obligations of ACME Corp. ACME LLC is fully
consolidated into the consolidated financial statements of Broadwing Corporation. To date, no
distributions have been made to ACME Corp. beyond those sufficient to pay the associated royalty
obligations.
(b) Strategic Relationships
The Company purchased approximately $0.1 million during 2003 from ITF Optical
Technologies (ITF). Certain officers and directors of the Company own a non-controlling interest
in ITF.
The Company purchased approximately $0.9 million, $0.1 million, and $2,400 of components
during 2003, 2004, and 2005, respectively, from Lightconnect, Inc. Certain officers and directors
own a non-controlling interest in Lightconnect.
27
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(16) Concentrations
Substantially all of the Companys cash and cash equivalents are held at four major U.S.
financial institutions. Deposits held with banks exceed the amount of insurance provided on such
deposits. Generally, these deposits may be redeemed upon demand and, therefore, in the opinion of
management, bear minimal risk.
The Company may be subject to credit risk due to concentrations of receivables from
companies that are communications providers, Internet service providers and cable television
companies. The Company performs ongoing credit evaluations of customers financial condition and
typically does not require significant collateral. Most of the Companys arrangements with large
customers do not provide guarantees that customer usage will be maintained at current levels. To
the extent these large customers cease to employ the Companys network to deliver their services,
or cannot pay outstanding accounts receivable balances, the Companys revenue and financial
condition could be materially adversely affected.
Revenue from the Companys ten largest customers accounted for approximately 20%, 19%,
and 18% of total communications services revenue for the year ended December 31, 2003, 2004, and
2005 respectively. In addition, revenue from communications carriers accounted for 40%, 38% and 42%
of total communications services revenue for the year ended December 31, 2003, 2004, and 2005
respectively.
(17) Commitments and Contingencies
(a) Summary
The following table provides information about our contractual obligations and commercial
commitments as of December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
(in thousands) |
|
Contractual Obligations |
|
Total |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
Long-term debt |
|
$ |
32,369 |
|
|
$ |
31,659 |
|
|
$ |
710 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Capital lease obligations |
|
|
39,828 |
|
|
|
3,459 |
|
|
|
3,308 |
|
|
|
3,162 |
|
|
|
2,855 |
|
|
|
2,431 |
|
|
|
24,613 |
|
Operating leases |
|
|
215,023 |
|
|
|
34,177 |
|
|
|
32,435 |
|
|
|
29,133 |
|
|
|
23,107 |
|
|
|
19,352 |
|
|
|
76,819 |
|
Contractual purchase
commitments |
|
|
587,086 |
|
|
|
213,744 |
|
|
|
184,909 |
|
|
|
107,751 |
|
|
|
56,683 |
|
|
|
23,486 |
|
|
|
513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual
obligations |
|
$ |
874,306 |
|
|
$ |
283,039 |
|
|
$ |
221,362 |
|
|
$ |
140,046 |
|
|
$ |
82,645 |
|
|
$ |
45,269 |
|
|
$ |
101,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration per Year |
|
|
|
(in thousands) |
|
Other Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments |
|
Total |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
Letters of credit |
|
$ |
14,071 |
|
|
$ |
9,567 |
|
|
$ |
641 |
|
|
$ |
383 |
|
|
$ |
1,549 |
|
|
$ |
|
|
|
$ |
1,931 |
|
Contractual purchase commitments consist primarily of leased circuits from third parties.
(b) Contingency
Excluded from the above at December 31, 2005, we have $35.7 million in contingent access
vendor billing disputes for which we have provided $12.9 million in accrued line costs. If
resolution of these disputes and allowances differ from our estimates, our reserve will be adjusted
resulting in an increase or decrease in cost of revenue and net earnings.
28
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(c) Legal Matters
Ciena
On March 31, 2005, Broadwing and Ciena Corporation (Ciena) entered into a settlement
agreement regarding certain patent infringement lawsuits. Under the terms of the settlement
agreement, Ciena and Broadwing have agreed to dismiss all claims. In addition, Broadwing will pay
to Ciena a total of $35.0 million in three equal annual installments, of which $33.0 million of the
total payment may be used as credits toward the purchase of Ciena equipment and services at market
prices over three and one-half years. The Company recorded a charge of $2.0 million associated with
the settlement in the first quarter of 2005. During the second quarter of 2005, the Company made
the first annual payment of $11.0 million to Ciena, while the remaining $22.0 million will be paid
half in the second quarter of 2006 and the other half in the second quarter of 2007. As of December
31, 2005, approximately $2.1 million related to advance payments made for future equipment
purchases is included in other non-current assets on the consolidated balance sheet.
Class Action Suit
Between May 7, 2001 and June 15, 2001, nine class action lawsuits were filed in the
United States District Court for the Southern District of New York relating to the Companys
initial public offering on behalf of all persons who purchased the Companys stock between July 28,
2000 and the filing of the complaints. Each of the complaints named as defendants: the Company, its
directors and officers who signed the registration statement in connection with its initial public
offering, and certain of the underwriters that participated in its initial public offering. The
Companys directors and officers have since been dismissed from the case, without prejudice. The
complaints allege that the registration statement and prospectus relating to the Companys initial
public offering contained material misrepresentations and/or omissions in that those documents did
not disclose (1) that certain of the underwriters had solicited and received undisclosed fees and
commissions and other economic benefits from some investors in connection with the distribution of
the Companys common stock in the initial public offering and (2) that certain of the underwriters
had entered into arrangements with some investors that were designed to distort and/or inflate the
market price for our common stock in the aftermarket following the initial public offering. The
complaints ask the court to award to members of the class the right to rescind their purchases of
the Companys common stock (or to be awarded rescissory damages if the class member has sold the
Companys stock) and prejudgment and post-judgment interest, reasonable attorneys and experts
witness fees and other costs.
On February 15th, 2005, the Judge granted preliminary approval of a proposed settlement
agreement between the plaintiffs and defendants, including Broadwing. The proposed settlement is a
$1 billion guaranteed settlement. The insurance companies for the defendants agreed to pay up to $1
billion dollars in total to the extent that judgment is rendered for the plaintiffs. If plaintiffs
succeed in recovering more than $1 billion from the underwriters, the companies that went public,
such as the Broadwing, will not have to pay any additional amounts. The defendants insurance
companies will be paying the settlement that is subject to the final approval of the district
court. Should the Judge not grant final approval of the settlement agreement, we believe that we
have meritorious defenses to plaintiffs allegations and will vigorously defend ourselves.
On August 31, 2005 the Judge issued an order clarifying certain provisions of the
proposed settlement and set deadlines for the final approval of the proposed settlement. The Judge
scheduled the fairness hearing on the proposed settlement for April 24, 2006.
Qwest Investigations
Since approximately 2003, the Denver, Colorado regional office of the SEC has been
conducting two investigations titled In the Matter of Qwest Communications International, Inc. and
In the Matter of Issuers Related to Qwest. The Company believes the first of these investigations
does not involve any allegation of wrongful conduct on the part of the Company. In connection with
the second investigation, the SEC is examining various transactions and business relationships
involving Qwest and eleven companies having a vendor relationship with Qwest, including the
Company. This investigation, insofar as it relates to the Company, appears to focus generally
29
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
on whether the Companys transactions and relationships with Qwest and its employees were
appropriately disclosed in the Companys public filings and other public statements.
In addition, during the same period, the United States Attorney in Denver has been
conducting an investigation involving Qwest, including Qwests relationships with certain of its
vendors, including the Company. In connection with that investigation, the U.S. Attorney has sought
documents and information from the Company and has sought interviews from persons associated or
formerly associated with the Company, including certain of the Companys officers. The U.S.
Attorney has indicated that neither the Company nor any of its current or former officers or
employees is a target or a subject of the investigation.
The Company has cooperated fully with these investigations. Both the SEC and U.S.
Attorney investigations have resulted in cases against Qwest and some of its former executives.
These cases do not involve or refer to the Company and the Company has received no indication from
either the SEC or U.S. Attorney that its present or former personnel will be witnesses in any of
these cases. The Company has not received any communication from the SEC or the U.S. Attorney as to
whether there is any ongoing investigation that relates to the Companys business relationship with
Qwest. The Company is not able, at this time, to say when the SEC and/or U.S. Attorney
investigations or cases will be completed and resolved, or what the ultimate outcome with respect
to the Company will be. These investigations or cases could result in substantial legal costs and a
diversion of managements attention that may have a material adverse effect on the Companys
business, financial condition and results of operations.
Great Northern Insurance Company
On October 5, 2004, the Company filed an action in the US District Court for the District
of Maryland against its property insurance carrier, Great Northern Insurance Company, for breach of
contract under a building and personal property insurance policy sold to the Company by Great
Northern. The claim is for a loss sustained by the Company due to a fire in a warehouse that
occurred in March 2003. The amount of loss alleged by the Company exceeds $46.0 million, of which
Great Northern has paid $4.5 million. The Company has requested a jury trial for this dispute. The
parties are conducting discovery in the matter, which is expected to be completed April 2006. No
trial date has been set.
The Company and its subsidiaries from time to time are also subject to pending and
threatened legal action and proceedings arising in the ordinary course of business. Management
believes that the outcome of such actions and proceedings will not have a material adverse effect
on the Companys business, financial condition or results of operations.
(d) Letters of Credit
As of December 31, 2005, long-term restricted cash totaled $14.6 million associated with
outstanding irrevocable letters of credit relating to lease obligations for various business
arrangements. These letters of credit are collateralized by funds in our operating account. Various
portions of the letters of credit expire at the end of each of the respective lease agreements.
(18) Quarterly Financial Information (Unaudited):
The following is a summary of the quarterly results of operations of the Company for the
years ended December 31, 2004 and December 31, 2005 (in millions, except per share amounts):
30
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter |
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Total |
2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
146.8 |
|
|
$ |
142.1 |
|
|
$ |
163.4 |
|
|
$ |
219.9 |
|
|
$ |
672.2 |
|
Net loss |
|
|
(33.9 |
) |
|
|
(38.1 |
) |
|
|
(36.8 |
) |
|
|
(43.4 |
) |
|
|
(152.2 |
) |
Basic and diluted net loss per share |
|
$ |
(0.70 |
) |
|
$ |
(0.80 |
) |
|
$ |
(0.69 |
) |
|
$ |
(0.68 |
) |
|
$ |
(2.87 |
) |
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
218.3 |
|
|
$ |
222.2 |
|
|
$ |
218.6 |
|
|
$ |
220.0 |
|
|
$ |
879.1 |
|
Net loss |
|
|
(43.5 |
) |
|
|
(38.3 |
) |
|
|
(30.5 |
) |
|
|
(21.1 |
) |
|
|
(133.4 |
) |
Basic and diluted net loss per share |
|
$ |
(0.62 |
) |
|
$ |
(0.52 |
) |
|
$ |
(0.41 |
) |
|
$ |
(0.29 |
) |
|
$ |
(1.83 |
) |
(19) Subsequent Events (Unaudited)
Senior Convertible Note Repayment
On January 17, 2006, the Company provided notice to the holders of its Senior Convertible
Notes that in accordance with the terms of the notes and the Securities Purchase Agreement, dated
February 9, 2004, relating to the notes, the Company was electing to pay fifty percent (50%) in
cash and fifty percent (50%) in stock each of the interest of $413,894 and the principal
installment of $32,142,857 due on February 21, 2006. The Company issued 1,894,235 shares associated
with this final installment of the note.
CEO Resignation
Dr. David Huber transitioned out of his role as Chief Executive Officer (CEO) of the
Company subsequent to year end, but he continues as the Chairman of the Companys Board of
Directors. The Board of Directors has named three executives, Lynn Anderson, Chief Financial
Officer, Kim Larsen, General Counsel, and Scott Widham, President of Sales, to the office of the
CEO that will conduct day-to-day operations of the Company pending appointment of a new chief
executive.
Upon resignation, Dr. Huber received consideration consisting of one years base pay or
$400,000, the vesting of all stock options and restricted stock exercisable up to ten years from
the date of grant, and continuation of health benefits for approximately eighteen months. The
accelerated vesting of 247,500 restricted stock units and 99,167 stock options will result in
non-cash compensation expense of $2.9 million in the first quarter of 2006.
(20) Financial Information for Debt Issuer and Guarantor and Non-Guarantor Subsidiaries
In the second quarter of 2006, the Company issued $180.0 million in aggregate principal amount
of Convertible Debentures, due May 16, 2026 (the Debentures). The Debentures accrue interest at a
rate of 3.125% per annum payable in cash semi-annually on May 15 and November 15 of each year and
are guaranteed on a senior basis by certain of the Companys 100% wholly-owned subsidiaries (the
Guarantors). The net proceeds from the offering of the Debentures were $174.0 million, after
deducting $6.0 million in fees related to the offering.
31
BROADWING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The
following represents the supplemental condensed consolidating financial statements of Broadwing
Corporation (the Parent), which was the issuer of the Debentures issued on May 16, 2006, the
Guarantors (the Guarantors) as listed in the Indenture agreement dated May 16, 2006, and the
Companys subsidiaries that are not guarantors of the Debentures. The information includes
elimination entries necessary to consolidate the Parent with the Guarantor and Non-Guarantor
Subsidiaries.
32
BROADWING CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of December 31, 2004
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
Combined Non- |
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|
Parent |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
142,458 |
|
|
$ |
(18,366 |
) |
|
$ |
448 |
|
|
$ |
|
|
|
$ |
124,540 |
|
Short-term investments |
|
|
100,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,139 |
|
Trade accounts receivable, net |
|
|
|
|
|
|
94,682 |
|
|
|
49 |
|
|
|
|
|
|
|
94,731 |
|
Investment |
|
|
(923,500 |
) |
|
|
(93,577 |
) |
|
|
|
|
|
|
1,017,077 |
|
|
|
|
|
Intercompany |
|
|
1,229,130 |
|
|
|
(1,229,130 |
) |
|
|
190 |
|
|
|
(190 |
) |
|
|
|
|
Prepaids and other current assets |
|
|
4,882 |
|
|
|
19,145 |
|
|
|
|
|
|
|
|
|
|
|
24,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
553,109 |
|
|
|
(1,227,246 |
) |
|
|
687 |
|
|
|
1,016,887 |
|
|
|
343,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash, non-current |
|
|
|
|
|
|
13,911 |
|
|
|
|
|
|
|
|
|
|
|
13,911 |
|
Long-term investments |
|
|
49,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,676 |
|
Property and equipment, net |
|
|
|
|
|
|
286,038 |
|
|
|
|
|
|
|
|
|
|
|
286,038 |
|
Goodwill |
|
|
|
|
|
|
48,696 |
|
|
|
|
|
|
|
|
|
|
|
48,696 |
|
Intangible assets, net |
|
|
|
|
|
|
30,152 |
|
|
|
|
|
|
|
|
|
|
|
30,152 |
|
Other non-current assets, net |
|
|
131 |
|
|
|
8,949 |
|
|
|
|
|
|
|
|
|
|
|
9,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
602,916 |
|
|
$ |
(839,500 |
) |
|
$ |
687 |
|
|
$ |
1,016,887 |
|
|
$ |
780,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and capital lease obligations, current portion |
|
$ |
116,333 |
|
|
$ |
991 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
117,324 |
|
Accounts payable |
|
|
|
|
|
|
11,937 |
|
|
|
515 |
|
|
|
|
|
|
|
12,452 |
|
Accrued expenses and other liabilities |
|
|
|
|
|
|
53,755 |
|
|
|
184 |
|
|
|
|
|
|
|
53,939 |
|
Intercompany |
|
|
|
|
|
|
(53,293 |
) |
|
|
52,596 |
|
|
|
697 |
|
|
|
|
|
Accrued communication service costs |
|
|
|
|
|
|
41,089 |
|
|
|
|
|
|
|
|
|
|
|
41,089 |
|
Deferred revenue, current portion |
|
|
|
|
|
|
7,072 |
|
|
|
|
|
|
|
|
|
|
|
7,072 |
|
Accrued restructuring and other charges |
|
|
|
|
|
|
7,364 |
|
|
|
1,256 |
|
|
|
|
|
|
|
8,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
116,333 |
|
|
|
68,915 |
|
|
|
54,551 |
|
|
|
697 |
|
|
|
240,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and capital lease obligations, net of current portion |
|
|
31,544 |
|
|
|
19,966 |
|
|
|
708 |
|
|
|
|
|
|
|
52,218 |
|
Other long-term liabilities |
|
|
|
|
|
|
14,949 |
|
|
|
|
|
|
|
|
|
|
|
14,949 |
|
Deferred revenue, net of current portion |
|
|
|
|
|
|
18,288 |
|
|
|
|
|
|
|
|
|
|
|
18,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
147,877 |
|
|
|
122,118 |
|
|
|
55,259 |
|
|
|
697 |
|
|
|
325,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
679 |
|
|
|
|
|
|
|
2,166 |
|
|
|
(2,166 |
) |
|
|
679 |
|
Treasury stock |
|
|
(9,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,512 |
) |
Additional paid-in capital |
|
|
3,137,928 |
|
|
|
246,202 |
|
|
|
944,940 |
|
|
|
(1,191,142 |
) |
|
|
3,137,928 |
|
Accumulated other comprehensive loss |
|
|
(717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(717 |
) |
Accumulated deficit |
|
|
(2,673,339 |
) |
|
|
(1,207,820 |
) |
|
|
(1,001,678 |
) |
|
|
2,209,498 |
|
|
|
(2,673,339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
455,039 |
|
|
|
(961,618 |
) |
|
|
(54,572 |
) |
|
|
1,016,190 |
|
|
|
455,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
602,916 |
|
|
$ |
(839,500 |
) |
|
$ |
687 |
|
|
$ |
1,016,887 |
|
|
$ |
780,990 |
|
|
|
|
33
BROADWING CORPORATION AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
As of December 31, 2005
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
Combined Non- |
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|
Parent |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivtalents |
|
$ |
62,635 |
|
|
$ |
3,514 |
|
|
$ |
557 |
|
|
$ |
|
|
|
$ |
66,706 |
|
Short-term investments |
|
|
42,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,648 |
|
Trade accounts receivable, net |
|
|
|
|
|
|
75,433 |
|
|
|
146 |
|
|
|
|
|
|
|
75,579 |
|
Investment |
|
|
(1,042,494 |
) |
|
|
(93,578 |
) |
|
|
|
|
|
|
1,136,072 |
|
|
|
|
|
Intercompany |
|
|
1,332,708 |
|
|
|
(1,332,708 |
) |
|
|
327 |
|
|
|
(327 |
) |
|
|
|
|
Prepaids and other current assets |
|
|
869 |
|
|
|
17,696 |
|
|
|
|
|
|
|
|
|
|
|
18,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
396,366 |
|
|
|
(1,329,643 |
) |
|
|
1,030 |
|
|
|
1,135,745 |
|
|
|
203,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash, non-current |
|
|
|
|
|
|
14,606 |
|
|
|
|
|
|
|
|
|
|
|
14,606 |
|
Property and equipment, net |
|
|
|
|
|
|
260,681 |
|
|
|
|
|
|
|
|
|
|
|
260,681 |
|
Goodwill |
|
|
|
|
|
|
58,354 |
|
|
|
|
|
|
|
|
|
|
|
58,354 |
|
Intangible assets, net |
|
|
|
|
|
|
24,820 |
|
|
|
|
|
|
|
|
|
|
|
24,820 |
|
Other non-current assets, net |
|
|
|
|
|
|
11,545 |
|
|
|
|
|
|
|
|
|
|
|
11,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
396,366 |
|
|
$ |
(959,637 |
) |
|
$ |
1,030 |
|
|
$ |
1,135,745 |
|
|
$ |
573,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and capital lease obligations, current portion |
|
$ |
31,355 |
|
|
$ |
1,557 |
|
|
$ |
160 |
|
|
$ |
|
|
|
$ |
33,072 |
|
Accounts payable |
|
|
|
|
|
|
31,832 |
|
|
|
389 |
|
|
|
|
|
|
|
32,222 |
|
Accrued expenses and other liabilities |
|
|
|
|
|
|
54,002 |
|
|
|
342 |
|
|
|
|
|
|
|
54,344 |
|
Intercompany |
|
|
|
|
|
|
(54,023 |
) |
|
|
53,463 |
|
|
|
560 |
|
|
|
|
|
Accrued communication service costs |
|
|
|
|
|
|
25,441 |
|
|
|
|
|
|
|
|
|
|
|
25,441 |
|
Deferred revenue, current portion |
|
|
|
|
|
|
6,941 |
|
|
|
|
|
|
|
|
|
|
|
6,941 |
|
Accrued restructuring and other charges |
|
|
|
|
|
|
3,522 |
|
|
|
443 |
|
|
|
|
|
|
|
3,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
31,355 |
|
|
|
69,272 |
|
|
|
54,797 |
|
|
|
560 |
|
|
|
155,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and capital lease obligations, net of current portion |
|
|
|
|
|
|
20,524 |
|
|
|
295 |
|
|
|
|
|
|
|
20,819 |
|
Other long-term liabilities |
|
|
|
|
|
|
13,750 |
|
|
|
|
|
|
|
|
|
|
|
13,750 |
|
Deferred revenue, net of current portion |
|
|
|
|
|
|
17,939 |
|
|
|
|
|
|
|
|
|
|
|
17,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
31,355 |
|
|
|
121,485 |
|
|
|
55,092 |
|
|
|
560 |
|
|
|
208,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
747 |
|
|
|
|
|
|
|
2,166 |
|
|
|
(2,166 |
) |
|
|
747 |
|
Treasury stock |
|
|
(9,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,512 |
) |
Additional paid-in capital |
|
|
3,180,763 |
|
|
|
246,204 |
|
|
|
944,939 |
|
|
|
(1,191,142 |
) |
|
|
3,180,764 |
|
Accumulated other comprehensive loss |
|
|
(220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(220 |
) |
Accumulated deficit |
|
|
(2,806,767 |
) |
|
|
(1,327,326 |
) |
|
|
(1,001,167 |
) |
|
|
2,328,493 |
|
|
|
(2,806,767 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
365,011 |
|
|
|
(1,081,122 |
) |
|
|
(54,062 |
) |
|
|
1,135,185 |
|
|
|
365,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
396,366 |
|
|
$ |
(959,637 |
) |
|
$ |
1,030 |
|
|
$ |
1,135,745 |
|
|
$ |
573,504 |
|
|
|
|
34
BROADWING CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
Year Ended December 31, 2003
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
Combined Non- |
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|
Parent |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
Revenue |
|
$ |
|
|
|
$ |
313,962 |
|
|
$ |
352 |
|
|
$ |
|
|
|
$ |
314,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
264,276 |
|
|
|
2,377 |
|
|
|
(1,634 |
) |
|
|
265,019 |
|
Research and development |
|
|
12,659 |
|
|
|
44,804 |
|
|
|
1,998 |
|
|
|
|
|
|
|
59,461 |
|
Sales, general and administrative |
|
|
7,938 |
|
|
|
149,307 |
|
|
|
2,428 |
|
|
|
|
|
|
|
159,673 |
|
Depreciation and amortization |
|
|
|
|
|
|
38,789 |
|
|
|
2,653 |
|
|
|
|
|
|
|
41,442 |
|
Restructuring and other charges |
|
|
|
|
|
|
62,820 |
|
|
|
(3,439 |
) |
|
|
|
|
|
|
59,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
20,597 |
|
|
|
559,996 |
|
|
|
6,017 |
|
|
|
(1,634 |
) |
|
|
584,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(20,597 |
) |
|
|
(246,034 |
) |
|
|
(5,665 |
) |
|
|
1,634 |
|
|
|
(270,662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net of capitalized amounts |
|
|
4,804 |
|
|
|
(22,873 |
) |
|
|
27,873 |
|
|
|
|
|
|
|
9,804 |
|
Loss in subsidiaries |
|
|
(244,678 |
) |
|
|
|
|
|
|
|
|
|
|
244,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before minority interest |
|
|
(260,471 |
) |
|
|
(268,907 |
) |
|
|
22,208 |
|
|
|
246,312 |
|
|
|
(260,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in loss |
|
|
|
|
|
|
387 |
|
|
|
|
|
|
|
|
|
|
|
387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(260,471 |
) |
|
$ |
(268,520 |
) |
|
$ |
22,208 |
|
|
$ |
246,312 |
|
|
$ |
(260,471 |
) |
|
|
|
35
BROADWING CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
Year Ended December 31, 2004
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
Combined Non- |
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|
Parent |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
Revenue |
|
$ |
|
|
|
$ |
672,242 |
|
|
$ |
38 |
|
|
$ |
|
|
|
$ |
672,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
455,429 |
|
|
|
|
|
|
|
|
|
|
|
455,429 |
|
Research and development |
|
|
3,776 |
|
|
|
14,995 |
|
|
|
|
|
|
|
|
|
|
|
18,771 |
|
Sales, general and administrative |
|
|
4,858 |
|
|
|
255,748 |
|
|
|
34 |
|
|
|
|
|
|
|
260,640 |
|
Depreciation and amortization |
|
|
|
|
|
|
61,560 |
|
|
|
|
|
|
|
|
|
|
|
61,560 |
|
Restructuring and other charges |
|
|
|
|
|
|
3,967 |
|
|
|
(21 |
) |
|
|
|
|
|
|
3,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
8,634 |
|
|
|
791,699 |
|
|
|
13 |
|
|
|
|
|
|
|
800,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(8,634 |
) |
|
|
(119,457 |
) |
|
|
25 |
|
|
|
|
|
|
|
(128,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net of
capitalized amounts |
|
|
(24,703 |
) |
|
|
(294 |
) |
|
|
882 |
|
|
|
|
|
|
|
(24,115 |
) |
Loss in subsidiaries |
|
|
(118,844 |
) |
|
|
|
|
|
|
|
|
|
|
118,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(152,181 |
) |
|
$ |
(119,751 |
) |
|
$ |
907 |
|
|
$ |
118,844 |
|
|
$ |
(152,181 |
) |
|
|
|
36
BROADWING CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
Year Ended December 31, 2005
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
Combined Non- |
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|
Parent |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
Revenue |
|
$ |
|
|
|
$ |
878,906 |
|
|
$ |
200 |
|
|
$ |
|
|
|
$ |
879,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
580,318 |
|
|
|
123 |
|
|
|
|
|
|
|
580,441 |
|
Research and development |
|
|
645 |
|
|
|
6,172 |
|
|
|
|
|
|
|
|
|
|
|
6,817 |
|
Sales, general and administrative |
|
|
3,844 |
|
|
|
305,015 |
|
|
|
23 |
|
|
|
|
|
|
|
308,882 |
|
Litigation settlement |
|
|
|
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
2,000 |
|
Depreciation and amortization |
|
|
|
|
|
|
101,706 |
|
|
|
|
|
|
|
|
|
|
|
101,706 |
|
Restructuring and other charges |
|
|
|
|
|
|
1,678 |
|
|
|
(317 |
) |
|
|
|
|
|
|
1,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
4,489 |
|
|
|
996,889 |
|
|
|
(171 |
) |
|
|
|
|
|
|
1,001,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(4,489 |
) |
|
|
(117,983 |
) |
|
|
371 |
|
|
|
|
|
|
|
(122,101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net of
capitalized amounts |
|
|
(9,945 |
) |
|
|
(1,523 |
) |
|
|
141 |
|
|
|
|
|
|
|
(11,327 |
) |
Loss in subsidiaries |
|
|
(118,994 |
) |
|
|
|
|
|
|
|
|
|
|
118,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(133,428 |
) |
|
$ |
(119,506 |
) |
|
$ |
512 |
|
|
$ |
118,994 |
|
|
$ |
(133,428 |
) |
|
|
|
37
BROADWING CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2003
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
Combined Non- |
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|
Parent |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(260,471 |
) |
|
$ |
(268,520 |
) |
|
$ |
22,208 |
|
|
$ |
246,312 |
|
|
$ |
(260,471 |
) |
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
38,789 |
|
|
|
2,653 |
|
|
|
|
|
|
|
41,442 |
|
Equity-based expense |
|
|
20,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,597 |
|
Provision for bad debt and sales allowances |
|
|
|
|
|
|
15,412 |
|
|
|
|
|
|
|
|
|
|
|
15,412 |
|
Non-cash restructuring, goodwill and asset impairments, inventory
write-downs and gain on sale of fixed assets |
|
|
|
|
|
|
71,166 |
|
|
|
289 |
|
|
|
|
|
|
|
71,455 |
|
Minority interest |
|
|
|
|
|
|
(387 |
) |
|
|
|
|
|
|
|
|
|
|
(387 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
7,718 |
|
|
|
749 |
|
|
|
|
|
|
|
8,467 |
|
Inventory |
|
|
|
|
|
|
(21,921 |
) |
|
|
|
|
|
|
|
|
|
|
(21,921 |
) |
Other current and non-current assets |
|
|
(709 |
) |
|
|
(52 |
) |
|
|
9,550 |
|
|
|
|
|
|
|
8,789 |
|
Net transfers with subsidiaries |
|
|
(59,331 |
) |
|
|
333,762 |
|
|
|
(28,119 |
) |
|
|
(246,312 |
) |
|
|
|
|
Accounts payable |
|
|
|
|
|
|
(38,849 |
) |
|
|
(1,333 |
) |
|
|
|
|
|
|
(40,182 |
) |
Other accrued expenses |
|
|
|
|
|
|
(15,269 |
) |
|
|
(11,326 |
) |
|
|
|
|
|
|
(26,595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(299,914 |
) |
|
|
121,849 |
|
|
|
(5,329 |
) |
|
|
|
|
|
|
(183,394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
|
|
|
|
(12,243 |
) |
|
|
|
|
|
|
|
|
|
|
(12,243 |
) |
Decrease in deposits and other long-term assets |
|
|
|
|
|
|
2,850 |
|
|
|
|
|
|
|
|
|
|
|
2,850 |
|
Broadwing Communication Services, Inc. acquisition |
|
|
|
|
|
|
(81,097 |
) |
|
|
|
|
|
|
|
|
|
|
(81,097 |
) |
Purchase of minority interest in Broadwing Communications, LLC |
|
|
|
|
|
|
(1,789 |
) |
|
|
|
|
|
|
|
|
|
|
(1,789 |
) |
Purchases and sale of investments, net |
|
|
8,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
8,771 |
|
|
|
(92,279 |
) |
|
|
|
|
|
|
|
|
|
|
(83,508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of notes payable and capital leases |
|
|
|
|
|
|
(686 |
) |
|
|
(369 |
) |
|
|
|
|
|
|
(1,055 |
) |
Changes in deposits and other non-current assets |
|
|
|
|
|
|
(4,704 |
) |
|
|
|
|
|
|
|
|
|
|
(4,704 |
) |
Proceeds from repayment of shareholder note |
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
32 |
|
Purchase of treasury stock |
|
|
(5,107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,107 |
) |
Proceeds from private placement of common stock |
|
|
73,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,794 |
|
Proceeds from stock options and warrants exercised |
|
|
4,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
73,309 |
|
|
|
(5,358 |
) |
|
|
(369 |
) |
|
|
|
|
|
|
67,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash effect of foreign exchange adjustment |
|
|
|
|
|
|
477 |
|
|
|
|
|
|
|
|
|
|
|
477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
(217,834 |
) |
|
|
24,689 |
|
|
|
(5,698 |
) |
|
|
|
|
|
|
(198,843 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsbeginning |
|
|
434,899 |
|
|
|
(7,212 |
) |
|
|
6,146 |
|
|
|
|
|
|
|
433,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsending |
|
$ |
217,065 |
|
|
$ |
17,477 |
|
|
$ |
448 |
|
|
$ |
|
|
|
$ |
234,990 |
|
|
|
|
38
BROADWING CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2004
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
Combined Non- |
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|
Parent |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(152,181 |
) |
|
$ |
(119,751 |
) |
|
$ |
907 |
|
|
$ |
118,844 |
|
|
|
(152,181 |
) |
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
60,291 |
|
|
|
|
|
|
|
|
|
|
|
60,291 |
|
Equity-based expense |
|
|
8,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,634 |
|
Provision for bad debt and sales allowances |
|
|
|
|
|
|
22,848 |
|
|
|
|
|
|
|
|
|
|
|
22,848 |
|
Deferred financing cost, original issue discount amortization, and
accretion of interest |
|
|
24,834 |
|
|
|
(3,357 |
) |
|
|
|
|
|
|
|
|
|
|
21,477 |
|
Amortization of deferred revenue |
|
|
|
|
|
|
(3,016 |
) |
|
|
|
|
|
|
|
|
|
|
(3,016 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
(30,823 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
(30,872 |
) |
Inventory |
|
|
|
|
|
|
(228 |
) |
|
|
|
|
|
|
|
|
|
|
(228 |
) |
Other current and non-current assets |
|
|
(8,528 |
) |
|
|
8,260 |
|
|
|
24 |
|
|
|
|
|
|
|
(245 |
) |
Net transfers with subsidiaries |
|
|
(188,151 |
) |
|
|
305,894 |
|
|
|
1,101 |
|
|
|
(118,844 |
) |
|
|
|
|
Accounts payable |
|
|
|
|
|
|
(31,574 |
) |
|
|
(802 |
) |
|
|
|
|
|
|
(32,376 |
) |
Other accrued expenses |
|
|
(216 |
) |
|
|
(6,546 |
) |
|
|
(395 |
) |
|
|
|
|
|
|
(7,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(315,608 |
) |
|
|
201,998 |
|
|
|
786 |
|
|
|
|
|
|
|
(112,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
|
|
|
|
(74,725 |
) |
|
|
|
|
|
|
|
|
|
|
(74,724 |
) |
Proceeds from the sale of property and equipment |
|
|
|
|
|
|
1,720 |
|
|
|
|
|
|
|
|
|
|
|
1,720 |
|
Cash acquired in Focal acquisition |
|
|
|
|
|
|
10,510 |
|
|
|
|
|
|
|
|
|
|
|
10,510 |
|
Focal acquisition costs |
|
|
172,948 |
|
|
|
(172,948 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Broadwing Communication Services, Inc. acquisition |
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
Purchases and sale of investments, net |
|
|
(87,741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
85,207 |
|
|
|
(225,443 |
) |
|
|
|
|
|
|
|
|
|
|
(140,235 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of notes payable and capital leases |
|
|
(75,222 |
) |
|
|
(879 |
) |
|
|
(786 |
) |
|
|
|
|
|
|
(76,887 |
) |
Changes in deposits and other non-current assets |
|
|
|
|
|
|
(4,269 |
) |
|
|
|
|
|
|
|
|
|
|
(4,269 |
) |
Proceeds from the issuance of convertible notes and associated warrants |
|
|
225,000 |
|
|
|
(7,250 |
) |
|
|
|
|
|
|
|
|
|
|
217,750 |
|
Proceeds from stock options and warrants exercised |
|
|
6,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
155,794 |
|
|
|
(12,398 |
) |
|
|
(786 |
) |
|
|
|
|
|
|
142,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(74,607 |
) |
|
|
(35,843 |
) |
|
|
|
|
|
|
|
|
|
|
(110,450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsbeginning |
|
|
217,065 |
|
|
|
17,477 |
|
|
|
448 |
|
|
|
|
|
|
|
234,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsending |
|
$ |
142,458 |
|
|
$ |
(18,366 |
) |
|
$ |
448 |
|
|
$ |
|
|
|
$ |
124,540 |
|
|
|
|
39
BROADWING CORPORATION AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2005
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
Combined Non- |
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|
Parent |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(133,428 |
) |
|
|
(119,506 |
) |
|
$ |
512 |
|
|
$ |
118,994 |
|
|
$ |
(133,428 |
) |
Adjustments to reconcile net income (loss) to net
cash provided by
(used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
101,707 |
|
|
|
|
|
|
|
|
|
|
|
101,707 |
|
Equity-based expense |
|
|
4,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,489 |
|
Provision for bad debt and sales allowances |
|
|
|
|
|
|
37,794 |
|
|
|
|
|
|
|
|
|
|
|
37,794 |
|
Deferred financing cost, original issue discount
amortization, and
accretion of interest |
|
|
19,027 |
|
|
|
(8,200 |
) |
|
|
|
|
|
|
|
|
|
|
10,827 |
|
Amortization of deferred revenue |
|
|
|
|
|
|
(1,520 |
) |
|
|
|
|
|
|
|
|
|
|
(1,520 |
) |
Non-cash restructuring, goodwill and asset
impairments, inventory
write-downs and gain on sale of fixed assets |
|
|
33 |
|
|
|
(830 |
) |
|
|
|
|
|
|
|
|
|
|
(797 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
(15,520 |
) |
|
|
(97 |
) |
|
|
|
|
|
|
(15,617 |
) |
Inventory |
|
|
|
|
|
|
1,179 |
|
|
|
|
|
|
|
|
|
|
|
1,179 |
|
Other current and non-current assets |
|
|
1,690 |
|
|
|
2,509 |
|
|
|
|
|
|
|
|
|
|
|
4,199 |
|
Net transfers with subsidiaries |
|
|
15,419 |
|
|
|
102,846 |
|
|
|
729 |
|
|
|
(118,994 |
) |
|
|
|
|
Accounts payable |
|
|
|
|
|
|
19,783 |
|
|
|
(126 |
) |
|
|
|
|
|
|
19,657 |
|
Other accrued expenses |
|
|
486 |
|
|
|
(29,571 |
) |
|
|
(656 |
) |
|
|
|
|
|
|
(29,741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(92,284 |
) |
|
|
90,671 |
|
|
|
362 |
|
|
|
|
|
|
|
(1,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
|
|
|
|
(55,255 |
) |
|
|
|
|
|
|
|
|
|
|
(55,255 |
) |
Proceeds from the sale of property and equipment |
|
|
|
|
|
|
788 |
|
|
|
|
|
|
|
|
|
|
|
788 |
|
Ciena equipment deposit |
|
|
|
|
|
|
(11,000 |
) |
|
|
|
|
|
|
|
|
|
|
(11,000 |
) |
Purchases and sale of investments, net |
|
|
107,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
107,373 |
|
|
|
(65,467 |
) |
|
|
|
|
|
|
|
|
|
|
41,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of notes payable and capital leases |
|
|
(96,441 |
) |
|
|
(1,139 |
) |
|
|
(253 |
) |
|
|
|
|
|
|
(97,833 |
) |
Changes in deposits and other non-current assets |
|
|
|
|
|
|
(2,185 |
) |
|
|
|
|
|
|
|
|
|
|
(2,185 |
) |
Proceeds from stock options and warrants exercised |
|
|
1,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,529 |
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
(94,912 |
) |
|
|
(3,324 |
) |
|
|
(253 |
) |
|
|
|
|
|
|
(98,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
(79,823 |
) |
|
|
21,880 |
|
|
|
109 |
|
|
|
|
|
|
|
(57,834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsbeginning |
|
|
142,458 |
|
|
|
(18,366 |
) |
|
|
448 |
|
|
|
|
|
|
|
124,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsending |
|
$ |
62,635 |
|
|
$ |
3,514 |
|
|
$ |
557 |
|
|
$ |
|
|
|
$ |
66,706 |
|
|
|
|
40
SIGNATURES
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 CORPORATION
|
|
|
By: |
/s/ Lynn D. Anderson
|
|
|
|
Senior Vice President and Chief |
|
|
|
Financial Officer |
|
|
|
|
|
|
By: |
/s/ Richard A. Martin
|
|
|
|
Vice President, Chief Accounting |
|
|
|
Officer and Controller |
|
|
Date: August 11, 2006
41