<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 1998
REGISTRATION NO. 333-
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TIME WARNER TELECOM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4813 84-1452416
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
5700 S. QUEBEC STREET
GREENWOOD VILLAGE, CO 80111
(303) 566-1000
(ADDRESS, INCLUDING EACH ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID J. RAYNER
VICE PRESIDENT, FINANCE
TIME WARNER TELECOM INC.
5700 S. QUEBEC STREET
GREENWOOD VILLAGE, CO 80111
(303) 566-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
<TABLE>
<CAPTION>
COPIES TO:
<S> <C> <C>
WILLIAM P. ROGERS, JR. PETER R. HAJE FAITH D. GROSSNICKLE
CRAVATH, SWAINE & MOORE EXECUTIVE VICE PRESIDENT, SECRETARY SHEARMAN & STERLING
WORLDWIDE PLAZA AND GENERAL COUNSEL 599 LEXINGTON AVENUE
825 EIGHTH AVENUE TIME WARNER INC. NEW YORK, N.Y. 10022-6069
NEW YORK, N.Y. 10019-7415 75 ROCKEFELLER PLAZA (212) 848-4000
(212) 474-1270 NEW YORK, N.Y. 10019
(212) 484-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE AMOUNT AGGREGATE OFFERING AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED TO BE REGISTERED PRICE PER UNIT(1) PRICE(1) REGISTRATION FEE(1)
<S> <C> <C> <C> <C>
Senior Notes Due 2008................ $200,000,000 100% $ 200,000,000 $ 59,000
Senior Discount Notes Due 2008....... N/A N/A $ 150,000,000 $ 44,250
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________
<PAGE>
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED MAY 26, 1998
[LOGO]
TIME WARNER TELECOM INC.
$ % SENIOR NOTES DUE 2008
$ % SENIOR DISCOUNT NOTES DUE 2008
------------------------
TIME WARNER TELECOM INC. IS OFFERING $ MILLION OF SENIOR NOTES DUE 2008 (THE
'SENIOR NOTES') AND $ MILLION PRINCIPAL AMOUNT AT MATURITY (APPROXIMATELY $
MILLION GROSS PROCEEDS) OF SENIOR DISCOUNT NOTES DUE 2008 (THE 'SENIOR
DISCOUNT NOTES' AND, TOGETHER WITH THE SENIOR NOTES, THE 'NOTES').
INTEREST ON THE SENIOR NOTES IS PAYABLE SEMIANNUALLY IN CASH ON AND
OF EACH YEAR, COMMENCING ON , 1998. THE SENIOR DISCOUNT
NOTES ARE BEING SOLD AT A SUBSTANTIAL DISCOUNT FROM THEIR PRINCIPAL
AMOUNT, AND THERE WILL NOT BE ANY PAYMENT OF INTEREST PRIOR TO
, 2003. EACH SENIOR DISCOUNT NOTE WILL HAVE A
PRINCIPAL AMOUNT AT MATURITY OF $1,000 AND AN ACCRETED VALUE OF
$ . FROM AND AFTER , 2003, INTEREST ON THE
SENIOR DISCOUNT NOTES WILL ACCRUE AT % AND PAYABLE
SEMI-ANNUALLY IN CASH ON AND OF EACH YEAR,
COMMENCING , 2003.
THE SENIOR NOTES ARE REDEEMABLE AT THE OPTION OF THE COMPANY, IN WHOLE OR IN
PART, AT ANY TIME ON OR AFTER , 2003, INITIALLY AT % OF
THEIR PRINCIPAL AMOUNT, PLUS ACCRUED INTEREST, DECLINING RATABLY TO 100% OF
THEIR PRINCIPAL AMOUNT. THE SENIOR DISCOUNT NOTES ARE REDEEMABLE AT THE
OPTION OF THE COMPANY, IN WHOLE OR IN PART, AT ANY TIME ON OR AFTER
, 2003, INITIALLY AT % OF THEIR PRINCIPAL AMOUNT AT
MATURITY, PLUS ACCRUED AND UNPAID INTEREST, IF ANY, DECLINING RATABLY
TO 100% OF THEIR PRINCIPAL AMOUNT AT MATURITY, PLUS ACCRUED AND
UNPAID INTEREST, IF ANY, ON OR AFTER , 2001. IN
ADDITION, AT ANY TIME PRIOR TO , 2001, UP TO 35%
OF THE AGGREGATE PRINCIPAL AMOUNT OF THE SENIOR NOTES AND 35% OF
THE AGGREGATE PRINCIPAL AMOUNT AT MATURITY OF THE SENIOR
DISCOUNT NOTES MAY BE REDEEMED BY THE COMPANY FROM THE PROCEEDS
OF ONE OR MORE SALES OF ITS COMMON STOCK, AT % OF THE SUM OF
THE PRINCIPAL AMOUNT IN THE CASE OF THE SENIOR NOTES AND THE
ACCRETED VALUE IN THE CASE OF THE SENIOR DISCOUNT NOTES PLUS
ACCRUED INTEREST ON THE REDEMPTION DATE; PROVIDED THAT AFTER
ANY SUCH REDEMPTION AT LEAST $ MILLION AGGREGATE
PRINCIPAL AMOUNT OF SENIOR NOTES AND $ MILLION
AGGREGATE PRINCIPAL AMOUNT AT MATURITY OF THE
SENIOR DISCOUNT NOTES REMAINS OUTSTANDING.
CONCURRENTLY WITH THE OFFERING MADE HEREBY (THE 'NOTES OFFERING'), THE COMPANY
WILL MAKE A PUBLIC OFFERING OF OF SHARES OF ITS CLASS A COMMON STOCK
(THE 'STOCK OFFERING'). THE CLOSING OF THE NOTES OFFERING IS CONDITIONED
UPON THE CLOSING OF THE STOCK OFFERING, BUT THE CLOSING OF THE STOCK
OFFERING IS NOT CONDITIONED UPON THE CLOSING OF THE NOTES OFFERING. THE
NOTES OFFERING AND THE STOCK OFFERING ARE COLLECTIVELY
REFERRED TO HEREIN AS THE 'OFFERINGS.'
THE NOTES WILL BE GENERAL, UNSECURED SENIOR OBLIGATIONS OF THE COMPANY, RANKING
PARI PASSU IN RIGHT OF PAYMENT WITH ALL EXISTING AND FUTURE UNSECURED
UNSUBORDINATED OBLIGATIONS, AND SENIOR IN RIGHT OF PAYMENT TO ALL EXISTING
AND FUTURE SUBORDINATED INDEBTEDNESS OF THE COMPANY. THE NOTES WILL ALSO BE
EFFECTIVELY SUBORDINATED TO ALL EXISTING AND FUTURE SECURED INDEBTEDNESS
OF THE COMPANY TO THE EXTENT OF SUCH SECURITY. AT , ON A
PRO FORMA BASIS AFTER GIVING EFFECT TO THE OFFERINGS AND THE
APPLICATION OF THE NET PROCEEDS THEREOF, THE COMPANY WOULD HAVE HAD
OUTSTANDING APPROXIMATELY $ MILLION OF INDEBTEDNESS, APPROXIMATELY
$ MILLION OF WHICH WOULD HAVE BEEN SECURED. IN ADDITION, THE
COMPANY IS A HOLDING COMPANY AND THE NOTES WILL BE EFFECTIVELY
SUBORDINATED TO ALL EXISTING AND FUTURE LIABILITIES (INCLUDING
TRADE PAYABLES) OF THE COMPANY'S SUBSIDIARIES. ON
, 1998, ON THE SAME PRO FORMA BASIS, THE
SUBSIDIARIES OF THE COMPANY WOULD HAVE HAD $ MILLION OF
LIABILITIES (EXCLUDING INTERCOMPANY PAYABLES), INCLUDING $
MILLION OF INDEBTEDNESS, APPROXIMATELY
$ MILLION OF WHICH WOULD HAVE BEEN SECURED.
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE PER SENIOR NOTE % AND ACCRUED INTEREST, IF ANY
PRICE PER SENIOR DISCOUNT NOTE % AND ACCRUED INTEREST, IF ANY
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC (1) COMMISSIONS (2) COMPANY (1) (3)
---------------------- ---------------------- ----------------------------
<S> <C> <C> <C>
Per Senior Note...................................... % % %
Total................................................ $ $ $
Per Senior Discount Note............................. % % %
Total................................................ $ $ $
</TABLE>
- ------------
(1) Plus accrued interest or original issue discount, if any, from
, 1998.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
'Underwriters.'
(3) Before deducting estimated expenses of $ , payable by the Company.
------------------------
The Notes are offered, subject to prior sale, when, as and if issued to and
accepted by the Underwriters named herein and subject to approval of certain
legal matters by Shearman & Sterling, counsel for the Underwriters. It is
expected that delivery of the Notes will be made on or about ,
1998 at the office of Morgan Stanley & Co. Incorporated, New York, NY, against
payment therefor in immediately available funds.
------------------------
JOINT BOOK -- RUNNING MANAGERS
MORGAN STANLEY DEAN WITTER LEHMAN BROTHERS
, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
<PAGE>
[INSIDE FRONT COVER PAGE]
[On the inside front cover there will be a map
showing the Company's operations.]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING,
AND MAY BID FOR, AND PURCHASE, NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE 'UNDERWRITERS.'
<PAGE>
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE NOTES
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
FOR INVESTORS OUTSIDE THE UNITED STATES: NO ACTION HAS BEEN OR WILL BE
TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY ANY UNDERWRITER THAT WOULD PERMIT
A PUBLIC OFFERING OF THE NOTES OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS
IN ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE
UNITED STATES. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED
BY THE COMPANY AND THE UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE
ANY RESTRICTIONS AS TO THE OFFERING OF THE NOTES AND THE DISTRIBUTION OF THIS
PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................... 4
Risk Factors..................................... 11
Use of Proceeds.................................. 22
The Reorganization............................... 23
Capitalization................................... 24
Selected Consolidated Financial and Other
Operating Data................................. 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 27
Business......................................... 35
Management....................................... 50
Certain Relationships and Related Transactions... 58
<CAPTION>
PAGE
----
<S> <C>
Principal Stockholders........................... 60
Description of the Notes......................... 62
Description of Capital Stock..................... 88
Certain United States Federal Tax Consequences... 91
Underwriters..................................... 95
Legal Matters.................................... 95
Experts.......................................... 95
Additional Information........................... 96
Glossary......................................... 97
Index to Combined Financial Statements........... F-1
</TABLE>
------------------------
Certain statements contained herein under 'Prospectus Summary,' 'Risk
Factors,' 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and 'Business' including, without limitation, those
concerning the Company's business and operating strategy, contain certain
forward-looking statements concerning the Company's operations, economic
performance and financial condition. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause such
differences include, but are not limited to, those discussed under 'Risk
Factors.'
3
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Company's financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
As used herein, the term 'Company' refers to Time Warner Telecom Inc., its
consolidated and unconsolidated subsidiaries and all operations of the Company
that were historically conducted by the Existing Stockholders (as defined
herein). The term 'Existing Stockholders' refers to Time Warner Inc. and certain
of its subsidiaries (collectively, 'TW'), U S WEST, Inc. and certain of its
subsidiaries (collectively, 'U S WEST'), and Advance/Newhouse Partnership
('Newhouse'). TW and U S WEST, through certain subsidiaries, are partners in
Time Warner Entertainment Company, L.P. ('TWE'). TWE and Newhouse are partners
in Time Warner Entertainment-Advance/Newhouse Partnership ('TWE-A/N'). The term
'TW Cable' refers collectively to the cable systems owned by subsidiaries and
divisions of TWE, TWE-A/N and TW. Upon the completion of
U S WEST's proposed separation of its communications and media businesses, U S
WEST's cable and media business, including all its interests in the Company,
will be owned by U S WEST, Inc., which will be renamed MediaOne Group, Inc. The
Company was recently formed in connection with a reorganization (the
'Reorganization') of the assets and liabilities of its business, which were
previously owned by subsidiaries and divisions of TWE, TWE-A/N and TW (together,
the 'Parent Companies'). In connection with the Reorganization, the Existing
Stockholders received all the outstanding shares of the Class B Common Stock.
Following the Reorganization, TW, U S WEST and Newhouse held 61.95%, 18.88%, and
19.17% respectively, of the Class B Common Stock. See 'The Reorganization' and
'Principal Stockholders.' Unless otherwise indicated, the information set forth
in this Prospectus gives effect to the transactions described herein under 'The
Reorganization' and does not give effect to the exercise of the U.S.
underwriters' over-allotment option relating to the Stock Offering. See
'Glossary' for definitions of certain other terms used in this Prospectus.
THE COMPANY
The Company is a leading facilities-based competitive local exchange
carrier ('CLEC') in selected metropolitan areas across the United States,
offering a wide range of business telephony services, primarily to medium- and
large-sized business customers and other carriers. The Company's customers are
principally telecommunications-intensive business end-users, long distance
carriers ('IXCs'), Internet service providers ('ISPs'), wireless communications
companies and governmental entities. Such customers are offered a wide range of
integrated telecommunications services, including dedicated transmission, local
switched, data and video transmission services and certain Internet services.
The Company has deployed switches in 16 of its 19 service areas as of March 31,
1998, and management expects that a growing portion of the Company's revenues
will be derived from providing switched services. In addition, the Company
benefits from its strategic relationship with TW Cable both through network
facilities access and cost-sharing. As a result, the Company's networks have
been constructed primarily through licensing the use of fiber capacity from TW
Cable. As of March 31, 1998, the Company operated networks in 19 metropolitan
areas that spanned 6,240 route miles, contained 244,894 fiber glass miles and
offered service to 2,711 buildings. Consolidated revenues for the Company, which
have historically been primarily derived from private line services, grew by
117.2% for the three months ended March 31, 1998 as compared to the same period
in 1997.
The business of the Company was commenced in 1993 by TW Cable, originally
to provide certain telephony services together with cable television. In January
1997, the Company put in place a new management team that is implementing a
business strategy focused on exclusively serving business customers, rapidly
providing switched services in all the Company's service areas and expanding the
range of business telephony services offered by the Company.
The Company believes that the Telecommunications Act of 1996 (the '1996
Act') and certain state regulatory initiatives provide increased opportunities
in the telecommunications marketplace by opening all local service areas to
competition and requiring incumbent local exchange carriers ('ILECs') to provide
increased direct interconnection. According to the Federal Communications
Commission (the 'FCC'), in 1996 the total revenues for the telecommunications
industry amounted to approximately $222 billion, of which approximately $122
billion was local service and approximately $100 billion was long distance. To
capitalize on these
4
<PAGE>
<PAGE>
significant opportunities, the Company has accelerated its deployment of high
capacity digital switches in its service areas and is aggressively marketing
switched services to medium- and large-sized businesses.
BUSINESS STRATEGY
The Company's primary objective is to be a leading CLEC in its existing and
future service areas, offering medium- and large-sized businesses superior
telecommunications services through advanced networks. The key elements of the
Company's business strategy include the following:
Leverage Existing Fiber Optic Networks. The Company has designed and
built its networks to serve geographic locations where management believes
there are large numbers of potential customers. As of March 31, 1998, the
Company operated networks that spanned 6,240 route miles and contained
244,894 fiber miles. The Company's highly concentrated networks have yet to
be fully exploited and provide the capacity to serve a substantially larger
base of customers. Management believes that the Company's extensive fiber
network capacity allows it to: (i) increase orders substantially from new
and existing customers without incurring significant additional capital
expenditures and operating expenses; (ii) emphasize its facilities-based
services rather than resales of network capacity of other providers; and
(iii) exert greater control over its services than the Company's
competitors that are dependent upon off-net facilities, thereby providing
better customer service.
Expand Switched Services. The Company provided a broad range of
switched services in 16 of its service areas as of March 31, 1998, and
plans to provide switched services in all of its current service areas by
the end of 1999. For the three months ended March 31, 1998, consolidated
revenues from switched service grew by 187.0% as compared to the same
period in 1997. Because the demand for switched services is greater than
for dedicated transport services, and the Company has been rapidly
installing switches in its markets, Management expects the Company to
derive a growing portion of its revenues from switched services.
Target Medium- and Large-Sized Business Customers. The Company
operates networks in metropolitan areas that have high concentrations of
medium- and large-sized businesses. Such businesses tend to be
telecommunications-intensive and are more likely to seek the greater
reliability provided by an advanced network such as the Company's. Thus,
management believes that significant economies of scale may be achieved by
focusing and intensifying its sales and marketing efforts on such
businesses as they are potentially high volume users of the Company's
services. To drive revenue growth in these markets, the Company is
aggressively expanding its direct sales force to focus on such business
customers.
Interconnect Cities within Clusters. The 19 cities in which the
Company currently operates are grouped in six geographic clusters across
the United States. The Company plans to interconnect each city within a
cluster with broadband, fiber optic facilities of its own or licensed from
TW Cable and/or third parties. Interconnecting the cities within a cluster
will enable the Company to increase its revenue potential by addressing
customers' regional long distance voice, data and video requirements. In
1998, management plans to begin interconnecting cities within the Company's
Midwest, Southwest and Southeast clusters.
Utilize Strategic Relationships with TW Cable. The Company has
benefited from and continues to leverage its relationships with TW Cable,
the second largest multiple system cable operator in the U.S., by licensing
and sharing the cost of digital fiber optic facilities. This licensing
arrangement allows the Company to benefit from TW Cable's access to
rights-of-way, easements, poles, ducts and conduits. By leveraging its
existing relationship with TW Cable, the Company believes that it can
increase revenues, benefit from existing regulatory approvals and licenses,
derive economies of scale in network costs and extend its existing networks
in a rapid, efficient and cost-effective manner. Furthermore, management
believes that the strong awareness and positive recognition of the 'Time
Warner' brand name significantly contributes to its marketing programs and
sales efforts by distinguishing it from its competitors.
Expand Product Offerings. The Company intends to increase revenues and
cash flows by developing and tailoring diversified bundles of telephony
services for its customers. The services currently offered by the Company
include a wide range of dedicated transmission, local switched, data and
video transmission services and certain Internet services. The Company
intends to offer additional services including long
5
<PAGE>
<PAGE>
distance service and other high speed data transport services. The Company
generally develops its customer base by first offering basic
telecommunications services to its new customers. As the needs of such
customers change and develop, the Company selectively bundles and offers
more sophisticated, higher margin products and services to them.
Enter into New Geographic Areas. The Company's strategy is to target
metropolitan areas possessing demographic, economic and telecommunications
demand profiles that it believes provide it with the potential to generate
an attractive economic return. Currently, the Company operates networks in
a total of 19 metropolitan areas. Management plans to have networks in
operation or under construction in several additional service areas by the
end of 1999, most of which will be in service areas where TW Cable has
already made substantial infrastructure investments. By licensing capacity
from TW Cable's existing fiber optic networks, the Company can develop new
networks quickly and cost-effectively, thereby giving it a competitive
advantage over other CLECs. See 'Certain Relationships and Related
Transactions -- Certain Operating Agreements.'
Continue Disciplined Expenditure Program. The Company increases
operational efficiencies by pursuing a disciplined approach to capital
expenditures. This capital expenditure program requires that prior to
making any expenditure on a project, the project must be expected to meet
stringent financial criteria such as minimum recurring revenue, cash flow
margins and rate of return. In addition, to control capital expenditures
and share the risks of developing costly new networks, management is
considering establishing strategic alliances with other telecommunications
providers in the form of joint ventures and possible co-branding marketing
programs.
FINANCING PLAN
Concurrently with the Notes Offering (as defined), the Company will make a
public offering of shares of its Class A Common Stock. The closing of the
Notes Offering is conditioned upon the closing of the Stock Offering (as
defined), but the closing of the Stock Offering is not conditioned upon the
closing of the Notes Offering. See 'Description of Capital Stock.'
Upon completion of the Offerings (as defined), the Company expects to enter
into a bank credit agreement providing it with a working capital facility. There
can be no assurance that such financing will be available on terms acceptable to
the Company or at all.
THE REORGANIZATION
The Company was recently formed in connection with the Reorganization of
the assets and liabilities of its business, which were previously owned by
subsidiaries and divisions of the Parent Companies. In connection with the
Reorganization, the Existing Stockholders received all the outstanding shares of
the Class B Common Stock. See 'The Reorganization' and 'Principal Stockholders.'
The Company was incorporated in the State of Delaware in 1998. The
Company's principal executive offices are located at 5700 S. Quebec Street,
Greenwood Village, CO 80111, and its telephone number is (303) 566-1000.
6
<PAGE>
<PAGE>
THE NOTES OFFERING
<TABLE>
<S> <C>
SENIOR NOTES
Securities Offered..................... $200,000,000 aggregate principal amount of % Senior Notes due 2008
(the 'Senior Notes').
Maturity............................... , 2008
Interest............................... Interest on the Senior Notes is payable semiannually in cash on
and , commencing on
, 1998.
SENIOR DISCOUNT NOTES
Securities Offered..................... $ aggregate principal amount at maturity of % Senior
Discount Notes due 2008 (the 'Senior Discount Notes' and together with
the Senior Notes, the 'Notes.')
Maturity............................... , 2008
Yield and Interest..................... The Senior Discount Notes are being sold at a substantial discount from
their principal amount at maturity and there will not be any payment of
interest prior to , 2003. For a discussion of the U.S.
federal income tax treatment of the Senior Discount Notes under the
original issue discount rules, see 'Certain United States Federal Income
Tax Consequences.' The Senior Discount Notes will fully accrete to face
value on , 2003. From and after , 2003, the
Senior Discount Notes will bear interest, payable semi-annually in cash,
at a rate of % per annum on and of each
year, commencing , 2003.
PROVISIONS APPLICABLE TO SENIOR NOTES
AND SENIOR DISCOUNT NOTES
Optional Redemption.................... The Notes are redeemable prior to maturity, in whole or in part, at the
option of the Company at any time on or after ,
2003, at the redemption prices set forth herein, plus accrued interest.
In addition, at any time prior to , 2001, up to %
of the aggregate principal amount of the Senior Notes and % of the
aggregate principal amount at maturity of the Senior Discount Notes may
be redeemed by the Company from the proceeds of one or more sales of its
common stock at % of the sum of the principal amount in the case of
the Senior Notes and the Accreted Value in the case of the Senior
Discount Notes plus in each case accrued interest on the redemption
date; provided that after any such redemption at least $ million
aggregate principal amount of the Senior Notes and $ million aggregate
principal amount at maturity of the Senior Discount Notes remains
outstanding.
Change of Control...................... Upon a Change of Control (as defined herein), the Company will be
required to make an offer to purchase the Notes at a purchase price
equal to 101% of the sum of their principal amount, plus accrued
interest. See 'Description of the Notes -- Repurchase of Notes upon a
Change of Control.'
Ranking................................ The Notes will rank pari passu with all unsecured, unsubordinated
indebtedness of the Company existing or created in the future, will be
effectively subordinated to the Company's obligations under secured
indebtedness to the extent of such security and will be senior to all
</TABLE>
7
<PAGE>
<PAGE>
<TABLE>
<S> <C>
subordinated indebtedness of the Company created in the future. The
Notes will also be effectively subordinated to all indebtedness and
other liabilities of the Company's subsidiaries. At ,
1998, on a pro forma basis after giving effect to the Offerings and the
application of the net proceeds thereof, the Company would have had
outstanding on a consolidated basis approximately $ million of
indebtedness, approximately $ million of which would have been
secured. At such date, the Company's subsidiaries had total liabilities
(excluding intercompany debt owed to the Company) of $ . See
'Description of the Notes -- Ranking.'
Certain Covenants...................... The Indenture will contain certain covenants, including, but not limited
to, covenants with respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on restricted payments; (iii) limitation
on dividend and other payment restrictions affecting restricted
subsidiaries; (iv) limitation on the issuance and sale of capital stock
of restricted subsidiaries; (v) limitation on issuances of guarantees by
restricted subsidiaries; (vi) limitation on transactions with
shareholders and affiliates; (vii) limitation on liens; (viii)
limitation on sale-leaseback transactions; and (ix) limitation on asset
sales. See 'Description of the Notes -- Certain Covenants.'
Use of Proceeds........................ The net proceeds to the Company from the Notes Offering, together with
the net proceeds from the Stock Offering, will be used to repay $
million of outstanding indebtedness to the Parent Companies, expand and
develop existing and new networks and for general corporate and working
capital purposes, which may include acquisitions of other
telecommunications service providers.
Concurrent Stock Offering.............. Concurrently with the Notes Offering, the Company is offering
shares ( shares if the U.S. underwriters' over-
allotment option is exercised in full) of the Class A Common Stock, $.01
par value, of the Company (the 'Class A Common Stock') for sale to the
public. The closing of the Notes Offering is conditioned on the
concurrent closing of the Stock Offering; however, the closing of the
Stock Offering is not conditioned upon the closing of the Notes
Offering.
</TABLE>
RISK FACTORS
Prospective investors should consider all of the information contained in
this Prospectus before making an investment in the Notes. In particular,
prospective investors should consider the factors set forth herein under 'Risk
Factors.'
8
<PAGE>
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA
The summary statement of operations data for the years ended December 31,
1995, 1996 and 1997 are derived from the audited financial statements of the
Company, including the notes thereto, appearing elsewhere in this Prospectus.
The summary statement of operations data for the year ended December 31, 1994
has been derived from audited financial statements of the Company not included
herein. The summary statement of operations data for the year ended December 31,
1993 has been derived from the Company's unaudited internal financial
statements, which in the opinion of management, have been prepared on the same
basis as the audited financial statements and reflect all adjustments
(consisting of normal recurring adjustments), necessary for a fair presentation
of the Company's results of operations and financial position. The summary data
as of and for the three months ended March 31, 1998 and the summary statement of
operations data for the three months ended March 31, 1997 are derived from
unaudited information. The pro forma data for the three months ended March 31,
1998 and the year ended December 31, 1997 gives effect to the Offerings as if
they occurred at the beginning of 1997. Such pro forma amounts are presented for
informational purposes only and are not necessarily indicative of the actual
amounts that would have been reported if the transaction had been consummated at
such date, nor are they necessarily indicative of future results. The summary
other operating data has been derived from the accounting records of the Company
and has not been audited. The summary financial and other operating data set
forth below should be read in conjunction with the information contained in
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the Company's financial statements, including the notes thereto,
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- --------- --------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Dedicated transport services...... $ 1,913 $ 2,169 $ 6,505 $ 20,362 $ 44,529 $ 8,301 $ 16,733
Switched services................. -- -- 350 3,555 10,872 1,852 5,315
-------- -------- --------- --------- --------- -------- --------
Total revenues................ 1,913 2,169 6,855 23,917 55,401 10,153 22,048
-------- -------- --------- --------- --------- -------- --------
Costs and expenses:
Operating (1)..................... 3,219 10,454 15,106 25,715 40,349 8,384 13,519
Selling, general and
administrative (1).............. 7,035 26,066 34,222 60,366 54,640 11,985 16,316
Depreciation and amortization
(1)............................. 578 1,213 7,216 22,353 38,466 8,842 11,932
-------- -------- --------- --------- --------- -------- --------
Total costs and expenses...... 10,832 37,733 56,544 108,434 133,455 29,211 41,767
-------- -------- --------- --------- --------- -------- --------
Operating loss........................ (8,919) (35,564) (49,689) (84,517) (78,054) (19,058) (19,719)
Gain on disposition of investment
(2)................................. -- -- -- -- 11,018 -- --
Equity in losses of unconsolidated
affiliates.......................... (392) (1,611) (1,391) (1,547) (2,082) (593) (58)
Interest expense, net (1)............. (81) (3) (25) (52) (1,538) -- (2,011)
-------- -------- --------- --------- --------- -------- --------
Net loss.............................. $ (9,392) $(37,178) $ (51,105) $ (86,116) $ (70,656) $(19,651) $(21,788)
-------- -------- --------- --------- --------- -------- --------
-------- -------- --------- --------- --------- -------- --------
Pro forma basic and diluted loss per
common share........................
--------- --------
--------- --------
Pro forma average common shares
outstanding.........................
--------- --------
--------- --------
Deficiency in coverage of fixed
charges by earnings before fixed
charges............................. $ (9,392) $(37,178) $ (51,075) $ (86,076) $ (70,629) $(19,641) $(21,788)
-------- -------- --------- --------- --------- -------- --------
-------- -------- --------- --------- --------- -------- --------
OTHER OPERATING DATA:
EBITDA (3)............................ $ (8,341) $(34,351) $ (42,473) $ (62,164) $ (39,588) $(10,216) $ (7,787)
EBITDA Margin (4)..................... (436.0)% (1,583.7)% (619.6)% (259.9)% (71.5)% (100.6)% (35.3)%
Capital expenditures.................. 7,154 50,293 141,479 144,815 127,315 14,261 24,961
Cash used in operations............... (3,100) (14,873) (35,605) (52,274) (29,419) (28,694) (15,103)
Cash used in investing activities..... (10,656) (52,632) (145,293) (149,190) (120,621) (14,233) (24,961)
Cash provided by financing
activities.......................... 13,756 67,505 180,898 201,464 150,040 42,927 40,064
Pro forma interest expense (5)........
Pro forma deficiency in coverage of
fixed charges by earnings before
fixed charges....................... $ $
</TABLE>
(footnotes on next page)
9
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
----- ------- -------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA (6):
Operating Networks................................... 3 8 15 18 19 19
Route miles.......................................... 168 880 3,207 5,010 5,913 6,240
Fiber miles.......................................... 5,820 24,995 116,286 198,490 233,488 244,894
Voice grade equivalent circuits...................... -- 39,002 158,572 687,001 1,702,431 1,904,420
Digital telephone switches........................... -- -- 1 2 14 16
Employees............................................ 78 239 508 673 714 739
Access lines......................................... -- -- 493 2,793 16,078 23,702
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------------------------
AS ADJUSTED
FOR THE STOCK
OFFERING AND
ACTUAL NOTES OFFERING
-------- AS ADJUSTED ---------------
FOR THE
STOCK
OFFERING
---------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................. $ --
Property, plant and equipment, net........................................ 428,319 428,319
Total assets.............................................................. 453,475
Loans payable to the Parent Companies..................................... 117,547
Long-term indebtedness.................................................... --
Total stockholders' equity................................................ 278,602
</TABLE>
- ------------
(1) Includes expenses resulting from transactions with affiliates of $168 in
1993, $1,901 in 1994, $6,507 in 1995, $11,023 in 1996 and $15,306 in 1997
and $3,486 and $5,479 in the three months ended March 31, 1997 and 1998,
respectively.
(2) In September 1997, the Company completed a series of transactions related to
its interests in the Hyperion Partnerships, a group of unconsolidated
telecommunication partnerships serving the New York area, whereby it sold
its interests in the partnerships serving the Buffalo and Syracuse markets
in exchange for $7.0 million of cash and all of the minority interests in
the partnerships serving the Albany and Binghamton markets that were not
already owned by the Company. In connection with these transactions, the
Company recognized a gain of approximately $11.0 million.
(3) EBITDA consists of operating income (loss) before depreciation and
amortization ('EBITDA'). Industry analysts generally consider EBITDA to be
an important measure of comparative operating performance for the
telecommunications industry, and when used in comparison to debt levels or
the coverage of interest expense, as a measure of liquidity. However, EBITDA
should be considered in addition to, not as a substitute for, operating
income, net income, cash flow and other measures of financial performance
and liquidity reported in accordance with generally accepted accounting
principles. EBITDA as defined herein may not be comparable to similarly
titled measures reported by other companies. Additionally, certain covenants
contained in the Indenture (as defined herein) are based on EBITDA. See the
Combined Statements of Cash Flows contained elsewhere in this Prospectus.
(4) EBITDA Margin represents EBITDA as a percentage of revenues.
(5) Pro forma interest expense gives effect to the issuance of the Notes offered
in the Notes Offering (assuming an effective annual interest rate of %),
as if such transaction had occurred at the beginning of 1997 assuming %
of the interest on the Notes would have been capitalized under FASB
Statement No. 34 'Capitalization of Interest Costs.' For each .125% change
in the interest rate on the Notes, pro forma interest expense would change
by % for 1997. Since any income tax benefits related to the Notes
Offering would have been fully offset by corresponding increases in the
valuation allowance due to the uncertainty of realizing the benefits for tax
losses on a separate return basis, the pro forma effect of the Notes
Offering on net loss would be identical to the pro forma effect on interest
expense.
(6) Includes all managed properties including unconsolidated affiliates
(MetroComm AxS, L.P. in Columbus, Ohio and the Albany and Binghamton, New
York networks). Albany and Binghamton were wholly owned at December 31,
1997.
10
<PAGE>
<PAGE>
RISK FACTORS
Prior to purchasing any of the Notes offered hereby, prospective investors
should consider carefully the following factors in addition to the other
information contained in this Prospectus.
LIMITED HISTORY OF OPERATIONS; NEGATIVE CASH FLOW AND OPERATING LOSSES
The Company was formed in 1998 pursuant to the Reorganization to continue
the business telephony services commenced by TW Cable in 1993. Accordingly,
prospective investors have limited historical financial information upon which
to base an evaluation of the Company's performance and an investment in the
Notes. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development and growth.
The Company has incurred, and may continue to incur, operating losses and
negative cash flow while it installs, develops and expands its existing and
future telecommunications networks and builds its customer base. For the years
ended December 31, 1996 and 1997, on a consolidated basis, the predecessor
entities of the Company operating the commercial telecommunications operations
of the Parent Companies sustained combined operating losses of $84.5 million and
$78.1 million, respectively, and negative EBITDA of $62.2 million and $39.6
million, respectively. EBITDA consists of operating income (loss) before
depreciation and amortization ('EBITDA'). Industry analysts generally consider
EBITDA to be an important measure of comparative operating performance for the
telecommunications industry, and when used in comparison to debt levels or the
coverage of interest expense, as a measure of liquidity. However, EBITDA should
be considered in addition to, not as a substitute for, operating income, net
income, cash flow and other measures of financial performance and liquidity
reported in accordance with generally accepted accounting principles. EBITDA as
defined herein may not be comparable to similarly titled measures reported by
other companies. The capital expenditures of the Company associated with the
installation, development and expansion of its existing networks and possible
acquisitions of future networks are substantial, and a significant portion of
these expenditures generally are incurred before any related revenues are
realized. These expenditures, together with associated initial operating
expenses, will generally result in negative cash flow and operating losses from
a network until an adequate customer base and revenue stream for the network
have been established. Accordingly, the Company expects that each network will
generally produce negative cash flow for at least two and a half years after
operations commence in such network. The Company expects to incur net losses for
the foreseeable future as it continues to acquire, install, develop and expand
its existing and new telecommunications networks and build its customer base.
There can be no assurance that an adequate revenue base will be established from
each of the Company's networks or that the Company will achieve or sustain
profitability or generate sufficient positive cash flow, if any, to meet its
working capital requirements and to service its indebtedness.
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION OF THE NOTES TO INDEBTEDNESS
OF SUBSIDIARIES
The Company is a holding company and following the Offerings and the use of
proceeds therefrom, its only material assets will consist of the equity
interests of its operating subsidiaries. The Company will be required to rely
upon dividends and other payments from its subsidiaries or the proceeds of
future debt or equity financings to generate the funds necessary to pay the
principal of and interest on the Notes. There can be no assurance that such
financing will be available on terms acceptable to the Company or at all. The
subsidiaries, however, are legally distinct from the Company and have no
obligation, contingent or otherwise, to pay amounts due pursuant to the Notes or
to make funds available for such payment. The Company's subsidiaries have not
guaranteed the Notes. The ability of the Company's subsidiaries to make such
dividends and other payments to the Company is subject to, among other things,
the availability of funds, the terms of such subsidiaries' indebtedness and
applicable state laws. Claims of creditors of the Company's subsidiaries,
including trade creditors, will generally have priority as to the assets of such
subsidiaries over the claims of the Company and the holders of the Company's
indebtedness, including the Notes. Accordingly, the Notes are and will be
effectively subordinated to all liabilities (including trade payables) of the
subsidiaries of the Company. At December 31, 1997, after giving effect to the
issuance of the Notes, the subsidiaries of the Company had approximately $
million of liabilities (excluding intercompany payables to the Company and each
other), including $ million of indebtedness. See 'Description of the Notes.'
11
<PAGE>
<PAGE>
SIGNIFICANT CAPITAL REQUIREMENTS
The development and expansion of the Company's existing and future networks
and services will require significant capital to fund capital expenditures,
working capital and debt service. The Company's principal capital expenditure
requirements are expected to consist of (i) the purchase and installation of
switches, electronics, fiber and other technologies in existing networks and in
additional networks to be constructed in new markets and (ii) the potential
acquisition and expansion of networks currently owned and operated by other
companies. The Company's expected expenditures for general corporate and working
capital purposes include (i) expenditures with respect to the Company's
management information system and corporate service support infrastructure and
(ii) operating and administrative expenses with respect to new networks and debt
service. The Company will continue to evaluate additional revenue opportunities
in each of its service areas and, as opportunities develop, the Company plans to
make the additional capital investments in its networks that are required to
pursue such opportunities. While the Company intends to continue to leverage its
relationship with TW Cable in pursuing expansion opportunities, to the extent
the Company seeks to expand into service areas where TW Cable does not conduct
cable operations, the Company may incur significant additional costs in excess
of those historically incurred by the Company when expanding into existing TW
Cable service areas.
The Company sustained significant working capital deficits in 1996 and
1997. The Company has historically been funded by capital contributions and
advances from the Parent Companies. As of March 31, 1998 the Company currently
has outstanding approximately $117.5 million of indebtness to the Parent
Companies, all of which is expected to be repaid with a portion of the net
proceeds of the Offerings. The Parent Companies do not have any obligation to
make additional equity investments in or loans to the Company.
The Company expects that the net proceeds of the Offerings after repayment
of certain indebtedness to the Parent Companies, together with internally
generated funds and borrowings expected to be available under its future credit
facility, will provide sufficient funds for the Company to expand its business
as planned and to fund its losses for approximately two years. Thereafter, the
Company expects to require additional financing. However, in the event that the
Company's plans or assumptions change or prove to be inaccurate, or the
foregoing sources of funds prove to be insufficient to fund the Company's growth
and operations, or if the Company consummates acquisitions, the Company may be
required to seek additional capital sooner than currently anticipated. The
Company's revenues and costs are dependent upon many factors that are not within
the Company's control, such as regulatory changes, changes in technology and
increased competition. Due to the uncertainty of these and other factors, actual
revenues and costs may vary from expected amounts, possibly to a material
degree, and such variations are likely to affect the level of the Company's
future capital expenditures and expansion plans. Sources of financing may
include public or private debt or equity financing by the Company or its
subsidiaries or other financing arrangements.
There can be no assurance that the Company will be successful in generating
sufficient cash flow or raising additional financing in sufficient amounts on
terms acceptable to it or within the limitations contained in its financing
arrangements, or that the terms of any such additional financing will not impair
the Company's ability to develop its business. The failure to generate
sufficient cash flow or to raise sufficient funds may require the Company to
modify, delay or abandon some or all of its development and expansion plans,
which could have a material adverse effect on the Company's growth, its ability
to compete in the telecommunications services business and its ability to
service its debt. See 'Use of Proceeds' and 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.'
SUBSTANTIAL LEVERAGE; INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES
The Company will be highly leveraged after the consummation of the Notes
Offering. As of March 31, 1998, after giving pro forma effect to the Offerings
and the application of the net proceeds therefrom, the Company would have had
approximately $ million of consolidated total debt and $ million of
consolidated stockholders' equity. The degree to which the Company is leveraged
could have a material adverse effect upon the Company, including: (i) the
Company's ability to obtain additional financing in the future for capital
expenditures, acquisitions, working capital or general corporate or other
purposes may be limited; (ii) a substantial portion of the Company's cash flow
from operations will be dedicated to the payment of the principal of, and
interest on, its debt; and (iii) the Company's substantial leverage may make it
more vulnerable to economic downturns, limit its ability to withstand
competitive pressures and reduce its flexibility in responding to changing
business and economic conditions. A failure by the Company to comply with the
covenants and
12
<PAGE>
<PAGE>
other provisions of financing documents to which the Company is a party,
including the Indentures, or other debt instruments to which the Company may
become party in the future, could permit acceleration of the debt under such
instruments and, in some cases, acceleration of debt under other instruments
that contain cross-default or cross-acceleration provisions. The Indentures
contain certain restrictive covenants. Such restrictions will affect, and in
many respects will significantly limit or prohibit, among other things, the
ability of the Company to incur indebtedness, make prepayments of certain
indebtedness, pay dividends, make investments, engage in transactions with
shareholders and affiliates, issue capital stock of subsidiaries, create liens,
sell assets and engage in mergers and consolidations.
After giving pro forma effect to the Offerings and the application of the
net proceeds therefrom as if such transactions had occurred at the beginning of
the respective periods, the Company's earnings would have been insufficient to
cover its fixed charges by $ million and $ million for the three months
ended March 31, 1998 and the year ended December 31, 1997, respectively. The
ability of the Company to meet its debt service obligations will be dependent
upon the future performance of the Company, which, in turn, will be subject to
the Company's successful implementation of its strategy, as well as to
financial, competitive, business, regulatory, technical and other factors,
including factors beyond the control of the Company. In general, the Company
expects that the rate at which it implements its expansion plans will be driven
by the rate of growth in its cash flow. Although the Company believes that it
will be able to generate sufficient cash flow from operations to meet its debt
service obligations as they become due, if it is unable to do so, it could face
liquidity problems and be forced to modify, delay or abandon some or all of its
development and expansion plans. In such circumstances, the Company may be
required to renegotiate the terms of the instruments governing its long-term
debt or to refinance all or a portion of its long-term debt. There can be no
assurance, however, that the Company will be able to renegotiate such terms or
refinance its indebtedness successfully on terms acceptable to it. If the
Company were unable to refinance its indebtedness or obtain new financing under
these circumstances, the Company would have to consider various other options
such as the sale of certain assets to meet its required debt service, the sale
of additional equity, negotiations with its lenders to restructure applicable
indebtedness or other options available to it under law.
RISKS OF EXPANSION; AND POSSIBLE INABILITY TO MANAGE GROWTH
Although the Company commenced operations in 1993, to date its business has
consisted primarily of offering dedicated point-to-point services. With the
adoption of the 1996 Act, the Company accelerated the implementation of switched
services in its markets. The Company expects that switched services will in the
future become the predominant source of its revenues. Switched services support
both analog and digital equipment compatible with the TDMA, FDMA and CDMA forms
of digital telephone technology. In addition to this transition to switched
services, the Company intends to enter into new geographic markets, expand its
operations in existing markets, interconnect its existing markets and offer
additional telecommunications services, when and if it becomes economically
desirable to do so. The Company's ability to manage the transition to switched
services and the continued expansion of its business will depend on, among other
things, the Company's ability to assess markets, design fiber optic network
backbone routes, acquire and install facilities, obtain and utilize
rights-of-way and building access, obtain any required governmental
authorizations and permits and implement interconnection with local exchange
carriers, all in a timely manner, at reasonable costs and on terms and
conditions acceptable to the Company. A substantial portion of the Company's
network build-out plans are dependent upon its continuing relationship with TW
Cable. See ' -- Relationship with TW Cable.' The successful implementation of
the Company's expansion strategy will be subject to a variety of risks,
including operating and technical problems, regulatory uncertainties,
competition and the availability of capital. There can be no assurance that any
existing networks will be successfully expanded or any new networks will be
developed or, if developed, that such new networks will be completed on
schedule, at commercially reasonable costs or within the Company's
specifications. In addition, there can be no assurance that any new or expanded
networks will become profitable or generate positive cash flow at any time in
the future. The Company's inability to expand its existing networks and
operations or install new networks or manage effectively such expansion and
installation could have a material adverse effect upon the Company's business
operations, financial conditions and results of operations. In addition, the
expansion of the Company's business may involve acquisitions which, if made,
could divert the resources and management time of the Company and could require
integration with the Company's operations. See ' -- Acquisition Related Risks.'
13
<PAGE>
<PAGE>
The Company's future performance will depend, in part, upon its ability to
manage its growth effectively. The Company's rapid growth has placed, and in the
future may continue to place, a significant strain on its administrative,
operational and financial resources. The Company's ability to continue to manage
its growth successfully will require the Company to further enhance its
operations, management, financial and information systems and controls and to
expand, train and manage its employee base. In addition, as the Company
increases its service offerings and expands its targeted markets, there will be
additional demands on the Company's customer support, sales, marketing, and
administrative resources and network infrastructure. There can be no assurance
that the Company's administrative, operating and financial resources, systems
and controls will be adequate to manage the Company's growth effectively. The
Company's inability to manage its expansion effectively, including the emergence
of unexpected expansion difficulties, could have a material adverse effect on
the Company's business, results of operations and financial condition.
RELATIONSHIP WITH TW CABLE
The Company is largely dependent upon TW Cable's governmental licenses,
permits and rights-of-way to operate and expand the Company's current business.
TW Cable is principally managed by a management committee that includes
representatives of U S WEST and TW. The Company presently licenses pursuant to
the Capacity License (as defined herein), and may enter into future licenses
for, significant numbers of optical fibers from TW Cable; however, TW Cable is
not obligated to license any additional fiber optic capacity not covered by the
Company's current licenses. See 'Certain Relationships and Related
Transactions -- Certain Operating Agreements.' Historically, the Company has
relied on TW Cable's fiber optics in constructing its own networks. In addition,
most of the new service areas in which management is considering operating or
constructing networks are located in areas where TW Cable has already made
substantial infrastructure investments. The inability of the Company to license
additional fiber optic capacity from TW Cable could materially affect the
Company's expansion plans, future business and operations. Any adverse changes
in the ability of TW Cable to obtain and maintain all necessary permits,
licenses, conduit agreements or pole attachments agreements from governmental
authorities or private rights-of-way providers necessary to effectuate such
license transactions may have a material adverse effect on the Company's
business and financial condition.
The Capacity License provides that the license of fiber optic capacity by
the Company may be terminated by TW Cable upon (i) a material impairment or
termination of TW Cable's ability to provide such license under relevant law,
(ii) the Company's material breach of the terms and conditions of the Capacity
License or (iii) the institution of any proceedings to impose any public utility
or common carrier status or obligations on TW Cable or any other proceedings
challenging TW Cable's operating authority as a result of the services provided
to the Company under the Capacity License. In addition, under the terms of the
Capacity License, the Company is restricted from utilizing such capacity for
Residential Services (as defined herein) and Content Services (as defined
herein) during the term of such license. Although management does not believe
that the restrictions contained in the Capacity License will materially affect
its business and operations in the immediate future, the effect of such
restrictions in the rapidly changing telecommunications industry cannot be
predicted. See 'Certain Relationships and Related Transactions -- Certain
Operating Agreements.' The termination of a Capacity License would terminate the
Company's ability to serve its customers in the applicable market and would have
a material adverse effect on the Company's business, financial condition and
results of operations.
RISKS RELATING TO LONG DISTANCE
Currently, the Company offers primarily local telecommunications services.
However, the Company continues to examine opportunities to expand into other
related telecommunications services. If the Company were to expand into new
categories of telecommunications services, it could incur certain additional
demands and risks in connection with such expansion, including demands on its
ability to manage growth, technological compatibility risks, legal and
regulatory risks and possible adverse reaction by some of its current customers.
The Company expects to increase its revenues by providing long distance
services. The long distance business is extremely competitive and prices have
declined substantially in recent years and are expected to continue to decline.
In addition, the long distance industry has historically had a high average
churn rate, as customers frequently change long distance providers in response
to the offering of lower rates or promotional incentives by competitors. The
Company intends to market its long distance services to smaller businesses, a
market segment that has not been a principal focus of the Company's business in
the past and thus one to which
14
<PAGE>
<PAGE>
the Company has limited experience marketing. The Company will rely on other
carriers to provide transmission and termination services for a majority of its
long distance traffic. The Company will negotiate resale agreements with long
distance carriers to provide it with transmission services. Such agreements
typically provide for the resale of long distance services on a per minute basis
and may contain minimum volume commitments. Negotiation of these agreements
involves estimates of future supply and demand for transmission capacity as well
as estimates of the calling pattern and traffic levels of the Company's future
long distance customers. If the Company were to fail to meet any minimum volume
commitments, it could be obligated to pay underutilization charges and in the
event it underestimates its need for transmission capacity, the Company may be
required to obtain capacity through more expensive means.
DEPENDENCE UPON INTERCONNECTION WITH ILECS; COMPETITION
The Company operates in an increasingly competitive environment. Services
substantially similar to those offered by the Company are also offered by ILECs
serving the markets currently served or intended to be served by the Company.
ILECs have long-standing relationships with their customers, have financial and
technical resources substantially greater than those of the Company, have the
potential to subsidize services of the type offered by the Company from service
revenues not subject to effective competition and currently benefit from certain
existing regulations that favor the ILECs over CLECs such as the Company in
certain respects. While recent regulatory initiatives, which allow CLECs such as
the Company to interconnect with ILEC facilities, provide increased business
opportunities for the Company, such interconnection opportunities have been
accompanied by increased pricing flexibility for and relaxation of regulatory
oversight of the ILECs.
To the extent the Company interconnects with and uses ILEC networks to
service its customers, the Company will be dependent upon the technology and
capabilities of the ILECs to meet certain telecommunications needs of the
Company's customers and to maintain its service standards. The Company will
become increasingly dependent on interconnection with ILECs as switched services
become a greater percentage of the Company's business. The 1996 Act imposes
interconnection obligations on ILECs; however, such interconnection requires the
negotiation of interconnection and collocation agreements with the ILECs, which
can take considerable time, effort and expense and are subject to Federal, state
and local regulation. There can be no assurance that the Company will be able to
obtain the interconnection it requires at rates, and on terms and conditions,
that permit the Company to offer switched services at rates that are both
competitive and profitable. In the event that the Company experiences
difficulties in obtaining high quality, reliable and reasonably priced service
from the ILECs, the attractiveness of the Company's services to its customers
could be impaired.
In addition, the 1996 Act allows the Regional Bell Operating Companies
('RBOCs') and others such as electric utilities to enter the long distance
market. Certain of the RBOCs have begun providing out-of-region long distance
services across Local Access and Transport Areas ('interLATA'). When an RBOC
obtains authority to provide in-region interLATA services, it will be able to
offer customers both local and long distance telephone services. Given the
market power the RBOCs currently possess in the local exchange market, the
ability to provide both local and long distance services is expected to make the
RBOCs very strong competitors. Certain RBOCs are actively working to satisfy
prerequisites for entry into the in-region long distance business. Formal
applications by the RBOCs to provide long distance service have been denied by
the FCC and are being appealed. It is anticipated that new applications will be
filed by the RBOCs in coming months. In addition, in a decision that is
currently being appealed, a U.S. District Court in Texas held that the
provisions of Section 271 of the 1996 Act limiting the RBOCs' entry into the
long distance business violate the U.S. constitution. Further, a continuing
trend toward consolidation, mergers, acquisitions and strategic alliances in the
telecommunications industry could also give rise to significant new competitors
to the Company or to the Company's customers. See 'Business -- Government
Regulation.'
In most of the areas in which the Company operates, at least one (and in
many markets several) other CAP or CLEC offers many local telecommunications
services similar to those provided by the Company, generally at similar prices.
Potential and actual new market entrants in the local telecommunications
services business include other CAPs and CLECs, ILECs entering new geographic
markets, cable television companies, electric utilities, long distance and
international carriers, microwave carriers, wireless telephone system operators
and private networks built by large end users. Many of these potential
competitors have financial, personnel and other resources substantially greater
than those of the Company. In addition, the current trend of business
15
<PAGE>
<PAGE>
combinations and alliances in the telecommunications industry, including mergers
between RBOCs, may create significant new competitors for the Company. For
example, on January 8, 1998, AT&T Corp. ('AT&T') announced that it had agreed to
acquire Teleport Communications Group Inc. ('TCG'), a competitor of the Company.
The 1996 Act has increased and will continue to increase competition in the
local telecommunications business. The 1996 Act requires all local exchange
providers, including new entrants, to offer their services for resale and
requires ILECs to offer their network facilities on an unbundled basis. Further,
pursuant to the 1996 Act, ILEC services provided to end users are required to be
made available to other telecommunications carriers for resale at wholesale
rates. There can be no assurance that any unbundled rates or facilities offered
by ILECs to the Company will be available in a timely manner or will be
economically attractive or technically viable. See 'Business -- Government
Regulation -- Telecommunications Act of 1996.' These requirements facilitate
entry by new competitors with reduced capital risk or investment. See
'Business -- Competition.'
The recent World Trade Organization ('WTO') agreement on basic
telecommunications services could increase the Company's competition for
telecommunications services both domestically and internationally. Under this
agreement, which became effective in 1998, the United States and other members
of the WTO committed themselves to opening their telecommunications markets to
competition and foreign ownership and to adopting regulatory measures to protect
competitors against anticompetitive behavior by dominant telephone companies. As
part of the U.S. government's implementation of the WTO Agreement, the FCC has
established new rules making it easier for foreign carriers to enter the U.S.
telecommunications market. See 'Business -- Competition' and ' -- Government
Regulation.'
DEPENDENCE ON INFORMATION BILLING SYSTEMS
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Information systems for the Company's
business have historically been operated internally with limited reliance on
third party vendors. As the Company continues to grow, the need for more
sophisticated information systems will increase significantly. The Company has
recently entered into agreements with certain vendors providing for the
development and operation of back office systems including ordering,
provisioning and billing systems. The failure of such vendors to perform their
services in a timely and effective manner at acceptable costs could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The Company has substantial business relationships with a few large
customers, including the major long distance carriers. For the three months
ended March 31, 1998, the Company's top 10 customers accounted for 40.6% of the
Company's consolidated revenues. The top three customers, which are IXCs or
other telecommunications providers, accounted for 26.1% of the consolidated
revenues, and no other customer accounted for 5% or more of revenues. A
significant reduction in the level of services the Company performs for any of
these customers could have a material adverse effect on the Company's business,
results of operations or financial condition. Some of the Company's customer
arrangements are subject to termination on short notice and do not provide the
Company with guarantees that service quantities will be maintained at current
levels, and there can be no assurance that such customers will continue to
purchase the same service quantity levels. The Company believes that certain
IXCs are pursuing alternatives to their current practices with regard to
obtaining local telecommunications services, including acquisition or
construction of their own facilities. For example, on January 8, 1998, AT&T, a
customer of the Company, announced that it had agreed to acquire TCG, which is a
CLEC that operates in several of the Company's service areas. This type of
activity has accelerated as a result of the 1996 Act, which limits the authority
of states to impose legal restrictions that have the effect of prohibiting a
company, including an IXC, from providing any telecommunications service. In
addition, the 1996 Act requires ILECs to unbundle their network facilities and
to offer their services for resale by other companies at wholesale discounts.
Accordingly, long distance carriers soon will be able to provide local service
by reselling the facilities or services of an ILEC, which may be more
cost-effective for an IXC than using the services of the Company or another CAP
or CLEC. See 'Business -- Customers and Sales and Marketing.'
16
<PAGE>
<PAGE>
FEDERAL AND STATE REGULATION
The Company is subject to Federal and state regulation. In most states, the
Company is subject to certification and tariff filing requirements with respect
to intrastate services. Although many restrictions on the services that may be
provided by the Company were eliminated as a result of the 1996 Act, which
prohibits states from imposing legal restrictions that effectively prohibit the
provision of any telecommunications service, states retain authority under the
1996 Act to impose on the Company and other telecommunications carriers
competitively neutral requirements to preserve universal service, protect public
safety, ensure quality of service and protect consumers. States are also
responsible under the 1996 Act for mediating and arbitrating interconnection
arrangements between CLECs and ILECs if the carriers fail to agree on such
arrangements.
In the past, the Company had been required to offer its interstate services
pursuant to rates, terms, and conditions set forth in tariffs filed with the
FCC. However, on June 19, 1997, the FCC issued a memorandum opinion and order
granting the Company's request that the FCC forbear from imposing on the Company
the tariff filing requirements of the Communications Act of 1934 (the
'Communications Act'). Following that favorable ruling on the Company's request,
the Company has withdrawn its interstate tariff and will now offer its
interstate access services pursuant to contracts with each of its customers. The
Company is still required to offer any interstate services other than interstate
access services, including, for example, interstate and international long
distance telephone service, pursuant to tariffs filed with the FCC.
Under the 1996 Act, the Company is subject to certain Federal regulatory
obligations when it provides local exchange service in a market. All local
exchange carriers, including CLECs, must interconnect with other carriers, make
their services available for resale by other carriers, provide nondiscriminatory
access to rights-of-way, offer reciprocal compensation for termination of
traffic and provide dialing parity and telephone number portability. The Company
is subject to requirements that the rates, terms, classifications and practices
with respect to its interstate access service be just and reasonable and may not
be unreasonably discriminatory. However, as a nondominant carrier, the Company's
rates, terms, classifications and practices are presumed to be lawful. The
Company's intrastate services, including local service and intrastate access,
are subject to similar requirements under state laws. In addition, as a
telecommunications carrier, the Company will be required to contribute to a fund
to preserve universal service and to enable schools, libraries and rural health
care centers to have access to telecommunications services and advanced
information services at discounted prices.
Pursuant to the 1996 Act, the Company is currently restricted from offering
originating interLATA service in the 14 states in which U S WEST Communications,
Inc., a subsidiary of U S WEST that is an RBOC, provides local exchange
telecommunications services. Upon the consummation of the separation of U S
WEST's communications and media businesses, the Company will cease to be an
affiliate of an RBOC under the 1996 Act. As a result, the Company expects that
it will no longer be restricted from offering its services in the 14 states in
which U S WEST Communications, Inc. currently operates. Any determination of
whether or not to operate in any of those states will be made based on, among
other things, demographic, economic and regulatory criteria. However, TW Cable
does not currently own any cable systems in 9 of such 14 states. See 'Business.'
In addition, no assurance can be given that changes to current regulations
or the adoption of new regulations by the FCC or state regulatory authorities or
legislative initiatives would not have a material adverse effect on the Company.
See 'Business -- Government Regulation.'
GOVERNMENTAL AND OTHER AUTHORIZATIONS
The development, expansion and maintenance of the Company's networks will
depend on, among other things, its ability to obtain rights-of-way and any other
required governmental authorizations and permits, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions. In certain of the
cities or municipalities where the Company provides network services, it pays
license or franchise fees, usually based on a percentage of gross revenues or a
rate per circuit. The 1996 Act permits municipalities to charge such fees only
if they are competitively neutral and nondiscriminatory, but there can be no
assurance that municipalities that presently favor a particular carrier,
typically the ILEC, will conform their practices to the requirements of the 1996
Act in a timely manner or without legal challenge. Furthermore, there can be no
assurance that certain cities or municipalities that do not now impose such fees
will not seek to impose fees, nor can there be any assurance that, following the
expiration of existing franchises, fees will remain at their current levels or
that the
17
<PAGE>
<PAGE>
franchises will be renewed. Some of the Company's franchise agreements also
provide for increases or renegotiation of fees at intervals prior to the
expiration thereof.
In addition, the Company currently licenses capacity of, and plans in the
future to enter into similar arrangements for, significant numbers of optical
fibers from TW Cable. See 'Certain Relationships and Related
Transactions -- Certain Operating Agreements.' There can be no assurance that
municipalities which regulate TW Cable will not seek to impose additional
franchise fees or otherwise charge TW Cable (subject to reimbursement by the
Company) in connection with such licenses. There can also be no assurance that
TW Cable or the Company will be able to obtain all necessary permits, licenses,
conduit agreements or pole attachment agreements from governmental authorities
or private rights-of-way providers necessary to effectuate future license
transactions. As a result, there can be no assurance that the Company will be
able to expand its existing networks or develop new networks successfully, which
would have a material adverse effect on the Company's growth and financial
condition.
There can be no assurance that the Company will be able to utilize TW
Cable's existing licenses, permits and rights-of-way or that it will be able to
obtain the governmental licenses and permits and rights-of-way required to enter
new markets on acceptable terms. The cancellation or non-renewal of existing
permits, licenses or rights-of-ways, or the inability to obtain the permits,
licenses or rights-of-ways to expand in accordance with its plans, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
ACQUISITION RELATED RISKS
The Company may, as part of its business strategy, acquire other businesses
that will complement its existing business. Management is unable to predict
whether or when any prospective acquisitions will occur or the likelihood of any
material transactions being completed on favorable terms and conditions. The
Company's ability to finance acquisitions may be constrained by, among other
things, its high degree of leverage following the Notes Offering. The Indenture
significantly limits the Company's ability to make acquisitions and to incur
indebtedness in connection with acquisitions. Such transactions commonly involve
certain risks, including, among others: the difficulty of assimilating the
acquired operations and personnel; the potential disruption of the Company's
ongoing business and diversion of resources and management time; the possible
inability of management to maintain uniform standards, controls, procedures and
policies; the risks of entering markets in which the Company has little or no
prior experience; and the potential impairment of relationships with employees
or customers as a result of changes in management or business. There can be no
assurance that any acquisition will be made, that the Company will be able to
obtain additional financing needed to finance any acquisition and, if any
acquisitions are made, that the acquired business will be successfully
integrated into the Company's operations so that the acquired business will
perform as expected. The Company has no definitive agreement with respect to any
acquisition, although from time to time it has discussions with other companies
and assesses opportunities on an ongoing basis.
The Company may also enter into joint venture transactions. These
transactions present many of the same risks involved in acquisitions and may
also involve the risk that other joint venture partners may have economic,
business or legal interests or objectives that are inconsistent with those of
the Company. Joint venture partners may also be unable to meet their economic or
other obligations, thereby forcing the Company to fulfill these obligations.
VARIABILITY OF QUARTERLY OPERATING RESULTS
As a result of the limited revenues and significant expenses associated
with the expansion and development of its networks and services, the Company
anticipates that its operating results could vary from period to period. In
addition, the Company's revenues are, and may continue to be, dependent upon
certain significant customers and contracts and as a result, may vary from
quarter to quarter. See ' -- Dependence on Significant Customers.'
CONTROL BY EXISTING STOCKHOLDERS; CONFLICTS OF INTEREST; POSSIBLE COMPETITION
Immediately following the completion of the Stock Offering, the Existing
Stockholders, who will hold all outstanding shares of the Class B Common Stock,
representing approximately % of the combined voting power of the Company's
outstanding Common Stock, generally will have the collective ability to control
all
18
<PAGE>
<PAGE>
matters requiring stockholder approval, including the nomination and election of
directors. The disproportionate voting rights of the Class B Common Stock
relative to the Class A Common Stock may make the Company a less attractive
target for a takeover than it otherwise might be, or render more difficult or
discourage a merger proposal, a tender offer or a proxy contest, even if such
actions were favored by a majority of the holders of the Class A Common Stock.
See 'Principal Stockholders,' 'Description of Capital Stock' and 'Certain
Relationships and Related Transactions.'
All of the Existing Stockholders are in the cable television business and
may, now or in the future, provide services which are the same or similar to
those provided by the Company. No assurance can be given that the Existing
Stockholders will not compete with the Company in its markets or in the
provision of certain telecommunications services. The Company is subject to
certain restrictions on offering Residential Services (as defined herein) and
Content Services (as defined herein). See ' -- Limitations on Business
Activity.' Although directors of the Company who are also directors, officers or
employees of the Existing Stockholders or any of their respective affiliates
have certain fiduciary obligations to the Company under Delaware law, such
directors and the Existing Stockholders, as the controlling stockholders of the
Company, are in positions that may create conflicts of interest with respect to
certain business opportunities available to and certain transactions involving
the Company. The Existing Stockholders have not adopted any special voting
procedures to deal with such conflicts of interest, and there can be no
assurance that any such conflict will be resolved in favor of the Company. The
Company's restated certificate of incorporation (the 'Restated Certificate of
Incorporation') provides for the allocation of corporate opportunities between
the Company and the Existing Stockholders. A corporate opportunity offered to
any person who is an officer, employee or director of the Company and/or an
Existing Stockholder will belong to the entity in which such person is an
officer or employee, unless such opportunity is expressly offered to such person
primarily in his or her capacity as an officer, employee or director of the
other entity. See 'Description of Capital Stock.'
LIMITATIONS ON BUSINESS ACTIVITY
The Company is currently restricted from offering telecommunications
services to residences and from providing content services to its customers. The
Restated Certificate of Incorporation provides that the Company may not (i)
engage in the business of providing, offering, promoting or branding any
wireline telecommunications services or other services (including data
services), directly or indirectly, to residences (collectively, 'Residential
Services') or (ii) engage in the production, packaging, distribution, marketing,
hosting, offering, promoting, branding or other provision (excluding mere
transport) of entertainment, information or any other content services
(collectively, 'Content Services'), in each case, until the earlier of (x) the
date that is five years after the date of the filing of the Restated Certificate
of Incorporation and (y) the date on which the holders of Class B Common Stock
no longer represent at least 50% of the voting power of the outstanding Common
Stock of the Company, without the affirmative vote of all the holders of the
Class B Common Stock. See 'Description of Capital Stock.' Similar restrictions
against using fiber capacity licensed from TW Cable under the Capacity License
for Residential Services and Content Services extend for the term of such
license. See 'Certain Relationships and Related Transactions -- Certain
Operating Agreements'. Although management does not believe that the
restrictions contained in the Restated Certificate of Incorporation or the
Capacity License will materially affect its business and operations in the
immediate future, the effect of such restrictions in the rapidly changing
telecommunications industry cannot be predicted.
DISCONTINUANCE OF USE OF 'TIME WARNER' NAME
Pursuant to a License Agreement with TW, the Company is required to
discontinue use of the 'Time Warner' name upon (i) TW's owning less than 30% of
the Common Stock (ii) TW having less than three nominees serving on the Board of
Directors of the Company, (iii) the Company's non-compliance with the
restrictions in the Restated Certificate of Incorporation regarding Residential
Services and Content Services or (iv) the transfer by an Existing Stockholder of
its Class B Common Stock together with its rights to designate nominees to the
Board of Directors under the Stockholders Agreement. See 'Certain Relationships
and Related Transactions -- Shareholders Agreement.' At such time, the Company
may change its name to TW Telecom Inc., and the Company will no longer have the
right to use the 'Time Warner' name. Such name change, and the inability to use
the 'Time Warner' name could have an adverse effect on the Company's ability to
conduct
19
<PAGE>
<PAGE>
its business and on its financial condition and results of operations. See
'Certain Relationships and Related Transactions -- Certain Operating
Agreements.'
NEED TO ADAPT TO TECHNOLOGICAL CHANGES
The telecommunications industry has experienced, and is expected to
continue to experience, rapid and significant changes in technology. While the
Company believes that, for the foreseeable future, these changes will neither
materially affect the continued use of fiber optic cable or digital switches and
transmission equipment nor materially hinder the Company's ability to acquire
necessary technologies, the effect of technological changes on the Company's
business and operations cannot be predicted. The Company believes that its
future success will depend, in part, on its ability to anticipate or adapt to
such changes and to offer, on a timely basis, services that meet customer
demands on a competitive basis. There can be no assurance that the Company will
obtain access to new technologies on a timely basis or on satisfactory terms.
Any failure by the Company to obtain new technologies could have a material
adverse effect on the Company's business, financial condition and results of
operations. Also, alternative technologies may develop for the provision of
services to customers. The Company may be required to select in advance one
technology over another, but it will be impossible to predict with any
certainty, at the time the Company is required to make its investment, which
technology will prove to be the most economic, efficient or capable of
attracting customer usage.
DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by a small group of key executive
officers. The loss of the services of any of these key individuals could have an
adverse impact on the Company. The Company has employment agreements with each
of Messrs. McPhie, Jones, Powers and and Ms. Herda. See
'Management -- Employment Agreements.' The Company does not carry key man life
insurance on any of such personnel. The Company believes that its future success
will depend in large part on its continued ability to attract and retain highly
skilled and qualified personnel. The competition for qualified personnel in the
telecommunications industry is intense and, accordingly, there can be no
assurance that the Company will be able to hire or retain necessary personnel.
See 'Management.'
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes may
require the Company to repurchase all or a portion of such holder's Notes at
101% of the principal amount of the Notes, together with accrued and unpaid
interest to the date of repurchase. If a Change of Control were to occur, the
Company may not have the financial resources to repay the Notes and any other
indebtedness that would become payable upon the occurrence of such Change of
Control. See 'Description of the Notes -- Certain Covenants -- Change of
Control.'
LACK OF PUBLIC MARKET
The Notes are a new issue of securities for which there is currently no
trading market. The Company does not intend to apply for the listing of the
Notes on any securities exchange or any inter-dealer automated quotation system.
The Underwriters have advised the Company that they currently intend to make a
market in the Notes, although the Underwriters are not obligated to do so, and
any market making with respect to the Notes may be discontinued at any time
without notice. See 'Underwriters.' There can be no assurance as to the
liquidity of any market that may develop for the Notes, the ability of the
holders of the Notes to sell their Notes or the price at which such holders
would be able to sell their Notes. If a market were to exist, the Notes could
trade at prices that may be lower than the initial offering price thereof
depending on many factors, including prevailing interest rates and the markets
for similar securities, general economic conditions and the financial condition
and performance of, and prospects for, the Company.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains forward-looking statements, including statements
regarding the Company's expected financial position, business and financing
plans. These forward-looking statements reflect the
20
<PAGE>
<PAGE>
Company's views with respect to future events and financial performance. The
words, 'believe,' 'expect,' 'plans' and 'anticipate' and similar expressions
identify forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from such
expectations (the 'Cautionary Statements') are disclosed in this Prospectus,
including, without limitation, in conjunction with the forward-looking
statements included in this Prospectus and under 'Risk Factors.' All subsequent
written and oral forward-looking statements attributable to the Company, its
subsidiaries or persons acting on the Company's behalf are expressly qualified
in their entirety by the Cautionary Statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
their dates. The Company undertakes no obligations to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
21
<PAGE>
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Notes
in the Notes Offering are estimated to be approximately $ million after
deducting estimated underwriting discounts and commissions and other expenses
payable by the Company. Concurrently with the Notes Offering, the Company is
offering shares of Class A Common Stock in the Stock Offering. The
closing of the Notes Offering is conditioned on the consummation of the Stock
Offering; however, the closing of the Stock Offering is not conditioned on the
consummation of the Notes Offering. The net proceeds to be received by the
Company from the Stock Offering are estimated to be approximately $ million
(approximately $ million if the U.S. Underwriters' over-allotment option is
exercised in full) after deducting estimated underwriting discounts and
commissions and other expenses payable by the Company.
The Company intends to use up to $ million of the net proceeds of the
Offerings to repay outstanding indebtedness to the Parent Companies, and the
remainder will be used, on an as-needed basis, to expand and develop existing
and new networks and for general corporate and working capital purposes, which
may include acquisitions. The use of such proceeds will be to fund ongoing
business operations of the Company's subsidiaries which own and operate its
networks. The Company expects to make capital expenditures of approximately
$147.7 million in 1998 and approximately $152.8 million in 1999. The Company
expects to make capital expenditures for the expansion, development and
acquisition of networks, including: (i) the purchase and installation of
switches, electronics, fiber and other additional technologies in existing
networks and in additional networks to be constructed in new markets and (ii)
the possible acquisition and expansion of networks currently owned and operated
by other companies. The Company's expected expenditures for general corporate
and working capital purposes include (i) expenditures with respect to the
Company's management information system and corporate service support
infrastructure and (ii) operating and administrative expenses with respect to
new networks and debt service. The Company intends to continue to evaluate
potential acquisitions. The Company has no definitive agreement with respect to
any acquisition, although from time to time it may discuss and assess
opportunities with other companies on an ongoing basis. A portion of the
proceeds of the Offerings may be used to finance acquisitions.
Pending the foregoing uses, the net proceeds of the Offerings will be
invested in short-term, money market instruments.
The Company expects that the net proceeds of the Offerings after repayment
of indebtedness to the Parent Companies, together with internally generated
funds and borrowings expected to be available under its future credit facility,
will provide sufficient funds for the Company to expand its business as planned
and to fund its losses for approximately two years. Thereafter, the Company
expects to require additional financing. However, in the event that the
Company's plans or assumptions change or prove to be inaccurate, or the
foregoing sources of funds prove to be insufficient to fund the Company's growth
and operations, or if the Company consummates acquisitions, the Company may be
required to seek additional capital sooner than currently anticipated. The
Company's revenues and costs are dependent upon factors that are not within the
Company's control, such as regulatory changes, changes in technology and
increased competition. Due to the uncertainty of these and other factors, actual
revenues and costs may vary from expected amounts, possibly to a material
degree, and such variations are likely to affect the Company's future capital
requirements. Sources of financing may include public or private debt or equity
financing by the Company or its subsidiaries or other financing arrangements.
22
<PAGE>
<PAGE>
THE REORGANIZATION
The Company was recently formed in connection with the Reorganization of
the assets and liabilities of its business, which were previously owned by
subsidiaries and divisions of the Parent Companies. The business of developing
and operating local telecommunications networks in the Company's 19 markets has
been conducted through its 22 subsidiaries which will be consolidated into fewer
entities. In connection with the Reorganization, the Existing Stockholders
received all the outstanding shares of the Class B Common Stock.
The Company's authorized capital includes two classes of Common Stock,
Class A Common Stock and Class B Common Stock, which will be identical in all
respects except that holders of Class A Common Stock are entitled to one vote
per share and holders of Class B Common Stock are entitled to 10 votes per share
on all matters submitted to a vote of stockholders and except that certain
matters require the approval of 100% of the outstanding Class B Common Stock,
voting separately as a class and certain other matters require the approval of a
majority of the outstanding Class A Common Stock, voting separately as of class.
Class B Common Stock is convertible Class A Common Stock. See 'Description of
Capital Stock' and 'Principal Stockholders.'
Set forth below is the organizational structure of the Company immediately
prior to the Stock Offering:
[CHART]
23
<PAGE>
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998, as adjusted to reflect the issuance and sale of the shares of
Class A Common Stock (based on an assumed public offering price of $ per
share) and the application of the net proceeds therefrom and sale of the Notes
in the Notes Offering and the application of the net proceeds therefrom. See
'Use of Proceeds.' This table should be read in conjunction with 'Selected
Financial and Other Operating Data,' 'Management's Discussion and Analysis of
Financial Condition and Results of Operations,' and the Company's financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------
ACTUAL
--------
PRO FORMA
--------------
AS ADJUSTED
FOR THE
STOCK OFFERING
AND THE
NOTES OFFERING
--------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................................. $ -- $
-------- ------
-------- ------
Loans payable to the Parent Companies................................................. 117,547
Long-term debt:
Senior Notes Due 2008............................................................ --
Senior Discount Notes Due 2008................................................... --
Total long-term debt........................................................ --
Stockholder's equity (deficit):
Class A Common Stock, $.01 par value; shares authorized, and shares issued
and outstanding on a pro forma basis, respectively(1)...........................
Class B Common Stock, $ par value; shares authorized, and shares
issued and outstanding on a pro forma basis, respectively.......................
Additional paid-in capital....................................................... 555,807
Accumulated deficit.............................................................. (277,205)
-------- ------
Total stockholders' equity (deficit)............................................. 278,602
-------- ------
Total capitalization........................................................ $396,149 $
-------- ------
-------- ------
</TABLE>
- ------------
(1) Excludes shares of Class A Common Stock issuable upon the exercise of
stock options that will be granted under the Company's stock option plan in
connection with the Stock Offering but will not be immediately exercisable.
See 'Management -- Stock Option Plan.'
24
<PAGE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA
The selected statement of operations data for the years ended December 31,
1995, 1996 and 1997, and the selected balance sheet data as of December 31, 1996
and 1997, are derived from, and are qualified by reference to, the financial
statements of the Company, including the notes thereto, audited by Ernst & Young
LLP, independent auditors, appearing elsewhere in this Prospectus. The selected
statement of operations data for the year ended December 31, 1994 and the
selected balance sheet data as of December 31, 1994 and 1995 have been derived
from audited financial statements of the Company not included herein. The
selected statement of operations data for the year ended December 31, 1993 and
the selected balance sheet data as of December 31, 1993 have been derived from
the Company's unaudited internal financial statements, which in the opinion of
management, have been prepared on the same basis as the audited financial
statements and reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the Company's results of
operations and financial position. The selected data as of and for the three
months ended March 31, 1998 and the selected statement of operations data for
the three months ended March 31, 1997 are derived from unaudited information.
The pro forma data as of and for the three months ended March 31, 1998 and the
year ended December 31, 1997 gives effect to the Offerings as if they occurred
at the beginning of 1997, with respect to statement of operations data, and
December 31, 1997, with respect to balance sheet data. Such pro forma amounts
are presented for informational purposes only and are not necessarily indicative
of the actual amounts that would have been reported if the transactions had been
consummated at the dates indicated, nor are they necessarily indicative of
future results. The selected other operating data has been derived from the
accounting records of the Company and has not been audited. The selected
financial and other operating data set forth below should be read in conjunction
with 'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the Company's financial statements, including the notes thereto,
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- --------- --------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Dedicated transport
services................ $ 1,913 $ 2,169 $ 6,505 $ 20,362 $ 44,529 $ 8,301 $ 16,733
Switched services......... -- -- 350 3,555 10,872 1,852 5,315
-------- -------- --------- --------- --------- -------- --------
Total revenues........ 1,913 2,169 6,855 23,917 55,401 10,153 22,048
-------- -------- --------- --------- --------- -------- --------
Costs and expenses:
Operating (1)............. 3,219 10,454 15,106 25,715 40,349 8,384 13,519
Selling, general and
administrative (1)...... 7,035 26,066 34,222 60,366 54,640 11,985 16,316
Depreciation and
amortization (1)........ 578 1,213 7,216 22,353 38,466 8,842 11,932
-------- -------- --------- --------- --------- -------- --------
Total costs and
expenses............ 10,832 37,733 56,544 108,434 133,455 29,211 41,767
-------- -------- --------- --------- --------- -------- --------
Operating loss................ (8,919) (35,564) (49,689) (84,517) (78,054) (19,058) (19,719)
Gain on disposition of
investment (2).............. -- -- -- -- 11,018 -- --
Equity in losses of
unconsolidated affiliates... (392) (1,611) (1,391) (1,547) (2,082) (593) (58)
Interest expense, net (1)..... (81) (3) (25) (52) (1,538) -- (2,011)
-------- -------- --------- --------- --------- -------- --------
Net loss...................... $ (9,392) $(37,178) $ (51,105) $ (86,116) $ (70,656) $(19,651) $(21,788)
-------- -------- --------- --------- --------- -------- --------
-------- -------- --------- --------- --------- -------- --------
Pro forma basic and diluted
loss per common share.......
--------- --------
--------- --------
Pro forma average common
shares outstanding..........
--------- --------
--------- --------
Deficiency in coverage of
fixed charges by earnings
before fixed charges........ $ (9,392) $(37,178) $ (51,075) $ (86,076) $ (70,629) $(19,641) $(21,788)
-------- -------- --------- --------- --------- -------- --------
-------- -------- --------- --------- --------- -------- --------
OTHER OPERATING DATA:
EBITDA (3).................... $ (8,341) $(34,351) $ (42,473) $ (62,164) $ (39,588) $(10,216) $ (7,787)
EBITDA Margin (4)............. (436.0)% (1,583.7)% (619.6)% (259.9)% (71.5)% (100.6)% (35.3)%
Capital expenditures.......... 7,154 50,293 141,479 144,815 127,315 14,261 24,961
Cash used in operations....... (3,100) (14,873) (35,605) (52,274) (29,419) (28,694) (15,103)
Cash used in investing
activities.................. (10,656) (52,632) (145,293) (149,190) (120,621) (14,233) (24,961)
Cash provided by financing
activities.................. 13,756 67,505 180,898 201,464 150,040 42,927 40,064
Pro forma interest expense
(5).........................
Pro forma deficiency in
coverage of fixed charges by
earnings before fixed
charges..................... $ $
</TABLE>
(footnotes on next page)
25
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
----- ------ ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA (6):
Operating Networks........ 3 8 15 18 19 19
Route miles............... 168 880 3,207 5,010 5,913 6,240
Fiber miles............... 5,820 24,995 116,286 198,490 233,488 244,894
Voice grade equivalent
circuits................ -- 39,002 158,572 687,001 1,702,431 1,904,420
Digital telephone
switches................ -- -- 1 2 14 16
Employees................. 78 239 508 673 714 739
Access lines.............. -- -- 493 2,793 16,078 23,702
</TABLE>
<TABLE>
<CAPTION>
AS OF AS ADJUSTED
AS OF DECEMBER 31, MARCH AS ADJUSTED FOR THE STOCK
-------------------------------------------------- 31, FOR THE OFFERING AND
1993 1994 1995 1996 1997 1998 STOCK OFFERING NOTES OFFERING
------- ------- -------- -------- -------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............. $ -- $ -- $ -- $ -- $ -- $ --
Property, plant and
equipment, net.......... 5,364 53,139 199,005 323,161 415,158 428,319
Total assets...... 10,129 60,604 214,963 341,480 438,077 453,475
Loans payable to the
Parent Companies........ -- -- -- -- 75,475 117,547
Long-term indebtedness.... -- -- -- -- --
Total
stockholders'
equity.......... 4,856 33,749 179,589 294,937 300,390 278,602
</TABLE>
- ------------
(1) Includes expenses resulting from transactions with affiliates of $168 in
1993, $1,901 in 1994, $6,507 in 1995, $11,023 in 1996 and $15,306 in 1997
and $3,486 and $5,479 in the three months ended March 31, 1997 and 1998,
respectively.
(2) In September 1997, the Company completed a series of transactions related to
its interests in the Hyperion Partnerships, a group of unconsolidated
telecommunication partnerships serving the New York area, whereby it sold
its interests in the partnerships serving the Buffalo and Syracuse markets
in exchange for $7.0 million of cash and all of the minority interests in
the partnerships serving the Albany and Binghamton markets that were not
already owned by the Company. In connection with these transactions, the
Company recognized a gain of approximately $11.0 million.
(3) EBITDA consists of operating income (loss) before depreciation and
amortization. Industry analysts generally consider EBITDA to be an important
measure of comparative operating performance of the telecommunications
industry, and when used in comparison to debt levels or the coverage of
interest expense, as a measure of liquidity. However, EBITDA should be
considered in addition to, not as a substitute for, operating income, net
income, cash flow and other measures of financial performance and liquidity
reported in accordance with generally accepted accounting principles. EBITDA
as defined herein may not be comparable to similarly titled measures
reported by other companies. Additionally, certain covenants contained in
the Indenture are based on EBITDA. See the Combined Statements of Cash Flows
contained elsewhere in this Prospectus.
(4) EBITDA Margin represents EBITDA as a percentage of revenues.
(5) Pro forma interest expense gives effect to the issuance of the Notes offered
in the Notes Offering (assuming an effective annual interest rate of %),
as if such transaction had occurred at the beginning of 1997 assuming %
of the interest on the Notes would have been capitalized under FASB
Statement No. 34 'Capitalization of Interest Costs.' For each .125% change
in the interest rate on the Notes, pro forma interest expense would change
by % for 1997. Since any income tax benefits related to the Notes
Offering would have been fully offset by corresponding increases in the
valuation allowance due to the uncertainty of realizing the benefits for tax
losses on a separate return basis, the pro forma effect of the Notes
Offering on net loss would be identical to the pro forma effect on interest
expense.
(6) Includes all managed properties including unconsolidated affiliates
(MetroComm AxS, L.P. in Columbus, Ohio and the Albany and Binghamton, New
York networks). Albany and Binghamton were wholly owned at December 31,
1997.
26
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Certain information contained in the discussion
and analysis set forth below and elsewhere in this Prospectus, including
information with respect to the Company's plans and strategy for its business
and related financing, includes forward-looking statements that involve risk and
uncertainties. See 'Risk Factors' for a discussion of important factors that
could cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained herein.
OVERVIEW
The Company is a leading facilities-based CLEC in selected metropolitan
markets across the United States, offering a wide range of business telephony
services, primarily to medium- and large-sized business customers. The business
of the Company was commenced in 1993 by TW Cable and reflects the combined
commercial telecommunications operations under the ownership or management
control of TW Cable. These operations consist of the commercial
telecommunication operations of TW and TWE-A/N that were each acquired or formed
in 1995, as well as the pre-existing commercial telecommunication operations of
TWE. All intercompany accounts and transactions between the combined entities
have been eliminated.
In connection with the Reorganization, the Existing Stockholders
contributed the assets and liabilities of the Company's business to the Company
in exchange for all of the outstanding shares of Class B Common Stock. The
Company accounted for the Reorganization at each of the Existing Stockholders'
historical cost basis of accounting and accordingly, the Reorganization had no
effect on the Company's total stockholders' equity which has been presented on a
consistent basis.
The primary change to the Company's operating structure following the
Reorganization was that the Company became directly accountable to the Board of
Directors, instead of to TW Cable. In addition, all future net operating loss
carryforwards can be utilized against future earnings of the Company, concurrent
with the change in the Company's operating and legal structure from a
partnership to a corporation, whereas prior to the Reorganization, all net
operating loss carryforwards were allocated to and utilized primarily by Time
Warner and its affiliates. Also, in connection with the Reorganization, the
Company's equity was reduced by approximately $35.0 million in order to record a
net deferred tax liability associated with the assets and liabilities
contributed to the Company.
To date, the majority of the Company's revenues have been derived from the
provision of 'private line' and 'direct access' telecommunications services.
Because the Company has deployed switches in 16 of its 19 service areas as of
March 31, 1998, management expects that a growing portion of its revenues will
be derived from providing switched services. The Company's customers are
principally telecommunications-intensive business end-users, IXCs, ISPs,
wireless communications companies and governmental entities. Such customers are
offered a wide range of integrated telecommunications products and services,
including dedicated transmission, local switched, data and video transmission
services and Internet services. In addition, the Company benefits from its
strategic relationship with TW Cable both through network facilities access and
cost-sharing. As a result, the Company's networks have been constructed
primarily through the use of fiber capacity licensed from TW Cable. As of March
31, 1998, the Company operated networks in 19 metropolitan service areas that
spanned 6,240 route miles, contained 244,894 fiber glass miles and offered
service to 2,711 buildings. The Company's consolidated revenues were $55.4
million for the year ended December 31, 1997 and $22.0 million for the 3 months
ended March 31, 1998. As of March 31, 1998, the Parent Companies had invested
$555.8 million in the Company.
To date, the Company's revenues have been derived primarily from end user
to end user private line connections and from a variety of services including:
(i) access between IXCs, (ii) access between end users and IXCs, (iii)
collocated special access, (iv) collocated points of presence ('POP') to LECs
switched access transport and (v) local switched services. Since its inception
in 1993, the Company has experienced significant growth in revenues and in the
geographic scope of its operations. Management believes an increasing portion of
the Company's future growth will come from the provision of local switched
services as a result of the 16 switches deployed as of March 31, 1998. The
Company believes that switched services provide the
27
<PAGE>
<PAGE>
opportunity for higher profit margins than those expected from transport
services, however the shift of the revenue growth to switched services may cause
the Company's revenues to become less predictable since a portion of such
services are billed to customers on a usage basis. Dedicated transport customers
are typically billed a flat monthly rate which produces a less variable stream
of revenues for the Company. Furthermore, it is expected that the growth in the
switched services offerings will expand the Company's customer base by making
more services available to customers that are generally smaller than those who
purchase dedicated transport services. These smaller customers are also expected
to be the principal users of the Company's long distance service. The Company
expects to experience a higher churn rate for these customers than it has
traditionally experienced with transport services.
The Company plans to expand its revenue base by fully exploiting available
network capacity in its existing markets and by continuing to develop and
selectively tailor new services in competitively-priced packages to meet the
needs of its medium- and large-sized business customers. The Company plans on
selectively entering new markets and intends to have networks under construction
or operational in several additional cities by the end of 1999.
Operating expenses consist of costs directly related to the operation and
maintenance of the networks and the provision of the Company's services. This
includes the salaries and related expenses of operations and engineering
personnel as well as costs from the ILECs and other competitors for facility
leases and interconnection. These costs have increased over time as the Company
has increased its operations and revenues. It is expected that these costs will
continue to increase, but at a slower rate than revenue growth.
Selling, general and administration expenses consist of salaries and
related costs for employees other than those involved in operations and
engineering. Such expenses also include costs related to non-technical facility,
sales and marketing, regulatory and legal costs. These costs have increased over
time as the Company has increased its operations and revenues. The Company
expects these costs to continue to increase as the Company's revenue growth
continues, but at a slower rate than revenue growth.
In the normal course of conducting its businesses, the Company has various
transactions with the Parent Companies, generally on terms resulting from
negotiation between the affected units that, in management's view, result in
reasonable allocations. The Company's selling, general and administrative
expenses include an allocation of certain general and administrative expenses,
primarily including office rent and overhead charges for various administrative
functions performed by TW Cable. These allocations were required to reflect all
costs of doing business and have been based on various methods, which management
believes results in reasonable allocations of such costs that were necessary to
present the Company's operations as if they had been operated on a stand alone
basis. In addition, the Company licenses the right to use the majority of its
fiber optic cable capacity from TW Cable and reimburses it for facility
maintenance and pole rental costs. Finally, effective July 1, 1997 all of the
Company's financing requirements began to be funded with loans from the Parent
Companies. These loans bear interest at the prime rate which was 8.5% throughout
the nine months ended March 31, 1998. The Company believes that this rate is
comparable to rates which could have been obtained from unrelated third parties.
The Company has not historically, and does not currently, generate positive
operating cash flow. However, for the year ended December 31, 1997, twelve of
the Company's nineteen markets generated positive cash flow and the Company, as
a whole, expects to begin generating positive operating cash flow within the
next 12-18 months. The following comparative discussion of the results of
financial condition and results of operations of the Company includes an
analysis of changes in revenues and operating income (loss) before depreciation
and amortization. Industry analysts generally consider EBITDA to be an important
measure of comparative operating performance for the telecommunications
industry, and when used in comparison to debt levels or the coverage of interest
expense, as a measure of liquidity. However, EBITDA should be considered in
addition to, not as a substitute for, operating income, net income, cash flow
and other measures of financial performance and liquidity reported in accordance
with generally accepted accounting principles. EBITDA as defined herein may not
be comparable to similarly titled measures reported by other companies.
The Company has had and will continue to have significant capital
expenditures. These expenditures pertain to the historical construction and
expansion of the networks and to the future expansion of the existing networks
as well as the construction of new networks.
28
<PAGE>
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data of the Company, in thousands of dollars and expressed as a percentage of
net revenues, for each of the periods presented. This table should be read in
conjunction with the Company's financial statements, including the notes
thereto, appearing elsewhere in this Prospectus:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------- ------------------------------
1995 1996 1997 1997 1998
----------------- ----------------- ----------------- ----------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Dedicated transport
services................ $ 6,505 94.9% $ 20,362 85.1% $ 44,529 80.4% $ 8,301 81.8% $ 16,733
Switched services......... 350 5.1 3,555 14.9 10,872 19.6 1,852 18.2 5,315
-------- ------ -------- ------ -------- ------ -------- ------ --------
Total revenues........ 6,855 100.0 23,917 100.0 55,401 100.0 10,153 100.0 22,048
Costs and expenses:
Operating (1)............. 15,106 220.4 25,715 107.5 40,349 72.8 8,384 82.6 13,519
Selling, general and
administrative (1)...... 34,222 499.2 60,366 252.4 54,640 98.6 11,985 118.0 16,316
Depreciation and
amortization (1)........ 7,216 105.3 22,353 93.5 38,466 69.4 8,842 87.1 11,932
-------- ------ -------- ------ -------- ------ -------- ------ --------
Total costs and
expenses............ 56,544 824.9 108,434 453.4 133,455 240.9 29,211 287.7 41,767
Operating loss................ (49,689) (724.9) (84,517) (353.4) (78,054) (140.9) (19,058) (187.7) (19,719)
Gain on disposition of
investment (2).............. -- -- -- 11,018 19.9 --
Equity in losses of
unconsolidated affiliates... (1,391) (20.3) (1,547) (6.5) (2,082) (3.8) (593) (5.8) (58)
Interest, net (1)............. (25) (0.3) (52) (0.2) (1,538) (2.8) -- (2,011)
-------- ------ -------- ------ -------- ------ -------- ------ --------
Net loss...................... $(51,105) (745.5)% $(86,116) (360.1)% $(70,656) (127.5)% $(19,651) (193.5)% $(21,788)
-------- ------ -------- ------ -------- ------ -------- ------ --------
-------- ------ -------- ------ -------- ------ -------- ------ --------
<CAPTION>
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Dedicated transport
services................ 75.9%
Switched services......... 24.1
------
Total revenues........ 100.0
Costs and expenses:
Operating (1)............. 61.3
Selling, general and
administrative (1)...... 74.0
Depreciation and
amortization (1)........ 54.1
------
Total costs and
expenses............ 189.4
Operating loss................ (89.4)
Gain on disposition of
investment (2)..............
Equity in losses of
unconsolidated affiliates... (0.3)
Interest, net (1)............. (9.1)
------
Net loss...................... (98.8)%
------
------
</TABLE>
- ------------
(1) Includes expenses resulting from transactions with affiliates of $6,507 in
1995, $11,023 in 1996 and $15,306 in 1997 and $3,486 and $5,479 in the three
months ended March 31, 1997 and 1998, respectively.
(2) In September 1997, the Company completed a series of transactions related to
its interests in the Hyperion Partnerships, a group of unconsolidated
telecommunication partnerships serving the New York area, whereby it sold
its interests in the partnerships serving the Buffalo and Syracuse markets
in exchange for $7.0 million of cash and all of the minority interests in
the partnerships serving the Albany and Binghamton markets that were not
already owned by the Company. In connection with these transactions, the
Company recognized a gain of approximately $11.0 million.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues. Revenue increased $11.9 million, or 117.2%, to $22.0 million for
the three months ended March 31, 1998, from $10.2 million for the same period in
1997. Revenues from the provision of dedicated transport services increased $8.4
million, or 101.6%, to $16.7 million in 1998, from $8.3 million in 1997.
Revenues from dedicated transport service increased 97.4% in those markets in
which dedicated transport services were offered as of March 31, 1997. Switched
service revenue increased $3.5 million, or 187.0%, to $5.3 million in 1998, from
$1.9 million in 1997. Switched services revenue increased 298.6% in those
markets in which switched services were offered as of March 31, 1997. The
increase in revenues from dedicated transport services primarily reflects growth
of services offered in existing markets. The increase in switched services
resulted from the offering of services in new markets and the growth of services
in existing markets. At March 31, 1998 the Company offered dedicated transport
services in 18 consolidated markets and switched services in 15 markets, as
compared to offering dedicated transport services in 15 markets and switched
services in 3 markets at March 31, 1997.
Operating Expenses. Operating expenses increased $5.1 million, or 61.2%, to
$13.5 million for the three months ended March 31, 1998, from $8.4 million for
the same period in 1997. The increase in operating expenses was primarily
attributable to the Company's expansion of its business, principally switched
services, and the ongoing development of existing markets resulting in higher
LEC charges for circuit leases and
29
<PAGE>
<PAGE>
interconnection, higher technical personnel costs, and higher data processing
costs. As a percentage of revenues, operating expenses decreased to 61.3% in
1998 from 82.6% for the same period in 1997.
Selling, General and Administrative. Selling, general and administrative
expenses increased $4.3 million, or 36.1%, to $16.3 million for the three months
ended March 31, 1998, from $12.0 million for the same period in 1997. The
increase in selling, general and administrative expenses was primarily
attributable to an increase in consulting expenses relating to local regulatory
matters and implementing new billing and system software, and higher direct
sales costs associated with the increase in revenues. As a percentage of
revenues, selling, general and administrative expenses decreased to 74.0% in
1998 from 118.0% for the same period in 1997.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $3.1 million, or 34.9%, to $11.9 million for the three months
ended March 31, 1998, from $8.8 million for the same period in 1997. The
increase in depreciation and amortization expense was primarily attributable to
higher capital expenditures related to the ongoing construction and expansion of
the Company's telecommunications networks in both 1997 and 1998. As a percentage
of revenues, depreciation and amortization expenses decreased to 54.1% in 1998,
from 87.1% for the same period in 1997.
EBITDA. The EBITDA loss for the three months ended March 31, 1998 decreased
$2.4 million, or 23.8%, to $7.8 million in 1998, from a loss of $10.2 million
for the same period in 1997. This improvement was primarily the result of
increased revenue due to the Company's expansion of local telecommunications
networks in new and existing markets and growth of the Company's customer base,
partially offset by higher operating expenses in support of the larger customer
base, and higher selling, general and administrative expenses required to
support the expansion.
Interest Expense. Effective July 1, 1997, all of the Company's financing
requirements began to be funded with loans from the Parent Companies. Interest
expense relating to these loans totaled $2.0 million for the three months ended
March 31, 1998.
Income Taxes. For the three months ended March 31, 1998, net income tax
benefits increased $0.9 million, or 11.4%, to $8.8 million, from $7.9 million
for the same period in 1997. The net income tax benefits have been fully offset
by corresponding increases in the valuation allowance due to the uncertainty of
realizing the benefit for tax losses on a separate return basis. On a pro forma
basis, had the Company been operating on a stand alone basis, the Company would
have had net operating loss carryforwards. However, the Company, which operated
as a partnership for tax purposes during the periods presented herein, has no
net operating loss carryforwards for tax purposes because such losses were
primarily allocated to and utilized by TW and its affiliates. The Company has
not, and will not, be compensated for such losses.
Net Loss. Net loss increased $2.1 million, or 10.9%, to $21.8 million for
the three months ended March 31, 1998, from a net loss of $19.7 million for the
same period in 1997. This increase resulted from higher operating, selling,
general and administrative and depreciation and amortization expenses relating
to the Company's expansion of telecommunications networks in new and existing
markets, as well as interest expense on the loans payable to the Parent
Companies, partially offset by the increase in revenues generated by the
Company's expansion.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues increased $31.5 million, or 131.6%, to $55.4 million in
1997, from $23.9 million in 1996. Revenues from the provision of dedicated
transport services increased $24.1 million, or 118.7%, to $44.5 million in 1997,
from $20.4 million in 1996. Revenue from dedicated transport service increased
115.9% in those markets in which dedicated transport services were offered as of
December 31, 1996. Switched service revenue increased $7.3 million, or 205.8%,
to $10.9 million in 1997, from $3.6 million in 1996. Switched services revenue
increased 183.9% in those markets in which switched services were offered as of
December 31, 1996. The increase in revenues from dedicated transport services
primarily reflected growth of services offered in existing markets. The increase
in switched services resulted from the offering of services in new markets and
the growth of services in existing markets. At December 31, 1997, the Company
offered dedicated transport services in 18 consolidated markets and switched
services in 14 markets, as compared to offering dedicated transport services in
15 markets and switched services in 2 markets at December 31, 1996.
Operating Expenses. Operating expenses increased $14.6 million, or 56.9%,
to $40.3 million in 1997, from $25.7 million in 1996. As a percentage of
revenues, operating expenses decreased to 72.8% in 1997 from
30
<PAGE>
<PAGE>
107.5% in 1996. The increase in operating expenses was primarily attributable to
the Company's expansion of its business, principally switched services, and the
ongoing development of existing markets resulting in higher technical personnel
costs, higher LEC charges for circuit leases and interconnection and higher data
processing costs.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $5.8 million, or 9.5%, to $54.6 million in 1997, from $60.4
million in 1996. As a percentage of revenues, selling, general and
administrative expenses decreased to 98.6% in 1997 from 252.4% in 1996. The
decrease in selling, general and administrative expenses was primarily
attributable to the absence of a $5.5 million charge recorded in 1996 to
terminate certain employees as well as the on-going cost reduction due to lower
employee headcount, partially offset by higher direct sales costs associated
with the increase in revenues.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $16.1 million, or 72.1%, to $38.5 million in 1997, from $22.4
million in 1996. As a percentage of revenues, depreciation and amortization
expenses decreased to 69.4% for 1997 from 93.5% for the same period in 1996. The
increase in depreciation and amortization expense was primarily attributable to
higher capital expenditures related to the ongoing construction and expansion of
the Company's telecommunications networks in both 1997 and 1996.
Gain on Disposition of Investments. In September 1997, the Company
completed a series of transactions related to its interests in the Hyperion
Partnerships, a group of unconsolidated telecommunication partnerships serving
the New York area, whereby it sold its interests in the partnerships serving the
Buffalo and Syracuse markets in exchange for $7.0 million of cash and all of the
minority interests in the partnerships serving the Albany and Binghamton markets
that were not already owned by the Company. In connection with these
transactions, the Company recognized a gain of approximately $11.0 million
EBITDA. The EBITDA loss in 1997 decreased $22.6 million, or 36.3%, to $39.6
million, from a loss of $62.2 million in 1996. This improvement was primarily
the result of increased revenues due to the Company's expansion of local
telecommunications networks in new and existing markets and growth of the
Company's customer base, partially offset by higher operating expenses in
support of the larger customer base.
Interest Expense, Net. Effective July 1, 1997 all of the Company's
financing requirements began to be funded with loans from the Parent Companies.
Interest expense relating to these loans totaled approximately $1.5 million in
1997.
Income Taxes. Pro forma net income tax benefits decreased by $6.2 million,
or 17.9%, to $28.4 million in 1997, from $34.6 million in 1996. These net income
tax benefits have been fully offset by corresponding increases in the valuation
allowance due to the uncertainty of realizing the benefit for tax losses on a
separate return basis. See Note 8 to the Company's financial statements
appearing elsewhere in this Prospectus.
Net loss. Net loss decreased $15.4 million, or 18.0%, to $70.7 million in
1997, from a net loss of $86.1 million in 1996. This improvement principally
resulted from the one-time $11.0 million gain resulting from the Hyperion
Transactions and from increased revenues generated by the Company's expanded
networks, partially offset by increased operating and depreciation and
amortization expenses relating to the Company's expansion of telecommunications
networks in new and existing markets.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues increased $17.0 million, or 248.9%, to $23.9 million in
1996, from $6.9 million in 1995. This increase reflected increased sales of
services in existing and new markets and growth of the Company's customer base.
Revenues from the provision of dedicated transport services increased $13.9
million, or 213.0%, to $20.4 million, in 1996, from $6.5 million in 1995.
Switched service revenue increased $3.2 million, or 915.7%, to $3.6 million in
1996, from $0.4 million in 1995. The increase in revenues from dedicated
services reflected growth in the existing markets and the commencement of
services in new markets. The increase in switched services reflected growth in
the existing markets. At December 31, 1996, the Company offered dedicated
transport services in 15 consolidated markets and switched services in 2
markets, as compared to offering dedicated transport services in 12 markets and
switched services in 1 market at December 31, 1995.
Operating Expenses. Operating expenses increased $10.6 million, or 70.2%,
to $25.7 million in 1996, from $15.1 million in 1995. As a percentage of
revenues, operating expenses decreased to 107.5% in 1996 from 220.4% in 1995.
The increase in operating expenses was primarily attributable to higher
technical personnel
31
<PAGE>
<PAGE>
costs, LECs charges for circuit leases and interconnection, data processing
costs associated with the Company's expansion into new markets and the ongoing
development of existing markets.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $26.2 million, or 76.4%, to $60.4 million in
1996, from $34.2 million in 1995. As a percentage of revenues, selling, general
and administrative expenses decreased to 252.4% in 1996 from 499.2% in 1995. The
increase in selling, general and administrative expense was primarily due to
higher personnel compensation costs necessary to support the continued expansion
of the Company's telecommunications networks and customer base. In addition, the
Company incurred a $5.5 million charge to terminate certain employees. See
'Business.'
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $15.2 million, or 209.8%, to $22.4 million in 1996, from $7.2
million in 1995. As a percentage of revenues, depreciation and amortization
expense decreased to 93.5% in 1996 from 105.3% in 1995. The increase in
depreciation and amortization expense was primarily attributable to the ongoing
construction and expansion of the Company's telecommunications networks in both
1995 and 1996.
EBITDA. The EBITDA loss for 1996 increased $19.7 million, or 46.4%, to
$62.2 million, from a loss of $42.5 million in 1995. Overall, increased
operating and selling, general and administrative expenses resulting from the
Company's development of local telecommunications networks in new and existing
markets more than offset increased revenues.
Income Taxes. Pro forma net income tax benefits increased by $14.1 million,
or 68.8%, to $34.6 million in 1996, from $20.5 million in 1995. These net income
tax benefits have been fully offset by corresponding increases in the valuation
allowance due to the uncertainty of realizing the benefit for tax losses on a
separate return basis. See Note 8 to the Company's financial statements
appearing elsewhere in this Prospectus.
Net loss. Net loss increased $35.0 million, or 68.5%, to $86.1 million in
1996, from $51.1 million in 1995. This increase resulted principally from
increased expenses relating to the Company's expansion of telecommunications
networks in new and existing markets. These increased expenses were partially
offset by increased revenues generated by the Company's expanded networks.
LIQUIDITY AND CAPITAL RESOURCES
Financing
Historically, the Company has not maintained cash balances since all the
Company's cash receipts and funding requirements were provided to or from the
Parent Companies. Part of the proceeds from the Offerings are expected to fund
the Company's future cash balances. Upon completion of the Offerings, the Parent
Companies and the Existing Stockholders will not be under any obligation to make
any additional equity investments in or loans to the Company.
The development of the Company's business and the installation and
expansion of the Company's communications networks, combined with the
development and operation of the Company's network operations center ('NOC'),
have resulted in substantial capital expenditures. These capital expenditures,
as well as the Company's historical operating losses, have resulted in
substantial negative cash flow for the Company since inception in 1993. Funding
of this historical cash flow deficiency has been primarily accomplished through
the receipt of capital contributions from the Parent Companies through June 30,
1997. From July 1, 1997, the deficiency has been funded through interest bearing
loans from the Parent Companies. The net balance of amounts due to the Parent
Companies, including interest payable thereon, under this funding arrangement
was $117.5 million and $75.5 million as of March 31, 1998 and December 31, 1997,
respectively. The average net capital contributions from the Parent Companies
were $517.8 million for the six months ended June 30, 1997 and $379.0 million
and $179.8 million for the years ended December 31, 1996 and 1995, respectively.
Additional paid-in capital balances, which include all capital contributions
from the Parent Companies have remained at $555.8 million since June 30, 1997
and totaled approximately $479.7 million and $278.2 million at December 31, 1996
and 1995, respectively.
The net proceeds to the Company from the sale of the Notes in the Notes
Offering are estimated to be approximately $ million. The net proceeds to the
Company from the Stock Offering are estimated to be approximately $
million (approximately $ million if the U.S. Underwriters'
over-allotment option is exercised in full).
The Company intends to use the net proceeds of the Offerings to repay $
million of outstanding indebtedness to the Parent Companies, to expand and
develop existing and new networks and for other general corporate and working
capital purposes, which may include acquisitions. While the primary use of such
32
<PAGE>
<PAGE>
proceeds will be to fund ongoing business operations of the Company's
subsidiaries which own and operate its networks, the Company intends to continue
to evaluate potential acquisitions. The Company has no definitive agreement with
respect to any acquisition, although from time to time it may discuss and assess
opportunities with other companies on an ongoing basis.
Pending the foregoing uses, the net proceeds of the Offerings will be
invested in short-term, money market instruments.
The Company expects that its future cash requirements will principally be
for working capital, capital expenditures and to fund its operating losses. The
Company expects that the net proceeds of the Offerings after the repayment of
$ million in loans to the Parent Companies, together with internally generated
funds and borrowings expected to be available under its future credit facility,
will provide sufficient funds for the Company to meet the Company's expected
capital and liquidity needs to expand its business as planned and to fund its
losses for approximately two years. Thereafter, the Company expects to require
additional financing. However, in the event that the Company's plans or
assumptions change or prove to be inaccurate, or the foregoing sources of funds
prove to be insufficient to fund the Company's growth and operations, or if the
Company consummates acquisitions, the Company may be required to seek additional
capital sooner than currently anticipated. The Company's revenues and costs are
dependent upon factors that are not within the Company's control, such as
regulatory changes, changes in technology and increased competition. Due to the
uncertainty of these and other factors, actual revenues and costs may vary from
expected amounts, possibly to a material degree, and such variations are likely
to affect the level of the Company's future capital expenditures and expansion
plans. Sources of financing may include public or private debt or equity
financing by the Company or its subsidiaries or other financing arrangements.
Capital Expenditures
The facilities-based telecommunications service business is a capital
intensive business. The Company's operations have required and will continue to
require substantial capital investment for: (i) the purchase and installation of
switches, electronics, fiber and other technologies in existing networks and in
additional networks to be constructed in new markets; and (ii) the acquisition
and expansion of networks currently owned and operated by other companies. The
Company's expected capital expenditures for general corporate and working
capital purposes include (i) expenditures with respect to the Company's
management information system and corporate service support infrastructure and
(ii) operating and administrative expenses with respect to new networks and debt
service. The Company plans to make substantial capital investments in connection
with the deployment of switches in all of its existing networks, and plans to
construct and develop new networks. Expansion of the Company's networks will
include the geographic expansion of the Company's existing operations and will
consider the development of new markets. In addition, the Company may acquire
existing networks in the future.
During the first three months of 1998, capital expenditures were $25.0
million, an increase of $10.7 million from the first three months in 1997. This
increase resulted from unusually low capital expenditures for the first three
months of 1997, principally due to the Company's new management team put into
place in January 1997, which required time to formulate the Company's current
business strategy focusing exclusively on business customers. During the year
ended December 31, 1997, capital expenditures were $127.3 million, a decrease of
$17.5 million from $144.8 million in 1996. The decrease was principally due to a
slower rate of expansion into new markets in 1997. Capital expenditures in 1996
increased $3.3 million from $141.5 million in 1995. The Company estimates it
will require $147.7 million in 1998 and $152.8 million in 1999 to fund its
capital expenditures.
Cash Flows
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
For the first three months of 1998, the Company's cash used in operations
decreased to $15.1 million from $28.7 million for the first three months of
1997. This decrease in cash used in operations of $13.6 million principally
resulted from lower EBITDA losses and working capital requirements in the first
three months of 1998. The Company expects to continue to have operating cash
flow deficiencies for the near future as it develops and expands its business.
Cash used in investing activities increased $10.8 million to $25.0 million
for the first three months of 1998, as compared to $14.2 million for the first
three months of 1997, principally as a result of higher capital expenditures.
33
<PAGE>
<PAGE>
For the first three months of 1998, net cash provided by financing
activities reflects the receipt of interest bearing loans from the Parent
Companies amounting to $40.1 million. Prior to July 1, 1997, the Company's cash
flow deficiencies were entirely funded by non-interest bearing capital
contributions from the Parent Companies. For the first three months of 1997, net
capital contributions amounted to $42.9 million. This decrease of $2.8 million
was primarily due to lower cash funding requirements principally due to
operating cash flow associated with the Company's expansion of its customer base
and services in new and existing markets and lower working capital requirements,
partially offset by higher capital expenditure requirements for the first three
months of 1998.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
For the year ended December 31, 1997, the Company's cash used in operations
decreased to $29.4 million from $52.3 million for the year ended December 31,
1996. This decrease in cash used in operations of $22.9 million principally
resulted from lower EBITDA losses during 1997. Cash used in operations increased
$16.7 million in 1996 from $35.6 million in 1995, primarily as a result of
increased EBITDA losses partially offset by other balance sheet changes. The
Company expects to continue to have operating cash flow deficiencies for the
near future as it develops and expands its business.
Cash used in investing activities decreased $28.6 million to $120.6 million
in 1997, as compared to $149.2 million in 1996. This decrease resulted
principally from lower capital expenditures due to a slower rate of expansion
and $7.0 million of cash proceeds received in 1997 relating to the Hyperion
Transactions. Cash used in investing activities in 1996 increased $3.9 million
to $149.2 million from $145.3 million in 1995, principally as a result of higher
capital expenditures used to build the Company's networks. As discussed more
fully above, the Company has made substantial capital expenditures in order to
develop and expand its business.
Net cash provided by financing activities reflects the receipt of
non-interest bearing capital contributions from the Parent Companies to fund the
Company's cash flow deficiencies through June 30, 1997. Effective July 1, 1997,
all of the Company's financing requirements were funded with interest bearing
loans from the Parent Companies. The aggregate of net capital contributions and
loans from the Parent Companies decreased $51.5 million to $150.0 million in
1997 as compared to $201.5 million in 1996. This decrease was primarily due to
lower cash funding requirements principally due to operating cash flow
associated with the Company's expansion of its customer base and services in new
and existing markets and lower capital expenditure requirements. Net capital
contributions in 1996 increased to $201.5 million from $180.9 million in 1995.
The increase in net capital contributions is primarily due to higher cash
funding requirements principally due to an increase in cash used in operations
associated with the Company's expansion of its customer base and services in new
and existing markets and higher capital expenditures requirements.
YEAR 2000
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of time-sensitive information by its computerized
information systems. Year 2000 issues may arise if computer programs have been
written using two digits (rather than four) to define the applicable year. In
such case, programs that have time-sensitive logic may recognize a date using
'00' as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. Management is in the process of completing a
review of significant software and equipment used in the Company's operations
and, to the extent practicable, in the operations of its key business partners,
in order to determine if any year 2000 risks exist that may be material to the
Company as a whole. This process includes an assessment of year 2000 risks on an
ongoing basis and the identification of practical remediation measures that
could be taken on a timely basis to alter, validate or replace time-sensitive
software and equipment. Management has already begun implementing certain of
these measures and intends to complete its remediation efforts prior to any
anticipated material impact on its computerized information systems. Costs of
addressing potential problems have not been material to date and, based on
preliminary information from the Company, its customers and vendors, are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. However, if the
Company, its customers or vendors are unable to resolve such processing issues
in a timely manner, it could result in a material financial risk. Accordingly,
management plans to devote the resources it concludes are appropriate to resolve
all significant year 2000 issues in a timely manner.
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on the Company.
34
<PAGE>
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading facilities-based CLEC in selected metropolitan
areas across the United States, offering a wide range of business telephony
services, primarily to medium- and large-sized business customers and other
carriers. The Company's customers are principally telecommunications-intensive
business end-users, IXCs, ISPs, wireless communications companies and
governmental entities. Such customers are offered a wide range of integrated
telecommunications services, including dedicated transmission, local switched,
data and video transmission services and certain Internet services. The Company
has deployed switches in 16 of its 19 service areas as of March 31, 1998, and
management expects that a growing portion of the Company's revenues will be
derived from providing switched services. In addition, the Company benefits from
its strategic relationship with TW Cable both through network facilities access
and cost-sharing. As a result, the Company's networks have been constructed
primarily through licensing the use of fiber capacity from TW Cable. As of March
31, 1998, the Company operated networks in 19 metropolitan areas that spanned
6,240 route miles, contained 244,894 fiber glass miles and offered service to
2,711 buildings. Consolidated revenues for the Company, which have historically
been primarily derived from private line services, grew by 117.2% for the three
months ended March 31, 1998 as compared to the same period in 1997.
The business of the Company was commenced in 1993 by TW Cable, originally
to provide certain telephony services together with cable television. In January
1997, the Company put in place a new management team that is implementing a
business strategy focused exclusively on serving business customers, rapidly
providing switched services in all the Company's service areas and expanding the
range of business telephony services offered by the Company.
The Company believes that the 1996 Act and certain state regulatory
initiatives provide increased opportunities in the telecommunications
marketplace by opening all local service areas to competition and requiring
ILECs to provide increased direct interconnection. According to the FCC, in 1996
the total revenues for the telecommunications industry amounted to approximately
$222 billion, of which approximately $122 billion was local service and
approximately $100 billion was long distance. To capitalize on these significant
opportunities, the Company has accelerated its deployment of high capacity
digital switches in its service areas and is aggressively marketing switched
services to medium- and large-sized businesses.
BUSINESS STRATEGY
The Company's primary objective is to be a leading CLEC in its existing and
future service areas offering medium- and large-sized businesses superior
telecommunications services through advanced networks. The key elements of the
Company's business strategy include the following:
Leverage Existing Fiber Optic Networks. The Company has designed and built
its networks to serve geographic locations where management believes there are
large numbers of potential customers. As of March 31, 1998, the Company operated
networks that spanned over 6,240 route miles and contained over 244,894 fiber
miles. The Company's highly concentrated networks have yet to be fully exploited
and provide the capacity to serve a substantially larger base of customers.
Management believes that the Company's extensive fiber network capacity allows
it to: (i) increase orders substantially from new and existing customers without
incurring significant additional capital expenditures and operating expenses;
(ii) emphasize its facilities-based services rather than resales of network
capacity of other providers; and (iii) exert greater control over its services
than the Company's competitors that are dependent upon off-net facilities,
thereby providing better customer service.
Expand Switched Services. The Company provided a broad range of switched
services in 16 of its service areas as of March 31, 1998, and plans to provide
switched services in all of its current service areas by the end of 1999. For
the three months ended March 31, 1998, consolidated revenues from switched
service grew by 187.0% as compared to the same period in 1997. Because the
demand for switched services is greater than for dedicated transport services
and the Company has been rapidly installing switches in its markets, management
expects the Company to derive a growing portion of its revenues from switched
services. The Company utilizes high capacity digital 5-ESS switches manufactured
by Lucent.
Target Medium- and Large-Sized Business Customers. The Company operates
networks in metropolitan areas that have high concentrations of medium- and
large-sized businesses. Such businesses tend to be
35
<PAGE>
<PAGE>
telecommunications-intensive and are more likely to seek the greater reliability
provided by an advanced network such as the Company's. Thus, management believes
that significant economies of scale may be achieved by focusing and intensifying
its sales and marketing efforts on such businesses as they are potentially high
volume users of the Company's services. To drive revenue growth in these
markets, the Company is aggressively expanding its direct sales force to focus
on such business customers.
Interconnect Cities within Clusters. The 19 cities in which the Company
currently operates are grouped in six geographic clusters across the United
States See ' -- Telecommunications Networks and Facilities -- Telecommunications
Networks.' The Company plans to interconnect each city within a cluster with
broadband, fiber optic facilities of its own or licensed from TW Cable and/or
third parties. Interconnecting cities within a cluster will enable the Company
to increase its revenue potential by addressing customers' regional long
distance voice, data and video requirements. In 1998, management plans to begin
interconnecting cities within the Company's Midwest, Southwest and Southeast
clusters.
Utilize Strategic Relationships with TW Cable. The Company has benefited
from and continues to leverage its relationships with TW Cable, the second
largest multiple system cable operator in the U.S., by licensing and sharing the
cost of digital fiber optic facilities. This licensing arrangement allows the
Company to benefit from TW Cable's access to rights-of-way, easements, poles,
ducts and conduits. See 'Certain Relationships and Related
Transactions -- Certain Operating Agreements.' By leveraging its existing
relationship with TW Cable, the Company believes that it can increase revenues,
benefit from existing regulatory approvals and licenses, derive economies of
scale in network costs and extend its existing networks in a rapid, efficient
and cost-effective manner. Furthermore, management believes that the strong
awareness and positive recognition of the 'Time Warner' brand name significantly
contributes to its marketing programs and sales efforts by distinguishing it
from its competitors.
Expand Product Offerings. The Company intends to increase revenues and cash
flows by developing and tailoring diversified bundles of telephony services for
its customers. The services currently offered by the Company include a wide
range of dedicated transmission, local switched, data and video transmission
services and certain Internet services. The Company intends to offer additional
services including long distance service and other high speed data transport
services. The Company generally develops its customer base by first offering
basic telecommunications services to its new customers. As the needs of such
customers change and develop, the Company selectively bundles and offers more
sophisticated, higher margin products and services to them.
Enter into New Geographic Areas. The Company's strategy is to target
metropolitan areas possessing demographic, economic and telecommunications
demand profiles that it believes provide it with the potential to generate an
attractive economic return. Currently, the Company operates networks in a total
of 19 metropolitan areas. Management plans to have networks in operation or
under construction in several additional service areas by the end of 1999, most
of which will be in service areas where TW Cable has already made substantial
infrastructure investments. By licensing capacity from TW Cable's existing fiber
optic networks, the Company can develop new networks quickly and
cost-effectively, thereby giving it a competitive advantage over other CLECs.
See 'Certain Relationships and Related Transactions -- Certain Operating
Agreements.'
Continue Disciplined Expenditure Program. The Company increases operational
efficiencies by pursuing a disciplined approach to capital expenditures. This
capital expenditure program requires that prior to making any expenditure on a
project, the project must be expected to meet stringent financial criteria such
as minimum recurring revenue, cash flow margins and rate of return. In addition,
to control capital expenditures and share the risks of developing costly new
networks, management is considering establishing strategic alliances with other
telecommunications providers in the form of joint ventures and possible
co-branding marketing programs.
MARKET OPPORTUNITY
The Company believes that the 1996 Act and certain state regulatory
initiatives provide increased opportunities in the telecommunications market
place by opening all local markets to competition and requiring ILECs to provide
increased direct interconnection. According to the FCC, in 1996 the total
revenues for the telecommunications industry amounted to approximately $222
billion, of which approximately $122 billion was local service and approximately
$100 billion was long distance. To capitalize on these significant
opportunities, the Company accelerated its deployment of high capacity digital
switches in its markets and is aggressively marketing switched services to its
customers.
36
<PAGE>
<PAGE>
SERVICES
The Company provides its customers with a wide range of telecommunications
services, including dedicated transmission, local switched, data and video
transmission services and certain Internet services. The Company's dedicated
services, which include private line and special access services, use
high-capacity digital circuits to carry voice, data and video transmissions from
point-to-point in multiple configurations. Switched voice services offered by
the Company use high-capacity digital switches to route voice transmissions
anywhere on the public switched telephone network. In offering its dedicated
transmission and switched services, the Company also provides private network
management and systems integration services for businesses that require
combinations of various dedicated and switched telecommunications services. Data
services provided by the Company allow customers to create their own internal
computer networks and access external computer networks and the Internet. The
Company can provide its customers, including companies in the media industry,
with advanced video transport services such as point-to-point, broadcast-quality
video channels for video transmissions between two or more locations, including
video links to all the major television networks as well as to advertising
agencies and other customers. Internet services provided by the Company include
dedicated Internet access, Web site hosting, access and upstream transport for
local ISPs and electronic commerce services.
Dedicated Transport Services
The Company currently provides a complete range of dedicated transport
services with transmission speeds from 2.4 Kbps to 2.488 Gbps to its IXC and
end-user customers. All products and services can be used for voice, data, image
and video transmission.
The Company offers the following dedicated transport links:
POP-to-POP Special Access. Telecommunications lines linking the POPs
of one IXC or the POPs of different IXCs in a market, allowing the POPs to
exchange transmissions for transport to their final destinations.
End-User/IXC Special Access. Telecommunications lines between an end
user, such as a large business, and the local POP of its selected IXC.
Private Line. Telecommunications lines connecting various locations of
a customer's operations, suitable for transmitting voice and data traffic
internally.
Transport Arrangement Service. Provides dedicated transport between
LEC central offices and customer designated POPs of an IXC for transport of
LEC provided switched access or LEC provided special access. This
point-to-point service is available at DS1 or DS3 interfaces at both ends.
The Company's Broadcast Video TV-1, STS-1 and Private Network Transport
services use high-capacity digital circuits to carry voice, data and video
transmissions from point-to-point in flexible configurations involving different
standardized transmission speeds and circuit capacities, including analog voice
grade, DS0, DS1, DS3 and Sonet OC-N.
Switched Services
The Company's switched services provide business customers with local
calling capabilities and connections to their IXCs. The Company owns, houses,
manages and maintains the switch used to provide the services. The Company's
switched services include the following:
Business Access Line Service. This service provides voice and data
customers quality analog voice grade telephone lines for use at any time.
Business Access Line Service provides customers with flexibility in network
configurations because lines can be added, deleted and moved as needed.
TW Access Trunks. TW Access Trunks provide communication lines between
two switching systems. These trunks are utilized by PBX users to provide
access to the local, regional and long distance telephone networks. PBX
customers may use either the Company's telephone numbers or their
ILEC-assigned telephone numbers. Customer access to the Company's local
exchange services is accomplished by a DS1 digital connection or DS0 analog
trunks between the customer's PBX port and the Company's switching centers.
37
<PAGE>
<PAGE>
TW Local Toll Service. This service provides customers with a
competitive alternative to ILEC service for intraLATA toll calls. It is a
customized, high-quality local calling plan available to Business Access
Line and TW Access Trunk customers. The Company works with customers to
devise cost-saving programs based on actual usage and calling patterns.
Local Telephone Service. Local telephone service is basic local
exchange service which can be tailored to a customer's particular calling
requirements. Local telephone service includes operator and directory
assistance services, as well as an optional intraLATA toll plan.
Switched Access Service. Switched Access Services provide IXCs with a
switched connection to their customers for the origination and termination
of long distance telephone calls.
Other services offered by the Company include telephone numbers,
listings, customized calling features, voice messaging, hunting, blocking
services and ISDN.
Data Transmission Services
The Company offers its customers a broad array of data transmission
services that enable customers to create their own internal computer networks
and access external computer networks and the Internet. In 1996, the Company
introduced its native speed LAN inter-networking data service which is used to
connect workstations and personal computer users on one or more LANs. Native
speed services avoid the bottleneck problems that are frequently encountered
with customary DS-1 connections by providing the customer with a circuit that
matches the transmission speeds of its LAN. The Company's LAN service provides
dedicated circuits, guaranteed transmission capacity and guaranteed bandwidth
for virtually all LAN applications. Users can share files and databases as if
they were all working on the same computer, or within the same LAN.
As companies and communications become more sophisticated, there is an
increased need for customer access to superior traffic management of sensitive
data, video and voice transmission within a single metropolitan area, or between
various company operations. The Company's switched data services offer
sophisticated switching technology and provide high standards in reliability and
flexibility while enabling users to reduce the costs associated with
interconnecting architecturally diverse information systems. The Company's data
service offerings support evolving high-speed applications, such as multimedia,
desktop video conferencing and medical imaging. The Company offers native speed
connections to both end-users as well as interexchange data carriers. The
Company's services allow users to interconnect both high speed and low speed LAN
environments and to benefit from flexible billing, as well as detailed usage
reports.
Video Transmission Services
The Company provides broadcast quality digital and analog video link
services to its video services customers, including media industry customers,
such as television networks, and advertising agencies. The Company's video
services include offering broadcast quality, digital channel transmissions that
can be provided on a point-to-point or point-to-multipoint basis.
Internet Services
In most of its service areas, the Company currently offers Internet
services such as dedicated Internet access, access and upstream transport for
local ISPs and for electronic commerce services. The Company believes that these
services will continue to be an important component of the Company's overall
product offerings and intends to continue to expand the offering of Internet
services within its service areas.
PLANNED/FUTURE SERVICES
Long Distance Services
The Company intends to offer basic and enhanced long distance services,
such as toll free, calling card and international gateways to Europe and the
Pacific, targeting medium- and small-size business customers. Generally, large
businesses tend to obtain their long distance needs directly from the major
IXCs. The Company believes medium- and small-size businesses are more likely to
obtain their long distance services from CLECs rather than the major IXCs. As a
result, management believes that such medium- and small-sized end-users
represent a potential customer base for developing a market for the Company's
long distance services. The
38
<PAGE>
<PAGE>
Company will purchase long distance capacity under agreements, currently in
negotiation, with major IXCs that provide the Company capacity at competitive
rates for resale and all support and billing services. Management believes that
the offering of long distance services will contribute to revenue growth with
profitable margins and will also add strategic sales and marketing value as a
bundled product.
Road Runner 'Work at Home' Services
TW Cable operates a high speed online content service, currently branded
'Road RunnerTM,' primarily to residential customers in a number of its cable
operating areas. There are currently active Road Runner operations in Albany,
Binghamton, San Diego, Memphis, Columbus, Tampa and Honolulu. As of December 31,
1997, TW Cable's Road Runner subscribers totaled approximately 27,000. The
Company expects that it and TW Cable will cooperate in providing services to or
on behalf of each other where advantageous Road Runner-related business
opportunities arise. See 'Certain Relationships and Related
Transactions -- Certain Operating Agreements.' For example, the Company may have
the first opportunity to provide network facilities to TW Cable for transport of
the Road Runner service where facilities are not internally available. Further,
the Company may be able to act as a sales agent for (or otherwise team with) TW
Cable for the Road Runner residential services as part of an overall 'work at
home' solution for the Company's large business customers. However, in light of
the restrictions in the Restated Certificate of Incorporation on Residential
Services and Content Services, any sales agent services provided by the Company
will require a waiver by the Existing Stockholders of the Content Services and
the Residential Services restrictions in accordance with the charter provisions.
As these services are in the developmental stage, it is not possible to predict
how significant the Road Runner teaming arrangements with TW Cable will become.
TELECOMMUNICATIONS NETWORKS AND FACILITIES
Overview
The Company uses the latest technologies and network architectures to
develop a highly reliable infrastructure for delivering high-speed, quality
digital transmissions of voice, data and video telecommunications. The Company's
basic transmission platform consists primarily of optical fiber equipped with
high capacity SONET equipment deployed in fully redundant, self-healing rings.
These SONET rings give the Company the capability of routing customer traffic in
both directions around the ring, thereby eliminating loss of service in the
event of a cable cut. The Company's networks are designed for remote automated
provisioning, which allows the Company to meet customers' real time service
needs. The Company extends SONET rings or point to point links from rings to
each customer's premises over its own fiber optic cable and unbundled facilities
obtained from ILECs. The Company also installs diverse building entry points
where a customer's security needs require such redundancy. The Company then
places necessary customer-dedicated or shared electronic equipment at a location
near or in the customer's premises to terminate the link.
The Company serves its customers from one or more central offices or hubs
strategically positioned throughout its networks. The central offices house the
transmission and switching equipment needed to interconnect customers with each
other, the IXCs and other local exchange networks. Redundant electronics, with
automatic switching to the backup equipment in the event of failure, protects
against signal deterioration or outages. The Company continuously monitors
system components from its NOC and proactively focuses on avoiding problems
rather than upon merely reacting upon failure.
The Company adds switched, dedicated and data services to its basic fiber
optic transmission platform by installing sophisticated digital electronics at
its central offices and nodes and at customer locations. The Company's advanced
Lucent 5-ESS digital telephone switches are connected to multiple ILEC and long
distance carrier switches to provide the Company's customers access to
telephones in the local market as well as the public switched telephone network.
Similarly, in certain markets, the Company provides ATM switched and LAN
multiplexers at its customers' premises and in its central offices to provide
high speed LAN interconnection services.
The Company's strategy for adding customers is designed to maximize the
speed and impact of its marketing efforts while maintaining attractive rates of
return on capital invested to connect customers directly to its networks. To
initially serve a new customer, the Company may use various transitional links,
such as reselling a portion of an ILEC's network. Once the new customer's
communications volume and product needs
39
<PAGE>
<PAGE>
are identified, the Company may build its own fiber optic connection between the
customer's premises and the Company's network to accommodate: (i) the customer's
needs; and (ii) the Company's efforts to maximize return on network investment.
Telecommunications Networks
The following chart sets forth information regarding each of the Company's
active telecommunications networks as of March 31, 1998:
<TABLE>
<CAPTION>
Network Switch Commercial
Commercially Commercially Fiber Route Buildings MSA Business
Metropolitan Area Available Available(1) Miles(2) On-Net Lines(3)
- ------------------------------- ------------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
NEW YORK REGION
Albany, New York............... Jul. 95 TBD 42 8 178,332
Binghamton, New York........... Jan. 95 TBD 73 16 70,301
Manhattan, New York............ Feb. 96 Feb. 96 157 52 2,375,192
Rochester, New York............ Dec. 94 Feb. 95 275 38 260,423
SOUTHWEST REGION
Austin, Texas.................. Sep. 94 Apr. 97 242 75 321,030
Houston, Texas................. Jan. 96 Sep. 97 418 96 1,133,864
San Antonio, Texas............. May 93(4) Nov. 97 481 145 394,536
San Diego, California.......... Jun. 95 Jul. 97 193 74 1,005,994
SOUTHEAST REGION
Charlotte, N. Carolina......... Sep. 94 Dec. 97 672 160 372,714
Greensboro, N. Carolina........ Jan. 96 TBD 94 7 265,080
Memphis, Tennessee............. May 95 May 97 467 105 225,342
Raleigh, N. Carolina........... Oct. 94 Sep. 97 430 102 224,596
MIDWEST REGION
Cincinnati, Ohio............... Jul. 95 Nov. 97 271 66 493,850
Columbus, Ohio(5).............. Mar. 91(4) Jul. 97 339 112 393,791
Indianapolis, Indiana.......... Sep. 87(4) Dec. 97 224 105 370,621
Milwaukee, Wisconsin........... Feb. 96 Sep. 97 376 71 399,555
SOUTH REGION
Tampa, Florida................. Dec. 97 Jan. 98 228 7 626,709
Orlando, Florida............... Jul. 95 Jul. 97 859 131 439,238
HAWAII REGION
Honolulu, Hawaii............... Jun. 94 Jan. 98 398 173 197,823
</TABLE>
- ------------
(1) Date of switch commercially available is the first date on which switched
services were provided to a customer of the Company.
(2) Licensed and owned fiber optic route miles.
(3) Metropolitan Statistical Areas ('MSA') business lines data are from ABI 1996
Business Data.
(4) The networks in Columbus, Ohio, San Antonio, Texas and Indianapolis, Indiana
were built by certain predecessor companies prior to the commencement of the
Company's business.
(5) The Columbus market is operated under a partnership, MetroComm AxS, L.P.,
which is a 50% owned entity of the Company. However, the switch is owned by
the Company.
Information Systems Infrastructure
The Company uses advanced technology in its information systems
infrastructure. The Company also uses an integrated, nationwide client server
platform and coherent relational databases to increase employee productivity,
link itself electronically to its customers and develop real time data and
information. The
40
<PAGE>
<PAGE>
architecture also enables the Company to rapidly re-engineer its processes and
procedures to lower its costs and to respond rapidly to changing industry
conditions. The Company's information systems deliver data at the network,
regional or corporate level, and also by customer and vendor. The Company's
information systems assist in the delivery of superior customer service and real
time support of network operations. The systems, which were developed by an
outside vendor but are operated internally, utilize open system standards and
architecture. As a result, the Company is positioned to either purchase from
third parties or develop in-house supplementary information support systems as
its needs arise.
Network Monitoring and Management
The Company provides a single point of contact for all of its customers and
consolidates all of its systems support, expertise and technical training at its
NOC in Englewood, Colorado. With over 340 technicians, customer service
representatives and administrative support staff dedicated to providing superior
customer service, the Company is able to quickly correct, and often anticipate,
any problems that may arise in its networks. The Company provides 24 hour-a-day
surveillance and monitoring of networks to achieve the Company's 99.98% network
reliability and performance. Network analysts monitor real-time alarm, status
and performance information for each circuit and the network equipment and react
swiftly to repair network failures.
Network Development and Application Laboratory
The Company's Network Development and Application Laboratory is a
comprehensive telecommunications technology, applications and services
development laboratory, equipped with advanced systems and equipment, including
those used by the Company in the operation of its local digital networks. The
center is designed to provide a self-contained testing and integration
environment, fully compatible with the Company's digital networks, for the
purposes of: (i) verifying the technical and operational integrity of new
equipment prior to installation in the networks; (ii) developing new services
and applications; (iii) providing a realistic training environment for
technicians, engineers and others; and (iv) providing a network simulation
environment to assist in fault isolation and recovery.
Billing Systems
The Company has historically developed its back office support functions
internally with limited reliance on outside vendors. Recently, the Company
entered into agreements with an outside vendor for the development, operation
and maintenance of its billing systems. See 'Risk Factors -- Dependence on
Information Billing Systems' and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000.'
Agreements with TW Cable
The Company has entered into several agreements with TW Cable for the
license of fiber optic networks and certain facilities, administrative and
operating services, residential telephony support services and high speed online
transport services. See 'Certain Relationships and Related
Transactions -- Certain Operating Agreements.'
NETWORK DESIGN AND CONSTRUCTION
In order to leverage its relationship with TW Cable, the Company has
constructed its existing networks in selected metropolitan areas served by TW
Cable's fiber optic infrastructure. This has allowed the Company to develop, in
a cost-efficient way, an extensive network in each of its service areas. As of
March 31, 1998, the Company's networks spanned 6,240 route miles, contained
244,894 fiberglass miles and offered service to 2,711 buildings with 1,904,420
VGE circuits and 23,702 access lines in service.
Before deciding to construct or acquire a network in a particular city, the
Company's corporate development staff reviews the demographic, economic,
competitive and telecommunications demand characteristics of the city, including
its location, the concentration of potential business, government and
institutional end-user customers, the economic prospects for the area, available
data regarding IXC and end-user special access and switched access transport
demand and actual and potential CAP/CLEC competitors. Market demand is
41
<PAGE>
<PAGE>
estimated on the basis of market research performed by Company personnel and
others, utilizing a variety of data including estimates of the number of
interstate access and intrastate private lines in the city based primarily on
FCC reports and commercial databases. This process has enabled the Company to
reduce its start-up costs and expedite lead times.
If a particular city targeted for development is found to have sufficiently
attractive demographic, economic, competitive and telecommunications demand
characteristics, the Company's network planning and design personnel design a
network targeted to provide access to the major IXC, POPs and the ILEC's
principal central office(s) in the city. Consistent with the Company's
disciplined capital expenditure program, distribution rings are designed to
cover strategic or highly concentrated business parks and downtown metropolitan
areas, and build-out to 100% of the identified end users is generally not
considered to be cost-effective since a portion of the end-users are located in
low density areas.
Based on the data obtained through the foregoing process, in connection
with either the construction or an acquisition of a network, the Company
develops detailed financial estimates based on the anticipated demand for the
Company's current services. If the financial estimates meet or exceed the
Company's minimum rate of return thresholds using a discounted cash flow
analysis, the Company's corporate planning personnel prepare a detailed business
and financial plan for the proposed network.
Prior to commencing construction, the Company's local staff, working
together with TW Cable, where applicable, obtains any needed city franchises,
permits, or other municipal requirements to initiate construction and operate
the network. In some cities, a construction permit is all that is required. In
other cities, a license agreement or franchise may also be required. Such
licenses, agreements and franchises are generally for a term of limited
duration. In addition, the 1996 Act requires that local governmental authorities
treat all telecommunications carriers in a competitively neutral,
non-discriminatory manner. The Company's current licenses and franchises expire
in years ranging from 1999 to 2015. City franchises often require payment of
franchise fees which in some cases can be directly passed through on customers'
invoices. The Company's local staff also finalizes arrangements for needed
rights-of-way. Rights-of-way are typically licensed from TW Cable under
multi-year agreements with renewal options and are generally non-exclusive. See
'Certain Relationships and Related Transactions -- Certain Operating
Agreements.' The Company leases underground conduit and pole space and other
rights-of-way from entities such as LECs and other utilities, railroads, long
distance providers, state highway authorities, local governments and transit
authorities. The 1996 Act requires most utilities, including most LECs and
electric companies, to afford CAPs/CLECs access to their poles, conduits and
rights-of-way at reasonable rates on non-discriminatory terms and conditions.
The Company's networks are constructed to cost-effectively access areas of
significant commercial end-user telecommunications traffic, as well as the POPs
of most IXCs and cellular companies and the principal LEC central offices in a
city. The Company establishes general requirements for network design, and
internally engineers the contemplated network and the required deployment.
Construction and installation services are provided by independent contractors,
including TW Cable, selected through a competitive bidding process. Company
personnel provide project management services, including contract negotiation
and supervision of the construction, testing and certification of all
facilities. The construction period for a new network varies depending upon the
number of route miles to be installed, the initial number of buildings targeted
for connection to the network, the general deployment of the network and other
field conditions. Networks that the Company has installed to date generally have
become operational within six to nine months after the beginning of
construction.
EQUIPMENT SUPPLY
The Company acquires Lucent 5-ESS digital switches pursuant to an exclusive
vendor agreement (the 'Lucent Agreement'), which provides for discounted
pricing. The Lucent Agreement expires in June of 1999 and is renewable for up to
three additional years upon the parties' mutual agreement. The Lucent Agreement
provides that if the Company purchases digital switches from a vendor other than
Lucent during the term of such agreement, Lucent, among other things, may
discontinue the agreed upon discounted pricing on all future orders, renegotiate
higher prices for digital switches and may not be liable for failures to meet
certain delivery and installation schedules on future orders.
42
<PAGE>
<PAGE>
CUSTOMERS AND SALES AND MARKETING
The Company's customers are principally telecommunications-intensive
medium- and large-sized businesses, long distance carriers, ISPs, wireless
communications companies and various government entities. Historically, the
Company's customers were primarily long distance carriers. While the Company's
carrier business has continued to grow in absolute numbers, it has declined as a
proportion of total business such that in 1997 end user customers accounted for
47.8% of the Company's revenues. For the three months ended March 31, 1998, the
Company's top 10 customers accounted for 40.6% of the Company's total revenues.
The top three customers, which are IXCs or other telecommunications providers,
accounted for 26.1% of total revenues, and no other customer accounted for 5% or
more of revenues. See 'Risk Factors -- Dependence on Significant Customers.'
The Company's marketing emphasizes its: (i) reliable, facilities-based
networks, (ii) flexibly priced, bundled products and services; (iii) responsive
customer service orientation; and (iv) integrated operations, customer support
and network monitoring and management systems. The Company's centrally managed
customer support operations are designed to facilitate the processing of orders
for changes and upgrades in customer services. To reduce the inherent risk in
bringing new and untested telecommunications products and services to a
dynamically changing market, the Company introduces its products and services
once market demand develops and offers them in diversified, competitively-priced
bundles, thereby increasing usage among its existing customers and attracting
new customers. The services offered by the Company are typically priced at a
discount to the prices of the ILECs.
With a direct sales force in each of its service areas along with regional
and national sales support, the Company targets medium- and large-sized
telecommunications-intensive businesses in the areas served by its networks.
Compensation for the Company's sales representatives is based primarily on
commissions that are tied to sales generated. The Company's customers include
financial services firms, health care, media, telecommunications services and
high tech companies and various governmental institutions. In addition, the
Company markets its services through sales agents, landlords, advertisements,
trade journals, media relations, direct mail and participation in trade
conferences.
The Company also targets long-distance carriers, ISPs, large, strategic
business accounts and wireless telephone companies through its national sales
organization. The Company has master services agreements (which generally set
forth technical standards, ordering processes, pricing methodologies and service
grade requirements, but do not guarantee any specified level of business for the
Company) with a significant number of the long-distance carriers, including
AT&T, MCI Communications Corporation, Sprint Corporation, WorldCom, Inc. and
LCI, Inc. By providing long-distance companies with a local connection to their
customers, the Company enables them to avoid complete dependence on the ILECs
for access to customers and to obtain a high quality and reliable local
connection. The Company provides a variety of transport services and
arrangements that allow long distance carriers to connect their own switches in
both local areas (intra-city) and in wide areas (inter-city). Additionally, long
distance companies may purchase the Company's transport services that allow them
to connect their switch to an ILEC switch and to end user locations directly.
The Company's advanced networks allow it to offer high volume business customers
and long-distance carriers uniformity of services, pricing, quality standards
and customer service.
CUSTOMER SERVICE
With over 365 expert technicians, customer service representatives and
administrative support staff, the Company provides its customers with continuous
support and superior service. To serve its customers, account representatives
are assigned to the Company's customers to act as effective liaisons with the
Company. Technicians and other support personnel are available in each of the
Company's markets to react to any network failures or problems. In addition, the
NOC provides 24 hour-a-day surveillance and monitoring of networks to maintain
the Company's network reliability and performance. See ' -- Telecommunications
Networks and Facilities -- Network Monitoring and Management.'
COMPETITION
The Company believes that the principal competitive factors affecting its
business are, and will continue to be, (i) the availability of proven support
systems for the Company's back office systems, including provisioning
43
<PAGE>
<PAGE>
and billing, (ii) competition for skilled, experienced personnel, and (iii)
regulatory decisions and policies that promote competition. The Company believes
that it competes favorably with other companies in the industry with respect to
each of these factors. The technologies and systems which provide back office
support for the CLEC industry are nascent and may not keep pace with the growth
of order volume, integration with other systems, and production of required
information for systems managers. The best personnel in all areas of the
Company's operations are in demand by the numerous participants in the highly
specialized CLEC industry. While the Company's employee base is very stable, it
is anticipated that others in the industry will continue to demand high quality
personnel and will thus drive pressure to maintain extremely competitive
compensation and benefits packages in addition to an attractive work
environment. Regulatory environments at both the state and Federal level differ
widely and have considerable influence on the Company's market and economic
opportunities and resulting investment decisions. The Company believes it must
continue monitoring regulatory developments and remain active in its
participation in regulatory issues.
Services substantially similar to those offered by the Company are also
offered by the ILECs, which include Ameritech Corporation, Bell Atlantic
Corporation, BellSouth Corporation, SBC Communications Inc. ('SBC') and GTE
Corporation. The Company believes that ILECs generally benefit from their
long-standing relationships with customers, substantial technical and financial
resources greater than those of the Company, have the potential to subsidize
services of the type offered by the Company from service revenues not subject to
effective competition and currently benefit from certain existing regulations
that favor the ILECs over CLECs such as the Company in certain respects. In
addition, in most of the metropolitan areas in which the Company currently
operates, at least one, and sometimes several, other CAPs or CLECs offer
substantially similar services at substantially similar prices to those of the
Company. Other CLECs, CAPs, cable television companies, electric utilities, long
distance carriers, microwave carriers, wireless telephone system operators and
private networks built by large end users currently do, and may in the future,
offer services similar to those offered by the Company.
The Company believes that the 1996 Act will provide increased business
opportunities by opening all local markets to competition and requiring ILECs to
provide increased direct interconnection. However, under the 1996 Act, the FCC
and some state regulatory authorities may provide ILECs with increased
flexibility to reprice their services as competition develops and as ILECs allow
competitors to interconnect to their networks. In addition, some new entrants in
the local market may price certain services to particular customers or for
particular routes below the prices charged by the Company for services to those
customers or for those routes, just as the Company may itself underprice those
new entrants for other services, customers or routes. If the ILECs and other
competitors lower their rates and can sustain significantly lower prices over
time, this may adversely affect revenues of the Company if it is required by
market pressure to price at or below the ILECs' prices. If regulatory decisions
permit the ILECs to charge CAPs/CLECs substantial fees for interconnection to
the ILECs' networks or afford ILECs other regulatory relief, such decisions
could also have a material adverse effect on the Company. However, the Company
believes that the negative effects of the 1996 Act may be more than offset by
(i) the increased revenues available as a result of being able to address the
entire local exchange market, (ii) mutual reciprocal compensation with the ILEC
that results in the Company terminating its local exchange traffic on the ILEC's
network at little or no net cost to the Company, (iii) obtaining access to off-
network customers through more reasonably priced expanded interconnection with
ILEC networks and (iv) a shift by IXCs to purchase access services from
CAPs/CLECs instead of ILECs. There can be no assurance, however, that these
anticipated results will offset completely the effects of increased competition
as a result of the 1996 Act.
Historically, the Company has been able to build new networks and expand
existing networks in a timely and economical manner through strategic
arrangements such as leasing fiber optic cable from TW Cable, which already
possesses rights-of-way and has facilities in place. The Company intends to use
its experience and presence in the telecommunications industry to fully exploit
its available capacity, further develop and expand its existing
telecommunications infrastructure and offer a diversified range of products and
services in competitively priced bundles.
GOVERNMENT REGULATION
Historically, interstate and foreign communication services were subject to
the regulatory jurisdiction of the FCC, and intrastate and local
telecommunications services were subject to regulation by state public service
44
<PAGE>
<PAGE>
commissions. With the enactment of the 1996 Act, competition in all
telecommunications market segments, including interstate and intrastate, local
and long distance, became matters of national policy. As described below, the
respective roles of Federal and state regulators to establish rules and pricing
requirements to implement that policy remain the subject of litigation.
Nonetheless, the Company believes that the national policy fostered by the 1996
Act should contribute to an increase in the market opportunities for the
Company. Because these developments require numerous actions to be implemented
by individual Federal and state regulatory commissions, and are subject to
particular legal, political and economic conditions, it is not possible to
predict the pace at which regulatory liberalization will occur.
Telecommunications Act of 1996
In early 1996, President Clinton signed the 1996 Act, the most
comprehensive reform of the nation's telecommunications laws since the
Communications Act. The 1996 Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect of
prohibiting any person from providing any interstate or intrastate
telecommunications service. This provision of the 1996 Act should enable the
Company to provide a full range of local telecommunications services in any
state. States retain jurisdiction under the 1996 Act to adopt competitively
neutral regulations necessary to preserve universal service, protect public
safety and welfare, ensure the continued quality of telecommunications services
and safeguard the rights of consumers. States are also responsible for mediating
and arbitrating CLEC-ILEC interconnection arrangements if voluntary agreements
are not reached. Therefore, the degree of state regulation of local
telecommunications services may be substantial.
The 1996 Act imposes a number of access and interconnection requirements on
all local exchange providers, including CLECs, with additional requirements
imposed on ILECs. The 1996 Act requires CLECs and ILECs to attempt to resolve
interconnection issues through negotiations for at least 135 days. During these
negotiations, the parties may submit disputes to state regulators for mediation
and, after the negotiation period has expired, the parties may submit
outstanding disputes to state regulators for arbitration. As of December 31,
1997, the Company has executed 33 definitive interconnection agreements with
ILECs, covering 18 of its markets. The Company has executed interconnection
agreements with the ILECs in each of its markets in which it offers switched
services and has negotiated, or is negotiating, secondary interconnection
arrangements with carriers whose territories are adjacent to the Company's for
intrastate intraLATA toll traffic and extended area services.
Under the 1996 Act, the FCC was required to establish rules and regulations
to implement the local competition provisions of the 1996 Act within six months
of enactment. In August 1996, the FCC issued two reports and orders. In the
First Report and Order, the FCC promulgated rules to govern interconnection,
resale, unbundled network elements, and the pricing of those facilities and
services, as well as the negotiation and arbitration procedures to be utilized
by states to implement those requirements. In the Second Report and Order, the
FCC adopted rules to govern the dialing parity requirements of the 1996 Act.
In July 1997, the Eighth Circuit Court of Appeals issued a decision in
which it affirmed certain portions of the FCC's rules and vacated others. It
vacated the FCC rules governing the pricing of interconnection, resale, and
unbundled network elements on the basis that the FCC lacks jurisdiction to
establish pricing rules for intrastate service. It also vacated rules allowing
requesting carriers to select from among various provisions of individual
interconnection agreements between ILECs and other carriers, and rules
permitting the combining of network elements. In a subsequent decision, the
court vacated the FCC's dialing parity rules with respect to intraLATA service.
In October 1997, the Eighth Circuit Court of Appeals issued an order on
rehearing in which it vacated one additional FCC rule. The vacated rule
prohibited ILECs from separating network elements that they currently combine,
except upon request. Although the FCC's rules governing the pricing of
interconnection, unbundled network elements, and resale have been vacated by the
Eighth Circuit Court of Appeals, interconnection and arbitration proceedings at
the state level have continued with the states implementing their own pricing
standards.
Several entities, including the United States government, have submitted
petitions for certiorari asking the U.S. Supreme Court to review the orders of
the Eighth Circuit Court of Appeals. Those petitions ask the Supreme Court to
review the Court of Appeals' ruling that the FCC lacks jurisdiction to establish
pricing rules for intrastate services and facilities as well as to establish
dialing parity requirements for intrastate (including most intraLATA) service.
In addition, the petitions ask the Supreme Court to review the Court of Appeals'
45
<PAGE>
<PAGE>
decision to vacate the so-called 'pick and choose' rule established by the FCC.
That rule required LECs to make available to requesting carriers (including the
Company) any provision from any interconnection, unbundled network element or
resale agreement between an ILEC and any requesting carrier approved by a state
commission. Finally, several of the petitions (including that of the U.S.
government) have asked the Supreme Court to review the October 1996 rehearing
order vacating the FCC rule which required ILECs to make available combined
packages of network elements.
On January 26, 1998, the Supreme Court issued an order granting all of the
petitions for certiorari seeking its review of the order of the Eighth Circuit
Court of Appeals. The case will not be heard until autumn 1998, and may not be
decided until 1999. Unless the Supreme Court reverses the rulings of the Eighth
Circuit Court of Appeals, interconnection, resale and unbundled network element
pricing questions will continue to be determined solely by state commissions
based upon each state's own pricing rules and standards. The obligation to
provide dialing parity for intrastate services will remain a requirement of the
1996 Act, although it will be left to the states to establish rules to implement
that requirement. In addition, there will be no Federal obligation for ILECs to
offer combined platforms of network elements, although state commissions may
impose such a requirement. The Company believes that the availability of
combined platforms of network elements could create economic incentives for new
competitors to enter local markets through acquisition of ILEC network element
platforms rather than by investing in their own network facilities as the
Company does.
The 1996 Act provides a detailed list of items which are subject to these
interconnection negotiations, as well as a detailed set of duties for all
affected carriers. All local exchange carriers, including CLECs, have a duty to
(i) not unreasonably limit the resale of their services, (ii) provide number
portability if technically feasible, (iii) provide dialing parity to competing
providers, (iv) provide access to poles, ducts and conduits and (v) establish
reciprocal compensation arrangements for the transport and termination of
telecommunications.
Under the 1996 Act and rules established by the FCC in 1996 (and modified
on reconsideration in 1997), LECs, including the Company, are required to make
available number portability. Number portability refers to the ability of users
of telecommunications services to retain, at the same location, existing
telecommunications numbers without impairment of quality, reliability, or
convenience when switching from one telecommunications carrier to another. Under
the schedule for number portability implementation established by the FCC, LECs
are required to implement number portability in the 100 largest Metropolitan
Statistical Areas ('MSAs') over a 5-phase period which begins on October 1, 1997
and concludes December 31, 1998. Thereafter, in areas outside the 100 largest
MSAs, LECs are required to make available number portability within 6 months of
receipt of a specific request from another telecommunications carrier.
The 1996 Act and the FCC's rules also require LECs to implement dialing
parity. Dialing parity refers to the ability of a person that is not an
affiliate of a LEC to be able to provide telecommunications services in such a
manner that customers have the ability to route automatically without the use of
any access code, their telecommunications to the telecommunications service
provider of the customer's designation from among 2 or more telecommunications
service providers (including such LEC). Under rules promulgated by the FCC in
1996, all LECs, including the Company, are required to provide intraLATA and
interLATA dialing parity not later than February 8, 1999. However, if a LEC also
provides interLATA service as the Company does, that LEC was required to provide
dialing parity by August 8, 1997. LECs unable to comply with that August 8, 1997
deadline were required to have notified the FCC by May 8, 1997. As indicated
above, the Eighth Circuit Court of Appeals has vacated the FCC's dialing parity
rules with respect to intraLATA dialing.
In addition to those general duties of all LECs, ILECs have additional
duties to (i) interconnect at any technically feasible point and provide service
equal in quality to that provided to their customers or the ILEC itself, (ii)
provide unbundled access to network elements at any technically feasible point,
(iii) offer retail services at wholesale prices for the use of competitors, (iv)
provide reasonable public notice of changes in the network or the information
necessary to use the network and (v) provide for physical collocation. The 1996
Act further imposes various pricing guidelines for the provision of certain of
these services. Both the ILECs and the requesting carriers have a statutory duty
to negotiate in good faith regarding these arrangements, and the RBOCs, in
particular, must successfully achieve agreements, leading to the development of
facilities based competition for business and residential users, in order to
enter the long distance markets within their regions. The Company has
successfully concluded interim agreements governing interconnection arrangements
in all of the states in which it holds CLEC authority. A number of the Company's
competitors are arbitrating issues governing interconnection. The Company's
interim agreements will be replaced by final arrangements which
46
<PAGE>
<PAGE>
will reflect the outcome of arbitration and utility commission proceedings
concerning pricing and other terms of interconnection. The Company cannot
predict the outcome of such arbitration and utility commission proceedings.
As noted above, the Company, in those states in which it is a CLEC, is
subject to five obligations under the 1996 Act. Specifically, the Company must
(i) not unreasonably limit the resale of its services, (ii) provide number
portability if technically feasible, (iii) provide dialing parity to competing
providers, (iv) provide access to poles, ducts and conduits owned by it and (v)
establish reciprocal compensation arrangements for the transport and termination
of telecommunications. The Company does not restrict the resale of its services,
engages in reciprocal compensation arrangements, and provides dialing parity,
satisfying three of the five requirements. The Company generally licenses poles,
ducts and conduits, and therefore owns few such rights-of-way subject to the
requirement to make them available to other carriers. Finally, the Company now
provides interim number portability and is prepared to provide full number
portability in 1998, in compliance with FCC requirements.
The 1996 Act establishes procedures under which BOCs may apply to the FCC
for authority to provide interLATA service from states within their operating
regions. A BOC seeking in-region interLATA authority must demonstrate that it is
subject to competition from a competitor in the state with whom it has entered
into an interconnection agreement and which is providing service to business and
residential customers within the state exclusively or predominantly over its own
facilities. Alternatively, the BOC may seek in-region interLATA authority if no
provider has requested access and interconnection, and the BOC has in place a
state commission-approved statement of generally available terms and conditions
for access and interconnection which is available to competitors. Further,
access and interconnection agreements must comply with each point of a 14 point
competitive checklist. To date, four applications by BOCs for in-region
interLATA authority have been filed with the FCC. An application filed by SBC
for authority in Oklahoma was denied by the FCC in June 1997. In March of 1998,
SBC's appeal was denied. In addition, in a decision that is currently being
appealed, SBC recently prevailed in a civil lawsuit in U.S. District Court that
challenged the constitutionality of the provisions of the 1996 Act governing BOC
entry into the long distance market. Ameritech applied for authority to provide
interLATA service in Michigan. That application has been denied. The Company
anticipates that the RBOCs will eventually comply with the competitive
checklists and that their applications to provide interLATA service will
ultimately be approved. BellSouth applied for authority to provide in-region,
interLATA services in both Louisiana and South Carolina. Those applications were
denied and are currently being appealed.
If the BOCs become authorized to provide in-region interLATA service, they
will be able to offer customers a full range of local and long distance
services. BOC entry into the interLATA services markets may reduce the market
shares held by major IXCs, which are among the Company's largest customers.
However, the Company believes that BOC entry into the interLATA market will
encourage IXCs to increase their use of exchange access services offered by the
Company and by other CLECs rather than the exchange access services of the BOCs.
When BOCs provide long distance services outside their local telephone service
areas, they will be potential customers of the Company's services as well as
services of other CLECs and CAPs.
The 1996 Act obligates the FCC to establish mechanisms for ensuring that
consumers, including low income consumers and those located in rural, insular
and high cost areas, have access to telecommunications and information services
at rates reasonably comparable to those charged for similar services in urban
areas. The 1996 Act also requires the FCC to establish funding mechanisms to
make available access to telecommunications services, including advanced
services, to schools, libraries and rural health care centers. These
requirements are generally referred to as the universal service requirements of
the 1996 Act. In May 1997, the FCC adopted rules to implement the universal
service requirements. Under those rules, all telecommunications carriers,
including the Company, are required to contribute to support universal service.
If the Company offers to provide local exchange service to all customers within
certain geographic areas, it may be deemed to be an 'Eligible Carrier' and
therefore entitled to subsidy funds under the program established by the FCC.
Certain aspects of universal service, including the formulas to be used to
quantify local service costs remain under study by the FCC.
Federal Regulation
Through a series of regulatory proceedings, the FCC has established
different levels of regulation for 'dominant carriers' and 'nondominant
carriers.' For domestic interstate telecommunications purposes, the
47
<PAGE>
<PAGE>
ILECs are generally classified as dominant carriers, and all other carriers,
including the Company and other CLECs are classified as nondominant carriers. As
a nondominant carrier, the Company has been required to file tariffs and
periodic reports with the FCC concerning the Company's interstate circuits and
deployment of network facilities. The FCC has proposed eliminating this
reporting requirement for IXCs, and the Company and another CAP have filed
petitions with the FCC asking that it permit CAPs to dispense with filing of FCC
tariffs, at the option of the carrier. On June 19, 1997, the FCC issued a
memorandum opinion and order granting the Company's petition that the FCC
forbear from requiring it and other nonincumbent LECs to file tariffs for their
interstate access services. Thus, the Company now provides interstate access
service to customers pursuant to contracts. This will improve the Company's
flexibility in implementing changes to its interstate access service prices in
response to competition and will reduce the Company's regulatory compliance
costs. Tariffs must still be filed with respect to other interstate services,
such as long distance services.
The FCC's action does not, however, impact the Company's state public
utility commission tariff requirements. Whether or not the Company is subject to
a tariff filing requirement, the Company must offer its interstate services on a
nondiscriminatory basis, at just and reasonable rates, and it is subject to the
complaint provisions of the Communications Act. For its current offering of
interstate services as a nondominant carrier, the Company is not subject to rate
of return or price cap regulation by the FCC and may install and operate digital
facilities for the transmission of interstate communications without prior FCC
authorization. Pursuant to the 1996 Act, the Company will become subject to
additional Federal regulatory obligations when it provides local exchange
service in a market, such as the access and interconnection requirements that
are imposed on all local exchange providers. See 'Telecommunications Act of
1996.'
State Regulation
The Company has acquired all state government authority needed to conduct
its business as currently contemplated to be conducted. Most state public
service commissions require carriers that wish to provide local and other
jurisdictionally intrastate common carrier services to be authorized to provide
such services. The Company's operating subsidiaries and affiliates are
authorized as common carriers in ten states. This certification covers the
provision of switched services including local basic exchange service, point to
point private line, competitive access services, and in five states long
distance services. The certification process has become fairly routine since the
passage of the 1996 Act.
Local Government Authorizations
The Company may be required to obtain from municipal authorities street
opening and construction permits and other rights and other rights-of-way to
install and expand its networks in certain cities. In some cities, the Company's
affiliates or subcontractors may already possess the requisite authorizations to
construct or expand the Company's networks.
In some of the metropolitan areas where the Company provides network
services, the Company pays license or franchise fees based on a percent of gross
revenues. There can be no assurance that municipalities that do not currently
impose fees will not seek to impose fees in the future, nor is there any
assurance that, following the expiration of existing franchises, fees will
remain at their current levels. Under the 1996 Act, municipalities are required
to impose such fees on a competitively neutral and nondiscriminatory basis.
There can be no assurance, however, that municipalities that currently favor the
ILECs will conform their practices in a timely manner or without legal
challenges by the Company or another CAP or CLEC.
If any of the Company's existing franchise or license agreements for a
particular metropolitan area were terminated prior to its expiration date and
the Company were forced to remove its fiber optic cables from the streets or
abandon its network in place, even with compensation, such termination could
have a material adverse effect on the Company's operation in that metropolitan
area and could have a material adverse effect on the Company.
The Company is party to various regulatory and administrative proceedings,
however, subject to the discussion above, the Company does not believe that any
such proceedings will have a material adverse effect on its business.
48
<PAGE>
<PAGE>
COMPANY NAME
The use of the 'Time Warner' name by the Company is subject to a certain
license agreement with TW. See 'Risk Factors -- Discontinuance of Use of `Time
Warner' Name' and 'Certain Relationships and Related Transactions -- Certain
Operating Agreements.'
EMPLOYEES
As of March 31, 1998, the Company employed approximately 739 full-time
employees, none of whom are represented by a union or covered by a collective
bargaining agreement. The Company believes that its relations with its employees
are good. In connection with the construction and maintenance of its networks
and the conduct of its other business operations, the Company uses third party
contractors, some of whose employees may be represented by unions or collective
bargaining agreements. The Company believes that its success will depend in part
on its ability to attract and retain highly qualified employees and maintain
good working relations with its current employees.
PROPERTIES
The Company leases network hub sites and other facility locations and sales
and administrative offices, substantially all of which are leased from TW Cable,
in each of the cities in which it operates networks. During 1996 and 1997,
rental expense for the Company's facilities and offices totaled approximately
$3.9 million and $4.7 million, respectively. The Company owns no material real
estate. Management believes that its properties, taken as a whole, are in good
operating condition and are suitable and adequate for the Company's business
operations. The Company currently leases approximately 130,000 square feet of
space in Greenwood Village, Colorado, where its corporate headquarters are
located.
LEGAL PROCEEDINGS
The Company is a party to various claims and legal and regulatory
proceedings arising in the ordinary course of business. The Company does not
believe that such claims or proceedings, individually or in the aggregate, will
have a material adverse effect on the Company's business, financial condition or
results of operations.
49
<PAGE>
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information (as of March 31, 1998)
with respect to the persons who are members of the Board of Directors, executive
officers or key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ----------------------------------------------------------------------
<S> <C> <C>
Stephen A. McPhie................... 43 President and Chief Executive Officer
Larissa L. Herda.................... 39 Senior Vice President, Sales
Paul B. Jones....................... 50 Senior Vice President, Legal and Regulatory
Raymond H. Whinery.................. 43 Senior Vice President, Technical Operations
A. Graham Powers.................... 51 Senior Vice President, Engineering and Technology
David J. Rayner..................... 41 Vice President, Finance
Julie A. Rich....................... 44 Vice President, Human Resources and Business Administration
Richard J. Bressler................. 40 Director*
Peter R. Haje....................... 63 Director*
Spencer B. Hays..................... 53 Director*
</TABLE>
- ------------
* Prior to the completion of the Stock Offering, the Board of Directors will be
reconstituted and the directors will be selected and nominated in accordance
with the Stockholders Agreement.
Mr. McPhie has served as President and Chief Executive Officer of the
Company since January 1997. Prior to joining the Company, Mr. McPhie was Vice
President of Business Development of U S West, Inc. since November 1995. From
1993 to 1995, Mr. McPhie served as Senior Vice President of MFS Network
Technologies. From 1989 to 1993, Mr. McPhie was the President of the Mission
Group, a telecommunications consultancy.
Ms. Herda was appointed the Company's Senior Vice President, Sales in March
1997. From 1989 to 1997, Ms. Herda was employed by MFS Telecom Inc., most
recently as Southeast Regional Vice President and General Manager.
Mr. Jones has served as the Senior Vice President, Legal and Regulatory for
the Company since October 1993. From 1992 to 1993, Mr. Jones served as Senior
Vice President, Corporate Development of Time Warner Cable Ventures. Mr. Jones
was Senior Vice President and General Counsel of Warner Cable from 1987 to 1992
and Vice President, Strategy and Development of CBS Publishing Group from 1985
to 1986. From 1977 to 1979, Mr. Jones was the Assistant General Counsel for the
FCC.
Mr. Whinery has held the position of Senior Vice President, Facilities and
Operations since January 1997. From May 1994 to January 1997, Mr. Whinery served
as the Senior Director of Engineering and Planning. Prior to May 1994, Mr.
Whinery was employed by U S West, Inc. since 1978 and acted as General Manager
of Idaho, Montana, North Dakota and South Dakota from 1992 to 1994.
Mr. Powers was appointed Senior Vice President, Engineering and Technology
in June 1996. From August 1993 to May 1996, Mr. Powers served as Senior Vice
President, Operations Development and Business Implementation. Prior to joining
the Company, Mr. Powers was the President of Telecommunications Strategy Inc.
from May 1992 to July 1993 and previously held various management positions at
American Television and Communications Corporation.
Mr. Rayner was appointed the Company's Vice President, Finance in February
1997. Prior to his appointment, Mr. Rayner served as Controller, a position held
since May 1994. From 1982 to 1994, Mr. Rayner held various financial and
operational management positions in Time Warner Cable.
Ms. Rich was appointed the Company's Vice President, Human Resources and
Business Administration in March 1998. From June 1996 to February 1998, she
owned an independent human resources consulting practice. From 1984 to 1996 she
was a founder of XEL Communications, Inc. and held positions of Director and
Vice President of Human Resources.
Mr. Bressler has served as a Director of the Company since February 5, 1998
and as Executive Vice President and Chief Financial Officer of Time Warner Inc.
since January 15, 1998. Prior to that, he served as
50
<PAGE>
<PAGE>
Time Warner Inc.'s Senior Vice President and Chief Financial Officer from March
16, 1995; as Senior Vice President, Finance from January 2, 1995; and as a Vice
President prior to that.
Mr. Haje has served as a Director of the Company since February 5, 1998 and
as Executive Vice President and General Counsel of Time Warner Inc. since
October 1, 1990 and Secretary since May 20, 1993.
Mr. Hays has served as a Director of the Company since February 5, 1998 and
as Vice President and Deputy General Counsel of Time Warner Inc. for more than
the past five years.
COMPENSATION OF DIRECTORS
It is currently anticipated that directors who are officers of the Company
or of any of the holders of Class B Common Stock will receive no compensation
for their services as directors. Each director who is not an officer of the
Company or of any of the holders of Class B Common Stock is entitled to receive
an annual retainer of $ (to be paid % in cash and % in Class A Common
Stock) and an additional $ plus reasonable expenses for attending each meeting
of the Board of Directors. Each such director is also entitled to be paid $
annually for each committee of the Board of Directors for which such director
serves as chairman.
BOARD COMPOSITION
Directors are elected annually. The Stockholders Agreement provides that
the Board of Directors will consist of up to 10 directors and that at each
annual meeting of the Company's stockholders at which directors are elected, the
holders of the Class B Common Stock (all of which is currently held by the
Existing Stockholders) will vote their shares in favor of the following
nominees: (i) up to seven nominees selected by the holders of Class B Common
Stock, (ii) the Chief Executive Officer of the Company (the 'CEO') and (iii) two
nominees who are neither employed by nor affiliated with the Company or any
holder of Class B Common Stock and who are selected by a committee comprised of
the members of the Board of Directors, other than the CEO and the independent
directors. See 'Certain Relationships and Related Transactions -- Stockholders
Agreement.' The holders of the Class A Common Stock will not have the right, as
a class, under the Company's Restated Certificate of Incorporation or the
Stockholders Agreement to nominate any individuals for election to the Board of
Directors.
COMMITTEES OF BOARD OF DIRECTORS
The Board of Directors currently has two committees: (i) an Audit Committee
and (ii) a Compensation Committee.
The Audit Committee is currently comprised of . The Audit Committee
reviews and recommends to the Board, as it deems necessary, the internal
accounting and financial controls for the Company and the accounting principles
and auditing practices and procedures to be employed in preparation and review
of financial statements of the Company. The Audit Committee makes
recommendations to the Board concerning the engagement of independent public
accountants and the scope of the audit to be undertaken by such accountants.
Ernst & Young LLP presently serves as the independent auditors of the Company.
The Compensation Committee is currently comprised of . The
Compensation Committee reviews and, as it deems appropriate, recommends to the
Board policies, practices and procedures relating to the compensation of the
officers and other managerial employees and the establishment and administration
of employee benefit plans. The Compensation Committee exercises all authority
under any employee stock option plans of the Company as the Committee specified
in such plans (unless the Board resolution appoints any other committee to
exercise such authority), and advises and consults with the officers of the
Company as may be requested regarding managerial personnel policies. The
Compensation Committee will have such additional powers and be granted
additional authority as may be conferred upon it from time to time by the Board.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning total compensation
paid to the Company's current Chief Executive Officer and each of its four
remaining most highly compensated current executive officers (the 'named
executive officers') for services rendered to the Company prior to the Stock
Offering during 1998 in their capacities as executive officers.
51
<PAGE>
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------
AWARDS(2)
----------
ANNUAL SECURITIES PAYOUTS
COMPENSATION UNDERLYING ----------
------------ OPTIONS LTIP ALL OTHER
NAME & PRINCIPAL POSITION SALARY(1) AWARDED(3) PAYOUTS(4) COMPENSATION(5)
- -------------------------------------------------------- ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Stephen A. McPhie ...................................... $234,000 -- -- $--
President and Chief
Executive Officer.....................................
Paul B. Jones .......................................... $259,242 8,350 $ 150,000 $--
Senior Vice President,
Legal & Regulatory....................................
Larissa L. Herda ....................................... $176,800 3,800 -- $--
Senior Vice President, Sales..........................
A. Graham Powers ....................................... $175,479 3,800 $ 67,500 $ 1,620
Senior Vice President,
Engineering & Technology..............................
</TABLE>
- ------------
(1) The information provided under the heading 'Salary' is the current
annualized salary. Once the Stock Offering is completed, the named executive
officers will receive the annual salaries set forth in their employment
agreements with the Company as follows: Mr. McPhie, $300,000; Mr. Jones,
$259,000; Ms. Herda, $230,000; Mr. Powers, $175,000; and .
These employment agreements also provide for an annual bonus target of 50%
of each executive's annual salary. See 'Employment Agreements.' In
accordance with rules of the Securities and Exchange Commission ('SEC'),
amounts of personal benefits totalling less than 10% of the total annual
salary and bonus reported in the Table have been omitted.
(2) Mr. McPhie holds 12,450 restricted shares of common stock of US WEST's Media
Group ('UMG') awarded by US WEST, 11,200 of which will vest on February 6,
1999 and 1,250 of which will vest on February 21, 1999. Mr. McPhie does not
receive any dividends paid on these shares. The value of these restricted
shares based on the closing price of UMG common stock on the New York Stock
Exchange Composite Listing on , 1998 was $ . None of the other
named executive officers was awarded restricted stock of US WEST, TW or the
Company during 1998 or holds any such shares.
(3) All of these options are exercisable for the common stock of TW. None of
these options was awarded with tandem stock appreciation rights. For
information regarding stock option awards to be made with respect to Class A
Common Stock in connection with the Stock Offering, see 'Stock Option
Plan -- Awards under the 1998 Option Plan.'
(4) These payouts were made in 1998 to participants in the TW Cable Long-Term
Cash-Flow Incentive Plan for the 1994 to 1997 four-year cycle.
(5) The amounts shown in this column include the following:
(a) Pursuant to the TWC Savings Plan (the 'Savings Plan'), a defined
contribution plan available generally to employees of the Company, each
executive named above, if eligible, may defer a portion of his or her
annual compensation and the Company contributes an additional two-thirds of
that contribution so deferred by the executive ('Matching Contribution').
These Matching Contributions were invested under the Savings Plan. The
amount contributed on behalf of each named executive officer for 1998,
through April 30, 1998, is disclosed under the heading 'All Other
Compensation.'
(b) The Company maintains a program of life and disability insurance
generally available to all salaried employees on the same basis. For 1998
prior to the Stock Offering, group term life insurance was reduced to
$50,000 for Mr. Jones, who is given an annual cash payment equal to the
cost of replacing coverage amounting to three times base salary and annual
bonus less $50,000.
52
<PAGE>
<PAGE>
STOCK OPTION PLAN
GENERAL
The Time Warner Telecom Inc. 1998 Stock Option Plan (the '1998 Option
Plan') provides for the granting of stock options to purchase shares of Class A
Common Stock to directors and employees of the Company and its subsidiaries. The
Company believes that the stock options to be granted under the 1998 Option Plan
are an important part of the compensation of the Company's directors and key
employees. The Board of Directors approved the 1998 Option Plan on
and the stockholders approved it on .
STOCK SUBJECT TO THE PLAN
The 1998 Option Plan provides for the granting of options ('Options') to
purchase a maximum of shares (approximately % of the Class A Common
Stock expected to be outstanding) of the Company's Class A Common Stock (the
'Awards'). The shares of Class A Common Stock issued under the 1998 Option Plan
may be either authorized and unissued shares or issued shares held in treasury,
or both. The Company will reserve the number of shares necessary to satisfy the
maximum number of shares that may be issued under the 1998 Option Plan. The
Class A Common Stock underlying any Option that expires, terminates or is
canceled for any reason without being exercised will again become available for
Awards under the 1998 Option Plan. Cash payments received by the Company upon
the exercise of Options will be used for general corporate purposes.
ADMINISTRATION AND ELIGIBILITY
The Board of Directors has initially delegated authority to administer the
1998 Option Plan to its Compensation Committee (the 'Committee'). Members of the
Committee will be 'non-employee directors' within the meaning of the SEC Rule
16b-3 and 'outside directors' within the meaning of Section 162(m) of the
Internal Revenue Code of 1986, as amended (the 'Code').
Awards may be made to employees and directors whether or not they
participate or are entitled to participate in any other option, restricted stock
or other compensation plan of the Company. The maximum number of shares that may
be awarded to any one person, is . The exercise of Options granted to a
prospective employee will be conditioned upon such person becoming an employee
of the Company or one of its subsidiaries.
Except as expressly provided by the 1998 Option Plan, the Committee will
have the plenary authority in its discretion, to grant Awards under the 1998
Option Plan and to determine the terms and conditions (which need not be
identical) of such Awards, including without limitation, (a) the employees and
directors to whom, and the time or times at which, Awards will be granted, (b)
the number of Awards to be granted, (c) whether an Option will be an incentive
stock option, within the meaning of Section 422A of the Code ('ISO') or a
nonqualified stock option ('NSO'), (d) the exercise price of any such Award, (e)
when an Option can be exercised and whether in whole or in installments, and (f)
the form, terms and provisions of any agreement in which Awards of Options are
made (an 'Award Agreement').
OPTIONS
Purchase Price. Subject to the limitations set forth below, the purchase
price of the shares of Class A Common Stock covered by each Option will be
determined by the Committee on the date of grant. The purchase price of the
shares of Class A Common Stock covered by each Option will not be less than the
fair market value of the Class A Common Stock on the date of grant of such
Option. In addition, an ISO may not be granted to any person who owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company unless the purchase price is at least 110% of the fair
market value of the Class A Common Stock at the time the ISO is granted and the
ISO is not exercisable after the expiration of five years from the date it is
granted.
Term and Exercise. The duration of each Option will be for a period of up
to ten years as the Committee determines at the time of grant and may be
exercised in whole or in part any time or only after a period of time or in
installments, as determined by the Committee at the time of grant, or by the
Committee's subsequent acceleration. Under the terms of the 1998 Option Plan,
Options become immediately exercisable in full if the optionee's employment
terminates by reason of death or total disability.
53
<PAGE>
<PAGE>
The Committee will establish Option exercise procedures. Payments may be
made in cash or, unless otherwise determined by the Committee, in shares of
Class A Common Stock already owned by the optionee or partly in cash and partly
in such Common Stock.
Options may be exercised after termination of employment only to the extent
provided in the Award Agreement; provided, however, that (i) if employment
terminates by reason of death or total disability, Options will remain
exercisable for a period of at least one year after such termination (but not
later than the scheduled expiration of such Options) and (ii) if employment
terminates for cause, then all such Options will terminate immediately.
Transferability. To the extent permitted by the Award Agreement, Options
will be transferable by gift to members of a holder's immediate family. Options
will also be transferable to a designated beneficiary or by will or the laws of
descent and distribution upon the death of the holder.
ACCELERATION OF OPTIONS
Unless otherwise provided in Award Agreement, each Award will vest upon the
occurrence of any of the following change-of-control transactions: (i) the Board
of Directors (or stockholders if required) approves a consolidation or merger in
which the Company is not the surviving corporation, the sale of all or
substantially all of the assets of the Company, or the liquidation or
dissolution of the Company or (ii) (a) TW, directly or indirectly, no longer has
the right under the Stockholders Agreement, or any other agreement or
arrangement, to cause at least three of its nominees to be elected to the
Company's Board of Directors, and (b) any person or entity, other than an
Existing Stockholder, or any affiliate of an Existing Stockholder, owns more
than 20% of the common equity of the Company.
Under Section 4999 of the Code, an optionee may be required to pay an
excise tax on certain cash or stock received in connection with the optionee's
termination of employment following any such change-of-control transaction, and,
under Section 280G of the Code, the Company, may not be entitled to a deduction
for Federal income tax purposes for certain of such cash or stock paid to an
optionee. However, the 1998 Option Plan provides that Award Agreements may
contain provisions relating to the applicability of the penalty provisions of
Section 4999 of the Code to any such cash or stock received by an optionee.
ADDITIONAL PROVISIONS
Change in Capitalization. In the event of stock split, stock dividend,
recapitalization, merger, consolidation or other similar transaction which
affects the character or amount of the outstanding shares of Class A Common
Stock, the Committee will equitably adjust the purchase price of each Award and
the number of shares subject to each such Award, and the number of shares for
which Awards may be granted under the 1998 Option Plan will be appropriately
adjusted.
Other. The obligations of the Company with respect to Awards granted under
the 1998 Option Plan are subject to all applicable laws. Unless otherwise
provided by the Committee, the payment of withholding taxes due in respect of an
Award under the 1998 Option Plan may be made with shares of Class A Common
Stock.
AMENDMENT AND TERMINATION
No Awards may be granted under the 1998 Option Plan on or after ,
2008. The Board of Directors may terminate or amend the 1998 Option Plan at any
time, provided that the Board of Directors must comply with all applicable laws,
applicable stock exchange listing requirements and applicable requirements for
the 1998 Option Plan to qualify as 'performance based' under Section 162(m) of
the Code. Termination or amendment of the 1998 Option Plan or any outstanding
Award may not adversely affect the rights of any holder without his or her
consent.
AWARDS UNDER THE 1998 OPTION PLAN
Prior to the Stock Offering, there has been no public trading market for
shares of the Company's Common Stock and no Awards have been made under the 1998
Option Plan. As stated above, any Awards under the 1998 Option Plan will be
determined by the Committee in its discretion. It is, therefore, not possible to
predict the Awards that will be made to particular officers in the future under
the 1998 Option Plan, except that in connection with the completion of the Stock
Offering, it is expected that Messrs. McPhie, Jones, Powers and
54
<PAGE>
<PAGE>
and Ms. Herda will be awarded NSOs with respect to , ,
, and shares of Class A Common Stock, respectively. These
Awards will be exercisable at the initial offering price, will become
exercisable in installments of one-quarter on each of the first four
anniversaries of the date of grant (subject to acceleration upon the occurrence
of certain events) and will expire ten years from the date of grant and the
non-employee directors will also receive Awards under the 1998 Option Plan.
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS
The following summary generally describes the principal Federal (and not
state and local) income tax consequences of Awards granted under the 1998 Option
Plan. It is general in nature and is not intended to cover all tax consequences
that may apply to a particular officer or to the Company. The provisions of the
Code and the regulations thereunder relating to these matters are complicated
and their impact in any one case may depend upon the particular circumstances.
If an Option is granted in accordance with the terms of the 1998 Option
Plan, no income will be recognized by the recipient thereof at the time the
Option is granted.
On exercise of an NSO, the amount by which the fair market value of the
shares of Class A Common Stock on the date of exercise exceeds the purchase
price of such shares will generally be taxable to the optionee as ordinary
income, and will be deductible for tax purposes by the Company in the year in
which the optionee recognized the ordinary income. The disposition of shares
acquired upon exercise of an NSO will ordinarily result in long-term or
short-term capital gain or loss (depending on the applicable holding period) in
an amount equal to the difference between the amount realized on such
disposition and the sum of the purchase price and the amount of ordinary income
recognized in connection with the exercise of the NSO.
On exercise of an ISO, an optionee will generally not recognize any income
and the Company will generally not be entitled to a deduction for tax purposes.
However, the difference between the exercise price and the fair market value of
the shares received on the date of exercise will be treated as a positive
adjustment in determining alternative minimum taxable income, which may subject
the optionee to the alternative minimum tax. The disposition of shares acquired
upon exercise of an ISO will ordinarily result in long-term or short-term
capital gain or loss (depending on the applicable holding period). However, if
the optionee disposes of shares acquired upon exercise of an ISO within two
years after the date of grant or within one year after the date of exercise (a
'disqualifying disposition'), the Optionee will generally recognize ordinary
income, and the Company will generally be entitled to a deduction for tax
purposes in the amount of the excess of the fair market value of the shares of
Class A Common Stock on the date the ISO is so exercised over the purchase price
(or, in certain circumstances, the gain on sale, if less). Any excess of the
amount realized by the optionee on the disqualifying disposition over the fair
market value of the shares on the date of exercise of the ISO will ordinarily
constitute capital gain.
If an Option is exercised through the use of Class A Common Stock
previously owned by the optionee, such exercise generally will not be considered
a taxable disposition of the previously owned shares and thus no gain or loss
will be recognized with respect to such shares upon such exercise. However, if
the previously owned shares were acquired on the exercise of an ISO or other
tax-qualified stock option and the holding period requirement for those shares
was not satisfied at the time they were used to exercise an Option intended to
qualify as an ISO, such use would constitute a disqualifying disposition of such
previously owned shares resulting in the recognition of ordinary income (but,
under proposed Treasury Regulations, not any additional capital gain) in the
amount described above. If an otherwise qualifying ISO becomes first exercisable
in any one year for shares having a value in excess of $100,000 (grant date
value), the portion of the Option in respect of such excess shares will be
treated as an NSO.
EMPLOYMENT AGREEMENTS
The Company is a party to employment agreements with the named executive
officers of the Company. These agreements have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part.
Among other things, the agreements with the Company's named executive
officers provide for: a three-year term of employment in a specified executive
post, commencing on the closing date of the Stock Offering; an annual salary; an
annual bonus in the discretion of the Company, generally targeted at 50% of the
named
55
<PAGE>
<PAGE>
executive officer's salary; and participation in any pension, profit-sharing,
employee stock ownership, vacation, insurance, hospitalization, medical, health,
disability and other employee benefit or welfare plan, program or policy whether
now existing or established hereafter, to the extent that employees at such
executive's level are generally deemed eligible under the general provisions
thereof. The minimum annual salaries under these agreements are $300,000 for Mr.
McPhie; $259,000 for Mr. Jones; $230,000 for Ms. Herda; and $175,000 for Mr.
Powers and $ for .
Generally, such agreements include a narrow definition of the 'cause' for
which an executive's employment may be terminated and in that event, the
executive will only receive earned and unpaid base salary accrued through such
date of termination.
These agreements typically provide that in the event of the Company's
material breach or termination of the executive's employment during the term of
employment without cause, the executive will be entitled to receive a lump-sum
payment equal to the present value of the base salary and annual bonus otherwise
payable during the remaining portion of the executive's term of employment,
provided that such amount shall not be less than the sum of such salary and
bonus prorated for an 18-month period. Executives are not generally required to
mitigate damages after such a termination, other than as necessary to prevent
the Company from losing any tax deductions to which it otherwise would have been
entitled for any payments deemed to be 'contingent on a change' under the Code.
If an executive becomes disabled during the term of his or her employment
agreement, the executive typically will receive 75% of the executive's then
current salary and his or her applicable target annual bonus amount prorated for
an 18-month period. Any such payments will be reduced by amounts received from
Worker's Compensation, Social Security and disability insurance policies
maintained by the Company.
If an executive dies during the term of an employment agreement, generally
the executive's beneficiaries will receive the executive's earned and unpaid
salary to the last date of the month in which the death occurs and a pro rata
portion of the executive's bonus for the year of his death.
PENSION COVERAGE
Although the Company does not currently have its own pension plan, Messrs.
Jones and Powers will, upon retirement, be entitled to receive benefits under
the Time Warner Cable Pension Plan (the 'TW Cable Pension Plan'). Mr. Mc Phie
will be entitled to benefits under the U S WEST Pension Plans. Set forth below
is a brief description of these plans.
TW CABLE PENSION PLAN
A participant accrues benefits under the TW Cable Pension Plan on the basis
of 1 1/4% of the average annual compensation (defined as the highest average
annual compensation for five consecutive full years of employment in the last
ten years, which includes regular salary, overtime and shift differential
payments, and non-deferred bonuses paid according to a regular program) up to
the average Social Security Wage Base plus 1 2/3% in excess of the average
Social Security Wage Base for each year of service up to 35 years and 1/2% for
each year of service over 35 years. In addition, there is a supplemental benefit
of $60 per year times years of service up to thirty years. Compensation for
purposes of calculating average annual compensation under the TW Cable Pension
Plan is limited to $200,000 per year for 1989 through 1993 and $150,000 per year
for 1994 and thereafter (each subject to adjustments provided in the Code).
Eligible employees become vested in all benefits under the TW Cable Pension Plan
on the earlier of five years of service or certain other events.
Federal law limits both the amount of compensation that is eligible for the
calculation of benefits and the amount of benefits derived from employer
contributions that may be paid to participants under the TW Cable Pension Plan.
However, as permitted by the Employee Retirement Income Security Act of 1974, as
amended ('ERISA'), TW Cable has adopted the Time Warner Cable Excess Benefit
Pension Plan (the 'Excess Plan'), which provides for payments by TW Cable of
certain amounts which employees of TW Cable would have received under the TW
Cable Pension Plan if eligible compensation were limited to $250,000 in 1994
(increased 5% per year thereafter, to a maximum of $350,000) and there were no
payment restrictions.
The following table shows the estimated annual pension payable upon
retirement to employees in specified remuneration and years-of-service
classifications. The amount of the estimated annual pension is based upon a
56
<PAGE>
<PAGE>
pension formula which applies to all participants in both the TW Cable Pension
Plan and the Excess Plan. The estimated amounts are based on the assumption that
payments under the TW Cable Pension Plan will commence upon normal retirement
(generally age 65), that the TW Cable Pension Plan will continue in force in its
present form and that no joint and survivor annuity will be payable (which would
on an actuarial basis reduce benefits to the employee but provide benefits to a
surviving beneficiary). Amounts calculated under the pension formula which
exceed ERISA limits will be paid under the Excess Plan from TW Cable's assets
and are included in the amounts shown in the following table.
ESTIMATED ANNUAL PENSION FOR YEARS OF CREDITED SERVICE
<TABLE>
<CAPTION>
HIGHEST CONSECUTIVE FIVE YEAR
AVERAGE COMPENSATION 10 15 20 25 30 35
- --------------------------------------------------- ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$50,000............................................ 7,036 10,555 14,073 17,591 21,109 24,627
$100,000........................................... 15,370 23,055 30,740 38,425 46,110 53,795
$200,000........................................... 32,037 48,055 64,074 80,092 96,111 112,129
$300,000........................................... 48,703 73,055 97,406 121,758 146,110 170,461
</TABLE>
The estimated annual benefits payable under the TW Cable Pension Plan and
the Excess Plan, as of May 1, 1988, would be based on average compensation of
$ for Mr. Jones and $ for Mr. Powers with and years of
credited service, respectively.
57
<PAGE>
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT
In connection with the Stock Offering, the Existing Stockholders will enter
into a stockholders' agreement (the 'Stockholders Agreement'). The following
summary description of the Stockholders Agreement does not purport to be
complete and is qualified in its entirety by reference to the text of such
agreement, which is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. Additionally, there can be no assurance that the
Existing Stockholders will not cause the Stockholders Agreement to be amended,
modified or terminated or cause the Company to waive any provision of such
agreement.
The Stockholders Agreement provides that at each annual meeting of the
Company's stockholders at which directors are elected, the holders of the Class
B Common Stock will vote their shares in favor of the following nominees: (i) up
to seven nominees selected by the holders of Class B Common Stock (the 'Class B
Nominees') as described in the next paragraph, (ii) the CEO and (iii) two
nominees who are neither employed by nor affiliated with the Company or any
holder of Class B Common Stock and who are selected by a committee comprised of
the members of the Board of Directors, other than the CEO and the independent
directors. Solely as a result of the agreement of each Existing Stockholder to
vote in favor of the other Existing Stockholders' director nominees under the
Stockholders Agreement, the Existing Stockholders may be deemed to share
beneficial ownership of the shares beneficially owned by each of them.
Under the Stockholders Agreement, the Class B Nominees will be selected as
follows: initially three Class B Nominees will be designated by TW, three by U S
WEST and one by Newhouse. Under the Stockholders Agreement, the ability of the
Existing Stockholders to designate any Class B Nominees depends on the identity
of the particular stockholder and the percentage of shares of Common Stock owned
by it. Generally, subject to taking into account adjustments for dilution, each
Existing Stockholder must own at least 9.5% of the Common Stock to appoint one
director. In the case of TW, so long as it owns at least 19% of the Common Stock
it will be entitled to nominate three directors. In the event that TW owns less
than 19% of the Common Stock (such event, a 'TW Step Event'), the number of
directors which TW may nominate will decrease proportionally with its ownership
of the Common Stock until it owns less than 9.5%, at which point it will not be
entitled to nominate any directors. In the case of U S WEST, so long as a TW
Step Event has not occurred and it owns at least 9.5% of the Common Stock, U S
WEST will be entitled to nominate three directors. If a TW Step Event has
occurred, the number of directors that U S WEST is entitled to nominate will
decrease proportionally with its ownership of the Common Stock (in accordance
with the same percentage thresholds as apply to TW) until it owns less than
9.5%, at which point it will not be entitled to nominate any directors. If a TW
Step Event has not occurred but U S WEST owns less than 9.5% of the Common
Stock, it will not be entitled to nominate any directors. In the case of
Newhouse, so long as it owns at least 9.5% of the Common Stock, Newhouse will be
entitled to nominate one director.
The Stockholders Agreement prohibits any transfer of Class B Common Stock
held by the Existing Stockholders, unless expressly permitted under the terms
thereof. In addition, voting agreements relating to the Class B Common Stock
with any third party are prohibited.
In the event that a selling Class B Common Stockholder proposes to sell all
of the shares of Class B Common Stock received by it in the Reorganization
pursuant to a bona fide offer from an unaffiliated third party, such stockholder
shall give notice (the 'Refusal Notice') to all other holders of Class B Common
Stock, which notice shall contain the identify of the offeror and an offer to
sell such stock to such holders of Class B Common Stock upon the terms and
subject to the conditions set forth in the offer from the third party. The non-
selling holders of Class B Common Stock will have the right (the 'Right of First
Refusal') to purchase pro rata all, but not less than all, of such Class B
Common Stock within 45 days of the delivery of the Refusal Notice. If an
agreement in respect of such purchase is not reached during such 45 day period
or if the non-selling holders have otherwise failed to exercise their Right of
First Refusal, the selling Class B Stockholder shall be free, for a period of 90
days thereafter, to sell such shares of Class B Common Stock (as shares of Class
B Common Stock) to a third party on terms and conditions that are no less
favorable to the selling Class B Common Stockholder than those contained in the
Refusal Notice. In connection with the sale by a holder of all, but not less
than all, of the shares of Class B Common Stock received by it in the
Reorganization and then owned by such holder, such holder shall have the right
to transfer all of its right, if any, to nominate Class B Nominees for election
to the board. In addition, if TW proposes to sell shares of Class B Common Stock
that represent more
58
<PAGE>
<PAGE>
than one-third of the voting power of the Common Stock, then other holders of
Class B Common Stock will have certain 'tag-along' rights that provide them with
the right to sell their shares of Class B Common Stock on a pro rata basis along
with, and on the same terms and conditions as, TW.
Except for transfers to other Class B Stockholders and any other transfer
described above, immediately prior to any direct transfer of Class B Common
Stock or certain indirect transfers of Class B Common Stock all such shares of
Class B Common Stock will be required to be converted to Class A Common Stock;
provided, that neither (a) transfers in connection with the formation of a new
holding company and the acquisition by such new holding company of 100% of the
stock or assets of the ultimate parent of a Class B Common Stockholder, where
such new holding company continues to be publicly held after such transaction
and the stockholders of such ultimate parent immediately prior to such
transaction continue to hold a majority of the total voting power of the capital
stock of such new holding company immediately after such transaction or (b)
transfers by a holder of Class B Common Stock to its ultimate parent or to any
subsidiary of its ultimate parent shall be subject to the foregoing requirement.
The Existing Stockholders will have demand registration rights with respect
to shares of Class A Common Stock (including shares of Class A Common Stock
issuable or issued upon the conversion of shares of Class B Common Stock) on the
following terms: (i) no demand may be made during the first 180 days after the
closing date of the Stock Offering, (ii) the Company shall not be obligated to
effect a demand within 180 days from the effective date of the previous demand
registration, (iii) the Company will not be required to effect a demand
registration unless the aggregate number of shares of Class A Common Stock to be
registered is, at any given time, at least 1% of the Class A Common Stock then
outstanding and (iv) the demand registration may be postponed for up to two
months if the Company believes that such registration would have a material
adverse effect on any proposal or plan to engage in any financing, acquisition
of assets or any merger, consolidation, tender offer or other significant
transaction. In addition, each Existing Stockholder may cause the Company to
include such stockholder's shares in certain other registered offerings under
the Securities Act, subject to certain conditions. Each Existing Stockholder
will pay all underwriting discounts and commissions and any transfer taxes
attributable to the sale of its shares. The Company will pay all expenses
relating to its obligations to file and maintain the effectiveness of a
registration statement, the legal fees of one counsel to represent the Existing
Stockholders and the fees and expenses of its auditors.
CERTAIN OPERATING AGREEMENTS
Capacity License Agreements. Each of the Company's local operations is
party to a certain Capacity License Agreement (collectively, the 'Capacity
License') with the local cable television operation of TW Cable, providing the
Company with a 30 year exclusive right to utilize all of the capacity of
specified fiber-optic cable owned and maintained by the respective TW Cable
operation. For the Company's existing networks, such Capacity License has been
fully paid and does not require additional license fees (although certain
maintenance fees and fees for splicing and similar services are payable
periodically). The Company may request that the TW Cable construct and provide
additional fiber-optic cable capacity to meet the Company's future needs;
however, TW Cable is not obligated to provide such fiber capacity to the
Company. See 'Risk Factors -- Relationship with TW Cable.' If TW Cable provides
such additional capacity, the Company will pay an allocable share of the cost of
construction of the fiber upon which capacity is to be provided. Such payments
are due one-half upon commencement of construction and the remainder upon
initial acceptance of the capacity by the Company. The Company is responsible
for all taxes and franchise or similar fees arising out of its utilization of
the capacity, and a pro rata portion of other out-of-pocket expenses incurred by
TW Cable with regard to the cable upon which such capacity is made available.
The Company is permitted to use the capacity for telecommunications services and
any other lawful purpose, except for the provision of Residential Services and
Content Services. The Capacity License does not restrict the Company from
licensing fiber optic capacity from parties other than TW Cable. The Company has
the right to terminate a Capacity License in whole or in part at any time upon
180 days' notice and payment of any outstanding fees regarding the terminated
capacity. TW Cable has the right to terminate a Capacity License upon 180 days'
notice in the event of, among other things, certain governmental proceedings or
third party challenges to TW Cable's franchises or the Capacity License. See
'Risk Factors -- Relationship with TW Cable.'
Facility Lease Agreements. The Company leases or subleases physical space
located at TW Cable's facilities for various purposes pursuant to certain
Facility Lease Agreements (the 'Facility Agreements'). In the
59
<PAGE>
<PAGE>
event that at least a majority of the ownership of any TW Cable system is not
owned by one or more Parent Companies (or their subsidiaries) the Company will
be required, at its own expense, to segregate and partition in a reasonable,
secure manner its leased or subleased space. The lease rates for properties
owned by TW Cable and leased to the Company are based upon comparable rents in
the local market, taking into account other factors such as the term of the
lease, type of space, square footage, location and leasehold improvements funded
to date by TW Cable. Generally, the term of such leases are for 15 years, with
two five year options to renew. With respect to properties leased by TW Cable,
the Company is charged a pro rata portion of the rent and fees payable under the
primary lease. The duration of the Company's subleases are coextensive with TW
Cable's primary lease.
Services Agreement. TW Cable provides certain administrative and operating
services, including certain payroll, tax, management information systems, and
legal support services, to the Company pursuant to a certain Administrative
Services Agreement (the 'Services Agreement'). The costs for such services are
determined by TW Cable based upon the Company's historical and projected usage,
depending on the amount and type of administrative services to be provided.
Residential Support Agreements. Pursuant to certain residential support
agreements ('Residential Agreements'), the Company will provide certain support
and interconnection services or service elements, on an unbundled basis, to TW
Cable for its residential telephony business. Generally, all rates for such
residential support services offered to TW Cable may be adjusted annually by the
Company, but may not be less favorable than the wholesale rates charged to the
Company's other customers.
Road Runner Agreement. The Company and TW Cable expect to enter into an
agreement (the 'Road Runner Agreement') covering principles they intend to
follow to cooperate in the marketing and provision of TW Cable's high speed
online 'Road Runner' services ('Road Runner Services'). The Company is expected
to have a right of first opportunity to provide TW Cable with any transport
services for Road Runner Services to businesses, provided that TW Cable does not
choose to provide such services directly over its own network and that the
Company's pricing for such services is no less favorable than those offered by
the Company's competitors. Road Runner Services for residential end-users that
are provided by TW Cable may be jointly marketed with the Company's offering of
Road Runner Services to business customers where mutually advantageous work at
home opportunities arise, subject to the requisite approval of the Existing
Stockholders. See 'Business -- Planned/Future Services.'
TW License Agreement. The use of the 'Time Warner' name by the Company is
subject to a certain License Agreement with TW (the 'License Agreement'). The
Company may change its name to 'TW Telecom Inc.' and the Company will no longer
have the right to use of the 'Time Warner' name upon (i) TW's owning less than
30% of the Common Stock, (ii) TW having less than 3 nominees serving on the
Board of Directors of the Company, (iii) the Company's non-compliance with the
restrictions in the Restated Certificate of Incorporation regarding Residential
Services and Content Services or (iv) the transfer by an Existing Stockholder of
its Class B Common Stock together with its rights to designate nominees to the
Board of Directors under the Stockholders Agreement. See ' -- Stockholders
Agreement.'
The Company believes that the terms and conditions, taken as a whole, of
the transactions described under the headings 'Capacity License Agreements,'
'Facility Lease Agreements,' 'Services Agreement,' 'Residential Support
Agreements,' 'Road Runner Agreement' and the 'TW License Agreement' were no less
favorable to the Company than could have been obtained from unaffiliated
parties.
PRINCIPAL STOCKHOLDERS
Prior to the Stock Offering, the Parent Companies beneficially owned all of
the assets and liabilities of the Company's business. In connection with the
Stock Offering, such assets were distributed to the Existing Stockholders and
the Existing Stockholders contributed such assets and liabilities to the Company
and in return received all the outstanding shares of the Class B Common Stock.
The following table sets forth certain information regarding the beneficial
ownership of the equity securities of the Company immediately prior to the Stock
Offering and immediately following the Stock Offering by: (i) each of the
Directors and the named executive officers; (ii) all Directors and executive
officers as a group; and (iii) each owner of more than 5% of any class of equity
securities of the Company ('5% Owners'). Unless otherwise noted, the address for
each executive officer of the Company is c/o the Company, 5700 S. Quebec Street,
Greenwood Village, CO 80111.
60
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
CLASS A COMMON STOCK (1) CLASS B COMMON STOCK (1)
---------------------------------------- -----------------------------------
PERCENT OF CLASS PERCENT OF CLASS
----------------------------- ------------------------
PRIOR TO FOLLOWING PRIOR TO FOLLOWING
NO. OF STOCK THE STOCK NO. OF STOCK THE STOCK
SHARES OFFERING (2) OFFERING (2) SHARES OFFERING OFFERING
------- ------------ ------------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
TW (3)(4)................................. 61.95% % 61.95% 61.95%
U S WEST (4)(5)........................... 18.88% % 18.88% 18.88%
Newhouse (4)(6)........................... 19.17% % 19.17% 19.17%
All Directors and executive officers
as a group ( persons) (7)(8)...... * * * * * *
</TABLE>
- ------------
* Represents less than one percent.
(1) The Company has two classes of outstanding Common Stock, the Class A Common
Stock and the Class B Common Stock. Beneficial ownership of the Common Stock
has been determined in accordance with the rules of the SEC. See
'Description of Capital Stock.'
(2) Includes shares of Class B Common Stock which are convertible into
an equal number of shares of Class A Common Stock.
(3) Owned by Time Warner Companies, Inc., American Television and Communications
Corporation, Warner Communications Inc., TW/TAE Inc., TWI/KBLCOM Inc. and
Paragon Communications, each a wholly owned subsidiary of Time Warner Inc.
The business address of TW is 75 Rockefeller Plaza, New York, NY 10019.
(4) Solely as a result of the agreement of the Existing Stockholders to vote in
favor of the others' director nominees under the Stockholders Agreement, the
Existing Stockholders may be deemed to share beneficial ownership of the
shares beneficially owned by each of them. See 'Certain Relationships and
Related Transactions.'
(5) Owned by MediaOne Group, Inc., an indirect wholly owned subsidiary of U S
WEST, Inc. The business address of U S WEST is 188 Inverness Drive West,
Englewood, CO 80112.
(6) Owned by Newhouse. The business address of Newhouse is 5015 Campuswood
Drive, East Syracuse, NY 13057.
(7) Prior to the Stock Offering none of the directors or executive officers of
the Company beneficially owns any shares of Class A Common Stock or Class B
Common Stock.
(8) As of , 1998, all directors and executive officers held an
aggregate of shares of TW Common Stock and shares of Common
Stock of U S WEST and shares of Common Stock of the Media Group of U
S WEST. In addition, such persons held (i) options which, subject to
certain vesting requirements, may be exercised to purchase shares of
TW and options which, subject to certain vesting requirements, may be
exercised to purchase shares of Common Stock of U S WEST and
shares of Common Stock of the Media Group of U S WEST.
61
<PAGE>
<PAGE>
DESCRIPTION OF THE NOTES
The Senior Notes are to be issued under an Indenture, to be dated as of the
Closing Date (the 'Senior Notes Indenture'), between the Company, as issuer, and
, as Trustee (the 'Senior Notes Trustee'). The Senior Discount Notes
are to be issued under an Indenture, to be dated as of the Closing Date (the
'Senior Discount Notes Indenture'), between the Company, as issuer, and
, as Trustee (the 'Senior Discount Notes Trustee'). The Senior Notes
Indenture and the Senior Discount Notes Indenture are hereinafter collectively
referred to as the 'Indentures.' The Senior Notes Trustee and the Senior
Discount Notes Trustee are hereinafter collectively referred to as the
'Trustees.' Any reference to a 'Trustee' means the Senior Notes Trustee or the
Senior Discount Notes Trustee, as the context may require.
A copy of each Indenture has been filed with the Commission as an exhibit
to the Registration Statement of which the Prospectus is a part. The following
summaries of certain provisions of the Indentures do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all the
provisions of the Indentures, including the definitions of certain terms therein
and those terms made a part thereof by reference to the Trust Indenture Act of
1939, as amended ('TIA'). Each Indenture is by its terms subject to and governed
by the TIA. Whenever particular defined terms of the Indentures not otherwise
defined herein are referred to, such defined terms are incorporated herein by
reference. For definitions of certain capitalized terms used in the following
summaries, see ' -- Certain Definitions.'
GENERAL
The Senior Notes will be unsecured unsubordinated obligations of the
Company, initially limited to $200 million aggregate principal amount, and will
mature on , 2008. Interest on the Notes will accrue at the rate
shown on the front cover of this Prospectus from the Closing Date or from the
most recent interest payment date to which interest has been paid or provided
for, payable semiannually (to Holders of record at the close of business on the
or immediately preceding the interest payment date)
on and of each year, commencing ,
1998. Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
The Senior Discount Notes will be unsecured unsubordinated obligations of
the Company, and will mature on , 2008. Although for federal
income tax purposes a significant amount of original issue discount, taxable as
ordinary income, will be recognized by a Holder as such discount accrues from
the issue date of the Senior Discount Notes, no interest will be payable on the
Senior Discount Notes prior to , 2003. From and after
, 2003, interest on the Senior Discount Notes will accrue at the
rate shown on the front cover of this Prospectus on the principal amount at
maturity of such Senior Discount Notes from , 2003 or from the
most recent Interest Payment Date to which interest has been paid or provided
for, payable semiannually (to Holders of record at the close of business on the
or immediately preceding the Interest Payment Date)
on and of each year, commencing ,
2003. Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which, for the Senior
Notes, initially will be the corporate trust office of the Senior Notes Trustee
at and, for the Senior Discount Notes, initially will be the
corporate trust office of the Senior Discount Notes Trustee at );
provided that, at the option of the Company, payment of interest may be made by
check mailed to the Holders at their addresses as they appear in the Security
Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity and any integral
multiple thereof. See ' -- Book-Entry; Delivery and Form.' No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The Company may, subject to the covenants described below under 'Covenants'
and applicable law, issue additional Senior Notes under the Senior Notes
Indenture. The Senior Notes offered hereby and any additional
62
<PAGE>
<PAGE>
Senior Notes subsequently issued would be treated as a single class for all
purposes under the Senior Notes Indenture.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after , 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the Redemption Prices (expressed in percentages of principal amount
at maturity) set forth below, plus accrued and unpaid interest, if any, to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date), if redeemed during the 12-month
period commencing , of the years set forth below:
For the Senior Notes
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- -------------------------------------------------------- ----------------
<S> <C>
2003.................................................... --%
2004.................................................... --%
2005.................................................... --%
2006 and thereafter..................................... 100.000%
</TABLE>
For the Senior Discount Notes
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- -------------------------------------------------------- ----------------
<S> <C>
2003.................................................... --%
2004.................................................... --%
2005.................................................... --%
2006 and thereafter..................................... 100.000%
</TABLE>
In addition, at any time prior to , 2001, the Company may, at
its option, redeem up to 35% of the aggregate principal amount at maturity of
the Notes with the net proceeds of one or more Equity Offerings, at any time or
from time to time in part, at a Redemption Price (expressed as a percentage of
principal amount, in the case of the Senior Notes, and Accreted Value on the
Redemption Date, in the case of the Senior Discount Notes) of % and %,
respectively, with respect to the Senior Notes and the Senior Discount Notes,
provided (i) that Notes representing at least 65% of the principal amount at
maturity of the Notes initially issued remain outstanding immediately after each
such redemption and (ii) that notice of each such redemption is mailed within 90
days of each such Equity Offering.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the relevant Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
relevant Notes are listed or, if such Notes are not listed on a national
securities exchange, by lot or by such other method as such Trustee in its sole
discretion shall deem to be fair and appropriate; provided that no Note of
$1,000 in principal amount at maturity or less shall be redeemed in part. If any
Note is to be redeemed in part only, the notice of redemption relating to such
Note shall state the portion of the principal amount thereof to be redeemed. A
new Note in principal amount at maturity equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original Note.
SINKING FUND
There will be no sinking fund payments for the Notes.
RANKING
The Indebtedness evidenced by the Notes will rank pari passu in right of
payment with all existing and future unsubordinated indebtedness of the Company
and senior in right of payment to all subordinated indebtedness of the Company.
Holders of secured obligations of the Company, however, will have claims that
are prior to the claims of the Holders of the Notes with respect to the assets
securing such obligations. The
63
<PAGE>
<PAGE>
Company also expects to enter into a Credit Agreement that will provide the
ability to incur up to $ million of additional indebtedness. The Notes will be
effectively subordinated to such indebtedness to the extent of any security
interest.
In addition, all existing and future liabilities (including trade payables)
of the Company's subsidiaries will be effectively senior to the Notes. See 'Risk
Factors -- Holding Company Structure; Effective Subordination of Notes to
Indebtedness of Subsidiaries.' After giving pro forma effect to the Offerings
and the application of the Net Proceeds therefrom, as of , the
Company and its subsidiaries would have had $ million of indebtedness
outstanding.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indentures. Reference is made to the
appropriate Indenture for the definition of any other capitalized term used
herein for which no definition is provided.
'Accreted Value' means, for any Specified Date, the amount provided below
for each $1,000 principal amount at maturity of Senior Discount Notes:
(i) if the Specified Date occurs on one of the following dates (each a
'Semi-Annual Accrual Date'), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
- ------------------------------------------------------------------------------ --------------
<S> <C>
, 1998.......................................................... $
, 1999.......................................................... $
, 1999.......................................................... $
, 2000.......................................................... $
, 2000.......................................................... $
, 2001.......................................................... $
, 2001.......................................................... $
, 2002.......................................................... $
, 2002.......................................................... $
, 2003.......................................................... $ 1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) $ and (b) an amount
equal to the product of (1) the Accreted Value for the first Semi-Annual
Accrual Date less $ multiplied by (2) a fraction, the numerator of
which is the number of days from the Closing Date to the Specified Date,
using a 360-day year of twelve 30-day months, and the denominator of which
is the number of days from the Closing Date to the first Semi-Annual
Accrual Date, using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
'Acquired Indebtedness' means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; provided that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
upon consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness.
64
<PAGE>
<PAGE>
'Adjusted Consolidated Net Income' means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person that is not a Restricted Subsidiary,
except (x) with respect to net income, to the extent of the amount of dividends
or other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such Person during such period and (y) with respect to net
losses, to the extent of the amount of Investments made by the Company or any
Restricted Subsidiary in such Person during such period; (ii) solely for the
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the 'Limitation on Restricted
Payments' covenant described below (and in such case, except to the extent
includable pursuant to clause (i) above), the net income (or loss) of any Person
accrued prior to the date it becomes a Restricted Subsidiary or is merged into
or consolidated with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by the
Company or any of its Restricted Subsidiaries; (iii) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the 'Limitation on Restricted Payments'
covenant described below, any amount paid or accrued as dividends (other than
dividends to the extent paid or payable in shares of Capital Stock (other than
Disqualified Stock) of the Company) on Preferred Stock of the Company or any
Restricted Subsidiary owned by Persons other than the Company and any of its
Restricted Subsidiaries; (vi) all extraordinary gains and extraordinary losses;
and (vii) any compensation expense paid or payable solely with Capital Stock
(other than Disqualified Stock) of the Company or any options, warrants or other
rights to acquire Capital Stock (other than Disqualified Stock).
'Adjusted Consolidated Net Tangible Assets' means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to the 'Commission Reports and Reports to Holders'
covenant.
'Affiliate' means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, 'control'
(including, with correlative meanings, the terms 'controlling,' 'controlled by'
and 'under common control with'), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
'Asset Acquisition' means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; provided that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
'Asset Disposition' means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
65
<PAGE>
<PAGE>
'Asset Sale' means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
all or substantially all of the assets of the Company; provided that 'Asset
Sale' shall not include (a) sales or other dispositions of inventory,
receivables and other current assets, (b) sales, transfers or other dispositions
of assets constituting a Restricted Payment permitted to be made under the
'Limitation on Restricted Payments' covenant, (c) sales, transfers or other
dispositions of assets with a fair market value (as certified in an Officers'
Certificate) not in excess of $5 million in any transaction or series of related
transactions, or (d) sales or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold or disposed of, to the
extent that the consideration received would constitute property, assets or
securities of the kind described in clause (B) of the 'Limitation on Asset
Sales' covenant.
'Average Life' means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
'Capital Stock' means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
'Capitalized Lease' means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
'Capitalized Lease Obligations' means the discounted present value of the
rental obligations under a Capitalized Lease.
'Change of Control' means such time as (i) [the Existing Stockholders as a
group cease to have the ability to elect a majority of the members of the Board
of Directors (other than the chief executive officer of the Company and
independent directors)] and a 'person' or 'group' (within the meaning of
Sections 13(d) and 14(d)(2) of the Exchange Act) (other than the Existing
Stockholders) has become the ultimate 'beneficial owner' (as defined in Rule
13d-3 under the Exchange Act) of more than 35% of the total voting power of the
Voting Stock of the Company on a fully diluted basis and such ownership
represents a greater percentage of the total voting power of the Voting Stock of
the Company, on a fully diluted basis, than is held by the Existing Stockholders
on such date; or (ii) individuals who on the Closing Date constitute the Board
of Directors (together with any new directors whose election by the Board of
Directors or whose nomination by the Board of Directors for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
members of the Board of Directors then in office who either were members of the
Board of Directors on the Closing Date or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the members of the Board of Directors then in office.
'Change of Control Period' means, with respect to a Change of Control, the
period of 60 days commencing on the date of the earlier to occur of (a) public
notice of the occurrence of a Change of Control or of the intention of the
Company to effect a Change of Control and (b) the Change of Control.
'Closing Date' means the date on which the Notes are originally issued
under the Indentures.
'Consolidated EBITDA' means, for any period, Adjusted Consolidated Net
Income for such period (x) plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets), (iii) depreciation expense, (iv) amortization expense and (v)
all other non-cash items reducing Adjusted Consolidated Net Income (other than
items that will require cash payments and for which an accrual or reserve is, or
is required by GAAP to be, made), less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a
66
<PAGE>
<PAGE>
consolidated basis for the Company and its Restricted Subsidiaries in conformity
with GAAP, and (y) solely for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of the
'Limitation on Restricted Payments' covenant described below, less (to the
extent not otherwise reduced in accordance with GAAP) the aggregate amount of
deposits made by the Company and its Restricted Subsidiaries after the Closing
Date in connection with proposed Asset Acquisitions that are forfeited by the
Company or any of its Restricted Subsidiaries; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the percentage
ownership interest in the income of such Restricted Subsidiary not owned on the
last day of such period by the Company or any of its Restricted Subsidiaries.
'Consolidated Interest Expense' means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and interest
on Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however, (i) in calculating Consolidated EBITDA, any amount
of such interest of any Restricted Subsidiary if the net income of such
Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof (but only in the
same proportion as the net income of such Restricted Subsidiary is excluded from
the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of
the definition thereof) and (ii) any premiums, fees and expenses (and any
amortization thereof) payable in connection with the offering of the Notes, all
as determined on a consolidated basis (without taking into account Unrestricted
Subsidiaries) in conformity with GAAP.
'Consolidated Leverage Ratio' means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to the 'Commission
Reports and Reports to Holders' covenant described below (such four fiscal
quarter period being the 'Four Quarter Period'); provided that, in making the
foregoing calculation, (A) pro forma effect shall be given to any Indebtedness
to be Incurred or repaid on the Transaction Date; (B) pro forma effect shall be
given to Asset Dispositions and Asset Acquisitions (including giving pro forma
effect to the application of proceeds of any Asset Disposition) that occur from
the beginning of the Four Quarter Period through the Transaction Date (the
'Reference Period'), as if they had occurred and such proceeds had been applied
on the first day of such Reference Period; and (C) pro forma effect shall be
given to asset dispositions and asset acquisitions (including giving pro forma
effect to the application of proceeds of any asset disposition) that have been
made by any Person that has become a Restricted Subsidiary or has been merged
with or into the Company or any Restricted Subsidiary during such Reference
Period and that would have constituted Asset Dispositions or Asset Acquisitions
had such transactions occurred when such Person was a Restricted Subsidiary as
if such asset dispositions or asset acquisitions were Asset Dispositions or
Asset Acquisitions that occurred on the first day of such Reference Period;
provided that to the extent that clause (B) or (C) of this sentence requires
that pro forma effect be given to an Asset Acquisition or Asset Disposition,
such pro forma calculation shall be based upon the four full fiscal quarters
immediately preceding the Transaction Date of the Person, or division or line of
business of the Person, that is acquired or disposed of for which financial
information is available.
'Consolidated Net Worth' means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign
67
<PAGE>
<PAGE>
currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
'Credit Agreement' means credit agreements, vendor financings or similar
facilities or arrangements made available from time to time to the Company and
its Restricted Subsidiaries from banks, other financial institutions and/or
equipment manufacturers for the Incurrence of Indebtedness, including letters of
credit and any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, as the same may be amended,
supplemented, modified or restated from time to time.
'Currency Agreement' means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
'Default' means any event that is, or after notice or passage of time or
both would be, an Event of Default.
'Disqualified Stock' means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an 'asset sale' or 'change of control'
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the 'asset sale' or 'change of control' provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in 'Limitation on Asset Sales' and
'Repurchase of Notes upon a Change of Control' covenants described below and
such Capital Stock, or the agreements or instruments governing the redemption
rights thereof, specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
'Limitation on Asset Sales' and 'Repurchase of Notes upon a Change of Control'
covenants described below.
'Equity Offering' means an offering of Common Stock of the Company for cash
pursuant to an effective registration statement under the Securities Act or an
exemption from the registration requirements contained therein.
'Existing Stockholders' means Time Warner, Inc., U.S. WEST, Inc.,
Advance/Newhouse Partnership and the Affiliates of each of the foregoing.
'fair market value' means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; provided that for purposes of clause (viii) of
the second paragraph of the 'Limitation on Indebtedness' covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property (other than
cash or cash equivalents) received by the Company exceeds $15 million, the fair
market value of such property shall be determined by a nationally recognized
investment banking firm and set forth in their written opinion which shall be
delivered to the Trustees.
'GAAP' means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indentures shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Notes and (ii) except as otherwise provided,
the amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
'Guarantee' means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any
68
<PAGE>
<PAGE>
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services (unless such purchase arrangements are on arm's-length
terms and are entered into in the ordinary course of business), to take-or-pay,
or to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness of
the payment thereof or to protect such obligee against loss in respect thereof
(in whole or in part); provided that the term 'Guarantee' shall not include
endorsements for collection or deposit in the ordinary course of business. The
term 'Guarantee' used as a verb has a corresponding meaning.
'Incur' means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an 'Incurrence' of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
'Indebtedness' means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all Capitalized
Lease Obligations of such Person, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, provided (A)
that the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at the
time of its issuance as determined in conformity with GAAP, (B) that money
borrowed and set aside at the time of the Incurrence of any Indebtedness in
order to prefund the payment of the interest on such Indebtedness shall not be
deemed to be 'Indebtedness' so long as such money is held to secure the payment
of such interest and (C) that Indebtedness shall not include any liability for
federal, state, local or other taxes.
'Interest Rate Agreement' means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
'Investment' in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock (or any other Investment), held by the Company
or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to
be a Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the 'Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries' covenant; provided that the
fair market value of the Investment
69
<PAGE>
<PAGE>
remaining in any Person that has ceased to be a Restricted Subsidiary shall not
exceed the aggregate amount of Investments previously made in such Person valued
at the time such Investments were made less the net reduction of such
Investments. For purposes of the definition of 'Unrestricted Subsidiary' and the
'Limitation on Restricted Payments' covenant described below, (i) 'Investment'
shall include the fair market value of the assets (net of liabilities (other
than liabilities to the Company or any of its Restricted Subsidiaries)) of any
Restricted Subsidiary at the time that such Restricted Subsidiary is designated
an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of
liabilities (other than liabilities to the Company or any of its Restricted
Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary shall be considered a reduction
in outstanding Investments and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
'Investment Grade' means a rating of the Senior Notes or the Senior
Discount Notes, as applicable, by both S&P and Moody's, each such rating being
in one of such agency's four highest generic rating categories that signifies
investment grade (i.e., BBB - (or the equivalent) or higher by S&P and Baa3 (or
the equivalent) or higher by Moody's); provided, in each case, such ratings are
publicly available; provided further, that in the event Moody's or S&P is no
longer in existence, for purposes of determining whether the Senior Notes or
Senior Discount Notes are rated 'Investment Grade,' such organization may be
replaced by a nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) designated by the Company, notice of which
designation shall be given to the Trustees.
'Lien' means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
'Moody's' means Moody's Investors Service, Inc. and its successors.
'Net Cash Proceeds' means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
'Offer to Purchase' means an offer to purchase Notes by the Company from
the Holders commenced by mailing a notice to the relevant Trustee and each
Holder stating: (i) the covenant pursuant to which the offer is being made and
that all Notes validly tendered will be accepted for payment on a pro rata
basis; (ii) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date such
notice is mailed) (the 'Payment Date'); (iii) that any Note not tendered will
continue to accrue interest (or original issue discount) pursuant to its terms;
(iv) that, unless the Company defaults in the payment of the purchase price, any
Note accepted for payment pursuant to the Offer to Purchase shall cease to
70
<PAGE>
<PAGE>
accrue interest (or original issue discount) on and after the Payment Date; (v)
that Holders electing to have a Note purchased pursuant to the Offer to Purchase
will be required to surrender the Note, together with the form entitled 'Option
of the Holder to Elect Purchase' on the reverse side of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the Business Day immediately preceding the Payment Date; (vi) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
immediately preceding the Payment Date, a telegram, facsimile transmission or
letter setting forth the name of such Holder, the principal amount at maturity
of Notes delivered for purchase and a statement that such Holder is withdrawing
his election to have such Notes purchased; and (vii) that Holders whose Notes
are being purchased only in part will be issued new Notes equal in principal
amount to the unpurchased portion of the Notes surrendered; provided that each
Note purchased and each new Note issued shall be in a principal amount at
maturity of $1,000 or an integral multiple thereof. On the Payment Date, the
Company shall (i) accept for payment on a pro rata basis Notes or portions
thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the
relevant Trustee all Notes or portions thereof so accepted together with an
Officers' Certificate specifying the Notes or portions thereof accepted for
payment by the Company. The Paying Agent shall promptly mail to the Holders of
Notes so accepted payment in an amount equal to the purchase price, and the
relevant Trustee shall promptly authenticate and mail to such Holders a new Note
equal in principal amount at maturity to any unpurchased portion of the Note
surrendered; provided that each Note purchased and each new Note issued shall be
in a principal amount at maturity of $1,000 or an integral multiple thereof. The
Company will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The relevant Trustee shall act as the Paying
Agent for an Offer to Purchase. The Company will comply with Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable, in the event that the Company
is required to repurchase Notes pursuant to an Offer to Purchase.
'Permitted Investment' means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; (iv) stock, obligations or securities received in
settlement of Indebtedness Incurred in the ordinary course of business, upon
foreclosure of a Lien created in the ordinary course of business or in
satisfaction of judgments, including in connection with a bankruptcy proceeding;
(v) Investments in prepaid expenses, negotiable instruments held for collection
and lease, utility and worker's compensation, performance and other similar
deposits; (vi) Interest Rate Agreements and Currency Agreements designed solely
to protect the Company or its Restricted Subsidiaries against fluctuations in
interest rates or foreign currency exchange rates; (vii) loans or advances to
officers or employees of the Company or any Restricted Subsidiary that do not in
the aggregate exceed $2 million at any time outstanding; and (viii) Investments
in any Person that is engaged in the telecommunications business and that is not
an Affiliate or a Related Person of the Company.
'Permitted Liens' means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the
71
<PAGE>
<PAGE>
ordinary course of business of the Company or any of its Restricted
Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real
or personal property acquired after the Closing Date; provided that (a) such
Lien is created solely for the purpose of securing Indebtedness Incurred, in
accordance with the 'Limitation on Indebtedness' covenant described below, to
finance the cost (including the cost of design, development, acquisition
(including all transaction costs related to such acquisition), construction,
installation, improvement, transportation or integration) of the item of
property or assets subject thereto and such Lien is created prior to, at the
time of or within six months after the later of the acquisition, the completion
of construction or the commencement of full operation of such property, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such cost and (c) any such Lien shall not extend to or cover any property or
assets other than such item of property or assets and any improvements on such
item; (vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its Restricted
Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets
under construction arising from progress or partial payments by a customer of
the Company or its Restricted Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xi) Liens on property
of, or on shares of Capital Stock or Indebtedness of, any Person existing at the
time such Person becomes, or becomes a part of, any Restricted Subsidiary;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets acquired;
(xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary that does not give rise to an Event of Default; (xiv)
Liens securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed solely to protect
the Company or any of its Restricted Subsidiaries from fluctuations in interest
rates, currencies or the price of commodities; (xvii) Liens arising out of
conditional sale, title retention, consignment or similar arrangements for the
sale of goods entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business in accordance with the past practices of the
Company and its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens
on or sales of receivables; and (xix) Liens that secure Indebtedness with an
aggregate principal amount not in excess of $ million at any time outstanding.
'Related Person' means, as applied to any Person, any other Person directly
or indirectly owning (a) 10% or more of the outstanding Common Stock of such
Person (or, in the case of a Person that is not a corporation, 10% or more of
the outstanding equity interest in such Person) or (b) 10% or more of the
combined outstanding voting power of the Voting Stock of such Person, and all
Affiliates of any such other Person.
'Restricted Subsidiary' means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
'Significant Subsidiary' means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
'S&P' means Standard & Poor's Ratings Services and its successors.
'Specified Date' means any Redemption Date, any Payment Date for an Offer
to Purchase or any date on which the Notes first become due and payable after an
Event of Default.
'Stated Maturity' means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
72
<PAGE>
<PAGE>
'Strategic Subordinated Indebtedness' means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in a business that is
related, ancillary or complementary to the business conducted by the Company or
any of its Restricted Subsidiaries, which Indebtedness by its terms, or by the
terms of any agreement or instrument pursuant to which such Indebtedness is
Incurred, (i) is expressly made subordinate in right of payment to the Notes and
(ii) provides that no payment of principal, premium or interest on, or any other
payment with respect to, such Indebtedness may be made prior to the payment in
full of all of the Company's obligations under the Notes; provided that such
Indebtedness may provide for and be repaid at any time from the proceeds of the
sale of Capital Stock of the Company (other than Disqualified Stock) or other
Indebtedness of the Company which by its terms, or by the terms of any agreement
or instrument pursuant to which such other Indebtedness is Incurred, meets
clauses (i) and (ii) above after the Incurrence of such Indebtedness.
'Subsidiary' means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
'Temporary Cash Investment' means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $500 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated 'A'
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) commercial paper, maturing not more than one year after the
date of acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of 'P-1' (or higher) according to Moody's or 'A-1' (or higher) according
to S&P, (v) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least 'A' by S&P or
Moody's, (vi) corporate debt securities with maturities of eighteen months or
less from the date of acquisition and with a rating at the time as of which any
Investment therein is made of 'A3' (or higher) according to Moody's or 'A-' (or
higher) according to S&P and (vii) money market funds at least 95% of the assets
of which are invested in the foregoing.
'Trade Payables' means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
'Transaction Date' means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
'Unrestricted Subsidiary' means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an 'Incurrence' of such Indebtedness and an 'Investment' by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the 'Limitation on Restricted
Payments' covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the
73
<PAGE>
<PAGE>
Investment referred to in clause (A) of this proviso would be permitted under
the 'Limitation on Indebtedness' and 'Limitation on Restricted Payments'
covenants described below. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that (i) no Default or Event
of Default shall have occurred and be continuing at the time of or after giving
effect to such designation and (ii) all Liens and Indebtedness of such
Unrestricted Subsidiary outstanding immediately after such designation would, if
Incurred at such time, have been permitted to be Incurred (and shall be deemed
to have been Incurred) for all purposes of the Indenture. Any such designation
by the Board of Directors shall be evidenced to the Trustee by promptly filing
with the Trustee a copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
'Voting Stock' means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
'Wholly Owned' means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company may Incur Indebtedness
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds therefrom, the Consolidated Leverage Ratio would
be greater than zero and less than 6.0:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $300 million, less any amount of such Indebtedness permanently repaid as
provided under the 'Limitation on Asset Sales' covenant described below; (ii)
Indebtedness owed (A) to the Company evidenced by a promissory note or (B) to
any Restricted Subsidiary; provided that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund, then
outstanding Indebtedness (other than Indebtedness Incurred under clause (i),
(ii), (iv), (vi), (viii) or (ix) of this paragraph) and any refinancings thereof
in an amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, fees and expenses); provided that Indebtedness the proceeds of
which are used to refinance or refund the Notes or Indebtedness that is pari
passu with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (iii) if (A) in case the Notes are refinanced in
part or the Indebtedness to be refinanced is pari passu with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made pari
passu with, or subordinate in right of payment to, the remaining Notes, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Indebtedness
to be refinanced or refunded; and provided further that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness of any
Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in
respect of performance, surety or appeal bonds provided in the ordinary course
of business, (B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements (a) are designed solely to protect the Company or
its Restricted Subsidiaries against fluctuations in foreign currency exchange
rates or interest rates and (b) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
74
<PAGE>
<PAGE>
compensation payable thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by the
Company or any Restricted Subsidiary in connection with such disposition; (v)
Indebtedness of the Company, to the extent the net proceeds thereof are promptly
(A) used to purchase Notes tendered in an Offer to Purchase made as a result of
a Change in Control or (B) deposited to defease the Notes as described below
under 'Defeasance'; (vi) Guarantees of the Notes and Guarantees of Indebtedness
of the Company by any Restricted Subsidiary provided the Guarantee of such
Indebtedness is permitted by and made in accordance with the 'Limitation on
Issuance of Guarantees by Restricted Subsidiaries' covenant described below;
(vii) Indebtedness Incurred to finance the cost (including the cost of design,
development, acquisition (including all transaction costs related to such
acquisition), construction, installation, improvement, transportation or
integration) to acquire equipment, inventory or network assets (including
acquisitions by way of Capitalized Lease and acquisitions of the Capital Stock
of a Person that becomes a Restricted Subsidiary to the extent of the fair
market value of the equipment, inventory or network assets so acquired plus
goodwill associated therewith) by the Company or a Restricted Subsidiary after
the Closing Date; (viii) Indebtedness of the Company not to exceed, at any one
time outstanding, two times (A) the Net Cash Proceeds received by the Company
after the Closing Date from the issuance and sale of its Capital Stock (other
than Disqualified Stock) to a Person that is not a Subsidiary of the Company, to
the extent (I) such Net Cash Proceeds have not been used pursuant to clause
(C)(2) of the first paragraph or clause (iii), (iv), (vi) of (vii) of the second
paragraph of the 'Limitation on Restricted Payments' covenant described below to
make a Restricted Payment and (II) if such Net Cash Proceeds are used to
consummate a transaction pursuant to which the Company Incurs Acquired
Indebtedness, the amount of such Net Cash Proceeds exceeds one-half of the
amount of Acquired Indebtedness so Incurred and (B) 80% of the fair market value
of property (other than cash and cash equivalents) received by the Company after
the Closing Date from the sale of its Capital Stock (other than Disqualified
Stock) to a Person that is not a Subsidiary of the Company, to the extent (I)
such sale of Capital Stock has not been used pursuant to clause (iii), (iv),
(vi) or (vii) of the second paragraph of the 'Limitation on Restricted Payments'
covenant described below to make a Restricted Payment and (II) if such Capital
Stock is used to consummate a transaction pursuant to which the Company Incurs
Acquired Indebtedness, 80% of the fair market value of the property received
exceeds one-half of the amount of Acquired Indebtedness so Incurred; provided
that such Indebtedness does not mature prior to the Stated Maturity of the Notes
and has an Average Life longer than the Notes; (ix) Acquired Indebtedness; (x)
Strategic Subordinated Indebtedness; and (xi) subordinated Indebtedness of the
Company (in addition to Indebtedness permitted under clauses (i) through (x)
above) in an aggregate principal amount outstanding at any time not to exceed
$200 million, less any amount of such Indebtedness permanently repaid as
provided under the 'Limitation on Asset Sales' covenant described below.
(b) Notwithstanding any other provision of this 'Limitation on
Indebtedness' covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may Incur pursuant to this 'Limitation on Indebtedness'
covenant shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this 'Limitation on Indebtedness' covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included and (2) any
Liens granted pursuant to the equal and ratable provisions referred to in the
'Limitation on Liens' covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this 'Limitation on
Indebtedness' covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
(d) For purposes of determining compliance with any Dollar-denominated
restriction on the Incurrence of Indebtedness denominated in a foreign currency,
the Dollar-equivalent principal amount of such Indebtedness Incurred pursuant
thereto shall be calculated based on the relevant currency exchange rate in
effect on the date
75
<PAGE>
<PAGE>
that such Indebtedness was Incurred, provided that (x) the Dollar-equivalent
principal amount of any such Indebtedness outstanding on the Closing Date shall
be calculated based on the relevant currency exchange rate in effect on the
Closing Date and (y) if such Indebtedness is Incurred to refinance other
Indebtedness denominated in a foreign currency, and such refinancing would cause
the applicable Dollar-denominated restriction to be exceeded if calculated at
the relevant currency exchange rate in effect on the date of such refinancing,
such Dollar-denominated restriction shall be deemed not to have been exceeded so
long as the principal amount of such refinancing Indebtedness, converted into
the currency in which the Indebtedness being refinanced is denominated at the
currency exchange rate in effect on the date of such refinancing, does not
exceed the principal amount of such Indebtedness being refinanced. The principal
amount of any Indebtedness Incurred to refinance other Indebteness, if Incurred
in a different currency from the Indebtedness being refinanced, shall be
calculated based on the foreign currency exchange rate applicable to the
currencies in which such respective Indebtedness is denominated that is in
effect on the date of such refinancing.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons other
than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of (A) the
Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of the Company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such
holder) of 5% or more of the Capital Stock of the Company, (iii) make any
voluntary or optional principal payment, or voluntary or optional redemption,
repurchase, defeasance, or other acquisition or retirement for value, of
Indebtedness of the Company that is subordinated in right of payment to the
Notes or (iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i) through (iv)
above being collectively 'Restricted Payments') if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default or Event of
Default shall have occurred and be continuing, (B) the Company could not Incur
at least $1.00 of Indebtedness under the first paragraph of the 'Limitation on
Indebtedness' covenant or (C) the aggregate amount of all Restricted Payments
(the amount, if other than in cash, to be determined in good faith by the Board
of Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of (1) the amount
by which Consolidated EBITDA exceeds 150% of Consolidated Interest Expense, in
each case, determined on a cumulative basis during the period (taken as one
accounting period) beginning on the first day of the fiscal quarter immediately
following the Closing Date and ending on the last day of the last fiscal quarter
preceding the Transaction Date for which reports have been filed with the
Commission or provided to the Trustee pursuant to the 'Commission Reports and
Reports to Holders' covenant plus (2) the aggregate Net Cash Proceeds received
by the Company after the Closing Date from the issuance and sale permitted by
the Indentures of its Capital Stock (other than Disqualified Stock) to a Person
who is not a Subsidiary of the Company, including an issuance or sale permitted
by the Indentures of Indebtedness of the Company for cash subsequent to the
Closing Date upon the conversion of such Indebtedness into Capital Stock (other
than Disqualified Stock) of the Company, or from the issuance to a Person who is
not a Subsidiary of the Company of any options, warrants or other rights to
acquire Capital Stock of the Company (in each case, exclusive of any
Disqualified Stock or any options, warrants or other rights that are redeemable
at the option of the holder, or are required to be redeemed, prior to the Stated
Maturity of the Notes), in each case except to the extent such Net Cash Proceeds
are used to Incur Indebtedness pursuant to clause (viii) or (ix) of the second
paragraph under the 'Limitation on Indebtedness' covenant, plus (3) an amount
equal to the net reduction in Investments (other than reductions in Permitted
Investments) in any Person resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers of assets, in
each case to the Company or any Restricted Subsidiary or from the Net Cash
Proceeds from the sale of any such Investment (except, in each case, to the
extent any such payment or proceeds are included in the calculation of Adjusted
Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition of
'Investments'), not to exceed, in each case, the
76
<PAGE>
<PAGE>
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the 'Limitation on Indebtedness' covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company or
an Unrestricted Subsidiary (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a substantially
concurrent offering of, shares of Capital Stock (other than Disqualified Stock)
of the Company (or options, warrants or other rights to acquire such Capital
Stock); (iv) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness of the
Company which is subordinated in right of payment to the Notes in exchange for,
or out of the proceeds of a substantially concurrent offering of, shares of the
Capital Stock (other than Disqualified Stock) of the Company (or options,
warrants or other rights to acquire such Capital Stock); (v) payments or
distributions, to dissenting stockholders pursuant to applicable law, pursuant
to or in connection with a consolidation, merger or transfer of assets that
complies with the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of the Company; (vi) Investments in any Person the primary business of
which is related, ancillary or complementary to the business of the Company and
its Restricted Subsidiaries on the date of such Investments; provided that the
aggregate amount of Investments made pursuant to this clause (vi) does not
exceed the sum of (a) $10 million and (b) the amount of Net Cash Proceeds
received by the Company after the Closing Date from the sale of its Capital
Stock (other than Disqualified Stock) to a Person who is not a Subsidiary of the
Company, except to the extent such Net Cash Proceeds are used to Incur
Indebtedness pursuant to clause (viii) or (ix) under the 'Limitation on
Indebtedness' covenant or to make Restricted Payments pursuant to clause (C)(2)
of the first paragraph, or clauses (iii) or (iv) of this paragraph, of this
'Limitation on Restricted Payments' covenant, plus (z) the net reduction in
Investments made pursuant to this clause (vi) resulting from distributions on or
repayments of such Investments or from the Net Cash Proceeds from the sale of
any such Investment (except in each case to the extent any such payment or
proceeds is included in the calculation of Adjusted Consolidated Net Income) or
from such Person becoming a Restricted Subsidiary (valued in each case as
provided in the definition of 'Investments'), provided that the net reduction in
any Investment shall not exceed the amount of such Investment; (vii) Investments
acquired in exchange for Capital Stock (other than Disqualified Stock) of the
Company; (viii) other Restricted Payments in an aggregate amount not to exceed
$10 million; and (ix) the repurchase, redemption or other acquisition of Capital
Stock of the Company (or options, warrants or other rights to acquire such
Capital Stock) from Persons who are or were formerly directors, officers or
employees of the Company or any Restricted Subsidiary, provided that the
aggregate amount of all such repurchases made in any calendar year pursuant to
this clause (ix) shall not exceed $2.0 million; provided that, except in the
case of clauses (i) and (iii), no Default or Event of Default shall have
occurred and be continuing or occur as a consequence of the actions or payments
set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment referred to in clause (vi)
thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred
to in clauses (iii), (iv) and (vi), shall be included in calculating whether the
conditions of clause (C) of the first paragraph of this 'Limitation on
Restricted Payments' covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is pari passu with the Notes, then the Net Cash
Proceeds of such issuance shall be included in clause (C) of the first paragraph
of this 'Limitation on Restricted Payments' covenant only to the extent such
proceeds are not used for such redemption, repurchase or other acquisition of
Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any
77
<PAGE>
<PAGE>
Capital Stock of such Restricted Subsidiary owned by the Company or any other
Restricted Subsidiary, (ii) pay any Indebtedness owed to the Company or any
other Restricted Subsidiary, (iii) make loans or advances to the Company or any
other Restricted Subsidiary or (iv) transfer any of its property or assets to
the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indentures or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law or
required by any regulatory authority having jurisdiction over the Company or any
Restricted Subsidiary; (iii) existing with respect to any Person or the property
or assets of such Person acquired by the Company or any Restricted Subsidiary,
existing at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any Person or
the property or assets of any Person other than such Person or the property or
assets of such Person so acquired, and any extensions, renewals or replacements
of such encumbrances or restrictions; provided that the encumbrances and
restrictions in any such extensions, renewals or replacements are no less
favorable in any material respect to the Holders than those encumbrances or
restrictions that are then in effect and that are being extended, renewed or
replaced; (iv) in the case of clause (iv) of the first paragraph of this
'Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries' covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indentures or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or assets
of the Company or any Restricted Subsidiary in any manner material to the
Company or any Restricted Subsidiary; (v) with respect to a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Subsidiary; or (vi) contained in the
terms of any Indebtedness or any agreement pursuant to which such Indebtedness
was issued if (A) the encumbrance or restriction either (1) applies only in the
event of a payment default or a default with respect to a financial covenant
contained in such Indebtedness or agreement or (2) is contained in a Credit
Agreement, (B) the encumbrance or restriction is not materially more
disadvantageous to the Holders of the Notes than is customary in comparable
financings (as determined by the Company) and (C) the Company determines on the
date of the Incurrence of such Indebtedness that any such encumbrance or
restriction would not be expected to materially impair the Company's ability to
make principal or interest payments on the Notes. Nothing contained in this
'Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries' covenant shall prevent the Company or any Restricted Subsidiary
from (1) creating, incurring, assuming or suffering to exist any Liens otherwise
permitted in the 'Limitation on Liens' covenant or (2) restricting the sale or
other disposition of property or assets of the Company or any of its Restricted
Subsidiaries that secure Indebtedness of the Company or any of its Restricted
Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been permitted
to be made under the 'Limitation on Restricted Payments' covenant if made on the
date of such issuance or sale; or (iv) issuances or sales of Common Stock of a
Restricted Subsidiary, provided that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale in compliance with the
'Limitation on Asset Sales' covenant described below.
78
<PAGE>
<PAGE>
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ('Guaranteed
Indebtedness'), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to each Indenture providing for a
Guarantee (a 'Subsidiary Guarantee') of payment of the relevant Notes by such
Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will not in
any manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall
not be applicable to any Guarantee of any Restricted Subsidiary that existed at
the time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with a Related Person or with any Affiliate of
the Company or any Restricted Subsidiary, except upon fair and reasonable terms
no less favorable to the Company or such Restricted Subsidiary than could be
obtained, at the time of such transaction or, if such transaction is pursuant to
a written agreement, at the time of the execution of the agreement providing
therefor, in a comparable arm's-length transaction with a Person that is not
such a Related Person or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustees a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the Company; (iv) any payments or other transactions pursuant to
any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes; (v) any transaction with respect to the
lease or sharing or other use of cable or fiber lines, equipment, transmission
capacity, right-of-way or other access rights, between the Company or any
Restricted Subsidiary and any other Person; provided that such transaction is on
terms that (A) are consistent with past practice of the Company and its
Restricted Subsidiaries and (B) are no less favorable, taken as a whole, to the
Company or the relevant Restricted Subsidiary than those that could have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person (or, in the event that there are no
comparable transactions involving unrelated Persons to apply for comparative
purposes, is otherwise on terms that, taken as a whole, the Company has
determined to be fair to the Company or the relevant Restricted Subsidiary) or
(vi) any Restricted Payments not prohibited by the 'Limitation on Restricted
Payments' covenant. Notwithstanding the foregoing, any transaction or series of
related transactions covered by the first paragraph of this 'Limitation on
Transactions with Shareholders and Affiliates' covenant and not covered by
clauses (ii) through (vi) of this paragraph, the aggregate amount of which
exceeds $10 million in value, must be determined to be fair in the manner
provided for in clause (i)(A) or (B) above.
79
<PAGE>
<PAGE>
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character (including, without limitation, licenses), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all other amounts due under
the Indentures to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the Notes, prior to) the obligation or liability secured by such
Lien.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries created in favor of the
Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Company or such other
Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to
refinance secured Indebtedness which is permitted to be Incurred under clause
(iii) of the second paragraph of the 'Limitation on Indebtedness' covenant;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets securing
the Indebtedness being refinanced; (v) Liens on the Capital Stock of, or any
property or assets of, a Restricted Subsidiary securing Indebtedness of such
Restricted Subsidiary permitted under the 'Limitation on Indebtedness' covenant;
or (vi) Permitted Liens.
Limitation on Sale-Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, applies an
amount not less than the net proceeds received from such sale in compliance with
the 'Limitation on Asset Sales' covenant described below.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of cash, Temporary Cash Investments or the assumption of Indebtedness
of the Company (other than Indebtedness that is subordinated to the Notes) or of
a Restricted Subsidiary and unconditional release of the Company and its
Restricted Subsidiaries from all liability on the Indebtedness assumed;
provided, however, that this clause (ii) shall not apply to long-term
assignments in capacity in a telecommunications network. In the event and to the
extent that the Net Cash Proceeds received by the Company or any of its
Restricted Subsidiaries from one or more Asset Sales occurring on or after the
Closing Date in any period of 12 consecutive months exceed 10% of Adjusted
Consolidated Net Tangible Assets (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
the Company and its Subsidiaries has been filed with the Commission pursuant to
the 'Commission Reports and Reports to Holders' covenant), then the Company
shall or shall cause the relevant Restricted Subsidiary to (i) within 12 months
after the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated
Net Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds
less any amounts invested within 6 months prior to such Asset Sale in property
or assets of a nature or type or that are used in a business (or in a company
having property and assets of a nature or type, or engaged in a business)
similar or related to the nature or type of the property and assets of, or the
business of, the Company and its Restricted Subsidiaries on the date of such
Asset Sale (the 'Adjusted Net Cash Proceeds') to permanently repay
unsubordinated Indebtedness of the Company, or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the 'Limitation on Issuances of
Guarantees by Restricted Subsidiaries'
80
<PAGE>
<PAGE>
covenant described above or Indebtedness of any other Restricted Subsidiary, in
each case owing to a Person other than the Company or any of its Restricted
Subsidiaries or (B) invest an equal amount, or the amount of Adjusted Net Cash
Proceeds not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) apply (no later than the end of
the 12-month period referred to in clause (i)) such excess Adjusted Net Cash
Proceeds (to the extent not applied pursuant to clause (i)) as provided in the
following paragraph of this 'Limitation on Asset Sales' covenant. The amount of
such excess Adjusted Net Cash Proceeds required to be applied (or to be
committed to be applied) during such 12-month period as set forth in clause (i)
of the preceding sentence and not applied as so required by the end of such
period shall constitute 'Excess Proceeds.'
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
'Limitation on Asset Sales' covenant totals at least $10 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Senior Notes, Accreted Value of Senior Discount
Notes and to the extent permitted or required by the terms thereof, any other
Indebtedness of the Company that is pari passu with the Notes, equal to the
Excess Proceeds on such date, at a purchase price equal to 100% of the principal
amount of the Senior Notes and such other Indebtedness, if applicable, and 100%
of the Accreted Value of the Senior Discount Notes and such other Indebtedness,
if applicable, on the relevant Payment Date, plus, in each case, accrued
interest (if any) to the Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the later of (a) the
occurrence of a Change of Control and (b) the end of the Change of Control
Period with respect to a Change of Control, and consummate an Offer to Purchase
for all Notes then outstanding, at a purchase price equal to 101% of the
principal amount of the Senior Notes and 101% of the Accreted Value of the
Senior Discount Notes on the relevant Payment Date, plus accrued interest (if
any) to the Payment Date; provided that, the Company shall not be required to
commence and consummate an Offer to Purchase if, at the time specified above for
the commencement of an Offer to Purchase the Notes shall be rated Investment
Grade.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is then required to file reports with the
Commission, the Company shall file with the Commission all such reports and
other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Securities Exchange Act of 1934 if it were
subject thereto. The Company shall supply the Trustees and each Holder or shall
supply to the Trustees for forwarding to each such Holder, without cost to such
Holder, copies of such reports and other information.
EVENTS OF DEFAULT
The following events will be defined as 'Events of Default' in the
Indentures: (a) default in the payment of principal of (or premium, if any, on)
any Senior Note or Senior Discount Note, as the case may be, when the same
becomes due and payable at maturity, upon acceleration, redemption or otherwise;
(b) default in the payment of interest on any Senior Note or Senior Discount
Note, as the case may be, when the same becomes due and payable, and such
default continues for a period of 30 days; (c) default in the performance or
breach of
81
<PAGE>
<PAGE>
the provisions of the Indentures applicable to mergers, consolidations and
transfers of all or substantially all of the assets of the Company or the
failure to make or consummate an Offer to Purchase in accordance with the
'Limitation on Asset Sales' or 'Repurchase of Notes upon a Change of Control'
covenant; (d) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in the Indentures or under the Senior Notes
or Senior Discount Note, as the case may be (other than a default specified in
clause (a), (b) or (c) above), and such default or breach continues for a period
of 30 consecutive days after written notice by the relevant Trustee or the
Holders of 25% or more in aggregate principal amount of the Senior Notes or
Senior Discount Notes, as the case may be; (e) there occurs with respect to any
issue or issues of Indebtedness of the Company or any Significant Subsidiary
having an outstanding principal amount of $12 million or more in the aggregate
for all such issues of all such Persons, whether such Indebtedness now exists or
shall hereafter be created, (I) an event of default that has caused the holder
thereof to declare such Indebtedness to be due and payable prior to its Stated
Maturity and such Indebtedness has not been discharged in full or such
acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (f) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $12 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against the Company or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period of
30 consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $12 million during which a
stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in
the premises enters a decree or order for (A) relief in respect of the Company
or any Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) the winding up or liquidation of the affairs of
the Company or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed and in effect for a period of 30 consecutive days;
or (h) the Company or any Significant Subsidiary (A) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the benefit of
creditors.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indentures, the relevant Trustee or the Holders of at least
25% in aggregate principal amount at maturity of the Senior Notes or Senior
Discount Notes, as the case may be, then outstanding, by written notice to the
Company (and to the relevant Trustee if such notice is given by the Holders),
may, and the relevant Trustee at the request of such Holders shall, declare the
principal amount (in the case of Senior Notes) or Accreted Value (in the case of
Senior Discount Notes) of, premium, if any, and accrued interest on the Notes to
be immediately due and payable. Upon a declaration of acceleration, such
principal amount or Accreted Value of, premium, if any, and accrued interest
shall be immediately due and payable. In the event of a declaration of
acceleration because an Event of Default set forth in clause (e) above has
occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs with respect to the Company, the principal amount or Accreted Value, as
the case may be, of, premium, if any, and accrued interest on the Notes then
outstanding shall ipso facto become and be immediately due and payable without
any declaration or other act on the part of the relevant Trustee or any Holder.
The Holders of at least a majority in principal amount at maturity of the
outstanding Notes by written notice to the Company and to the relevant Trustee,
may waive all past defaults and rescind and annul a declaration of acceleration
and its consequences if (i) all existing Events of Default, other than the
nonpayment of the principal or Accreted Value, as the case may be, of, premium,
if any, and interest on the Notes that have become due
82
<PAGE>
<PAGE>
solely by such declaration of acceleration, have been cured or waived and (ii)
the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction. For information as to the waiver of defaults, see
' -- Modification and Waiver.'
The Holders of at least a majority in aggregate principal amount of the
outstanding Senior Notes or Senior Discount Notes may direct the time, method
and place of conducting any proceeding for any remedy available to the relevant
Trustee or exercising any trust or power conferred on the relevant Trustee.
However, the relevant Trustee may refuse to follow any direction that conflicts
with law or the relevant Indenture, that may involve the relevant Trustee in
personal liability, or that the relevant Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Senior Notes or Senior Discount
Notes, as the case may be, not joining in the giving of such direction and may
take any other action it deems proper that is not inconsistent with any such
direction received from Holders of such Notes. A Holder may not pursue any
remedy with respect to the Indentures or the Notes unless: (i) the Holder gives
the relevant Trustee written notice of a continuing Event of Default; (ii) the
Holders of at least 25% in aggregate principal amount at maturity of outstanding
Senior Notes or Senior Discount Notes, as the case may be, make a written
request to the relevant Trustee to pursue the remedy; (iii) such Holder or
Holders offer the relevant Trustee indemnity satisfactory to such Trustee
against any costs, liability or expense; (iv) the relevant Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the Holders of a majority
in aggregate principal amount of the outstanding Senior Notes or Senior Discount
Notes, as the case may be, do not give the relevant Trustee a direction that is
inconsistent with the request. However, such limitations do not apply to the
right of any Holder of a Note to receive payment of the principal amount or
Accreted Value, as the case may be, of, premium, if any, or interest on, such
Note or to bring suit for the enforcement of any such payment, on or after the
due date expressed in the Notes, which right shall not be impaired or affected
without the consent of the Holder.
The Indentures will require certain officers of the Company to certify, on
or before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustees of any default or defaults
in the performance of any covenants or agreements under the Indentures.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustees, all of the obligations of the Company on all of the Notes and under
the Indentures; (ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction on a pro forma basis, the
Company or any Person becoming the successor obligor of the Notes shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately prior to such transaction; provided that this clause
(iii) shall only apply to a sale of substantially all, but less than all, of the
assets of the Company; (iv) immediately after giving effect to such transaction
on a pro forma basis the Company, or any Person becoming the successor obligor
of the Notes, as the case may be, could Incur at least $1.00 of Indebtedness
under the first paragraph of the 'Limitation on Indebtedness' covenant; provided
that this clause (iv) shall not apply to (x) a consolidation, merger or sale of
all (but not less than all) of the assets of the Company if all Liens and
Indebtedness of the Company or any Person becoming the successor obligor on the
Notes, as the case may be, and its Restricted Subsidiaries outstanding
immediately after such transaction would, if Incurred at such time, have been
permitted to be Incurred (and all such Liens and Indebtedness, other than Liens
and Indebtedness of the Company and its Restricted Subsidiaries outstanding
immediately prior to the transaction, shall be deemed to
83
<PAGE>
<PAGE>
have been Incurred) for all purposes of the Indenture or (y) a consolidation,
merger or sale of all or substantially all of the assets of the Company if
immediately after giving effect to such transaction on a pro forma basis, the
Company or any Person becoming the successor obligor of the Notes shall have a
Consolidated Leverage Ratio equal to or less than the Consolidated Leverage
Ratio of the Company immediately prior to such transaction; and (v) the Company
delivers to the Trustees an Officers' Certificate (attaching the arithmetic
computations to demonstrate compliance with clauses (iii) and (iv) above) and
Opinion of Counsel, in each case stating that such consolidation, merger or
transfer and such supplemental indenture complies with this provision and that
all conditions precedent provided for herein relating to such transaction have
been complied with; provided, however, that clauses (iii) and (iv) above do not
apply if, in the good faith determination of the Board of Directors of the
Company, whose determination shall be evidenced by a Board Resolution, the
principal purpose of such transaction is to change the state of incorporation of
the Company; and provided further that any such transaction shall not have as
one of its purposes the evasion of the foregoing limitations.
DEFEASANCE
Defeasance and Discharge. Each Indenture will provide that the Company will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Senior Notes or Senior Discount Notes, as the case may be, on the
123rd day after the deposit referred to below, and the provisions of the
relevant Indenture will no longer be in effect with respect to such Notes
(except for, among other matters, certain obligations to register the transfer
or exchange of such Notes, to replace stolen, lost or mutilated Notes, to
maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the relevant Trustee, in trust,
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the relevant Notes on the Stated Maturity of such payments
in accordance with the terms of the relevant Indenture and the Notes, (B) the
Company has delivered to the relevant Trustee (i) either (x) an Opinion of
Counsel to the effect that Holders will not recognize income, gain or loss for
federal income tax purposes as a result of the Company's exercise of its option
under this 'Defeasance' provision and will be subject to federal income tax on
the same amount and in the same manner and at the same times as would have been
the case if such deposit, defeasance and discharge had not occurred, which
Opinion of Counsel must be based upon (and accompanied by a copy of) a ruling of
the Internal Revenue Service to the same effect unless there has been a change
in applicable federal income tax law after the Closing Date such that a ruling
is no longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law, (C) immediately after giving
effect to such deposit on a pro forma basis, no Event of Default, or event that
after the giving of notice or lapse of time or both would become an Event of
Default, shall have occurred and be continuing on the date of such deposit or
during the period ending on the 123rd day after the date of such deposit, and
such deposit shall not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound and (D) if at such time the Notes are listed on a national securities
exchange, the Company has delivered to the relevant Trustee an Opinion of
Counsel to the effect that the Notes will not be delisted as a result of such
deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. Each
Indenture further will provide that the provisions of such Indenture will no
longer be in effect with respect to clauses (iii) and (iv) under 'Consolidation,
Merger and Sale of Assets' and all the covenants described herein under
'Covenants,' clause (c) under 'Events of Default' with respect to such clauses
(iii) and (iv) under 'Consolidation, Merger and Sale of Assets,' clause (d)
under 'Events of Default' with respect to such other covenants and clauses (e)
and (f) under 'Events of Default' shall be deemed not to be Events of Default
upon, among other things, the deposit with the relevant Trustee, in trust, of
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the Senior Notes or Senior Discount Notes, as the case may
be, on the Stated Maturity of such payments in accordance with the terms of the
relevant Indenture and the Notes, the satisfaction of the provisions described
in clauses (B)(ii), (C) and (D) of the
84
<PAGE>
<PAGE>
preceding paragraph and the delivery by the Company to the relevant Trustee of
an Opinion of Counsel to the effect that, among other things, the Holders will
not recognize income, gain or loss for federal income tax purposes as a result
of such deposit and defeasance of certain covenants and Events of Default and
will be subject to federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such deposit and defeasance
had not occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
either Indenture with respect to the Senior Notes or Senior Discount Notes, as
the case may be, as described in the immediately preceding paragraph and such
Notes are declared due and payable because of the occurrence of an Event of
Default that remains applicable, the amount of money and/or U.S. Government
Obligations on deposit with the relevant Trustee will be sufficient to pay
amounts due on such Notes at the time of their Stated Maturity but may not be
sufficient to pay amounts due on such Notes at the time of the acceleration
resulting from such Event of Default. However, the Company will remain liable
for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the respective Indentures may be made by
the Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the outstanding Senior Notes or Senior
Discount Notes, as the case may be; provided, however, that no such modification
or amendment may, without the consent of each Holder affected thereby, (i)
change the Stated Maturity of the principal of, or any installment of interest
on, any Note, (ii) reduce the principal amount or Accreted Value of, or premium,
if any, or interest on, any Note, (iii) change the place or currency of payment
of principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Senior
Notes or Senior Discount Notes, as the case may be, the consent of whose Holders
is necessary to modify or amend the applicable Indenture, (vi) waive a default
in the payment of principal of, premium, if any, or interest on the Senior Notes
or Senior Discount Notes, as the case may be, or modify any provisions of the
applicable Indenture relating to modification or amendment thereof or (vii)
reduce the percentage or aggregate principal amount at maturity of outstanding
Senior Notes or Senior Discount Notes, as the case may be, the consent of whose
Holders is necessary for waiver of compliance with certain provisions of the
applicable Indenture or for waiver of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indentures provide that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indentures, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indentures provide that, except during the continuance of a Default,
each Trustee will perform only such duties as are specifically set forth in such
Indentures. If an Event of Default has occurred and is continuing, the Trustee
will use the same degree of care and skill in its exercise of the rights and
powers vested in it under the Indentures as a prudent person would exercise
under the circumstances in the conduct of such person's own affairs.
The Indentures and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
each Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. Each Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
85
<PAGE>
<PAGE>
BOOK-ENTRY; DELIVERY AND FORM
The Notes will be initially represented by two or more global notes (the
'Global Notes') issued in the form of fully registered Global Notes, which will
be deposited with, or on behalf of, the Depositary and registered in the name of
a nominee of the Depositary. Transfers between participants in the Depositary
will be effected in the ordinary way in accordance with the Depositary's rules
and will be settled in same-day funds.
The Depositary has advised the Company and the Underwriters that the
Depositary intends to follow the procedures described below:
The Depositary will act as securities depository for the Global Notes.
The Global Notes will be issued as a fully registered security registered
in the name of Cede & Co. (the Depositary's nominee).
The Depositary is a limited-purpose trust company organized under the
New York Banking Law, a 'banking organization' within the meaning of the
New York Banking Law, a member of the Federal Reserve System, a 'clearing
corporation' within the meaning of the New York Uniform Commercial Code,
and a 'clearing agency' registered pursuant to the provisions of Section
17A of the Exchange Act. The Depositary holds securities that its
participants ('Participants') deposit with the Depositary. The Depositary
also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct Participants include securities brokers and dealers,
banks, trust companies, clearing corporations, and certain other
organizations ('Direct Participants'). The Depositary is owned by a number
of its Direct Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the Depositary's system is also available to others
such as securities brokers and dealers, banks, and trust companies that
clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ('Indirect Participants'). The
Rules applicable to the Depositary and its Participants are on file with
the Commission.
Purchases of Notes must be made by or through Direct Participants,
which will receive a credit for the Notes on the Depositary's records. The
ownership interest of each actual purchaser of each Note ('Beneficial
Owner') is in turn recorded on the Direct and Indirect Participant's
records. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in the Notes, except in the event
that use of the book-entry system for the Notes is discontinued.
Conveyance of Notes and other communications by the Depositary to
Direct Participants, by Direct Participants to Indirect Participants, and
by Direct Participants and Indirect Participants to Beneficial Owners are
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Senior Notes or Senior Discount Notes, as the case may be, are being
redeemed, the Depositary's practice is to determine by lot the amount of
the interest of each Direct Participant in such issue to be redeemed.
Neither the Depositary nor Cede & Co. will consent or vote with
respect to the Notes. Under its usual procedures, the Depositary mails an
Omnibus Proxy to the issuer as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those
Direct Participants to whose accounts the Notes are credited on the record
date (identified in a listing attached to the Omnibus Proxy).
Principal, premium (if any), and interest payments on the Notes will
be made to the Depositary. The Depositary's practice is to credit Direct
Participants' accounts on the payable date in accordance with their
respective holdings shown on the Depositary's records unless the Depositary
has reason to believe that it will not receive payment on the payable date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices, as is the case with securities held
for the accounts of customers in bearer form or registered in 'street
name,' and will be the responsibility of such Participant and not of the
Depositary, the Paying Agent, or the Company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment to
the Depositary of principal, premium (if any) and interest on the Notes are
the responsibility of the Company or the Paying Agent, disbursement of such
payments to Direct Participants shall be the responsibility of the
Depositary, and
86
<PAGE>
<PAGE>
disbursement of such payments to the Beneficial Owners shall be the
responsibility of Direct and Indirect Participants.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the
Company believes to be reliable, but the Company takes no responsibility
for the accuracy thereof.
So long as the Depositary for the Global Notes, or its nominee, is the
registered owner of the Global Notes, the Depositary or its nominee, as the
case may be, will be considered the sole owner or Holder of the Notes
represented by the Global Notes for all purposes under the applicable
Indenture. Except as set forth below, owners of beneficial interests in
such Global Notes will not be entitled to have Notes represented by such
Global Notes registered in their names, will not receive or be entitled to
receive physical delivery of Notes in definitive form and will not be
considered the owners or Holders thereof under the Indenture. Accordingly,
each person owning a beneficial interest in Global Notes must rely on the
procedures of the Depositary and, if such person is not a Participant,
those of the Participant through which such person owns its interests, in
order to exercise any rights of a Holder under the Indenture or such Note.
The Indentures provide that the Depositary, as a Holder, may appoint
agents and otherwise authorize Participants to give or take any request,
demand, authorization, direction, notice, consent, waiver or other action
which a Holder is entitled to give or take under the Indentures, including
the right to sue for payment of principal or interest pursuant to Section
316(b) of the Trust Indenture Act of 1939, as amended. The Company
understands that under existing industry practices, when the Company
requests any action of Holders or when a Beneficial Owner desires to give
or take any action which a Holder is entitled to give or take under either
Indenture, the Depositary generally will give or take such action, or
authorize the relevant Participants to give or take such action, and such
Participants would authorize Beneficial Owners owning through such
Participants to give or take such action or would otherwise act upon the
instructions of Beneficial Owners owning through them.
The Company has been informed by the Depositary that the Depositary
will assist its Participants and their customers (Beneficial Owners) in
taking any action a Holder is entitled to take under either Indenture or
exercise any rights available to Cede & Co., as the holder of record of the
Notes and including the right to demand acceleration of the Notes upon an
Event of Default or to institute suit for the enforcement of payment or
interest pursuant to Section 316(b) of the Trust Indenture Act of 1939, as
amended. The Depositary has advised the Company that it will act with
respect to such matters only upon written instructions from a Participant
to whose account with the Depositary the relevant beneficial ownership in
the Notes is credited and only in respect of such portion of the aggregate
principal amount of the Notes as to which such Participant has given such
direction. The Company understands that a Participant will deliver such
written instructions to the Depositary upon itself receiving similar
written instructions from either Indirect Participants or Beneficial
Owners, as the case may be. Under Rule 6 of the rules and procedures filed
by the Depositary with the Commission pursuant to Section 17 of the
Exchange Act, Participants are required to indemnify the Depositary against
all liability the Depositary may sustain, without fault on the part of the
Depositary or its nominee, as a result of any action they may take pursuant
to the instructions of the Participant in exercising any such rights.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Such limits and such laws may impair the ability to transfer beneficial
interests in the Global Notes.
Principal, premium, if any, and interest payments on Notes registered
in the name of or held by the Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner or
the Holder of the Global Notes representing such Notes. Neither the Company
nor the Trustees will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
If the Depositary is at any time unwilling, unable or ineligible to
continue as depositary and a successor depositary is not appointed by the
Company within 60 days or, if an Event of Default under the Indentures has
occurred and is continuing, the Company will issue Notes in definitive
registered form, without coupons, in denominations of $1,000 of principal
amount at maturity and any integral multiple
87
<PAGE>
<PAGE>
thereof, in exchange for the Global Notes representing such Notes. In
addition, the Company may at any time and in its sole discretion determine
not to have any Notes in registered form represented by the Global Notes
and, in such event, will issue Notes or in definitive registered form in
exchange for the Global Notes representing such Notes. In any such
instance, an owner of a beneficial interest in a Global Note will be
entitled to physical delivery in definitive form of Notes registered in its
name. Upon the exchange of the Global Notes for Notes in definitive form,
the Global Notes will be canceled by the relevant Trustee.
DESCRIPTION OF CAPITAL STOCK
The Company's Restated Certificate of Incorporation provides for authorized
capital stock of million shares, including million shares of Class A
Common Stock, $.01 par value per share, million shares of Class B Common
Stock, $.01 par value per share, and million shares of preferred stock, $.01
par value per share (the 'Preferred Stock'). Upon completion of the Stock
Offering, there will be no preferred stock outstanding and the Existing
Stockholders will own of record all of the outstanding shares of Class B Common
Stock. See 'Principal Stockholders.'
The following summary description relating to the capital stock of the
Company does not purport to be complete. The rights of the holders of the
Company's capital stock will be set forth in the Company's Restated Certificate
of Incorporation, as well as the Stockholders Agreement, the forms of both of
which are filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The summary set forth below is qualified by reference
to such exhibits and to the applicable provisions of the Delaware General
Corporation Law (the 'DGCL').
COMMON STOCK
The relative rights of the Class A Common Stock and Class B Common Stock
are substantially identical in all respects, except for voting rights and
conversion rights.
Voting Rights. Each share of Class A Common Stock entitles the holder to
one vote and each share of Class B Common Stock entitles the holder to 10 votes
on each matter to be voted upon by the holders of the Common Stock. The holders
of the shares of Class A Common Stock and Class B Common Stock vote as one class
on all matters to be voted on by stockholders, including, without limitation,
the election of directors and any proposed amendment to the Restated Certificate
of Incorporation of the Company that would increase the authorized number of
shares of Common Stock or any class thereof or any other class or series of
stock or decrease the number of authorized shares of any class or series of
stock (but not below the number thereof then outstanding), except as required by
the DGCL and except that, (i) without a unanimous vote of the holders of the
Class B Common Stock, voting as a separate class, (A) the Restated Certificate
of Incorporation may not be amended, altered or repealed and (B) the Company may
not merge or consolidate with, or sell all or substantially all of its assets
to, any person, in each case, until such time as the outstanding shares of Class
B Common Stock represent less than 50% of the voting power of the outstanding
Common Stock and (ii) without a majority vote of the holders of the Class A
Common Stock, certain provisions of the Restated Certificate of Incorporation
relating to the termination of, and vote required to waive, the limitations on
business purposes described in the next sentence may not be amended, altered or
repealed. Under the Restated Certificate of Incorporation, the Company may not
(i) engage in the business of providing, offering, promoting or branding any
Residential Services or (ii) engage in the production, packaging, distribution,
marketing, hosting, offering, promoting or branding or other provision
(excluding mere transport) of Content Services, in each case until the earlier
of (x) the date that is five years after the date of the filing of the Restated
Certificate of Incorporation and (y) the date on which the holders of Class B
Common Stock no longer represent at least 50% of the voting power of the
outstanding Common Stock of the Company.
Neither the holders of Class A Common Stock nor the holders of Class B
Common Stock have cumulative voting rights. For a discussion of the effects of
the disproportionate voting rights of the Class A Common Stock and Class B
Common Stock, see 'Risk Factors -- Control by Principal Stockholders; Conflicts
of Interest; Possible Competition.'
Dividends. Each share of Common Stock is entitled to receive dividends from
funds legally available therefor if, as and when declared by the Board of
Directors of the Company. Class A Common Stock and Class B Common Stock share
equally, on a share-for-share basis, in any dividends declared by the Board of
88
<PAGE>
<PAGE>
Directors. If at any time a distribution of the Class A Common Stock or Class B
Common Stock is to be paid in shares of Class A Common Stock, Class B Common
Stock or any other securities of the Company or any other person, such dividends
may be declared and paid only as follows: (1) a share distribution consisting of
Class A Common Stock to holders of Class A Common Stock and Class B Common
Stock, on an equal per share basis; or to holders of Class A Common Stock only,
but in such event there shall also be a simultaneous share distribution to
holders of Class B Common Stock consisting of shares of Class B Common Stock on
an equal per share basis; (2) a share distribution consisting of Class B Common
Stock to holders of Class B Common Stock and Class A Common Stock, on an equal
per share basis; or to holders of Class B Common Stock only, but in such event
there shall also be a simultaneous share distribution to holders of Class A
Common Stock consisting of shares of Class A Common Stock on an equal per share
basis; and (3) a share distribution of shares of any class of securities of the
Company or any other person other than the Common Stock, either on the basis of
a distribution of identical securities, on an equal per share basis to the
holders of Class A Common Stock and Class B Common Stock, or on the basis of a
distribution of one class of securities to the holders of Class A Common Stock
and another class of securities to holders of Class B Common Stock, provided
that the securities so distributed do not differ in any respect other than
relative voting rights and related differences in designations, conversion and
share distribution provisions, with the holders of Class B Common Stock
receiving the class having the higher relative voting rights, provided that if
the securities so distributed constitute capital stock of a subsidiary of the
Company, such rights shall not differ to a greater extent than the corresponding
differences in voting rights, designations, conversion and distribution
provisions between Class A Common Stock and Class B Common Stock. If the Company
shall in any manner subdivide or combine the outstanding shares of Class A
Common Stock or Class B Common Stock, the outstanding shares of the other class
of Common Stock shall be proportionally subdivided or combined in the same
manner and on the same basis as the outstanding shares of Class A Common Stock
or Class B Common Stock, as the case may be, that have been subdivided or
combined.
Conversion. Under the Restated Certificate of Incorporation, each share of
Class B Common Stock is convertible at any time and from time to time at the
option of the holder thereof into one share of Class A Common Stock. The Class A
Common Stock has no conversion rights.
Other. Stockholders of the Company have no preemptive or other rights to
subscribe for additional shares. All holders of Common Stock, regardless of
class, are entitled to share equally on a share-for-share basis in any assets
available for distribution to stockholders on liquidation, dissolution or
winding up of the Company. All outstanding shares are, and all shares offered by
this Prospectus will be, when sold, validly issued, fully paid and
nonassessable. The Company may not subdivide or combine shares of Common Stock
without at the same time proportionally subdividing or combining shares of the
other classes.
PREFERRED STOCK
The Company's Board of Directors is authorized to provide for the issuance
of Preferred Stock in one or more series and to fix the designation,
preferences, powers and relative, participating, optional and other rights,
qualifications, limitations and restrictions thereof, including the dividend
rate, conversion rights, voting rights, redemption price and liquidation
preference and to fix the number of shares to be included in any such series.
Any Preferred Stock so issued may rank senior to the Common Stock with respect
to the payment of dividends or amounts upon liquidation, dissolution or winding
up, or both. In addition, any such shares of Preferred Stock may have class or
series voting rights.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Restated Certificate of Incorporation of the Company expressly states
that the Company has elected not to be governed by Section 203 of the DGCL which
prohibits a publicly held Delaware corporation from engaging in a 'business
combination' (as defined in Section 203(c)(3) of the DGCL) with an 'interested
stockholder' (as defined in Section 203(c)(5) of the DGCL) for a period of three
years after the date of the transaction in which such stockholder became an
interested stockholder.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate of Incorporation limits the liability of Directors
to the fullest extent permitted by the Delaware General Corporation Law. In
addition, the Restated Certificate of Incorporation will provide that
89
<PAGE>
<PAGE>
the Company shall indemnify Directors and officers of the Company to the fullest
extent permitted by such law. The Company anticipates entering into separate
indemnification agreements with its current Directors and executive officers
prior to the completion of the Stock Offering which will have the effect of
providing such persons indemnification protection in the event the Restated
Certificate of Incorporation is subsequently amended.
NASDAQ LISTING
The Class A Common Stock is expected to be approved for quotation on the
Nasdaq National Market of the Nasdaq Stock Market under the symbol 'TWTC.'
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is .
90
<PAGE>
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material U.S. Federal income
tax considerations applicable to initial holders of the Senior Notes and Senior
Discount Notes. This summary is based upon current provisions of the Code,
regulations of the Treasury Department, administrative rulings and
pronouncements of the Internal Revenue Service ('IRS') and judicial decisions
currently in effect, all of which are subject to change, possibly with
retroactive effect. The discussion does not deal with all aspects of U.S.
Federal income taxation that may be relevant to particular investors in light of
their personal investment circumstances, including persons holding Senior Notes
or Senior Discount Notes as part of a conversion transaction or as part of a
hedge or hedging transaction, or as a position in a straddle for tax purposes,
nor does it discuss U.S. Federal income tax considerations applicable to certain
types of investors subject to special treatment under the U.S. Federal income
tax laws, including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers and taxpayers subject to the alternative minimum
tax. In addition, the discussion does not consider the effect of any foreign,
state, local, gift, estate or other tax laws that may be applicable to a
particular investor (except as specifically provided below). In addition, except
as provided below as to non-U.S. holders, the discussion is limited to holders
of Senior Notes and Senior Discount Notes that are U.S. holders. For purposes of
this discussion, 'U.S. Holder' means a holder of the Senior Notes or Senior
Discount Notes who or which is (i) a citizen or resident (as defined in Section
7701(b)(1) of the Code) of the United States, (ii) a corporation or other entity
taxable as a corporation created or organized under the laws of the United
States or any State thereof (including the District of Columbia), (iii) an
estate or trust described in Section 7701(a)(30) of the Code, or (iv) a person
whose worldwide income or gain is otherwise subject to U.S. Federal income
taxation on a net income basis, and 'Non-U.S. Holder' means any holder of a
Senior Note or Senior Discount Note that is not a U.S. Holder. EACH POTENTIAL
INVESTOR SHOULD CONSULT ITS TAX ADVISOR REGARDING THE PARTICULAR TAX
CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE SENIOR NOTES AND SENIOR
DISCOUNT NOTES INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND
FOREIGN TAX LAWS.
U.S. HOLDERS
TAXATION OF U.S. HOLDERS OF THE SENIOR NOTES
Payment of Interest
In general, interest on the Senior Notes will be taxable to a U.S. Holder
as ordinary income at the time it is received or accrued in accordance with the
U.S. Holder's method of accounting for U.S. Federal income tax purposes.
Sale, Exchange or Redemption
Upon the sale, exchange or redemption of the Senior Notes, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
(i) the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (except to the extent such amount
is attributable to accrued but unpaid interest which is taxable as ordinary
income) and (ii) such U.S. Holder's adjusted tax basis in the Senior Notes. A
U.S. Holder's adjusted tax basis in a Senior Note generally will equal the cost
of the Senior Note to such U.S. Holder. Capital gain recognized by an individual
U.S. Holder generally will be subject to a maximum United States Federal income
tax rate of (i) 39.6% if the U.S. Holder held the asset for not more than one
year before sale, (ii) 28% if the U.S. Holder held the asset for more than one
year but not more than eighteen months before sale, and (iii) 20% if the U.S.
Holder held the asset for more than eighteen months before sale.
TAXATION OF U.S. HOLDERS OF THE SENIOR DISCOUNT NOTES
Original Issue Discount
The Senior Discount Notes will be issued with original issue discount
('OID') for U.S. Federal income tax purposes. In general, OID on the Senior
Discount Notes, defined as the excess of 'stated redemption price at maturity'
over 'issue price', must be included in a holder's gross income in advance of
the receipt of cash
91
<PAGE>
<PAGE>
representing that income (regardless of whether the U.S. Holder is a cash or
accrual method taxpayer). U.S. Holders will not be required to report separately
as taxable income actual distributions of stated interest with respect to the
Senior Discount Notes.
The 'issue price' of a Note is the first price at which a substantial
amount of the Senior Discount Notes is sold to the public for cash (excluding
sales to bond houses, brokers or similar persons or organizations acting in the
capacity of underwriters, placement agents or wholesalers, such as the Initial
Purchasers).
The 'stated redemption price at maturity' of the Senior Discount Notes will
equal their principal amount at maturity plus all of the stated interest on the
Senior Discount Notes. Thus, each Senior Discount Note will bear OID in an
amount equal to the excess of (i) the sum of the principal amount at maturity
plus all stated interest payments over (ii) its issue price.
The Company will report annually to the IRS and to record holders of the
Senior Discount Notes information with respect to OID accruing during the
calendar year.
A U.S. Holder of a Senior Discount Note will be required to include in
gross income for U.S. Federal income tax purposes the sum of the 'daily
portions' of OID with respect to the Note for each day during the taxable year
on which such U.S. Holder holds the Senior Discount Note. The daily portions of
OID with respect to a Senior Discount Note are determined by allocating to each
day in any 'accrual period' a ratable portion of the OID allocable to that
accrual period. Accrual periods with respect to a Senior Discount Note may be
any set of periods (which may be of varying lengths) selected by a U.S. Holder
as long as (i) no accrual period is longer than one year and (ii) each scheduled
payment of interest or principal on the Senior Discount Note occurs on either
the first or final day of an accrual period.
The amount of OID allocable to each accrual period equals the amount
determined by multiplying the 'adjusted issue price' of the Senior Discount Note
at the beginning of the accrual period by the yield to maturity of the Senior
Discount Note (i.e., the discount rate that, when applied to all payments under
the Senior Discount Note, results in a present value equal to the issue price).
The 'adjusted issue price' at the beginning of any accrual period is the issue
price of the Senior Discount Note, plus the amount of OID taken into account for
all prior accrual periods minus the amount of all cash payments previously made
on the debt instrument (including payments of stated interest). This constant
yield method of determining the amount of OID includible in income for any
period will require a U.S. Holder of a Senior Discount Note to include
increasing amounts of OID in income in successive accrual periods.
Sale, Exchange or Redemption
A U.S. Holder generally will recognize capital gain or loss upon the sale,
exchange, retirement or other taxable disposition of a Senior Discount Note
equal to the difference between the amount realized upon such disposition and
its adjusted tax basis in the Senior Discount Note. A U.S. Holder's adjusted tax
basis in a Note generally will equal the cost of the Senior Discount Note to
such U.S. Holder, increased by accrued OID previously included in the U.S.
Holder's gross income with respect to the Senior Discount Note, and decreased by
any cash payments (including payments of stated interest) made with respect to
the Senior Discount Note. Capital gain recognized by an individual U.S. Holder
generally will be subject to a maximum U.S. Federal income tax rate of (i) 39.6%
if the U.S. Holder held the asset for not more than one year, (ii) 28% if the
U.S. Holder held the asset for more than one year but not more than eighteen
months and (iii) 20% if the U.S. Holder held the asset for more than eighteen
months.
INFORMATION REPORTING AND BACKUP WITHHOLDING APPLICABLE TO U.S. HOLDERS
On October 6, 1997, the Treasury Department issued final regulations
relating to withholding, information reporting and backup withholding that unify
current certification procedures and forms and clarify reliance standards (the
'Final Regulations'). The Final Regulations generally will be effective with
respect to payments made after December 31, 1999. Except as provided below, this
section describes rules applicable to payments made on or before December 31,
1999.
A U.S. Holder of the Senior Notes or Senior Discount Notes may be subject
to backup withholding at a rate of 31% with respect to payments attributable to
interest and/or OID on the Senior Notes or Senior Discount Notes and proceeds
from the sale, exchange or redemption of the Senior Notes or Senior Discount
Notes, unless such U.S. Holder is (a) is a corporation or comes within certain
other exempt categories and, when required,
92
<PAGE>
<PAGE>
demonstrates that fact, or (b) provides a correct taxpayer identification
number, certifies as to its exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. Certain
payments may be imposed by the IRS on a U.S. Holder that is required to supply
information but does not do so in the proper manner.
Any amount withheld under the backup withholding rules from a payment to a
U.S. Holder is allowable as a credit against such U.S. Holder's Federal income
tax (which might entitle such U.S. Holder to a refund), provided that such U.S.
Holder furnishes the required information to the IRS.
NON-U.S. HOLDERS
TAXATION OF NON-U.S. HOLDERS OF SENIOR NOTES AND SENIOR DISCOUNT NOTES
Under present United States Federal and estate tax law, and subject to the
discussion below concerning backup withholding:
(a) no withholding of United States Federal income tax will be
required with respect to the payment by the Company or any paying agent of
principal interest or OID on a Senior Note or Senior Discount Note owned by
a Non-U.S. Holder, provided (i) that the beneficial owner does not actually
or constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote within the meaning of
section 871(h)(3) of the Code and the regulations thereunder, (ii) the
beneficial owner is not a controlled foreign corporation that is related to
the Company through stock ownership, (iii) the beneficial owner is not a
bank whose receipt of interest on a Senior Note or Senior Discount Note is
described in section 881(c)(3)(A) of the Code and (iv) the beneficial owner
satisfies the statement requirement (described generally below) set forth
in section 871(h) and section 881(c) of the Code and the regulations
thereunder; and
(b) no withholding of United States Federal income tax will be
required with respect to any gain or income realized by a Non-U.S. Holder
upon the sale, exchange, retirement or other disposition of a Senior Note
or Senior Discount Note; and
(c) a Senior Note or Senior Discount Note beneficially owned by an
individual who at the time of death is a Non-U.S. Holder will not be
subject to United States Federal estate tax as a result of such
individual's death, provided that such individual does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote within the meaning of
section 871(h)(3) of the Code and provided that the interest and/or OID
payments with respect to such Senior Note or Senior Discount Note would not
have been, if received at the time of such individual's death, effectively
connected with the conduct of a United States trade or business by such
individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Senior Note or Senior Discount Note, or a financial institution
holding the Senior Note or Senior Discount Note on behalf of such owner, must
provide, in accordance with specified procedures, a paying agent of the Company
with a statement to the effect that the beneficial owner is not a United States
person. Currently, these requirements will be met if (1) the beneficial owner
provides his name and address, and certifies, under penalties of perjury, that
he is not a United States person (which certification may be made on an IRS Form
W-8 (or successor form)) or (2) a financial institution holding the Senior Note
or Senior Discount Note on behalf of the beneficial owner certifies, under
penalties of perjury, that such statement has been received by it and furnishes
a paying agent with a copy thereof. Under the Final Regulations, the statement
requirement referred to in (a)(iv) above may also be satisfied with other
documentary evidence for interest paid after December 31, 1999 with respect to
an offshore account or through certain foreign intermediaries.
If a Non-U.S. Holder cannot satisfy the requirements of the 'portfolio
interest' exception described in (a)(iv) above, payments of interest and/or OID
made to such Non-U.S. Holder will be subject to a 30% withholding tax (or such
lower rate as may be provided by an applicable income tax treaty between the
United States and a foreign country) unless the beneficial owner of the Senior
Note or Senior Discount Note provides the Company or its paying agent, as the
case may be, with a properly executed (1) IRS Form 1001 (or successor form)
claiming an exemption from withholding under the benefit of a tax treaty or (2)
IRS Form 4224 (or successor form) stating that interest and/or OID paid on the
Senior Note or Senior Discount Note is not subject to withholding tax because it
is effectively connected with the beneficial owner's conduct of a trade or
business
93
<PAGE>
<PAGE>
in the United States. Under the Final Regulations, Non-U.S. Holders will
generally be required to provide IRS Form W-8 in lieu of the IRS Form 1001 and
IRS Form 4224, although alternative documentation may be applicable in certain
situations.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest and/or OID on the Senior Note or Senior Discount Note is
effectively connected with the conduct of such trade or business, the Non-United
States Holder, although exempt from the withholding tax discussed above
(provided the Non-United States Holder files the appropriate certification with
the Company or its agent), will be subject to United States Federal income tax
on such interest and/or OID on a net income basis in the same manner as if it
were a United States person. In addition, if such holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits for the taxable year, subject to
adjustments. For this purpose, OID and/or interest on a Senior Note or Senior
Discount Note will be included in such foreign corporation's earnings and
profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Senior Note or Senior Discount Note generally will not be
subject to United States Federal income tax unless (i) such gain or income is
effectively connected with trade or business in the United States of the
Non-U.S. Holder, or (ii) in the case of a Non-U.S. Holder who is an individual,
such individual is present in the United States for 183 days or more in the
taxable year of such sale, exchange, retirement or other disposition, and
certain other conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING APPLICABLE TO NON-U.S. HOLDERS
No information reporting or backup withholding tax (which is a withholding
tax imposed at the rate of 31% on certain payments to persons who fail to
furnish the information required under the United States information reporting
requirements) will be required with respect to payments made by the Company or
any paying agent to Non-U.S. Holders if a statement described in (a)(iv) under
'Non-United States Holders' has been received and the payor does not have actual
knowledge that the beneficial owner is a United States person.
In addition, backup withholding and information reporting generally will
not apply if payments of the principal or interest on a Senior Note or Senior
Discount Note are paid or collected by a foreign office of a custodian, nominee
or other foreign agent on behalf of the beneficial owner of such Senior Note or
Senior Discount Note, or if a foreign office of a broker (as defined in
applicable Treasury regulations) pays the proceeds of the sale of a Senior Note
or Senior Discount Note to the owner thereof. If, however, such nominee,
custodian, agent or broker is, for United States Federal income tax purposes, a
United States person, a controlled foreign corporation or a foreign person that
derives 50% or more of its gross income for certain periods from the conduct of
a trade or business in the United States, or, for taxable years beginning after
December 31, 1999, a foreign partnership, in which one or more United States
persons, in the aggregate, own more than 50% of the income or capital interests
in the partnership or which is engaged in a trade or business in the United
States, such payments will not be subject to backup withholding but will be
subject to information reporting, unless (1) such custodian, nominee, agent or
broker has documentary evidence in its records that the beneficial owner is not
a United States person and certain other conditions are met or (2) the
beneficial owner otherwise establishes an exemption.
Payments of principal or interest, on a Senior Note or Senior Discount Note
paid to the beneficial owner of a Senior Note or Senior Discount Note by a
United States office of a custodian, nominee or agent, or the payment by the
United States office of a broker of the proceeds of sale of a Senior Note or
Senior Discount Note will be subject to both backup withholding and information
reporting unless the beneficial owner provides the statement referred to in
(a)(iv) above and the payor does not have actual knowledge that the beneficial
owner is a United States person or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's United States Federal income tax
liability provided the required information is furnished to the IRS.
94
<PAGE>
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the 'Underwriting Agreement'), the Underwriters
named below for whom Morgan Stanley & Co. Incorporated and Lehman Brothers Inc.
are acting as Representatives have severally agreed to purchase, and the Company
has agreed to sell to them, severally, the respective principal amount of Notes
set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
PRINCIPAL
NAME AMOUNT
- -------------------------------------------------------------------------------- ----------------
<S> <C>
Underwriters
Morgan Stanley & Co. Incorporated..........................................
Lehman Brothers Inc........................................................
Subtotal..............................................................
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all the
Notes offered hereby if any are taken.
The Underwriters propose to offer part of the Notes directly to the public
at the Price to Public set forth on the cover page hereof and part to certain
dealers at a price which represents a concession not in excess of % of the
public offering price for the Notes. Each Underwriter may allow, and such
dealers may reallow, a concession to certain other dealers not in excess of %
of the public offering price for the Notes. After the initial offering of the
Notes, the offering price and other selling terms may from time to time be
varied by the Underwriters.
In order to facilitate the Notes Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may over-allot in connection with the
Notes Offering, creating a short position in the Notes for their own account. In
addition, to cover over-allotments or to stabilize the price of the Notes, the
Underwriters may bid for, and purchase, Notes in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an Underwriter
or a dealer for distributing the Notes in the Notes Offering, if the syndicate
repurchases previously distributed Notes in transactions to cover syndicate
short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Notes above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
The Underwriters are the representatives of the underwriters in connection
with the Stock Offering. From time to time, Morgan Stanley & Co. Incorporated
and Lehman Brothers Inc. provide certain financial advisory services to the
Company and the Existing Stockholders for which they have received customary
fees and commissions.
LEGAL MATTERS
The legality of the Notes offered hereby and certain other legal matters
will be passed upon for the Company by Cravath, Swaine & Moore, New York, New
York and for the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The combined financial statements of Time Warner Telecom Inc. and its
subsidiaries as of December 31, 1997 and 1996 and for each of the three years in
the period ended December 31, 1997 included in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
95
<PAGE>
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-1
under the Securities Act with respect to the Notes being offered in the Notes
Offering. For the purposes hereof, the term 'Registration Statement' means the
original Registration Statement and any and all amendments thereto, including
the schedules and exhibits to such original Registration Statement or any such
amendment. This Prospectus does not contain all of the information set forth in
the Registration Statement, to which reference hereby is made. Each statement
made in this Prospectus concerning a document filed as an exhibit to the
Registration Statement is qualified in its entirety by reference to such exhibit
for a complete statement of its provisions.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the 'Exchange Act'). As a
result of the Stock Offering, the Company will become subject to the
informational requirements of the Exchange Act and in accordance therewith will
file periodic reports, proxy statements and other information relating to its
business, financial statements and other matters. Any interested party may
inspect the Registration Statement, the reports, proxy statements and other
information without charge, at the public reference facilities of the SEC at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at its regional offices in Chicago (Citicorp Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60601), and in New York
(Seven World Trade Center, 13th Floor, New York, New York 10048) or through the
World Wide Web (http://www.sec.gov.). Any interested party may obtain copies of
all or any portion of the Registration Statement, the reports, proxy statements
and other information at prescribed rates from the Public Reference Section of
the SEC at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549.
The Company intends to distribute to all holders of the Notes offered
hereby annual reports containing audited consolidated financial statements and a
report thereon by its independent certified public accountants and quarterly
reports containing unaudited consolidated financial information for each of the
first three quarters of each fiscal year.
96
<PAGE>
<PAGE>
GLOSSARY
Access Charges. The fees paid by long distance carriers for the local
connections between the long distance carriers' networks and the long distance
carriers' customers.
ATM (asynchronous transfer mode). A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits of
a standard fifty-three bit-long packet or cell. ATM-based packet transport was
specifically developed to allow switching and transmission of mixed voice, date
and video at varying rates. The ATM format can be used by many different
information systems, including LANs.
BOC (Bell Operating Company). A telephone operating subsidiary of an RBOC;
an incumbent local exchange carrier.
Broadcast Video TV-1. This Company service provides dedicated transport of
broadcast quality video signals.
CAP (Competitive Access Provider). A company that provides dedicated
telecommunications services (private line, local transport and special access)
as an alternative to the ILEC.
CDMA (Code Division Multiple Access). A form of wireless communications
technology.
Central Offices. A telecommunications center where switches and other
telecommunications facilities are housed. CAPs may connect with ILEC networks
either at this location or through a remote location.
Collocation. The ability of a telecommunications carrier to interconnect
its network to the ILEC's network by extending its facilities to the ILEC's
central office. Physical collocation occurs when the interconnecting carrier
places its network equipment within the ILEC's central offices. Virtual
collocation is an alternative to physical collocation under which the ILEC
permits a carrier to interconnect its network to the ILEC's network in a manner
which is technically, operationally and economically comparable to physical
collocation, even though the interconnecting carrier's network connection
equipment is not physically located within the central offices.
CLEC (Competitive Local Exchange Carrier). A company that provides local
exchange services, including Dedicated service, in competition with the ILEC.
Dedicated. Telecommunications lines dedicated to, or reserved for use by, a
particular customer along predetermined routes (in contrast to links which are
temporarily established).
Dedicated Transmission. The sending of electronic signals carrying
information over a Direct Transport facility.
DID. The ability of an outside caller to call an internal extension without
having to pass through an operator. In large PBX systems, the dialed numbers are
passed through from the Central Office.
Digital. A means of storing, processing and transmitting information by
using distinct electronic or optical pulses that represent the binary digits 0
and 1. Digital transmission and switching technologies use a sequence of these
pulses to represent information as opposed to the continuously variable analog
signal. The precise digital numbers preclude and distortion (such as graininess
or snow in the case of video transmission, or static or other background
distortion in the case of audio transmission).
Direct Transport (aka Dedicated Transport). A non-switched point-to-point
telecommunications facility leased from a telecommunications provider by an end
user and used exclusively by that end user.
Diverse Routing. A telecommunications network configuration in which
signals are transmitted simultaneously along two different paths so that if one
path is cut or impaired, traffic can continue in the other direction without
interrupting service. The Company's networks generally provide diverse routing.
DOD. The ability to dial directly out from an internal extension without
having to go through an operator.
DS0, DS1, DS3. Standard North American telecommunications industry digital
signal formats, which are distinguishable by bit rate (the number of binary
digits (0 and 1) transmitted per second). DS0 service has a bit rate of 64
kilobits per second. DS1 service has a bit rate of 1.544 megabits per second and
DS3 service as a bit rate of 44.736 megabits per second. A DS0 can transmit a
single uncompressed voice conversation.
FCC. Federal Communications Commission.
FDMA (Frequency Division Multiple Access). A form of wireless
communications technology.
97
<PAGE>
<PAGE>
Fiber Miles. The number of route miles of fiber optic cable installed
(excluding pending installations) along a telecommunications path multiplied by
the number of fibers in the cable. See the definition of 'route mile' below.
Fiber Optics. Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information. Fiber optic cable
is the medium of choice for the telecommunications and cable industries. Fiber
is immune to electrical interference and environmental factors that effect
copper wiring and satellite transmission.
Hub. Collocation centers located centrally in an area where
telecommunications traffic can be aggregated for transport and distribution.
Hybrid Fiber Coaxial (HFC). A new technology consisting of fiber optic
distribution facilities and coaxial cable deployed to the home or business. This
technology enables the operator to offer a wide variety of two-way broadband
services, including telecommunications and entertainment.
Interconnection Decisions. Rulings by the FCC announced in September 1992
and August 1993, which require the BOCs and other large ILECs to provide
interconnection in ILEC central offices to any CAP, long distance carrier or end
user requesting such interconnection to provide interstate special access or
switched transport services.
ILECs (Incumbent Local Exchange Carriers). The local phone companies,
either a BOC or an independent (such as GTE) which provides local exchange
services.
Internet. The name used to describe the global open network of computers
that permits a person with access to the Internet to exchange information with
any other computer connected to the network.
ISDN (Integrated Services Digital Network). ISDN is an internationally
agreed standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission line.
ISDN permits video conferencing over a single line, for example, and also
supports a multitude of value-added switched service applications such as
Incoming Calling Line Identification. ISDN's combined voice and data networking
capabilities reduce costs for end users and result in more efficient use of
available facilities. ISDN combines standards for highly flexible customer to
network signaling with both voice and data within a common facility.
IXC (Interexchange Carrier). A long distance carrier.
Kbps (Kilobits). One thousand bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in 'thousands of bits
per second.'
LANs (Local Area Networks). The interconnection of computers for the
purpose of sharing files, programs and peripheral devices such as printers and
high-speed modems. LANs may include dedicated computers or file servers that
provide a centralized source of shared files and programs. LANs are generally
confined to a single customer's premises and may be extended or interconnected
to other locations through the use of bridges and routers.
LATAS (Local Access and Transport Area). The geographical areas within
which a local telephone company may offer telecommunications services, as
defined in the divestiture order known as the Modified Final Judgment ('MFP')
unless and until refined by the FCC pursuant to the Telecommunications Act of
1996.
Local Exchange. A geographic area defined by the appropriate state
regulatory authority in which telephone calls generally are transmitted without
toll charges to the calling or called party.
Local Exchange Service/Local Exchange Telephone Service. Basic local
telephone service, including the provision of telephone numbers, dial tone and
calling within the local exchange area.
Long Distance Carriers (Interexchange Carriers or IXC). Long distance
carriers providing services between LATAs, on an interstate or intrastate basis.
A long distance carrier may be facilities-based or offer service by reselling
the services of a facilities-based carrier.
Local Transport Services. Dedicated lines between the ILEC's central
offices and long distance carrier POPs used to carry switched traffic.
Mbps (Megabit). One million bits of information. The information carrying
capacity (i.e., bandwidth) of a circuit may be measured in 'millions of bits per
second.'
98
<PAGE>
<PAGE>
Multiplexing. An electronic or optical process that combines a number of
lower speed transmission signals into one higher speed signal. There are various
techniques for multiplexing, including frequency division (splitting the total
available frequency bandwidth into smaller frequency slices), time division
(slicing a channel into timeslots and placing each signal into its assigned
timeslot), and statistical (wherein multiplexed signals share the same channel
and each transmits only when it has data to send).
Node. A point of connection into a fiber optic network.
PBX (Private Branch Exchange). A customer owned and operated switch on
customer premises, typically used by large businesses with multiple telephone
lines.
PBX Trunk. A transmission facility which connects a PBX to the Company's or
ILEC's central office switching center.
POPs (Points of Presence). Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
telephone calls to, a network switching center of the same long distance
carrier.
Private Line. A private, dedicated telecommunications link between
different customer locations (excluding long distance carrier POPs).
Private Network Transport Service. This service is a private, dedicated
high capacity premium quality service over fully redundant, diverse routed,
SONET rings with band width that is dedicated and always available.
Public Switched Network. The switched network available to all users
generally on a shared basis (i.e., not dedicated to a particular user). The
local exchange telephone service networks operated by ILECs are the largest and
often the only public switched networks in a given locality.
PUC (Public Utility Commission). A state regulatory body, established in
most states, which regulates utilities, including telecommunications companies
providing intrastate services. In some states this regulatory body may have a
different name, such as public service commission ('PSC').
RBOC (Regional Bell Operating Company). The holding company which owns a
BOC.
Reciprocal Compensation. An arrangement in which two local exchange
carriers agree to terminate traffic originating on each other's networks in
exchange for a negotiated level of compensation.
Redundant Electronics. A telecommunications facility that uses two separate
electronic devices to transmit a telecommunications signal so that if one device
malfunctions, the signal may continue without interruption.
Route Mile. The number of miles along which fiber optic cables are
installed.
SONET (Synchronous Optical Network). A set of standards for optical
communications transmission systems that define the optical rates and formats,
signal characteristics, performance, management and maintenance information to
be embedded within the signals and the multiplexing techniques to be employed in
optical communications transmission systems. SONET facilitates the
interoperability of dissimilar vendors equipment. SONET benefits business
customers by minimizing the equipment necessary for various telecommunications
applications and supports networking diagnostic and maintenance features.
Special Access Services. The lease of private, dedicated telecommunications
lines or circuits on an ILEC's or a CAP's network which run to or from the long
distance carrier's POPs. Special access services do not require the use of
switches. Examples of special access services are telecommunications circuits
running between POPs of a single long distance carrier, from one long distance
carrier's POP to another long distance carrier's POP or from an end user to its
long distance carrier's POP.
STS-1. This dedicated transmission service is carried over high capacity
channels for full duplex, synchronous optical transmission of digital data on
SONET standards. This service eliminates the need to maintain and pay for
multiple dedicated lines.
Switch. A mechanical or electronic device that opens or closes circuits or
selects the paths or circuits to be used for the transmission of information.
Switching is a process of linking different circuits to create a temporary
transmission path between users. Within this document, switches generally refer
to voice grade telecommunications switches unless specifically stated otherwise.
Switched Access Services. The connection between a long distance carrier's
POP and an end user's premises through the switching facilities of a local
exchange carrier.
99
<PAGE>
<PAGE>
Switched Services. Telecommunications services that support the connection
of one calling party with another calling party via use of a telephone switch
(i.e., an electronic device that opens or closes circuits, completes or breaks
an electrical path, or selects paths or circuits).
TDMA (Time Division Multiple Access). A form of wireless communications
technology.
Toll Services. Otherwise known as EAS or intra LATA toll services are those
calls that are beyond the free local calling area but originate and terminate
within the same LATA; such calls are usually priced on a measured basis.
Voice Grade Equivalent ('VGE') Circuit. One DSO. One voice grade equivalent
circuit is equal to 64 kilobits of bandwidth.
100
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements:
Report of Independent Auditors........................................................................ F-2
Combined Balance Sheet at December 31, 1997 and 1996.................................................. F-3
Combined Statement of Operations for the years ended December 31, 1997, 1996
and 1995............................................................................................ F-4
Combined Statement of Cash Flows for the years ended December 31, 1997, 1996
and 1995............................................................................................ F-5
Combined Statement of Changes in Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.................................................................... F-6
Notes to Combined Financial Statements................................................................ F-7
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts...................................................... F-14
Unaudited Financial Statements:
Combined Balance Sheet at March 31, 1998 and December 31, 1997........................................ F-15
Combined Statement of Operations for the three months ended March 31, 1998 and 1997................... F-16
Combined Statement of Cash Flows for the three months ended March 31, 1998 and 1997................... F-17
Combined Statement of Changes in Stockholders' Equity for the three months ended
March 31, 1998...................................................................................... F-18
Notes to Combined Financial Statements................................................................ F-19
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To TIME WARNER TELECOM INC.
We have audited the accompanying combined balance sheet of Time Warner
Telecom Inc. (the 'Company') as of December 31, 1997 and 1996, and the related
combined statements of operations, cash flows and stockholders' equity for each
of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index as Schedule II.
These combined financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Company
at December 31, 1997 and 1996, and the combined results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic combined financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 13, 1998,
except for Notes 1, 5 and 7, as to
which the date is May 21, 1998
The foregoing report is in the form that will be signed upon the effective
date of the Company's registration of Class A Common Stock in a registration
statement on Form S-1 and the concurrent change in the Company's operating and
legal structure from a partnership to a corporation.
ERNST & YOUNG LLP
New York, New York
March 13, 1998
F-2
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Receivables, less allowances of $776 and $193........................................ $ 8,882 $ 4,863
Prepaid expenses..................................................................... 1,192 1,115
-------- --------
Total current assets............................................................ 10,074 5,978
Investments in unconsolidated affiliates............................................. 4,376 10,239
Property, plant and equipment........................................................ 484,206 352,708
Less: accumulated depreciation....................................................... (69,048) (29,547)
-------- --------
415,158 323,161
Intangible assets, net............................................................... 8,469 2,102
-------- --------
Total assets.................................................................... $438,077 $341,480
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable..................................................................... $ 32,908 $ 27,622
Loans payable to the Parent Companies (including $1,544 of accrued interest)......... 75,475 --
Other current liabilities............................................................ 29,304 17,793
-------- --------
Total current liabilities....................................................... 137,687 45,415
Other liabilities.................................................................... -- 1,128
Stockholders' equity
Paid-in capital...................................................................... 555,807 479,698
Accumulated deficit.................................................................. (255,417) (184,761)
-------- --------
Total stockholders' equity...................................................... 300,390 294,937
-------- --------
Total liabilities and stockholders' equity...................................... $438,077 $341,480
-------- --------
-------- --------
</TABLE>
See accompanying notes.
F-3
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues:
Dedicated transport services............................................. $ 44,529 $ 20,362 $ 6,505
Switched services........................................................ 10,872 3,555 350
-------- -------- --------
Total revenues...................................................... 55,401 23,917 6,855
-------- -------- --------
Costs and expenses:
Operating(a)............................................................. 40,349 25,715 15,106
Selling, general and administrative(a)................................... 54,640 60,366 34,222
Depreciation and amortization(a)......................................... 38,466 22,353 7,216
-------- -------- --------
Total costs and expenses............................................ 133,455 108,434 56,544
-------- -------- --------
Operating loss................................................................ (78,054) (84,517) (49,689)
Gain on disposition of investments (Note 3)................................... 11,018 -- --
Equity in losses of unconsolidated affiliates................................. (2,082) (1,547) (1,391)
Interest expense, net(a)...................................................... (1,538) (52) (25)
-------- -------- --------
Net loss...................................................................... $(70,656) $(86,116) $(51,105)
-------- -------- --------
-------- -------- --------
Pro forma basic and diluted loss per common share............................. $ -- $ -- $ --
-------- -------- --------
-------- -------- --------
Pro forma average common shares............................................... -- -- --
-------- -------- --------
-------- -------- --------
(a) Includes expenses resulting from transactions with affiliates (Note 7):
Operating.............................................................. $ 1,731 $ 1,303 $ 648
-------- -------- --------
-------- -------- --------
Selling, general and administrative.................................... $ 4,967 $ 4,759 $ 3,789
-------- -------- --------
-------- -------- --------
Depreciation and amortization.......................................... $ 7,064 $ 4,961 $ 2,070
-------- -------- --------
-------- -------- --------
Interest expense, net.................................................. $ 1,544 $ -- $ --
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes.
F-4
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
OPERATIONS
Net loss................................................................... $ (70,656) $ (86,116) $ (51,105)
Adjustments for noncash and nonoperating items:
Gain on disposition of investments......................................... (11,018) -- --
Depreciation and amortization.............................................. 38,466 22,353 7,216
Equity in loss of unconsolidated affiliates................................ 2,082 1,547 1,391
Changes in operating assets and liabilities:
Accounts receivable and other current assets.......................... (4,124) (2,334) (936)
Accounts payable and other current liabilities........................ 18,374 10,424 7,277
Other balance sheet changes........................................... (2,543) 1,852 552
--------- --------- ---------
Cash used in operations.................................................... (29,419) (52,274) (35,605)
--------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures....................................................... (127,315) (144,815) (141,479)
Investments and acquisitions............................................... (334) (4,375) (3,814)
Proceeds from sale of investment........................................... 7,028 -- --
--------- --------- ---------
Cash used in investing activities.......................................... (120,621) (149,190) (145,293)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from loans from the Parent Companies.............................. 73,931 -- --
Capital contributions from the Parent Companies............................ 127,550 222,584 185,989
Distributions to the Parent Companies...................................... (51,441) (21,120) (5,091)
--------- --------- ---------
Cash provided by financing activities...................................... 150,040 201,464 180,898
--------- --------- ---------
INCREASE IN CASH AND EQUIVALENTS........................................... -- -- --
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................ -- -- --
--------- --------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD...................................... $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures of cash flow information:
Interest paid.............................................................. $ -- $ 55 $ 25
--------- --------- ---------
--------- --------- ---------
Noncash financing activities............................................... $ -- $ -- $ 16,047
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-5
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
-------- ----------- --------------
(THOUSANDS)
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994............................................ $ 81,289 $ (47,540) $ 33,749
Net loss for 1995....................................................... -- (51,105) (51,105)
Capital contributions resulting from the A/N and KBLCOM transactions
(Note 2).............................................................. 16,047 -- 16,047
Net capital contributions from the Parent Companies..................... 180,898 -- 180,898
-------- ----------- --------------
BALANCE AT DECEMBER 31, 1995............................................ 278,234 (98,645) 179,589
Net loss for 1996....................................................... -- (86,116) (86,116)
Net capital contributions from the Parent Companies..................... 201,464 -- 201,464
-------- ----------- --------------
BALANCE AT DECEMBER 31, 1996............................................ 479,698 (184,761) 294,937
Net loss for 1997....................................................... -- (70,656) (70,656)
Net capital contributions from the Parent Companies..................... 76,109 -- 76,109
-------- ----------- --------------
BALANCE AT DECEMBER 31, 1997............................................ $555,807 $(255,417) $300,390
-------- ----------- --------------
-------- ----------- --------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Time Warner Telecom Inc. (the 'Company') is a facilities-based competitive
local telecommunications services provider ('CLEC') in selected metropolitan
markets across the United States, offering a wide range of business telephony
services, primarily to medium- and large-sized business customers. The business
of the Company was commenced in 1993 by Time Warner Cable ('TW Cable'), a
division of Time Warner Entertainment Company, L.P. ('TWE'), and reflects the
combined commercial telecommunication operations under the ownership or
management control of TW Cable. These operations consist of the commercial
telecommunication operations of Time Warner Inc. and certain of its subsidiaries
('Time Warner') and the Time Warner Entertainment-Advance/Newhouse Partnership
('TWEAN') that were acquired or formed in 1995, as well as the pre-existing
commercial telecommunication operations of TWE (collectively, TWE, TWEAN and
Time Warner are referred to herein as the 'Parent Companies').
To date, the majority of the Company's revenues have been derived from the
provision of 'private line' or 'direct access' telecommunications services.
Because the Company has deployed switches in 16 of its 19 markets, management
expects that a growing portion of the Company's revenues will be derived from
providing switched services. The Company's customers are principally
telecommunications-intensive business end-users, IXCs, ISPs, wireless
communications companies and governmental entities. Such customers are offered a
wide range of integrated telecommunications products and services, including
dedicated transmission, local switched, data and video transmission services and
Internet services. In addition, the Company benefits from its strategic
relationship with TW Cable both through access rights and cost-sharing. As a
result, the Company's networks have been constructed primarily through the use
of fiber capacity licensed from TW Cable.
BASIS OF PRESENTATION
The combined financial statements of the Company reflect the 'carved out'
historical financial position, results of operations, cash flows and changes in
stockholders' equity of the commercial telecommunication operations of the
Parent Companies as if they had been operating as a separate company. Although
these financial statements are presented as if the Company had operated as a
corporation, the Company operated as a partnership for tax purposes and
continued to operate in a partnership structure through December 31, 1997. The
combined statement of operations has been adjusted to retroactively reflect an
allocation of certain expenses pursuant to the final terms of the related
agreements, primarily relating to office rent, overhead charges for various
administrative functions performed by TW Cable and certain facility maintenance
and pole rental costs. These allocations were required to reflect all costs of
doing business and have been based on various methods (Note 7), which management
believes results in reasonable allocations of such costs.
The combined financial statements also include the contribution of the
Advance/Newhouse Partnership's ('A/N') ownership interests in various telephony
partnerships effective as of April 1, 1995 and the San Antonio, Texas telephony
operation of KBLCOM Incorporated ('KBLCOM') acquired by Time Warner effective as
of July 6, 1995.
Effective January 1, 1996, the Company adopted Financial Accounting
Standards Board ('FASB') Statement No. 121 ('FAS 121'), 'Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of',
which established standards for the recognition and measurement of impairment
losses on long-lived assets and certain intangible assets. The adoption of FAS
121 did not have a material effect on the Company's financial condition and
results of operations.
Time Warner has various stock option plans under which Time Warner may
grant options to purchase Time Warner common stock to employees of the Company.
Such options have been granted to employees of the Company at fair market value
at the date of grant. In accordance with Accounting Principles Board Statement
No. 25 ('APB 25'), no compensation cost has been recognized for its stock
options. Generally, the options become exercisable over a three-year vesting
period and expire ten years from the date of grant. The Company has elected to
continue to account for such transactions under APB 25. The Company has
determined that if
F-7
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FASB Statement No. 123, 'Accounting for Stock-Based Compensation' had been
adopted, its impact on the combined statement of operations for the years ended
December 31, 1997 and 1996 would be insignificant.
During fiscal 1997, the FASB issued Statement No. 130, 'Reporting
Comprehensive Income' ('FAS 130'), and Statement No. 131, 'Disclosures about
Segments of an Enterprise and Related Information' ('FAS 131'). FAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of financial
statements. The Company will adopt FAS 130 as of the first quarter of 1998. FAS
131 requires disclosure of financial and descriptive information about an
entity's reportable operating segments under the 'management approach' as
defined in the Statement. The Company will adopt FAS 131 as of December 31,
1998. The impact of adoption of these standards on the Company's financial
statements is not expected to be material.
BASIS OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS
The combined financial statements include 100% of the assets, liabilities,
revenues, expenses, income, loss and cash flows of the Company and all entities
in which the Company has a controlling voting interest ('subsidiaries'), as if
the Company and its subsidiaries were a single entity. Significant intercompany
accounts and transactions between the combined entities have been eliminated.
Significant accounts and transactions with the Parent Companies are disclosed as
related party transactions.
Investments in entities in which the Company has significant influence, but
less than a controlling voting interest, are accounted for using the equity
method. At December 31, 1997, the Company's investments in unconsolidated
affiliates consisted solely of a 50% investment in Metrocomm AXS, L.P., a joint
venture providing commercial telecommunications services in the central Ohio
area. Under the equity method, only the Company's investment in and amounts due
to and from the equity investee are included in the combined balance sheet, and
only the Company's share of the investee's earnings is included in the combined
operating results. In addition, only the Company's share of the cash
distributions and cash paid to the investee are included in the combined cash
flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
REVENUES
Revenues for dedicated transport services are generally billed on a fixed
rate basis and recognized over the period provided. Revenues for switched
services revenues are generally billed on a transactional basis determined by
customer usage, and are recognized over the period provided.
In addition to depreciation expense, the primary costs of revenues are
charges from local exchange carriers for circuit leases and interconnection
costs, which are both expensed as incurred.
ADVERTISING
Advertising costs are expensed upon the first exhibition of related
advertisements. Advertising expense amounted to $1.0 million, $1.4 million and
$1.1 million for the years ended December 31, 1997, 1996, and 1995,
respectively.
SIGNIFICANT CUSTOMERS
The Company has substantial business relationships with a few large
customers, including the major long distance carriers. For the year ended
December 31, 1997, the Company's top 10 customers accounted for 47.8% of the
Company's consolidated revenues. Two of these customers were interexchange
carriers ('IXC'), which
F-8
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
each accounted for more than 10% of the Company's revenues in 1997 and 1996.
Revenues included sales to these two IXC's of approximately $14.7 million and
$5.2 million in 1997 and 1996, respectively. In 1995, no single customer
accounted for more than 10% of the Company's total revenues. The Company does
not require collateral for telecommunications services provided to its
customers. However, the Company performs ongoing credit evaluations of its
customers' financial conditions and an allowance for doubtful accounts of
$776,000 and $193,000 at December 31, 1997 and 1996, respectively, has been
provided based on the expected collectibility of all accounts receivables.
CASH AND EQUIVALENTS
The Company does not maintain any cash balance since all funding of the
Company's operating, investing and financing activities were provided by the
Parent Companies or by revolving loans payable to the Parent Companies (Note 5).
This funding consists of non-interest bearing capital contributions through June
30, 1997 and revolving loans thereafter. The non-interest bearing capital
contributions have been included in paid-in capital. The average net capital
contributions from the Parent Companies were $517.8 million for the six months
ended June 30, 1997, and $379.0 million and $179.8 million for the years ended
December 31, 1996, and 1995, respectively. The revolving loans, including
accrued interest, have been reflected as a current liability in the accompanying
balance sheet.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Additions to property,
plant and equipment generally include material, labor, and overhead. The Company
licenses the right to use the majority of its fiber optic cable from TW Cable
divisions, in which they are co-located. The cost of these use rights is
capitalized and reflects an allocable share of TW Cable's costs, which generally
reflects the incremental costs incurred by TW Cable to construct the fiber. Such
amounts do not always reflect TW Cable's total costs of constructing the
distribution plant. Depreciation is provided on the straight-line method over
estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings and improvements............................................. 5-20 years
Communications networks................................................ 5-15 years
Vehicles and other equipment........................................... 3-10 years
Fiber optic use rights................................................. 15 years
</TABLE>
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(THOUSANDS)
<S> <C> <C>
Buildings and improvements............................................ $ 12,846 $ 8,485
Communications networks............................................... 290,618 203,841
Vehicles and other equipment.......................................... 46,086 38,250
Fiber optic use rights................................................ 134,656 102,132
-------- --------
484,206 352,708
Less accumulated depreciation......................................... (69,048) (29,547)
-------- --------
Total....................................................... $415,158 $323,161
-------- --------
-------- --------
</TABLE>
INTANGIBLE ASSETS
Intangible assets primarily consist of goodwill, deferred right of way
costs and covenants not to compete, which are amortized over periods up to 20
years using the straight-line method. Amortization expense amounted to $2.0
million, $271,000 and $213,000 for the years ended December 31, 1997, 1996 and
1995, respectively. Accumulated amortization of intangible assets at December
31, 1997 and 1996, amounted to $1.2 million and $920,000, respectively.
F-9
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
No income tax benefits have been provided in the accompanying combined
statement of operations because such benefits have been fully offset by
corresponding increases in the valuation allowance due to the uncertainty of
realizing the benefit for tax losses on a separate return basis. On a historical
basis, the operating results of the Company have primarily been included in the
consolidated U.S. Federal, state and local income tax returns of Time Warner or
subsidiaries of Time Warner. Time Warner has not, and will not, compensate the
Company for the utilization of the Company's losses.
LOSS PER SHARE
In February 1997, the FASB issued Statement No. 128, 'Earnings per Share'
('FAS 128'), effective for periods ending after December 15, 1997. The new rules
establish simplified standards for computing and presenting earnings per share.
The Company's adoption of FAS 128 did not have a material effect on its
financial statements.
2. MERGERS AND ACQUISITIONS
On April 1, 1995, in connection with the formation of TWEAN, A/N
contributed certain telecommunication investments to the Company, consisting of
(i) various telecommunication partnerships serving the New York area (the
'Hyperion Partnerships'), including a 20% interest in Buffalo (the 'Buffalo
Operations'), a 50% interest in Syracuse (the 'Syracuse Operations'), a 50%
interest in Albany (the 'Albany Operations') and an 80% interest in Binghamton
(the 'Binghamton Operations') and (ii) the remaining 50% interest not already
owned by the Company of a telecommunications partnership serving the Charlotte,
North Carolina area (the 'Charlotte Operations'). The net assets contributed
were recorded at an historical cost of $7.4 million. In connection with this
transaction, the Company consolidated the Charlotte Operations effective April
1, 1995 as a result of its 100% ownership interest therein.
On July 6, 1995, Time Warner acquired KBLCOM, a cable television company
which also owned a telephony operation in San Antonio, Texas. The net assets of
the San Antonio telephony operation were acquired at fair market value and
totaled $8.6 million, consisting of: property, plant and equipment, net of $7.8
million; other current and noncurrent assets of $1.0 million; and other current
liabilities of $200,000.
3. INVESTMENTS
Since April 1995, the Company has owned various interests in the Hyperion
Partnerships, a group of telecommunication partnerships serving the Buffalo,
Syracuse, Albany and Binghamton, New York areas. These interests were all
previously accounted for under the equity method of accounting.
In September 1997, the Company completed a series of transactions, whereby
it sold its interests in the Buffalo Operations and Syracuse Operations in
exchange for $7.0 million of cash and all of the minority interests in the
Albany Operations and Binghamton Operations (collectively, the 'Hyperion
Transactions'). Accordingly, effective September 1997, the Company has
consolidated the Albany Operations and Binghamton Operations as a result of its
100% ownership interests therein. The net assets of the Albany Operations and
Binghamton Operations are not material to the Company's financial position.
The Company accounted for the acquisition of the minority interests in the
Albany Operations and Binghamton Operations under the purchase method of
accounting for business combinations. In connection with the Hyperion
Transactions, the Company recognized a gain of approximately $11.0 million.
4. STOCKHOLDERS' EQUITY
At December 31, 1997, all the assets and liabilities of the Company were
beneficially owned by Time Warner and US WEST, Inc. ('US WEST'), which, through
certain subsidiaries, are partners in TWE. The assets and liabilities of the
Company were also beneficially owned by A/N through TWEAN. Time Warner and
certain
F-10
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of its subsidiaries, US WEST and certain of its subsidiaries and A/N are
collectively referred to herein as the 'Existing Stockholders'.
5. LOANS PAYABLE TO THE PARENT COMPANIES
Effective July 1, 1997, all of the Company's financing requirements began
to be funded with loans from the Parent Companies. These loans are due on demand
and bear interest at the prime rate which was 8.5% at December 31, 1997.
Interest expense relating to these loans totaled approximately $1.5 million in
1997.
6. BENEFIT PLANS
The Company participates in the Time Warner Cable Pension Plan (the
'Pension Plan'), a noncontributory defined benefit pension plan which covers
approximately 75% of all employees. The remaining 25% of employees are
participating in a pension plan under the administration of US WEST, their
previous employer. The Company also participates in the Time Warner Cable
Employees Savings Plan (the 'Savings Plan'), a defined contribution plan. Both
the Pension Plan and Savings Plan are administered by a committee appointed by
the Board of Representatives of TWE and cover substantially all employees.
Benefits under the Pension Plan are determined based on formulas which
reflect employees' years of service and compensation levels during their
employment period. Total pension cost was $1.7 million, $1.2 million and
$900,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company's contributions to the Savings Plan can represent up to 6.67%
of the employees' compensation during the plan year. TWE's Board of
Representatives has the right in any year to set the maximum amount of the
Company's annual contribution. Defined contribution plan expense was $710,000,
$606,000 and $410,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
7. RELATED PARTY TRANSACTIONS
In the normal course of conducting its businesses, the Company has various
transactions with the Parent Companies, generally on terms resulting from
negotiation between the affected units that, in management's view, results in
reasonable allocations.
The Company's local operations, which in certain cases are co-located with
TW Cable divisions, are allocated a charge for various overhead expenses for
services provided by TW Cable. These allocations are based on direct labor,
total expenses, or headcount relative to each division. The Company is also
allocated rent based on the square footage of space occupied by the Company at
TW Cable facilities. The aggregate of these charges totaled approximately $4.4
million, $4.3 million and $2.8 million for the years ended December 31, 1997,
1996 and 1995, respectively.
The combined statement of operations include consulting charges from US
WEST, in 1995 only, for the use of certain employees on a temporary basis and
pension costs for certain employees of the Company who remain on the US WEST
pension plan. Consulting fees approximated $522,000 for the year ended December
31, 1995. There were no charges for consulting in 1997 and 1996. Pension costs
were approximately $624,000, $500,000 and $450,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
The Company licenses the right to use the majority of its fiber optic cable
from TW Cable. The Company paid TW Cable $32.5 million, $41.3 million, and $46.9
million in the years ended December 31, 1997, 1996 and 1995, respectively, under
this arrangement. Such costs have been capitalized by the Company. The
amortization of these costs and fiber previously capitalized in the amount of
$7.1 million, $5.0 million and $2.1 million for the years ended December 31,
1997, 1996 and 1995, respectively, has been classified as a component of
depreciation and amortization in the accompanying combined statement of
operations. In addition, under this licensing arrangement, the Company
reimburses TW Cable for facility maintenance and pole rental costs, which costs
amounted to $1.7 million, $1.3 million and $648,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
F-11
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Effective July 1, 1997, all of the Company's financing requirements began
to be funded with loans from the Parent Companies. Interest expense relating to
these loans totaled approximately $1.5 million in 1997.
8. INCOME TAXES
There are no current income taxes payable based on the Company's operating
losses.
The pro forma deferred tax assets and liabilities calculated on a
separate-company basis consistent with the liability method prescribed by FASB
Statement No. 109, 'Accounting for Income Taxes' are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
--------- --------
(THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts......................................... $ 312 $ 78
Tax losses utilized by Time Warner...................................... 134,365 87,171
--------- --------
Total gross deferred tax assets......................................... 134,677 87,249
Less: valuation allowance............................................... (102,679) (74,275)
--------- --------
Net deferred tax assets................................................. 31,998 12,974
--------- --------
Deferred tax liabilities:
Depreciation and amortization........................................... (30,583) (11,662)
Investments............................................................. (1,415) (1,312)
--------- --------
Total gross deferred tax liabilities............................... (31,998) (12,974)
--------- --------
Net deferred tax assets................................................. $ -- $ --
--------- --------
--------- --------
</TABLE>
In 1997, 1996 and 1995, the net income tax benefits of approximately $28.4
million, $34.6 million and $20.5 million, respectively, have been fully offset
by corresponding increases in the valuation allowance due to the uncertainty of
realizing the benefit for tax losses on a separate return basis.
On a pro forma basis, had the Company been operating on a stand alone
basis, the Company would have had net operating loss carryforwards for tax
purposes of approximately $281.5 million during the three years ended December
31, 1997. However, at December 31, 1997, the Company, which operated as a
partnership for tax purposes during the periods presented herein, has no net
operating loss carryforwards for tax purposes because such losses were primarily
allocated to and utilized by Time Warner and its affiliates. The Company has
not, and will not, be compensated for such losses. Consequently, without the tax
benefit for losses utilized by Time Warner, the Company would have a net
deferred tax liability of approximately $31.7 million at December 31, 1997.
9. COMMITMENTS AND CONTINGENCIES
The Company has noncancelable operating leases for office space and
switching facilities expiring over various terms. Rental expense for all
operating leases totaled $5.4 million, $4.2 million and $3.2 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
The minimum rental commitments under noncancelable operating leases are:
1998-$1.3 million; 1999-$2.8 million; 2000-$2.8 million; 2001-$2.9 million and
after 2002-$13.8 million.
Historically, the Company has relied on TW Cable's fiber in constructing
its own networks. In addition, most of the new markets in which management plans
to operate or construct networks are located in areas where TW Cable has already
made substantial infrastructure investments. The failure of the Company to
license additional fiber optic capacity from TW Cable could materially affect
the Company's future business and operations.
F-12
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Pending legal proceedings are substantially limited to litigation
incidental to the business of the Company. In the opinion of management, the
ultimate resolution of these matters will not have a material effect on the
Company's financial statements.
10. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(THOUSANDS)
<S> <C> <C>
Accrued salaries and employee costs..................................... $13,103 $ 8,591
Property and other taxes................................................ 7,682 5,187
Accrued expenses........................................................ 6,227 2,860
Other................................................................... 2,292 1,155
------- -------
Total......................................................... $29,304 $17,793
------- -------
------- -------
</TABLE>
11. SUBSEQUENT EVENTS (UNAUDITED)
The Company is expected to complete a reorganization under which the
Company's authorized capital will include two classes of common stock, Class A
Common Stock and Class B Common Stock, which will be identical in all respects
except that holders of Class A Common Stock will be entitled to one vote per
share and holders of Class B Common Stock will be entitled to 10 votes per share
on all matters submitted to a vote of stockholders and except that only holders
of Class B Common Stock, voting separately as a class, will be entitled to vote
on certain matters. The Existing Stockholders will contribute their respective
assets and liabilities of the Company's business to the Company and in return
will receive all the outstanding shares of the Class B Common Stock. The Company
also expects to complete a public offering of the Class A Common Stock.
F-13
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS/
BALANCE AT CHARGES TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
(THOUSANDS)
<S> <C> <C> <C> <C>
For the Year ended December 31, 1997:
Allowance for doubtful accounts receivable................. $193 $1,213 $ (630) $776
For the Year ended December 31, 1996:
Allowance for doubtful accounts receivable................. $ 21 $ 271 $ (99) $193
For the Year ended December 31, 1995:
Allowance for doubtful accounts receivable................. $ -- $ 24 $ (3) $ 21
</TABLE>
F-14
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(UNAUDITED)
(THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Receivables, less allowances of $1,030 and $776................................... $ 11,712 $ 8,882
Prepaid expenses.................................................................. 814 1,192
--------- ------------
Total current assets......................................................... 12,526 10,074
Investments in unconsolidated affiliates.......................................... 4,318 4,376
Property, plant and equipment..................................................... 508,988 484,206
Less: accumulated depreciation.................................................... (80,669) (69,048)
--------- ------------
428,319 415,158
Intangible assets, net............................................................ 8,312 8,469
--------- ------------
Total assets................................................................. $ 453,475 $438,077
--------- ------------
--------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................................................................. $ 21,810 $ 32,908
Loans payable to the Parent Companies (including $3,552 and $1,544 of accrued
interest, respectively).......................................................... 117,547 75,475
Other current liabilities......................................................... 35,516 29,304
--------- ------------
Total current liabilities.................................................... 174,873 137,687
Stockholders' equity
Paid-in capital................................................................... 555,807 555,807
Accumulated deficit............................................................... (277,205) (255,417)
--------- ------------
Total stockholders' equity................................................... 278,602 300,390
--------- ------------
Total liabilities and stockholders' equity................................... $ 453,475 $438,077
--------- ------------
--------- ------------
</TABLE>
See accompanying notes.
F-15
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
(UNAUDITED)
(THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues:
Dedicated transport services.......................................................... $ 16,733 $ 8,301
Switched services..................................................................... 5,315 1,852
-------- --------
Total revenues................................................................... 22,048 10,153
-------- --------
Costs and expenses:
Operating(a).......................................................................... 13,519 8,384
Selling, general and administrative(a)................................................ 16,316 11,985
Depreciation and amortization(a)...................................................... 11,932 8,842
-------- --------
Total costs and expenses......................................................... 41,767 29,211
-------- --------
Operating loss............................................................................. (19,719) (19,058)
Equity in losses of unconsolidated affiliates.............................................. (58) (593)
Interest expense(a)........................................................................ (2,011) --
-------- --------
Net loss................................................................................... $(21,788) $(19,651)
-------- --------
-------- --------
Pro forma basic and diluted loss per common share.......................................... $ -- $ --
-------- --------
-------- --------
Pro forma average common shares............................................................ -- --
-------- --------
-------- --------
(a) Includes expenses resulting from transactions with affiliates (Note 3):
Operating expenses.................................................................... $ 513 $ 433
-------- --------
-------- --------
Selling, general and administrative................................................... $ 765 $ 1,428
-------- --------
-------- --------
Depreciation and amortization......................................................... $ 2,193 $ 1,625
-------- --------
-------- --------
Interest expense...................................................................... $ 2,008 $ --
-------- --------
-------- --------
</TABLE>
See accompanying notes.
F-16
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
(UNAUDITED)
(THOUSANDS)
<S> <C> <C>
OPERATIONS
Net loss................................................................................... $(21,788) $(19,651)
Adjustments for noncash and nonoperating items:
Depreciation and amortization.............................................................. 11,932 8,842
Equity in loss of unconsolidated affiliates................................................ 58 593
Changes in operating assets and liabilities:
Accounts receivable and other current assets.......................................... (2,452) (2,473)
Accounts payable and other current liabilities........................................ (2,878) (15,556)
Other balance sheet changes........................................................... 25 (449)
-------- --------
Cash used in operations.................................................................... (15,103) (28,694)
-------- --------
INVESTING ACTIVITIES
Capital expenditures....................................................................... (24,961) (14,261)
Investments and acquisitions............................................................... -- 28
-------- --------
Cash used in investing activities.......................................................... (24,961) (14,233)
-------- --------
FINANCING ACTIVITIES
Proceeds from loans from the Parent Companies.............................................. 59,166 --
Capital contributions from the Parent Companies............................................ -- 50,814
Repayment of loans from the Parent Companies............................................... (19,102) --
Distributions to the Parent Companies...................................................... -- (7,887)
-------- --------
Cash provided by financing activities...................................................... 40,064 42,927
-------- --------
INCREASE IN CASH AND EQUIVALENTS........................................................... -- --
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................................ -- --
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD...................................................... $ -- $ --
-------- --------
-------- --------
</TABLE>
See accompaning notes.
F-17
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
-------- ----------- -------------
(UNAUDITED)
(THOUSANDS)
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997............................................. $555,807 $(255,417) $ 300,390
Net loss................................................................. -- (21,788) (21,788)
-------- ----------- -------------
BALANCE AT MARCH 31, 1998................................................ $555,807 $(277,205) $ 278,602
-------- ----------- -------------
-------- ----------- -------------
</TABLE>
See accompanying notes.
F-18
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Time Warner Telecom Inc. (the 'Company') is a facilities-based competitive
local telecommunications services provider ('CLEC') in selected metropolitan
markets across the United States, offering a wide range of business telephony
services, primarily to medium- and large-sized business customers. The business
of the Company was commenced in 1993 by Time Warner Cable ('TW Cable'), a
division of Time Warner Entertainment Company, L.P. ('TWE'), and reflects the
combined commercial telecommunication operations under the ownership or
management control of TW Cable. These operations consist of the commercial
telecommunication operations of Time Warner Inc. and certain of its subsidiaries
('Time Warner') and the Time Warner Entertainment-Advance/Newhouse Partnership
('TWEAN') that were acquired or formed in 1995, as well as the pre-existing
commercial telecommunication operations of TWE (collectively, TWE, TWEAN and
Time Warner are referred to herein as the 'Parent Companies').
To date, the majority of the Company's revenues have been derived from the
provision of 'private line' or 'direct access' telecommunications services.
Because the Company has deployed switches in 16 of its 19 markets, management
expects that a growing portion of the Company's revenues will be derived from
providing switched services. The Company's customers are principally
telecommunications-intensive business end-users, IXCs, ISPs, wireless
communications companies and governmental entities. Such customers are offered a
wide range of integrated telecommunications products and services, including
dedicated transmission, local switched, data and video transmission services and
Internet services. In addition, the Company benefits from its strategic
relationship with TW Cable both through access rights and cost-sharing. As a
result, the Company's networks have been constructed primarily through the use
of fiber capacity licensed from TW Cable.
BASIS OF PRESENTATION
The combined financial statements of the Company reflect the 'carved out'
historical financial position, results of operations, cash flows and changes in
stockholders' equity of the commercial telecommunication operations of the
Parent Companies as if they had been operating as a separate company. Although
these financial statements are presented as if the Company had operated as a
corporation, the Company operated as a partnership for tax purposes and
continued to operate in a partnership structure through March 31, 1998. The
combined statement of operations has been adjusted to retroactively reflect an
allocation of certain expenses pursuant to the final terms of the related
agreements, primarily relating to office rent, overhead charges for various
administrative functions performed by TW Cable and certain facility maintenance
and pole rental costs. These allocations were required to reflect all costs of
doing business and have been based on various methods (Note 3), which management
believes result in reasonable allocations of such costs.
The accompanying financial statements are unaudited but, in the opinion of
management, contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flows for the periods presented in
conformity with generally accepted accounting principles applicable to interim
periods. The accompanying financial statements should be read in conjunction
with the audited combined financial statements of the Company for the year ended
December 31, 1997.
2. LOANS PAYABLE TO THE PARENT COMPANIES
Effective July 1, 1997, all of the Company's financing requirements began
to be funded with loans from the Parent Companies. These loans are due on demand
and bear interest at the prime rate which was 8.5% at March 31, 1998. Interest
expense relating to these loans totaled approximately $2.0 million for the three
months ended March 31, 1998.
F-19
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
3. RELATED PARTY TRANSACTIONS
In the normal course of conducting its businesses, the Company has various
transactions with the Parent Companies, generally on terms resulting from
negotiation between the affected units that, in management's view, results in
reasonable allocations.
The Company's local operations, which in certain cases are co-located with
TW Cable divisions, are allocated a charge for various overhead expenses for
services provided by TW Cable. These allocations are based on direct labor,
total expenses, or headcount relative to each division. The Company is also
allocated rent based on the square footage of space occupied by the Company at
TW Cable facilities. The aggregate of these charges totaled approximately
$614,000 and $1.3 million for the three months ended March 31, 1998 and 1997,
respectively.
The combined statement of operations includes pension costs for certain
employees of the Company who remain on the US WEST, Inc. ('US WEST') pension
plan. Pension costs were approximately $151,000 and $157,000 for the three
months ended March 31, 1998 and 1997, respectively.
The Company licenses the right to use the majority of its fiber optic cable
from TW Cable. The Company paid TW Cable approximately $1.2 million and $5.6
million in the three months ended March 31, 1998 and 1997, respectively, under
this arrangement. Such costs have been capitalized by the Company. The
amortization of these costs and fiber previously capitalized in the amount of
approximately $2.2 million and $1.6 million for the three months ended March 31,
1998 and 1997, respectively, has been classified as a component of depreciation
and amortization in the accompanying combined statement of operations. In
addition, under this licensing arrangement, the Company reimburses TW Cable for
facility maintenance and pole rental costs, which costs amounted to $513,000 and
$433,000 for the three months ended March 31, 1998 and 1997, respectively.
Effective July 1, 1997, all of the Company's financing requirements began
to be funded with loans from the Parent Companies. Interest expense relating to
these loans totaled approximately $2.0 million for the three months ended March
31, 1998.
4. COMMITMENTS AND CONTINGENCIES
Pending legal proceedings are substantially limited to litigation
incidental to the business of the Company. In the opinion of management, the
ultimate resolution of these matters will not have a material effect on the
Company's financial statements.
5. SUBSEQUENT EVENTS
At March 31, 1998, all the assets and liabilities of the Company were
beneficially owned by Time Warner and US WEST which, through certain
subsidiaries, are partners in TWE. The assets and liabilities of the Company
were also beneficially owned by Advance/Newhouse Partnership ('A/N') through
TWEAN. Time Warner and certain of its subsidiaries, US WEST and certain of its
subsidiaries and A/N are collectively referred to herein as the 'Existing
Stockholders'.
The Company is expected to complete a reorganization under which the
Company's authorized capital will include two classes of common stock, Class A
Common Stock and Class B Common Stock, which will be identical in all respects
except that holders of Class A Common Stock will be entitled to one vote per
share and holders of Class B Common Stock will be entitled to 10 votes per share
on all matters submitted to a vote of stockholders and except that only holders
of Class B Common Stock, voting separately as a class, will be entitled to vote
on certain matters. The Existing Stockholders will contribute their respective
assets and liabilities of the Company's business to the Company and in return
will receive all the outstanding shares of the Class B Common Stock. The Company
also expects to complete a public offering of the Class A Common Stock.
F-20
<PAGE>
<PAGE>
[Logo]
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the expenses of issuance and distribution of the
$ million aggregate principal amount of % Senior Notes Due 2008 and
$ million aggregate principal amount of % Senior Discount Notes Due 2008
registered hereunder on Form S-1, other than underwriting discounts and
commissions. All amounts except the Registration Fee are estimated.
<TABLE>
<S> <C>
Registration Fee............................................................................ $103,250
NASD Filing Fee............................................................................. *
Printing and Engraving Fees................................................................. *
Blue Sky Fees and Expenses.................................................................. *
Legal Fees and Expenses..................................................................... *
Accounting Fees and Expenses................................................................ *
Trustees' Fees.............................................................................. *
Miscellaneous............................................................................... *
--------
Total.................................................................................. $ *
--------
--------
</TABLE>
- ------------
* To be filed by amendment.
All of the above expenses have been or will be paid by Time Warner Telecom
Inc.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Restated Certificate of Incorporation (the 'Restated
Certificate of Incorporation') of Time Warner Telecom Inc. (the 'Company')
provides that to the fullest extent permitted under the General Corporation Law
of the State of Delaware (the 'DGCL'), a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director.
Section 102(b)(7) of the DGCL, provides that a corporation may eliminate or
limit the personal liability of a director (or certain persons who, pursuant to
the provisions of the certificate of incorporation, exercise or perform duties
conferred or imposed upon directors by the DGCL) to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provisions shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL (providing for liability of directors for unlawful
payment of dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which the director derived an improper personal benefit.
Under Section 145 of the DGCL, in general, a corporation may indemnify its
directors, officers, employees or agents against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by them in connection with any action, suit or proceeding which they
may be made parties by reason of their being or having been directors, officers,
employees or agents if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. Article VIII of the Restated Certificate of
Incorporation provides that the Company shall indemnify its officers, directors,
employees and agents to the full extent permitted by Delaware law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has not sold any securities
without registration under the Securities Act.
II-1
<PAGE>
<PAGE>
ITEM 16. EXHIBITS
(a) Exhibits:
TIME WARNER TELECOM INC.
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ -----------------------------------------------------------------------------------------------------------
<C> <S>
1.1 -- Form of Purchase Agreement**
2.1 -- Reorganization Agreement**
3.1 -- Restated Certificate of Incorporation of the Company**
3.2 -- Restated By-laws of the Company**
4.1 -- Stockholders Agreement, among the Company, Time Warner Companies, Inc., American Television and
Communications Corporation, Warner Communications, Inc., TW/TAE Inc., U S WEST Multimedia Communications,
Inc. and Advance/Newhouse Partnership.**
4.2 -- Form of Indenture, between the Company and , as Trustee*
5 -- Opinion of Cravath, Swaine and Moore*
10.1 -- Lease, between Quebec Court Joint Venture No. 2, Landlord, and Intelligent Advanced Systems, Inc.,
Tenant, dated June 3, 1994**
10.2 -- Agreement for Assignment of Lease, dated September 12, 1997, between Ingram Micro Inc. and Time Warner
Communications Holdings Inc.**
10.3 -- First Amendment to Lease, dated October 15, 1997, by Carramerica Realty, L.P. and Time Warner
Communications Holdings Inc.**
10.4 -- Time Warner Telecom Inc. 1998 Stock Option Plan**
10.5 -- Employment Agreement between the Company and **
12 -- Ratio of Earnings to Fixed Charges of the Company
21 -- Subsidiaries of the Company**
23.1 -- Consent of Ernst & Young LLP, Independent Public Accountants
23.2 -- Consent of Cravath, Swaine & Moore (included in Exhibit 5)*
24.1 -- Power of Attorney (contained on signatures page)
27 -- Financial Data Schedule**
</TABLE>
- ------------
* To be filed by amendment.
** Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 333-49439) filed with the Commission.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described under Item 14 above or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of their
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-2
<PAGE>
<PAGE>
The Company hereby undertakes that:
1. For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as a part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed part of this Registration
Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at such time shall be
deemed to be the initial bona fide offering thereof.
3. It will provide the underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.
II-3
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Time Warner Telecom Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, on May 26,
1998.
TIME WARNER TELECOM INC.
By /S/ DAVID J. RAYNER
....................................
DAVID J. RAYNER
VICE PRESIDENT, FINANCE
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen A. McPhie and David J. Rayner, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments and post-effective
amendments to this Registration Statement, and to file the same, with all
exhibits thereto, and any and all documents in connection therewith, with the
Securities and Exchange Commission, hereby granting unto said attorneys-in-fact
and agents full power and authority to do and perform any and all acts and
things requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------------- ------------------------------------ --------------
<S> <C> <C>
(i) Principal Executive Officer
/S/ STEPHEN A. MCPHIE President and Chief Executive May 26, 1998
........................................................ Officer
STEPHEN A. MCPHIE
(ii) Principal Financial and Accounting Officer
/S/ DAVID J. RAYNER Vice President, Finance May 26, 1998
........................................................
DAVID J. RAYNER
(iii) Directors
/S/ RICHARD J. BRESSLER Director May 26, 1998
........................................................
RICHARD J. BRESSLER
Director May 26, 1998
........................................................
PETER R. HAJE
/S/ SPENCER B. HAYS Director May 26, 1998
........................................................
SPENCER B. HAYS
* By:
........................................................
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
DESCRIPTION OF DOCUMENT PAGE
------------------------------------------------------------------------------------------------------- ----
<C> <S> <C>
1.1 -- Form of Purchase Agreement**........................................................................
2.1 -- Reorganization Agreement**..........................................................................
3.1 -- Restated Certificate of Incorporation of the Company**..............................................
3.2 -- Restated By-laws of the Company**...................................................................
4.1 -- Stockholders Agreement, among the Company, Time Warner Companies, Inc., American Television and
Communications Corporation, Warner Communications, Inc., TW/TAE Inc., U S WEST Multimedia
Communications, Inc. and Advance/Newhouse Partnership**..............................................
4.2 -- Form of Indenture, between the Company and , as Trustee*...................
5 -- Opinion of Cravath, Swaine and Moore*...............................................................
10.1 -- Lease, between Quebec Court Joint Venture No. 2, Landlord, and Intelligent Advanced Systems, Inc.,
Tenant, dated June 3, 1994**.........................................................................
10.2 -- Agreement for Assignment of Lease, dated September 12, 1997, between Ingram Micro Inc. and Time
Warner Communications Holdings Inc.**................................................................
10.3 -- First Amendment to Lease, dated October 15, 1997 by Carramerica Realty, L.P. and Time Warner
Communications Holdings Inc.**.......................................................................
10.4 -- Time Warner Telecom Inc. 1998 Stock Option Plan**...................................................
10.5 -- Employment Agreement between the Company and **..............................................
12 -- Ratio of Earnings to Fixed Charges of the Company...................................................
21 -- Subsidiaries of the Company**.......................................................................
23.1 -- Consent of Ernst & Young LLP, Independent Public Accountants........................................
23.2 -- Consent of Cravath, Swaine & Moore (included in Exhibit 5)*.........................................
24.1 -- Power of Attorney (contained on signatures page)....................................................
27 -- Financial Data Schedule**...........................................................................
</TABLE>
- ------------
* To be filed by amendment.
** Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 333-49439) filed with the Commission.
<PAGE>
<PAGE>
EXHIBIT 12
TIME WARNER TELECOM INC.
RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 3/31/97 3/31/98
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS:
Net loss before tax........ $(9,392) $(37,178) $(51,105) $(86,116) $(70,656) $(19,651) $(21,788)
Interest expense........... 12 3 25 55 1,544 -- 2,011
Portion of rents
representative of an
interest factor.......... 25 444 1,050 1,374 1,793 416 218
Undistributed losses of
less than 50% owned
companies................ -- -- 30 40 27 10 --
------- -------- -------- -------- -------- -------- --------
Total earnings.................. (9,355) (36,731) (50,000) (84,647) (67,292) (19,225) (19,559)
------- -------- -------- -------- -------- -------- --------
FIXED CHARGES:
Interest expense........... 12 3 25 55 1,544 -- 2,011
Portion of rents
representative of an
interest factor.......... 25 444 1,050 1,374 1,793 416 218
------- -------- -------- -------- -------- -------- --------
Total fixed charges... 37 447 1,075 1,429 3,337 416 2,229
------- -------- -------- -------- -------- -------- --------
Deficiency in the
coverage of fixed
charges by earnings
before fixed
charges............. $(9,392) $(37,178) $(51,075) $(86,076) $(70,629) $(19,641) $(21,788)
------- -------- -------- -------- -------- -------- --------
------- -------- -------- -------- -------- -------- --------
</TABLE>
<PAGE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption 'Experts' and
'Selected Consolidated Financial and Other Operating Data' and to the use of our
report dated March 13, 1998 (except Notes 1, 5 and 7, as to which the date is
May 21, 1998), in the Registration Statement (Form S-1) and related Prospectus
of Time Warner Telecom Inc. for the registration of $200 million principal %
Senior Notes Due 2008 and $150 million principal % Senior Discount Notes Due
2008.
Ernst & Young LLP
New York, New York
May 22, 1998
The foregoing consent is in the form that will be signed upon the effective
date of the Company's registration of Class A Common Stock in a registration
statement on a Form S-1 and the concurrent change in the Company's operating and
legal structure from a partnership to a corporation.
Ernst & Young LLP
New York, New York
May 22, 1998
<PAGE>
