<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 20, 1999
REGISTRATION NO. 333-49439
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
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. [ ]
------------------------
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>
EXPLANATORY NOTE
THIS REGISTRATION STATEMENT CONTAINS TWO FORMS OF PROSPECTUS: ONE TO BE
USED IN CONNECTION WITH AN OFFERING OF THE REGISTRANT'S CLASS A COMMON STOCK IN
THE UNITED STATES AND CANADA (THE 'U.S. PROSPECTUS'), AND ONE TO BE USED IN A
CONCURRENT OFFERING OF THE REGISTRANT'S CLASS A COMMON STOCK OUTSIDE THE UNITED
STATES AND CANADA (THE 'INTERNATIONAL PROSPECTUS' AND TOGETHER WITH THE U.S.
PROSPECTUS, THE 'PROSPECTUSES'). THE PROSPECTUSES ARE IDENTICAL EXCEPT FOR THE
FRONT COVER PAGE. THE U.S. PROSPECTUS IS INCLUDED HEREIN AND IS FOLLOWED BY THE
ALTERNATE FRONT COVER PAGE TO BE USED IN THE INTERNATIONAL PROSPECTUS. THE
ALTERNATE PAGE FOR THE INTERNATIONAL PROSPECTUS INCLUDED HEREIN IS LABELED
'ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS.' FINAL FORMS OF EACH PROSPECTUS
WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER RULE 424(b) OF
THE GENERAL RULES AND REGULATIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JANUARY 20, 1999
SHARES
[LOGO]
TIME WARNER TELECOM INC.
CLASS A COMMON STOCK
------------------------
TIME WARNER TELECOM INC. IS OFFERING SHARES OF ITS CLASS A COMMON
STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY
EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC
OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE.
TIME WARNER TELECOM INC. HAS TWO CLASSES OF COMMON STOCK CONSISTING OF CLASS A
COMMON STOCK AND CLASS B COMMON STOCK. AFFILIATES OF TIME WARNER TELECOM INC.
CURRENTLY OWN 100% OF THE CURRENTLY OUTSTANDING SHARES OF CLASS B COMMON
STOCK AND WILL RETAIN % OF THE OUTSTANDING COMBINED
VOTING POWER OF THE COMMON STOCK AFTER THE OFFERING.
------------------------
WE EXPECT THE CLASS A COMMON STOCK TO BE APPROVED FOR QUOTATION ON THE NASDAQ
NATIONAL MARKET OF THE NASDAQ STOCK MARKET UNDER THE SYMBOL 'TWTC.'
------------------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE 'RISK FACTORS'
BEGINNING ON PAGE 12.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
-------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total................................... $ $ $
</TABLE>
------------------------
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Time Warner Telecom Inc. has granted the U.S. underwriters the right to purchase
up to an additional shares of Class A Common Stock to cover
over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares
of Class A Common Stock to purchasers on , 1999.
------------------------
JOINT BOOK - RUNNING MANAGERS
MORGAN STANLEY DEAN WITTER LEHMAN BROTHERS
, 1999
<PAGE>
<PAGE>
[MAP TO COME]
------------------------
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................... 5
Risk Factors..................................... 12
Use of Proceeds.................................. 24
Dividend Policy.................................. 24
The Reconstitution............................... 25
Capitalization................................... 26
Dilution......................................... 27
Selected Combined Financial and Other Operating
Data........................................... 28
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 31
Business......................................... 41
Management....................................... 56
Certain Relationships and Related Transactions... 68
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
Principal Stockholders........................... 72
<S> <C>
Description of Certain Indebtedness.............. 73
Description of Capital Stock..................... 74
Certain United States Federal Tax Consequences to
Non-United States Holders of Common Stock...... 77
Shares Eligible for Future Sale.................. 80
Underwriters..................................... 81
Legal Matters.................................... 84
Experts.......................................... 84
Additional Information........................... 84
Glossary......................................... 85
Index to Combined Financial Statements........... F-1
</TABLE>
------------------------
You should rely only on the information contained in this Prospectus. We
have not authorized anyone to provide you with information different from that
contained in this Prospectus. We are offering to sell shares of Class A Common
Stock and seeking offers to buy shares of Class A Common Stock, only in
jurisdictions where offers and sales are permitted. The information contained in
this Prospectus is accurate only as of the date of this Prospectus, regardless
of the time of delivery of this Prospectus or any sale of the Class A Common
Stock.
WE HAVE NOT TAKEN ANY ACTION TO PERMIT A PUBLIC OFFERING OF THE SHARES OF
CLASS A COMMON STOCK OUTSIDE THE UNITED STATES OR TO PERMIT THE POSSESSION OR
DISTRIBUTION OF THIS PROSPECTUS OUTSIDE THE UNITED STATES. PERSONS OUTSIDE THE
UNITED STATES WHO COME INTO POSSESSION OF THIS PROSPECTUS MUST INFORM THEMSELVES
ABOUT AND OBSERVE ANY RESTRICTIONS RELATING TO THE OFFERING OF THE SHARES OF
CLASS A COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS OUTSIDE THE UNITED
STATES.
UNTIL , 1999 ALL DEALERS THAT BUY, SELL OR TRADE SHARES OF
CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
This Prospectus contains forward-looking statements, including statements
regarding, among other items, our business and operating strategy, operations,
economic performance and financial condition. These forward-looking statements
are subject to risks, uncertainties and assumptions, certain of which are beyond
our control. 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.' We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this Prospectus might not
occur.
3
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THIS PAGE INTENTIONALLY LEFT BLANK
4
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding the Company, the Class A Common Stock being sold in this
Offering and our financial statements and the notes thereto appearing elsewhere
in this Prospectus.
In this Prospectus:
The term 'Company'
(a) when used to refer to any period prior to the completion of the
Reconstitution (as defined), refers to Time Warner Telecom LLC ('TWT LLC'),
its consolidated and unconsolidated subsidiaries including Time Warner
Telecom Inc., a wholly owned subsidiary of TWT LLC formed solely to serve
as co-obligor of the Notes (as defined) ('TWT Inc.'), and all operations of
the Company that were historically conducted by the Existing Stockholders
(as defined) and
(b) when used to refer to any period after the Reconstitution, refers
to Time Warner Telecom Inc. ('Newco'), the successor of both TWT LLC and
TWT Inc., and its consolidated and unconsolidated subsidiaries.
The term 'Existing Stockholders' refers to (a) Time Warner Inc. and certain
of its subsidiaries (collectively, 'TW'), (b) MediaOne of Colorado, Inc. and
certain of its subsidiaries (collectively, 'MediaOne'), and
(c) Advance/Newhouse Partnership ('Newhouse'). TW and MediaOne,
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.
Newco was recently formed to conduct the Offering and to acquire the assets
of TWT LLC through a merger of both TWT LLC and TWT Inc. with and into Newco
(the 'Reconstitution'). The Reconstitution will be effective immediately prior
to the effectiveness of the Registration Statement that this Prospectus is part
of. Following the Reconstitution, TW, MediaOne and Newhouse will hold 61.95%,
18.88% and 19.17%, respectively, of the Class B Common Stock. See 'The
Reconstitution' and 'Principal Stockholders.' The information set forth in this
Prospectus assumes (a) that the transactions described under 'The
Reconstitution' have occurred and (b) that the U.S. Underwriters do not exercise
their over-allotment option. 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. It
offers a wide range of business telephony services, primarily to medium- and
large-sized telecommunications-intensive business end-users, long distance
carriers ('IXCs'), Internet service providers ('ISPs'), wireless communications
companies and governmental entities. These business telephony services include
dedicated transmission, local switched, long distance, data and video
transmission services and certain Internet services. The Company has deployed
switches in 16 of its 19 service areas as of September 30, 1998. As of
September 30, 1998, the Company operated networks in 19 metropolitan areas that
spanned 6,500 route miles, contained 252,503 fiber glass miles and offered
service to 3,463 buildings.
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.
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 yet to fully
exploit its highly concentrated networks. Management believes that this
extensive fiber network capacity allows it to:
5
<PAGE>
<PAGE>
increase orders substantially from new and existing customers without
incurring significant additional capital expenditures and operating
expenses;
emphasize its fiber facilities-based services rather than resales of
network capacity of other providers; and
provide better customer service because the Company can exert greater
control over its services than its competitors that depend on off-net
facilities.
Expand Switched Services. For the nine months ended September 30, 1998,
combined revenues from switched service grew by 240.8% as compared to the same
period in 1997. Because the market 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 plans to provide
switched services in all its current service areas by the end of 1999.
Target Medium- and Large-Sized Business Customers. The Company operates in
metropolitan areas that have high concentrations of medium- and large-sized
businesses that are high volume users of telecommunications services. Management
intends to emphasize its advanced network in marketing to these customers.
Management also believes the Company can achieve significant economies of scale
by focusing and intensifying its sales and marketing efforts on these
businesses.
Interconnect Service Areas. The Company groups the 19 service areas in
which the Company currently operates into six geographic clusters across the
United States. The Company plans to interconnect each service area with its own
broadband, fiber optic facilities or with facilities licensed from TW Cable
and/or third parties. This is expected to increase its revenue potential by
addressing customers' regional long distance voice, data and video requirements.
The Company began interconnecting its service areas during 1998.
Utilize Strategic Relationships with TW Cable. The Company intends to
continue to use licensing arrangements and share the cost of digital fiber optic
facilities with TW Cable, the second largest multiple system cable operator in
the United States. 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;
extend its existing networks in a rapid, efficient and cost-effective
manner; and
capitalize on the strong awareness and positive recognition of the 'Time
Warner' brand name.
Expand Product Offerings.
The Company currently offers:
a wide range of dedicated transmission, local switched, data and video
transmission services;
certain Internet services; and
limited long distance service.
The Company intends to offer additional services to its customers
including high speed data transport services. The Company generally
develops its customer base by first offering basic telecommunications
services to its new customers. In order to increase revenues and cash
flows 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 targets metropolitan areas
that it believes have the potential to generate attractive economic returns.
Currently, the Company operates networks in a total of 19 metropolitan areas.
Management plans to have networks in operation or under construction in 3
additional service areas by the end of 1999.
Continue Disciplined Expenditure Program. The Company increases operational
efficiencies by pursuing a capital expenditure program focusing on projects
expected to meet stringent financial criteria. The Company is also considering
strategic alliances with other telecommunications providers to share the costs
and risks of developing new projects.
6
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<PAGE>
FINANCING PLAN
On July 21, 1998 the Company completed the public offering of $400.0
million principal amount of its 9 3/4% Senior Notes due 2008 (the 'Notes'). See
'Description of Certain Indebtedness -- The Notes.'
The Company expects that the net proceeds of the Offering after repayment
of subordinated indebtedness to the Parent Companies (as defined), together with
proceeds received from the sale of the Notes and internally generated funds will
provide sufficient funds for the Company to expand its business as currently
planned, pay interest on the Notes and fund its currently expected losses
through the second quarter of 2000. After that, the Company expects to require
additional financing. See 'Use of Proceeds.'
THE RECONSTITUTION
Newco is a Delaware corporation that was recently formed to conduct the
Offering and to become the successor to both TWT LLC and TWT Inc. TWT LLC was
formed in connection with a reorganization (the 'Reorganization') of the assets
and liabilities of the business telephony operations that were previously owned
by subsidiaries and divisions of TWE, TWE-A/N and TW (together, the 'Parent
Companies'). The Reorganization took place on July 14, 1998. In the
Reorganization, TW, MediaOne and Newhouse received 61.95%, 18.88% and 19.17%,
respectively, of the limited liability company interests of TWT LLC. Upon the
Reconstitution, these interests were exchanged for all the outstanding Class B
Common Stock of Newco. See 'The Reconstitution' and 'Principal Stockholders.'
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.
7
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<PAGE>
THE OFFERING
<TABLE>
<S> <C> <C>
Class A Common Stock offered........... shares
Class A Common Stock offered in:
U.S. Offering..................... shares
International Offering............ shares
-----------
Total........................ shares
===========
Common Stock outstanding after the
Offering:............................ shares (1)
Over-allotment option.................. shares
Use of Proceeds........................ The Company will use the net proceeds from the Offering to repay up to
$ million of outstanding indebtedness to the Parent Companies (at
November 30, 1998, indebtedness to the Parent Companies totaled $173.8
million) and for general corporate and working capital purposes, which
may include payment of interest on the Notes and acquisitions of and
joint ventures with other telecommunications service providers. See 'Use
of Proceeds.'
Voting Rights.......................... After the Offering:
the Company will have outstanding two classes of common stock: the
Class A Common Stock and the Class B Common Stock (together, the
'Common Stock'); and
the Existing Stockholders will have approximately % of the combined
voting power of the outstanding Common Stock. As a result, they
generally will have the collective ability to control all matters
requiring stockholder approval, including the election of directors.
Holders of Class A Common Stock have one vote per share.
Holders of Class B Common Stock have ten votes per share.
Holders of the Class A Common Stock and Class B Common Stock generally
vote together as a single class. However, certain matters require the
approval of 100% of the holders of the Class B Common Stock voting
separately as a class, and certain matters require the approval of a
majority of the holders of the Class A Common Stock, voting separately
as a class.
See 'Principal Stockholders,' 'Description of Capital Stock' and
'Certain Relationships and Related Transactions -- Stockholders
Agreement.'
Conversion............................. Each share of Class B Common Stock is convertible into one share of
Class A Common Stock.
Proposed Nasdaq National Market
Symbol............................... 'TWTC'
</TABLE>
- ------------
(1) As of , 1999, includes shares of Class B Common Stock.
Assumes shares of Class A Common Stock are issued in the Offering and
excludes approximately shares of Class A Common Stock issuable upon the
exercise of stock options that were assumed by Newco in connection with the
Reconstitution but are not immediately exercisable. See 'Management -- Stock
Option Plan.'
RISK FACTORS
You should consider all of the information contained in this Prospectus
before making an investment in the Class A Common Stock. In particular, you
should consider the factors described under 'Risk Factors.'
8
<PAGE>
<PAGE>
SUMMARY COMBINED 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 and for the nine months ended September 30, 1998 and 1997 and the summary
balance sheet data as of September 30, 1998 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. Operating results for the nine months ended September 30, 1998 and
1997 are not necessarily indicative of results that may be expected for the full
year. The pro forma other operating data have been derived from the accounting
records of the Company and have not been audited. The financial statements of
the Company for all periods prior to the Reorganization that occurred on July
14, 1998 reflect the 'carved out' historical financial position, results of
operations, cash flows and changes in stockholders' equity of the commercial
telecommunications operations of the Parent Companies, as if they had been
operating as a separate company. 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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- --------- --------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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 $ 29,742 $ 57,871
Switched services.................. -- -- 350 3,555 10,872 7,015 23,910
-------- -------- --------- --------- --------- -------- ---------
Total revenues................. 1,913 2,169 6,855 23,917 55,401 36,757 81,781
-------- -------- --------- --------- --------- -------- ---------
Costs and expenses:
Operating (1)...................... 3,219 10,454 15,106 25,715 40,349 28,050 46,341
Selling, general and administrative
(1).............................. 7,035 26,066 34,222 60,366 54,640 39,000 55,294
Depreciation and amortization
(1).............................. 578 1,213 7,216 22,353 38,466 27,866 36,804
-------- -------- --------- --------- --------- -------- ---------
Total costs and expenses....... 10,832 37,733 56,544 108,434 133,455 94,916 138,439
-------- -------- --------- --------- --------- -------- ---------
Operating loss......................... (8,919) (35,564) (49,689) (84,517) (78,054) (58,159) (56,658)
Gain on disposition of investments
(2).................................. -- -- -- -- 11,018 11,018 --
Equity in losses of unconsolidated
affiliates........................... (392) (1,611) (1,391) (1,547) (2,082) (1,722) (16)
Interest income........................ -- -- -- -- -- -- 4,069
Interest and other, net (1)............ (81) (3) (25) (52) (1,538) (359) (15,808)
-------- -------- --------- --------- --------- -------- ---------
Net loss............................... $ (9,392) $(37,178) $ (51,105) $ (86,116) $ (70,656) $(49,222) $ (68,413)
-------- -------- --------- --------- --------- -------- ---------
-------- -------- --------- --------- --------- -------- ---------
Basic and diluted loss per common
share................................
-------- -------- --------- --------- --------- -------- ---------
-------- -------- --------- --------- --------- -------- ---------
Average common shares outstanding......
-------- -------- --------- --------- --------- -------- ---------
-------- -------- --------- --------- --------- -------- ---------
OTHER OPERATING DATA:
EBITDA (3)............................. $ (8,341) $(34,351) $ (42,473) $ (62,164) $ (39,588) $(30,293) $ (19,854)
EBITDA Margin (4)...................... (436.0)% (1,583.7)% (619.6)% (259.9)% (71.5)% (82.4)% (24.3)%
Capital expenditures................... 7,154 50,293 141,479 144,815 127,315 72,964 87,116
Cash provided (used) by operations..... (3,100) (14,873) (35,605) (52,274) (29,419) (39,236) 3,327
Cash used in investing activities...... (10,656) (52,632) (145,293) (149,190) (120,621) (65,936) (275,546)
Cash provided by financing
activities........................... 13,756 67,505 180,898 201,464 150,040 105,172 475,477
Pro forma interest expense, net
(5)(6)...............................
Pro forma net loss (5).................
Pro forma basic and diluted loss per
common share (5).....................
Pro forma average common shares
outstanding (5)......................
</TABLE>
(footnotes on next page)
9
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<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
----- ------- -------- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA (7):
Operating Networks................................. 3 8 15 18 19 19
Route miles........................................ 168 880 3,207 5,010 5,913 6,500
Fiber miles........................................ 5,820 24,995 116,286 198,490 233,488 252,503
Voice grade equivalent circuits.................... -- 39,002 158,572 687,001 1,702,431 2,478,518
Digital telephone switches......................... -- -- 1 2 14 16
Employees.......................................... 78 239 508 673 714 858
Access lines....................................... -- -- 493 2,793 16,078 54,438
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
---------------------------
AS ADJUSTED
FOR THE
RECONSTITUTION
AND THE
ACTUAL OFFERING (8)
-------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $203,258
Marketable securities..................................................................... 188,430
Property, plant and equipment, net........................................................ 464,989 464,989
Total assets.............................................................................. 910,193
Long-term debt (9)........................................................................ 571,597
Total stockholders' equity................................................................ 231,977
</TABLE>
- ------------
(1) Includes expenses resulting from transactions with affiliates of $168,000 in
1993, $1.9 million in 1994, $6.5 million in 1995, $11.0 million in 1996,
$15.3 million in 1997 and $12.4 million and $20.3 million in the nine months
ended September 30, 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' is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provisions for income taxes. Accordingly, EBITDA is not intended to replace
operating income, net income, cash flow and other measures of financial
performance and liquidity reported in accordance with generally accepted
accounting principles. Rather, EBITDA is a measure of operating performance
and liquidity that should be considered in addition to those measures. The
Company believes that EBITDA is a standard measure of operating performance
and liquidity that is commonly reported and widely used by analysts,
investors and other interested parties in the telecommunications industry.
However, EBITDA as used herein may not be comparable to similarly titled
measures reported by other companies.
(4) EBITDA Margin represents EBITDA as a percentage of revenues.
(5) The pro forma statement of operations data for the nine months ended
September 30, 1998 and for the year ended December 31, 1997 give effect to
the Reconstitution, the Offering and the sale of the Notes as if they had
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 transactions had been
consummated at such date, nor are they necessarily indicative of future
results. The pro forma data excludes a one-time non-recurring $36.2 million
charge to earnings, recognized by the Company upon the Reconstitution date,
to record a net deferred tax liability associated with the change from a
limited liability company to a corporation.
(6) Pro forma interest expense gives effect to (i) the issuance of $400.0
million principal amount of the Notes at an interest rate of 9.75% at the
beginning of the respective periods and (ii) the use of $ million of the
net proceeds from the Offering to repay subordinated indebtedness to the
Parent Companies, as if such transactions had occurred at the beginning of
1997 assuming approximately 4.0% of the interest on the Notes would have
been capitalized under FASB Statement No. 34, 'Capitalization of Interest
Costs.' In addition,
(footnotes continued on next page)
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pro forma interest expense includes $1.25 million and $937,500 for the year
ended December 31, 1997 and the nine months ended September 30, 1998,
respectively, relating to the amortization of approximately $12.5 million
of debt issuance costs over a ten-year period.
(7) 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.
(8) Adjusted to give effect to (i) the issuance by the Company and distribution
to the Existing Stockholders of shares of Class B Common Stock pursuant to
the Reconstitution, (ii) the issuance and sale by the Company of
shares of Class A Common Stock in the Offering at an assumed initial public
offering price per share of $ , the midpoint of the range set forth on
the cover page of this Prospectus, (iii) the application of the net proceeds
to the Company therefrom to repay $ million of subordinated indebtedness
to the Parent Companies and (iv) a reduction in stockholders' equity that
reflects a one-time non-recurring $36.2 million charge to earnings,
recognized by the Company upon the Reconstitution date, to record a net
deferred tax liability associated with the change from a limited liability
company to a corporation. See 'Use of Proceeds' and 'Capitalization.'
(9) As of September 30, 1998, long-term debt consisted of (a) $400.0 million
principal amount of the Notes and (b) $171.6 million principal amount of
subordinated loans payable to the Parent Companies. All such indebtedness to
the Parent Companies pays interest in kind at an annual rate equal to The
Chase Manhattan Bank's prime lending rate as in effect from time to time, is
expressly subordinated to the Notes and matures one month following the
maturity of the Notes. As of November 30, 1998, $173.8 million of
subordinated loans payable to the Parent Companies was outstanding. The
Company anticipates utilizing the proceeds of the Offering to repay up to
$ million of indebtedness to the Parent Companies, as well as for general
corporate and working capital purposes.
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RISK FACTORS
Prior to purchasing any shares of Class A Common Stock 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 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 Class A Common Stock. 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 operating losses and negative cash flow since
inception, and expects to 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 combined 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 means operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provisions for income taxes. Accordingly, EBITDA is not intended to replace
operating income, net income, cash flow and other measures of financial
performance and liquidity reported in accordance with generally accepted
accounting principles. Rather, EBITDA is a measure of operating performance and
liquidity that should be considered in addition to those measures. The Company
believes that EBITDA is a standard measure of operating performance and
liquidity that is commonly reported and widely used by analysts, investors and
other interested parties in the telecommunications industry. However, EBITDA as
used 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.
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 over the next two years are expected to consist of approximately
(i) $280.0 million to purchase and install switches, electronics, fiber and
other additional technologies in existing networks and in additional networks to
be constructed in new service areas and (ii) $45.0 million for capital
expenditures with respect to the Company's management information system
infrastructure. 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.
The Company, from time to time, evaluates potential acquisitions of, and
joint ventures relating to, networks currently owned and operated by other
companies, including affiliates of the Existing Stockholders, and expects to
continue to do so. In the event the Company enters into a definitive agreement
with respect to any acquisition or joint venture, it may require additional
financing or it may elect to use a portion of the proceeds from the Offering or
from the sale of the Notes not theretofore expended for other purposes.
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
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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. In addition, TW Cable is not obligated to construct or
provide additional fiber optic capacity in excess of what is already licensed to
the Company under the Capacity License (as defined). Accordingly, if the Company
is unable to lease such additional capacity at the same rates as are currently
provided for under the Capacity License, the Company may be required to obtain
additional capacity on more expensive terms. See 'Certain Relationships and
Related Transactions -- Certain Operating Agreements.'
The Company sustained significant working capital deficits in each year
since inception. The Company has historically been funded by capital
contributions and advances from the Parent Companies. As of November 30, 1998,
the Company had outstanding approximately $173.8 million of subordinated
indebtedness to the Parent Companies, a substantial portion or all of which is
expected to be repaid with a portion of the net proceeds of the Offering. 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 Offering after repayment
of subordinated indebtedness to the Parent Companies, together with the net
proceeds received from the sale of the Notes and internally generated funds,
will provide sufficient funds for the Company to expand its business as
currently planned, pay interest on the Notes and to fund its currently expected
losses through the second quarter of 2000. 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 or joint ventures, 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, vendor financing or other financing arrangements. At a future
date, the Company may negotiate a bank credit facility to provide it with
working capital and enhance its financial flexibility. There can be no assurance
that such financing will be available on terms acceptable to the Company or at
all. The issuance by the Company of additional equity securities could cause
substantial dilution of the interest in the Company of purchasers of shares of
Class A Common Stock offered hereby.
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
The Company is highly leveraged. As of September 30, 1998, after giving pro
forma effect to the Reconstitution, the Offering and the application of the net
proceeds therefrom to repay $ million of subordinated indebtedness to the
Parent Companies, and the sale of the Notes, the Company would have had
approximately $ million of consolidated total debt, including $ million of
subordinated debt to the Parent Companies 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, joint ventures, 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 other provisions of financing documents to which the Company is a
party, including the Indenture governing the Notes (the 'Indenture'), or other
debt instruments to
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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 Indenture contains certain restrictive covenants. Such restrictions affect,
and in many respects 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. The Indenture also
provides for the repayment of subordinated debt, including the subordinated
indebtedness to the Parent Companies, prior to maturity with the net proceeds of
any offering of common stock or equivalent interests of the Company, including
the Offering.
RISKS OF EXPANSION; AND POSSIBLE INABILITY TO MANAGE GROWTH
The Company's ability to expand its business and manage its transition to
switched services depends on a variety of factors. These factors include 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 ('LECs'). There can be no
assurance that the Company will be able to achieve this expansion in a timely
manner, at a reasonable cost, or on terms and conditions acceptable to the
Company.
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 Time Division Multiple
Access ('TDMA'), Frequency Division Multiple Access ('FDMA') and Code Division
Multiple Access ('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 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. In addition, there can be no assurance that any
networks that are developed will be completed on schedule, at commercially
reasonable costs or within the Company's specifications. There also can be no
assurance that any new or expanded networks will become profitable or generate
positive cash flow at any time in the future. A substantial portion of the
Company's network build-out plans within existing markets are dependent upon its
continuing relationship with TW Cable. See ' -- Relationship with TW Cable.' 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
condition and results of operations. In addition, the expansion of the Company's
business may involve acquisitions or joint ventures which, if made or entered
into, could divert the resources and management time of the Company and could
require integration with the Company's operations. See ' -- Acquisition Related
Risks.'
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.
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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 generally managed by a management committee that includes
representatives of MediaOne and TW. The Company presently licenses pursuant to
the Capacity License, and may enter into future licenses for the capacity of
significant numbers of optical fibers from TW Cable; however, TW Cable is not
obligated to construct or provide additional fiber optic capacity in excess of
what is already licensed to the Company under the Capacity License. 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 attachment 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 expires in 2028. Although TW Cable has agreed to
negotiate renewal or alternative provisions in good faith at that time, there
can be no assurance that the parties will agree on the terms of any renewal or
that the terms of any renewal or alternative provisions which may be agreed upon
by the parties will be favorable to the Company. If the Capacity License is not
renewed in 2028, the Company will have no residual interest in the capacity
under the Capacity License and may need to build, lease or otherwise obtain
transmission capacity in order to service its customers in the service areas
covered by the Capacity License. The terms of such arrangements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Capacity License also provides that the license of fiber optic capacity
by the Company may be terminated by TW Cable upon:
a material impairment or termination of TW Cable's ability to provide such
license under relevant law,
the Company's material breach of the terms and conditions of the Capacity
License, or
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)
and Content Services (as defined) 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 the
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 has begun to offer long distance service on a limited basis and
expects to realize increased revenues therefrom by the second quarter of 1999.
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
markets its long distance services to smaller businesses, a market segment that
has not been a principal focus of
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the Company's business in the past and thus one to which the Company has limited
experience marketing. The Company relies on other carriers to provide
transmission and termination services for a majority of its long distance
traffic. The Company has negotiated a non-exclusive resale agreement with a long
distance carrier and may negotiate additional resale agreements with other long
distance carriers to provide it with additional 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 and
state 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 Federal Communications Commission (the 'FCC') and are being appealed. It is
anticipated that new applications will be filed by the RBOCs in coming months.
In addition, 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. On September 4, 1998, the U.S. Court of
Appeals for the Fifth Circuit reversed that District Court decision, concluding
that the provisions of Section 271 governing the RBOCs interLATA service entry
do not constitute an unconstitutional bill of attainder. Several parties,
including SBC Communications, Inc. ('SBC'), have filed petitions for certiorari
with the U.S. Supreme Court asking the that it review the decision of the Fifth
Circuit. On January 19, 1999, the Supreme Court declined to review that
decision. In addition, two RBOCs, Ameritech and U S WEST Communications, Inc.
('U S WEST'), had entered into agreements with a long distance carrier, Qwest
Communications Corp. ('Qwest'), under which they plan to jointly market Qwest
long distance service to local telephone service consumers in their operating
territories. Those agreements were challenged by several IXCs and CLECs before
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U.S. District Courts and before the FCC. On September 28, 1998, the FCC released
a Memorandum Opinion and Order determining that the offering by Ameritech and
U S WEST of Qwest's long distance service as part of combined packages of
service violates Section 271 of the 1996 Act. However, that decision has been
appealed. 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 Competitive Access Provider ('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 combinations and alliances in
the telecommunications industry, including mergers between BOCs, between BOCs
and other ILECs, and between major interexchange carriers and CLECs, may create
significant new competitors for the Company. For example, Bell Atlantic has
acquired the LECs owned by NYNEX and SBC, has acquired Southern New England
Telephone and Pacific Telesis. In addition, SBC and Ameritech have agreed to
merge, as have Bell Atlantic and GTE Corporation. On July 23, 1998, AT&T Corp.
('AT&T') announced that it had completed its acquisition of Teleport
Communications Group Inc. ('TCG'), a competitor of the Company. In addition,
AT&T and Tele-Communications, Inc. ('TCI'), a major cable operator, have
announced their intent to merge, and have applied to the FCC for consent to the
transfer of control of TCI to AT&T.
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/or 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. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Year 2000.'
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The Company has substantial business relationships with a few large
customers, including the major long distance carriers. For the nine months ended
September 30, 1998, the Company's top 10 customers accounted for 40.0% of the
Company's combined revenues. The top 3 customers, which are IXCs, accounted for
27.9% of
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the combined 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 July 23, 1998, AT&T, a
customer of the Company, announced that it had completed its acquisition of 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.'
FEDERAL AND STATE REGULATION
The Company is subject to Federal and state regulation. Existing Federal
and state regulations, or new regulations that may be adopted by the FCC or
state regulatory authorities may have a material adverse effect on the Company.
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'), with respect to interstate access services offered by the
Company. Following that favorable ruling on the Company's request, the Company
has withdrawn its interstate access 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.
As a result of rules and policies implemented by the FCC, ILECs have been
required to reduce the access charges paid by IXCs. Access charges are the fees
which IXCs pay to LECs for the use of local exchange telecommunications
facilities to originate and terminate interexchange (long distance) telephone
calls. These mandatory reductions in the access charges of ILECs, including the
RBOCs, may place downward pressure on the prices charged by the Company for
access services which it provides to IXCs.
Under the 1996 Act, the Company is subject to certain Federal regulatory
obligations when it provides local exchange service in a market. All LECs,
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.
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Pursuant to the requirements of the 1996 Act and the FCC's rules
promulgated to implement the 1996 Act, the Company is required to compensate
other LECs for termination of local exchange traffic originated by the Company.
Conversely, the Company is entitled to receipt of compensation from other LECs
when it terminates local exchange traffic originated by other LECs. This
requirement is commonly referred to as reciprocal compensation. Several BOCs and
other ILECs have taken the position that traffic terminated at the premises of
Internet service providers should be considered to be interstate traffic rather
than local traffic and that such traffic should not be subject to the reciprocal
compensation obligation described above. Those LECs have asked state commissions
and the FCC to reach the same conclusion. To date, every state commission which
has considered the issue has concluded that traffic transported within a local
exchange which is terminated at the premises of Internet service providers is
local traffic and is subject to the reciprocal compensation requirement. The FCC
has not yet addressed this issue with respect to local traffic originated by
customers on a dial-up basis. A determination that such traffic is not local
exchange traffic and is not subject to reciprocal compensation could reduce the
level of compensation received by the Company for termination of local traffic
originated by other LECs. 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 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. The
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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, including affiliates of the Existing Stockholders, 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 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 matters requiring stockholder approval, including the nomination and
election of directors. The Class B Common Stock is not subject to any mandatory
conversion provisions other than pursuant to certain transfer restrictions nor
are there any restrictions on the ability of the Existing Stockholders to
acquire additional Class B Common Stock. 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. There is no restriction on the Existing
Stockholders' ability to compete with the Company and no assurance can be given
that the Existing Stockholders will not compete with the Company in its service
areas or in the provision of certain telecommunications services. The Company is
subject to certain restrictions on offering Residential Services and Content
Services. 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
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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,
directly or indirectly (through a subsidiary or affiliate of the Company),
without the affirmative vote of all the holders of the Class B Common Stock:
engage in the business of providing, offering, packaging, marketing,
promoting or branding (alone or jointly with or as an agent for other
parties) any wireline telecommunications services or other services
(including data services) to residences (collectively, 'Residential
Services'), or
engage in the business of producing, packaging, distributing, marketing,
hosting, offering, promoting, branding or otherwise providing
entertainment, information or any other content services, whether fixed or
interactive, or any services incidental thereto (but excluding acting
solely as a carrier of video, audio or data of unaffiliated third parties
by providing transport services, so long as the Company has no other
direct or indirect pecuniary interest in the transmitted information or
content) (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. 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 30-year term of such license. Accordingly, the Capacity License
restrictions will apply after the restrictions in the Restated Certificate of
Incorporation have terminated. See 'Certain Relationships and Related
Transactions -- Certain Operating Agreements.' Violations of the limitations on
business activities of the Company contained in the Restated Certificate of
Incorporation or the Capacity License may, subject to the cure period provided
in the Capacity License, result in a termination of the Capacity License.
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 (as defined) with TW, the Company is
required to discontinue use of the 'Time Warner' name upon:
expiration of the initial four year term or any renewal term of such
agreement,
TW's owning less than 30% of the Common Stock,
TW having the right to nominate less than three nominees to the Board of
Directors of the Company,
the Company's non-compliance with the restrictions in the Restated
Certificate of Incorporation regarding Residential Services and Content
Services, or
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 (as defined). See 'Certain Relationships
and Related Transactions -- Stockholders Agreement.'
Under such circumstances, 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 its business and on
its financial condition and results of operations. See 'Certain Relationships
and Related Transactions -- Certain Operating Agreements.'
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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. Although the senior executives of the Company
have considerable experience in the telecommunications industry, they have not
previously operated a public company. Moreover, Ms. Herda was appointed chief
executive officer in June 1998, having previously served as Senior Vice
President, Sales prior to that time. The Company has employment agreements with
each of Ms. Herda, Messrs. Jones, Powers, Rayner, Blount, and Whinery and Ms.
Rich. 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.'
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
Prior to the Offering, there has been no public market for the shares of
Class A Common Stock. Although the Class A Common Stock is expected to be
approved for quotation through the Nasdaq National Market, there can be no
assurance that an active trading market for the Class A Common Stock will
develop or will be sustained. The initial public offering price of the Class A
Common Stock will be determined through negotiations between the Company and the
representatives of the Underwriters and may not be indicative of the market
price for the Class A Common Stock following the Offering. There can be no
assurance that future market prices for the Class A Common Stock will equal or
exceed the initial public offering price set forth on the cover page of this
Prospectus. The market prices of securities of growth companies similar to the
Company have historically been highly volatile. Future announcements on matters
concerning the Company or its competitors, including quarterly results,
technological innovations, mergers or strategic alliances, new services or
government legislation or regulation, may have a significant effect on the
market price of the Class A Common Stock. In addition, in recent years the
market for the stock of technology, communications and computer companies has
been highly volatile with large price and volume fluctuations, particularly for
companies with relatively small capitalizations. These fluctuations have had a
substantial effect on the market prices for the stock of many technology,
communications and computer companies, often unrelated to the operating
performance of the specific companies. See 'Underwriters.'
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be shares of Class A Common
Stock outstanding and shares of Class B Common Stock outstanding (all of
which are convertible into Class A Common Stock on a share for share basis).
Except in certain circumstances, shares of Class B Common Stock are not
transferable without their conversion into shares of Class A Common Stock. See
'Certain Relationships and Related Transactions -- Stockholders Agreement.' The
shares of Class A Common Stock sold in the Offering will be eligible for
immediate sale in the public market without restriction by persons other than
'affiliates' of the Company. The remaining shares of Class A Common Stock
(including any shares into which shares of Class B
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Common Stock are convertible) are 'restricted securities' within the meaning of
the Securities Act, and may not be sold in the absence of registration under the
Securities Act or an exemption therefrom, including the exemptions contained in
Rule 144 under the Securities Act. The Company has reserved for issuance
shares (subject to adjustment based on the size of the Offering) of Class A
Common Stock upon the exercise of stock options of which are outstanding as
a result of Newco's assumption of TWT LLC's outstanding options in connection
with the Reconstitution. See 'Management -- Stock Option Plan.'
Each of the Company, its directors and executive officers and the Existing
Stockholders has agreed that, subject to certain exceptions, without the prior
written consent of Morgan Stanley & Co. Incorporated, it will not, during the
period ending 180 days after the date of this Prospectus, offer, pledge, sell,
contract to sell or otherwise transfer, lend or dispose of, directly or
indirectly, any shares of Class A Common Stock or any securities convertible
into or exercisable or exchangeable for shares of Class A Common Stock. See
'Underwriters.' Thereafter, no assurance can be given that holders of the Class
B Common Stock will not decide, based upon then prevailing market and other
conditions, to convert their Class B Common Stock to Class A Common Stock and to
dispose of all or a portion of such stock pursuant to the provisions of Rule 144
under the Securities Act or pursuant to the registration rights contained in the
Stockholders Agreement. See 'Certain Relationships and Related
Transactions -- Stockholders Agreement.'
No predictions can be made about the effect, if any, that market sales of
shares of Class A Common Stock or the availability of such shares for sale would
have on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of Class A Common Stock in the public market, or the
perception that such sales could occur, may have an adverse impact on the market
price for the shares of Class A Common Stock offered hereby or on the ability of
the Company to raise capital through a public offering of its equity securities.
See 'Principal Stockholders.'
SUBSTANTIAL AND IMMEDIATE DILUTION
Purchasers of the Class A Common Stock offered hereby will incur immediate
and substantial dilution in pro forma net tangible book value per share. See
'Dilution.'
ABSENCE OF DIVIDENDS
The Company plans to retain all its net earnings, if any, for investment in
its business and does not currently intend to pay dividends on its capital
stock. The Board of Directors of the Company in its discretion determines the
times and amounts in which dividends may be declared and paid on the Company's
capital stock. The Indenture limits and may effectively prevent the Company from
paying dividends. See 'Dividend Policy.'
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USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of shares
of Class A Common Stock in the Offering are estimated to be approximately $
million (approximately $ million if the U.S. Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of $
per share, the midpoint of the range set forth on the cover page of this
Prospectus, after deducting estimated underwriting discounts and commissions and
other expenses of approximately $ payable by the Company.
The Company intends to use up to $ million of the net proceeds of the
Offering to repay outstanding subordinated indebtedness (aggregating
approximately $173.8 million as of November 30, 1998) to the Parent Companies,
and the remainder will be used for general corporate and working capital
purposes, which may include acquisitions and joint ventures. Pending such uses,
the net proceeds of the Offering will be invested in short-term, money market
instruments. This indebtedness bears interest (payable in kind) at an annual
rate equal to The Chase Manhattan Bank's prime lending rate as in effect from
time to time, and matures on August 15, 2008, one month after the maturity of
the Notes.
The Company, from time to time, evaluates potential acquisitions of, and
joint ventures relating to, networks currently owned and operated by other
companies, including affiliates of the Existing Stockholders, and expects to
continue to do so. In the event the Company enters into a definitive agreement
with respect to any acquisition or joint venture, it may require additional
financing or it may elect to use a portion of the proceeds of the Offering or
the proceeds from the sale of the Notes not theretofore expended for other
purposes.
The Company expects that the net proceeds of the Offering after repayment
of subordinated indebtedness to the Parent Companies, together with the net
proceeds received from the sale of the Notes and internally generated funds,
will provide sufficient funds for the Company to expand its business as
currently planned, pay interest on the Notes and to fund its currently
expected losses through the second quarter of 2000. 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 or joint
ventures, 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, vendor
financing or other financing arrangements. At a future date, the Company may
negotiate a bank credit facility to provide it with working capital and enhance
its financial flexibility. There can be no assurance that such financing will be
available on terms acceptable to the Company or at all. The issuance by the
Company of additional equity securities could cause substantial dilution of the
interest in the Company of purchasers of shares of Class A Common Stock offered
hereby.
DIVIDEND POLICY
The Company intends to retain future earnings, if any, to finance its
growth strategy and the development and expansion of its networks and operations
and, therefore, does not anticipate paying any dividends in the foreseeable
future. The decision whether to pay dividends will be made by the Company's
Board of Directors in light of conditions then existing, including the Company's
results of operations, financial condition and requirements, business
conditions, covenants under loan agreements and other contractual arrangements,
and other factors. In addition, the Indenture contains covenants that limit and
may effectively prevent the Company from paying dividends on the Common Stock.
See 'Risk Factors -- Absence of Dividends.'
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THE RECONSTITUTION
Newco was recently formed to conduct the Offering and to become the
successor to both of TWT LLC and TWT Inc. TWT LLC was formed in connection with
the Reorganization. The Reorganization took place on July 14, 1998. TWT Inc. was
formed solely for the purpose of serving as co-obligor of the Notes. The
business of developing and operating local telecommunications networks in the
Company's 19 service areas has been conducted through its 14 operating
subsidiaries. In connection with the Reorganization, the Existing Stockholders
received all the limited liability company interests of TWT LLC. These interests
were exchanged in connection with the Reconstitution for all the outstanding
Class B Common Stock of Newco. The Reconstitution resulted in a one-time
non-recurring $36.2 million charge to earnings, recognized by the Company upon
the Reconstitution date, to record a net deferred tax liability associated with
the change from a limited liability company to a corporation.
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 a
class. Each share of Class B Common Stock is convertible into one share of
Class A Common Stock. See 'Description of Capital Stock' and 'Principal
Stockholders.'
Set forth below is the organizational structure of the Company immediately
following the Offering:
[CHART]
- ------------
(1) Assumes shares of Class A Common Stock are issued in the Offering and
excludes (i) shares of Class A Common Stock issuable pursuant to the U.S.
Underwriters' over-allotment option and (ii) approximately shares of
Class A Common Stock issuable upon the exercise of stock options that were
assumed by Newco in connection with the Reconstitution but are not
immediately exercisable. See 'Management -- Stock Option Plan.'
(2) Consisting of Class B Common Stock. On a pro forma basis assuming shares
of Class A Common Stock are issued in the Offering, TW, MediaOne and
Newhouse would hold Class B Common Stock representing %, % and % of
the voting power, respectively.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998, as adjusted to reflect (a) the issuance and sale of the
shares of Class A Common Stock offered hereby by the Company (based on an
assumed public offering price of $ per share, the midpoint of the range set
forth on the cover page of this Prospectus) and the application of the net
proceeds therefrom to repay $ million of subordinated indebtedness to the
Parent Companies (assuming the U.S. Underwriters' over-allotment option is not
exercised) and (b) the Reconstitution, including a reduction in stockholders'
equity resulting from a one-time non-recurring $36.2 million
charge to earnings, recognized by the Company upon the Reconstitution date, to
record a net deferred tax liability associated with the change from a limited
liability company to a corporation. See 'Use of Proceeds' and 'The
Reconstitution.' 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 SEPTEMBER 30, 1998
-----------------------------------
AS ADJUSTED
FOR THE RECONSTITUTION
ACTUAL AND THE OFFERING
--------- ----------------------
<S> <C> <C>
Cash and cash equivalents...................................................... $ 203,258 $
--------- ------------
--------- ------------
Marketable securities.......................................................... $ 188,430 $
--------- ------------
--------- ------------
Long-term debt:
Notes..................................................................... $ 400,000 $ 400,000
Subordinated loans payable to the Parent Companies(1)..................... 171,597
--------- ------------
Total long-term debt................................................ 571,597 400,000
Stockholder's equity (deficit):
Class A Common Stock, $.01 par value; shares authorized, and
shares issued and outstanding on a pro forma basis,
respectively(2)........................................................
Class B Common Stock, $ par value; shares authorized, and
shares issued and outstanding on a pro forma basis, respectively.......
Contributed capital.................................................. 555,807
Accumulated deficit prior to the Reconstitution...................... (299,340)
--------- ------------
Total Class B Common Stock......................................... 256,467
Accumulated Deficit.................................................. (24,490) (60,663)
--------- ------------
Total stockholders' equity..................................................... 231,977
--------- ------------
Total capitalization............................................... $ 803,574 $
--------- ------------
--------- ------------
</TABLE>
- ------------
(1) As of September 30, 1998, the Company had outstanding approximately $171.6
million of indebtedness to the Parent Companies, all of which is
subordinated in right of payment to the Notes. This indebtedness bears
interest (payable in kind) at an annual rate equal to The Chase Manhattan
Bank's prime lending rate as in effect from time to time, and matures on
August 15, 2008, one month after the maturity of the Notes. The Indenture
provides that such subordinated indebtedness may be repaid prior to maturity
with the net proceeds of any offering of common stock or equivalent
interests of the Company, including the Offering. Such indebtedness was
approximately $173.8 million at November 30, 1998.
(2) Assumes shares of Class A Common Stock are issued in the Offering and
excludes (i) shares of Class A Common Stock issuable pursuant to the U.S.
Underwriters' over-allotment option and (ii) approximately shares of
Class A Common Stock issuable upon the exercise of stock options that
were assumed by Newco in connection with the Reconstitution but are not
immediately exercisable. See 'Management -- Stock Option Plan.'
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DILUTION
The pro forma net tangible book value of the Company as of September 30,
1998 was $ million, or $ per share of Class A Common Stock. Pro forma net
tangible book value per share is determined by dividing the tangible net worth
of the Company (total assets less intangible assets and total liabilities) by
the aggregate number of shares of Class A Common Stock and Class B Common Stock
outstanding, assuming the Reconstitution and the Offering had taken place on
September 30, 1998. After giving effect to the sale of the shares of Class A
Common Stock offered hereby (at an assumed initial public offering price of $
per share, the midpoint of the range set forth on the cover page of this
Prospectus) and the receipt and application of the net proceeds therefrom, pro
forma net tangible book value of the Company as of September 30, 1998, would
have been approximately $ million, or $ per share. This represents an
immediate in pro forma net tangible book value of $ per share
to the Existing Stockholders of the Company and an immediate dilution in pro
forma net tangible book value of $ per share to purchasers of Class A Common
Stock in the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.............................................. $
Pro forma net tangible book value per share at September 30, 1998(1).................
Increase in pro forma net tangible book value per share attributable to purchasers in
the Offering.......................................................................
------
Pro forma net tangible book value per share after the Offering.......................
------
Dilution in pro forma net tangible book value per share to purchasers of Class A
Common Stock in the Offering(2).................................................... $
------
------
</TABLE>
- ----------
(1) Pro forma net tangible book value per share at September 30, 1998, includes
.
(2) Dilution is determined by subtracting pro forma net tangible book value per
share after the Offering from the initial public offering price per share.
------------------------
The following table summarizes, on a pro forma basis, as of September 30,
1998, the numbers of shares purchased, the total consideration paid (or to be
paid) and the average price per share paid (or to be paid) by the Existing
Stockholders and the purchasers of Class A Common Stock in the Offering, at the
initial public offering price of $ per share (the midpoint of the range set
forth on the cover page of this Prospectus), before deducting estimated Offering
expenses of $ and underwriting discounts and commissions:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
----------------- ----------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders................................ % $ % $
Purchasers of Class A Common Stock in the Offering...
------ ------- ------ ------- ---------
Total........................................... 100.0% $ 100.0% $
------ ------- ------ ------- ---------
------ ------- ------ ------- ---------
</TABLE>
- ------------------
The foregoing calculations assume shares of Class A Common Stock are
issued in the Offering and exclude an aggregate of: (i) shares of Class A
Common Stock issuable pursuant to the U.S. Underwriters' overallotment option,
(ii) approximately shares of Class A Common Stock issuable upon the exercise
of stock options that were assumed by Newco in connection with the
Reconstitution but not immediately exercisable and (iii) additional shares of
Class A Common Stock reserved for awards under the Company's stock option plan.
See 'Management -- Stock Option Plan.'
27
<PAGE>
<PAGE>
SELECTED COMBINED 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
for the nine months ended September 30, 1998 and 1997, and the selected balance
sheet data as of December 31, 1993 and as of September 30, 1998 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. Operating results for the nine months ended
September 30, 1998 and 1997 are not necessarily indicative of results that may
be expected for the full year. The pro forma other operating data have been
derived from the accounting records of the Company and have not been audited.
The financial statements of the Company for all periods prior to the
Reorganization that occurred on July 14, 1998 reflect the 'carved out'
historical financial position, results of operations, cash flows and changes in
stockholders' equity of the commercial telecommunications operations of the
Parent Companies, as if they had been operating as a separate company. 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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- --------- ----------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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 $ 29,742 $ 57,871
Switched services......... -- -- 350 3,555 10,872 7,015 23,910
-------- -------- --------- ----------- --------- -------- ---------
Total revenues........ 1,913 2,169 6,855 23,917 55,401 36,757 81,781
-------- -------- --------- ----------- --------- -------- ---------
Costs and expenses:
Operating (1)............. 3,219 10,454 15,106 25,715 40,349 28,050 46,341
Selling, general and
administrative (1)...... 7,035 26,066 34,222 60,366 54,640 39,000 55,294
Depreciation and
amortization (1)........ 578 1,213 7,216 22,353 38,466 27,866 36,804
-------- -------- --------- ----------- --------- -------- ---------
Total costs and
expenses............ 10,832 37,733 56,544 108,434 133,455 94,916 138,439
-------- -------- --------- ----------- --------- -------- ---------
Operating loss................ (8,919) (35,564) (49,689) (84,517) (78,054) (58,159) (56,658)
Gain on disposition of
investments (2)............. -- -- -- -- 11,018 11,018 --
Equity in losses of
unconsolidated affiliates... (392) (1,611) (1,391) (1,547) (2,082) (1,722) (16)
Interest income............... -- -- -- -- -- -- 4,069
Interest and other, net (1)... (81) (3) (25) (52) (1,538) (359) (15,808)
-------- -------- --------- ----------- --------- -------- ---------
Net loss...................... $ (9,392) $(37,178) $ (51,105) $ (86,116) $ (70,656) $(49,222) $ (68,413)
-------- -------- --------- ----------- --------- -------- ---------
-------- -------- --------- ----------- --------- -------- ---------
Basic and diluted loss per
common share................
-------- -------- --------- ----------- --------- -------- ---------
-------- -------- --------- ----------- --------- -------- ---------
Average common shares
outstanding.................
-------- -------- --------- ----------- --------- -------- ---------
-------- -------- --------- ----------- --------- -------- ---------
OTHER OPERATING DATA:
EBITDA (3).................... $ (8,341) $(34,351) $ (42,473) $ (62,164) $ (39,588) $(30,293) $ (19,854)
EBITDA Margin (4)............. (436.0)% (1,583.7)% (619.6)% (259.9)% (71.5)% (82.4)% (24.3)%
Capital expenditures.......... 7,154 50,293 141,479 144,815 127,315 72,964 87,116
Cash provided (used) by
operations.................. (3,100) (14,873) (35,605) (52,274) (29,419) (39,236) 3,327
Cash used in investing
activities.................. (10,656) (52,632) (145,293) (149,190) (120,621) (65,936) (275,546)
Cash provided by financing
activities.................. 13,756 67,505 180,898 201,464 150,040 105,172 475,477
Pro forma interest expense,
net (5)(6)..................
Pro forma net loss (5)........
Pro forma basic and diluted
loss per common share (5)...
Pro forma average common
shares outstanding (5)......
</TABLE>
(footnotes on next page)
28
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
------- ------- -------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA (7):
Operating Networks........ 3 8 15 18 19 19
Route miles............... 168 880 3,207 5,010 5,913 6,500
Fiber miles............... 5,820 24,995 116,286 198,490 233,488 252,503
Voice grade equivalent
circuits................ -- 39,002 158,572 687,001 1,702,431 2,478,518
Digital telephone
switches................ -- -- 1 2 14 16
Employees................. 78 239 508 673 714 858
Access lines.............. -- -- 493 2,793 16,078 54,438
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
AS OF DECEMBER 31, 1998
-------------------------------------------------------- -------------
1993 1994 1995 1996 1997 ACTUAL
-------- ------- -------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............. $ -- $ -- $ -- $ -- $ -- $ 203,258
Marketable securities..... -- -- -- -- 188,430
Property, plant and
equipment, net.......... 5,364 53,139 199,005 323,161 415,158 464,989
Total assets.............. 10,129 60,604 214,963 341,480 438,077 910,193
Long-term debt (8)........ -- -- -- -- 75,475 571,597
Total stockholders'
equity.................. 4,856 33,749 179,589 294,937 300,390 231,977
</TABLE>
- ------------
(1) Includes expenses resulting from transactions with affiliates of $168,000 in
1993, $1.9 million in 1994, $6.5 million in 1995, $11.0 million in 1996,
$15.3 million in 1997 and $12.4 million and $20.3 million in the nine months
ended September 30, 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' is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provisions for income taxes. Accordingly, EBITDA is not intended to replace
operating income, net income, cash flow and other measures of financial
performance and liquidity reported in accordance with generally accepted
accounting principles. Rather, EBITDA is a measure of operating performance
and liquidity that should be considered in addition to those measures. The
Company believes that EBITDA is a standard measure of operating performance
and liquidity that is commonly reported and widely used by analysts,
investors and other interested parties in the telecommunications industry.
However, EBITDA as used herein may not be comparable to similarly titled
measures reported by other companies.
(4) EBITDA Margin represents EBITDA as a percentage of revenues.
(5) The pro forma statement of operations data for the nine months ended
September 30, 1998 and for the year ended December 31, 1997 give effect to
the Reconstitution, the Offering and the sale of the Notes as if they had
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 transactions had been
consummated at such date, nor are they necessarily indicative of future
results. The pro forma data excludes a one-time non-recurring $36.2 million
charge to earnings, recognized by the Company upon the Reconstitution date,
to record a net deferred tax liability associated with the change from a
limited liability company to a corporation.
(6) Pro forma interest expense gives effect to (a) the issuance of $400.0
million principal amount of the Notes at an interest rate of 9.75% at the
beginning of the respective periods and (b) the use of $ million of the
net proceeds from the Offering to repay $ million of subordinated
indebtedness to the Parent Companies, as if such transactions had occurred
at the beginning of 1997, assuming approximately 4% of the interest on the
Notes would have been capitalized under FASB Statement No. 34,
'Capitalization of Interest Costs.' In addition, pro forma interest expense
includes $1.25 million and $937,500 for the year ended December 31, 1997 and
the nine months ended September 30, 1998, respectively, relating to the
amortization of approximately $12.5 million of debt issuance costs over a
ten-year period.
(7) 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.
(footnotes continued on next page)
29
<PAGE>
<PAGE>
(8) As of September 30, 1998, long-term debt consisted of (a) $400.0 million
principal amount of the Notes and (b) $171.6 million principal amount of
subordinated loans payable to the Parent Companies. All such indebtedness to
the Parent Companies pays interest in kind at an annual rate equal to The
Chase Manhattan Bank's prime lending rate as in effect from time to time, is
expressly subordinated to the Notes and matures one month following the
maturity of the Notes. As of November 30, 1998, $173.8 million of
subordinated loans payable to the Parent Companies was outstanding. The
Company anticipates utilizing the proceeds of the Offering to repay up to
million of indebtedness to the Parent Companies, as well as for
general corporate and working capital purposes.
30
<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 assets and liabilities of the
Company's business were contributed to TWT LLC by the Parent Companies and in
connection therewith, the Existing Stockholders received all of the limited
liability company interests of TWT LLC. These interests were exchanged in
connection with the Reconstitution for all of the outstanding Class B Common
Stock of Newco. The Company accounted for the Reorganization and the
Reconstitution at each of the Existing Stockholders' historical cost basis of
accounting and, except as noted below, the Reorganization and the Reconstitution
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
Reconstitution is that the management of the Company becomes directly
accountable to the Board of Directors, instead of to the management committee of
TWT LLC. 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 limited liability company to
a corporation, whereas prior to the Reconstitution, all net operating loss
carryforwards were allocated to and utilized primarily by TW and its affiliates.
The Company has not, and will not, be compensated for such losses. Also, in
connection with the Reconstitution, the Company recognized a one-time
non-recurring charge to earnings of approximately $36.2 million, to record a net
deferred tax liability associated with the change from a limited liability
company to a corporation.
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 September 30,
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
September 30, 1998, the Company operated networks in 19 metropolitan areas that
spanned 6,500 route miles, contained 252,503 fiber glass miles and offered
service to 3,463 buildings. The Company's 19 service areas include 18 networks
that are wholly owned and one that is owned through a 50% joint venture and is
not combined with the Company's financial results. The Company's combined
revenues were $55.4 million for the year ended December 31, 1997 and $81.8
million for the nine months ended September 30, 1998. As of September 30, 1998,
the Parent Companies had invested $555.8 million in equity and $171.6 million in
debt in the Company.
The Company's revenues have been derived primarily from business telephony
services, including dedicated transmission, local switched, long distance, data
and video transmission services and certain Internet
31
<PAGE>
<PAGE>
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 September 30, 1998. The Company believes that switched services provide the
opportunity for higher profit margins and better utilization of capital
investment than those expected from transport services. 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 service 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 services (which were launched in the third quarter of 1998) and
Internet resale services. The Company expects to experience a higher churn rate
for these customers than it has traditionally experienced with transport
services. The Company intends to minimize this churn for long distance services
to smaller customers by offering such service under minimum one-year contracts.
The Company plans to expand its revenue base by fully utilizing 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 3 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 administrative 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
facilities, 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 engages in
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. In connection with the Reorganization, the Company
entered into several contracts with the Parent Companies in respect of certain
of these transactions. See 'Certain Relationships and Related
Transactions -- Certain Operating Agreements.' The Company's selling, general
and administrative expenses include charges allocated from the Parent Companies
for certain general and administrative expenses, primarily including office rent
and overhead charges for various administrative functions performed by TW Cable.
These charges are required to reflect all costs of doing business and are based
on various methods, which management believes result in reasonable allocations
of such costs that are necessary to present the Company's operations as if they
are 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. These costs are
included in the Company's operating expense. Finally, effective July 1, 1997
through July 14, 1998, all of the Company's financing requirements were funded
with loans from the Parent Companies. These loans are subordinated in right of
payment to the Notes, bear interest (payable in kind) at an annual rate equal to
The Chase Manhattan Bank's prime lending rate as in effect from time-to-time and
mature on August 15, 2008. The Company believes that this rate is comparable to
rates that could have been obtained from unrelated third parties. The Parent
Companies and the Existing Stockholders are not under any obligation to make
additional equity investments in or loans to the Company.
The Company expects that the net proceeds of the Offering, after repayment
of up to $ million of subordinated indebtedness to the Parent Companies,
together with the net proceeds received from the sale on July 21, 1998, of
$400.0 million principal amount of Notes and internally generated funds, will
provide sufficient funds for the Company to expand its business as currently
planned, pay interest on the Notes and to fund its currently expected working
capital needs
32
<PAGE>
<PAGE>
through the second quarter of 2000. 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 if the Company consummates
acquisitions or joint ventures, the Company may be required to seek additional
capital sooner than currently anticipated.
The Company has not historically, and does not currently, generate positive
operating cash flow. However, for the nine months ended September 30, 1998, 16
of the Company's 19 service areas generated positive operating cash flow and the
Company, as a whole, expects to begin generating positive operating cash flow by
the second quarter of 1999. 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 expense ('EBITDA'). EBITDA does not include charges for
interest expense or provisions for income taxes. Accordingly, EBITDA is not
intended to replace operating income, net income, cash flow and other measures
of financial performance and liquidity reported in accordance with generally
accepted accounting principles. Rather, EBITDA is a measure of operating
performance and liquidity that should be considered in addition to those
measures. The Company believes that EBITDA is a standard measure of operating
performance and liquidity that is commonly reported and widely used by analysts,
investors and other interested parties in the telecommunications industry.
However, EBITDA as used 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.
RESULTS OF OPERATIONS
The following table sets forth certain combined statement of operations
data of the Company, in thousands of dollars and expressed as a percentage of
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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------- -------------------------------------
1995 1996 1997 1997 1998
----------------- ----------------- ----------------- ----------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <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% $ 29,742 80.9% $ 57,871 70.8%
Switched services.... 350 5.1 3,555 14.9 10,872 19.6 7,015 19.1 23,910 29.2
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total revenues... 6,855 100.0 23,917 100.0 55,401 100.0 36,757 100.0 81,781 100.0
Costs and expenses:
Operating (1)........ 15,106 220.4 25,715 107.5 40,349 72.8 28,050 76.3 46,341 56.7
Selling, general and
administrative
(1)................ 34,222 499.2 60,366 252.4 54,640 98.6 39,000 106.1 55,294 67.6
Depreciation and
amortization (1)... 7,216 105.3 22,353 93.5 38,466 69.4 27,866 75.8 36,804 45.0
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total costs and
expenses....... 56,544 824.9 108,434 453.4 133,455 240.8 94,916 258.2 138,439 169.3
Operating loss........... (49,689) (724.9) (84,517) (353.4) (78,054) (140.8) (58,159) (158.2) (56,658) (69.3)
Gain on disposition of
investments (2)........ -- -- -- -- 11,018 19.9 11,018 30.0 -- --
Equity in losses of
unconsolidated
affiliates............. (1,391) (20.3) (1,547) (6.5) (2,082) (3.8) (1,722) (4.7) (16) --
Interest income.......... -- -- -- -- -- -- -- -- 4,069 4.9
Interest and other, net
(1).................... (25) (.3) (52) (.2) (1,538) (2.8) (359) (1.0) (15,808) (19.3)
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loss................. $(51,105) (745.5)% $(86,116) (360.1)% $(70,656) (127.5)% $(49,222) (133.9)% $(68,413) (83.7)%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Basic and diluted loss
per common share.......
Average common shares
outstanding............
EBITDA................... $(42,473) (619.6)% $(62,164) (259.9)% $(39,588) (71.5)% $(30,293) (82.4)% $(19,854) (24.3)%
</TABLE>
- ------------
(1) Includes expenses resulting from transactions with affiliates of $6.5
million in 1995, $11.0 million in 1996 and $15.3 million in 1997 and $12.4
million and $20.3 million in the nine months ended September 30, 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 (the 'Hyperion
Partnerships'), whereby it sold its interests in the partnerships serving
the Buffalo and Syracuse
(footnotes continued on next page)
33
<PAGE>
<PAGE>
(footnotes continued from previous page)
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 (collectively, the 'Hyperion
Transactions'). In connection with these transactions, the Company
recognized a gain of approximately $11.0 million.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues. Revenues increased $45.0 million, or 122.5%, to $81.8 million for
the nine months ended September 30, 1998, from $36.8 million for the same period
in 1997. Revenues from the provision of dedicated transport services increased
$28.2 million, or 94.6%, to $57.9 million for the nine months ended September
30, 1998, from $29.7 million for the same period in 1997. Revenues from
dedicated transport services increased 93.8% in those markets in which dedicated
transport services were offered as of September 30, 1997. Switched service
revenue increased $16.9 million, or 240.8%, to $23.9 million for the nine months
ended September 30, 1998, from $7.0 million for the same period in 1997.
Switched services revenues increased 190.6% in those markets in which switched
services were offered as of September 30, 1997. The increase in revenues from
dedicated transport services primarily reflects growth of services and new
products 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 September 30, 1998, the Company offered dedicated transport
services in 19 metropolitan areas, 16 of which also offered switched services,
as compared to offering dedicated transport services in 18 metropolitan areas,
10 of which also offered switched services at September 30, 1997.
Operating Expenses. Operating expenses increased $18.2 million, or 65.2%,
to $46.3 million for the nine months ended September 30, 1998, from $28.1
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 interconnection, higher technical
personnel costs, and higher data processing costs. As a percentage of revenues,
operating expenses decreased to 56.7% in 1998 from 76.3% for the same period in
1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $16.3 million, or 41.8%, to $55.3 million for
the nine months ended September 30, 1998, from $39.0 million for the same period
in 1997. The increase in selling, general and administrative expenses was
primarily attributable to higher direct sales costs associated with the increase
in revenues, an increase in consulting expenses relating to local regulatory
matters, implementing new billing and system software, higher property taxes and
moving costs related to consolidating the corporate office into one building. As
a percentage of revenues, selling, general and administrative expenses decreased
to 67.6% in 1998 from 106.1% for the same period in 1997.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $8.9 million, or 32.1%, to $36.8 million for the nine months
ended September 30, 1998, from $27.9 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 45.0% in 1998,
from 75.8% for the same period in 1997.
EBITDA. The EBITDA loss for the nine months ended September 30, 1998
decreased $10.4 million, or 34.5%, to $19.9 million in 1998, from a loss of
$30.3 million for the same period in 1997. 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, and higher selling, general and
administrative expenses required to support the expansion.
Interest Expense. Effective July 1, 1997 through July 14, 1998, all of the
Company's financing requirements were funded with loans from the Parent
Companies. On July 21, 1998, the Company issued $400.0 million in Notes.
Interest expense relating to these loans and Notes totaled $15.8 million for the
nine months ended September 30, 1998, an increase of $15.4 million compared to
the same period in 1997.
Income Taxes. On a pro forma basis, had the Company been operating as a
corporation on a stand-alone basis, for the nine months ended September 30,
1998, net income tax benefits would have increased $10.2
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million, or 59.0%, to $27.5 million, from $17.3 million for the same period in
1997. The net income tax benefits would 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 as a corporation 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 $19.2 million, or 39.0%, to $68.4 million for
the nine months ended September 30, 1998, from a net loss of $49.2 million for
the same period in 1997. This increase resulted from higher depreciation and
amortization expenses relating to the Company's expansion of telecommunications
networks in new and existing markets, as well as interest expense relating to
the loans payable to the Parent Companies and the Notes.
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. Revenues from dedicated transport service increased
115.9% in those markets in which dedicated transport services were offered as of
December 31, 1996. Switched service revenues increased $7.3 million, or 205.8%,
to $10.9 million in 1997, from $3.6 million in 1996. Switched services revenues
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 metropolitan areas, 14 of which also
offered switched services, as compared to offering dedicated transport services
in 15 metropolitan areas, 2 of which also offered switched services 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. 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. As a percentage of
revenues, operating expenses decreased to 72.8% in 1997 from 107.5% in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $5.8 million, or 9.5%, to $54.6 million in
1997, from $60.4 million 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 a result of
the Company's reorganization at the end of 1996 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. As a percentage of
revenues, selling, general and administrative expenses decreased to 98.6% in
1997 from 252.4% in 1996.
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. 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. As a percentage of revenues, depreciation and amortization
expenses decreased to 69.4% for 1997 from 93.5% for the same period in 1996.
Gain on Disposition of Investments. In September 1997, the Company
completed the Hyperion Transactions. 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.
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Interest and Other, Net. Effective July 1, 1997 all of the Company's
financing requirements were funded with loans from the Parent Companies.
Interest expense relating to these loans totaled approximately $1.5 million in
1997.
Income Taxes. On a pro forma basis, had the Company been operating as a
corporation on a stand-alone basis, net income tax benefits would have 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 would 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 9 to the Company's
annual 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 revenues increased $3.2 million, or 915.7%, to $3.6 million in
1996, from $.4 million in 1995. The increase in revenues from dedicated
transport 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 metropolitan areas, 2 of which also offered switched
services, as compared to offering dedicated transport services in 12
metropolitan areas, 1 of which also offered switched services 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. The increase in operating
expenses was primarily attributable to higher technical personnel 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. As a percentage of revenues, operating expenses decreased to
107.5% in 1996 from 220.4% in 1995.
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. 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 $5.6 million
charge to terminate certain employees. See 'Business.' As a percentage of
revenues, selling, general and administrative expenses decreased to 252.4% in
1996 from 499.2% in 1995.
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. This 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. As a percentage of
revenues, depreciation and amortization expense decreased to 93.5% in 1996 from
105.3% in 1995.
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. On a pro forma basis, had the Company been operating as a
corporation on a stand-alone basis, pro forma net income tax benefits would have
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 would 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 9 to
the Company's annual financial statements appearing elsewhere in this
Prospectus.
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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
Cash Flows. For the first nine months of 1998, the Company's cash provided
by operations was $3.3 million as compared to cash used in operations of $39.2
million for the first nine months of 1997. This increase in cash provided by
operations of $42.5 million principally resulted from lower EBITDA losses and
working capital requirements in the first nine 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.
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.
Cash used in investing activities increased $209.6 million to $275.5
million for the first nine months of 1998, as compared to $65.9 million for the
first nine months of 1997. The increase was due to higher purchases of
marketable securities of $188.4 million, an increase of $14.2 million in
capital expenditures and lower investment proceeds of $7.0 million.
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.
For the first nine months of 1998, cash provided by financing activities
reflected the receipt of interest bearing subordinated loans from the Parent
Companies amounting to $88.0 million and net proceeds from the sale of the Notes
of $387.5 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 nine months of 1997, cash provided by financing
activities reflected the receipt of interest bearing loans from the Parent
Companies of $27.5 million, and net capital contributions from the Parent
Companies of $77.7 million. The total increase in cash provided by financing
activities of $370.3 million was primarily due to the proceeds from the sale of
the Notes.
Cash provided by financing activities reflected 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 through
July 14, 1998, all of the Company's financing requirements were funded with
interest-bearing loans from the Parent Companies. The loans from the Parent
Companies are subordinated in right of payment to the Notes, bear interest
(payable in kind) at an annual rate equal to The Chase Manhattan Bank's prime
lending rate as in effect from time-to-time and mature on August 15, 2008, one
month after the maturity of the Notes. 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 was 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. Currently, the Company's financing requirements are funded by the
proceeds from the sale of the Notes.
Financing. Historically, the Company did not maintain cash balances since
all the Company's funding requirements were provided by the Parent Companies.
The proceeds from the Offering after repayment of subordinated indebtedness to
the Parent Companies, together with the net proceeds from the sale of the Notes
and
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cash flow from operations, are expected to fund the Company's future cash
requirements through the second quarter of 2000. The Parent Companies and the
Existing Stockholders are not under any obligation to make any additional equity
investments in or loans to the Company. At a future date, the Company may
negotiate a bank credit facility to provide it with working capital and enhance
its financial flexibility. There can be no assurance that such financing will be
available on terms acceptable to the Company or at all.
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 through July 14, 1998, the deficiency has been funded
through interest bearing loans from the Parent Companies. Thereafter, the
Company expects cash flow deficiencies to be funded with the proceeds of the
Offering, the proceeds of the Notes and future financings as described above.
This indebtedness to the Parent Companies is subordinated in right of payment to
the Notes, bears interest (payable in kind) at an annual rate equal to The Chase
Manhattan Bank's prime lending rate as in effect from time-to-time and matures
on August 15, 2008, one month after the maturity of the Notes. In addition, the
Notes provide that the proceeds of an equity offering such as the Offering may
be used to repay subordinated indebtedness to the Parent Companies. The amounts
due to the Parent Companies, including interest accrued thereon, under this
funding arrangement was $171.6 million and $75.5 million as of September 30,
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. Combined 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.
On July 21, 1998, the Company issued $400.0 million principal amount in
Notes. Interest on the Notes is payable semiannually on January 15 and July 15,
beginning on January 15, 1999. The net proceeds from the sale of the Notes were
immediately invested in short term investments.
The net proceeds to the Company from the sale of shares of Class A
Common Stock in the Offering are estimated to be approximately $ million
(approximately $ million if the U.S. Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $ per share,
the midpoint of the range set forth on the cover page of this Prospectus, after
deducting underwriting discounts and estimated expenses of the Offering.
The Company intends to use up to $ million of the net proceeds of the
Offering to repay outstanding subordinated indebtedness (aggregating
approximately $173.8 million as of November 30, 1998) to the Parent Companies,
and the remainder will be used for general corporate and working capital
purposes, which may include acquisitions and joint ventures. Pending the
foregoing uses, the net proceeds of the Offering will be invested in short term
investments. While the primary use of such remaining proceeds, together with the
proceeds from the sale of the Notes, 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 and joint ventures. The
Company has no definitive agreement with respect to any material acquisition or
joint venture, although from time to time it may discuss and assess
opportunities with other companies, including affiliates of the Existing
Stockholders, on an ongoing basis.
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 Offering after the repayment of
$ million in subordinated loans to the Parent Companies, together with the net
proceeds of $387.5 million received from the sale of the Notes and internally
generated funds, will provide sufficient funds for the Company to meet the
Company's expected capital and liquidity needs to expand its business as
currently planned, pay interest on the Notes and to fund its currently expected
losses through the second quarter of 2000. 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 or joint ventures, the Company may be required
to seek additional capital sooner than currently anticipated. The Company's
revenues
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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 service
areas; 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 nine months of 1998, capital expenditures were $87.1
million, an increase of $14.2 million from the first nine months in 1997. The
largest commitment of capital was related to the installation of transport and
switch related electronics to support the increase in sales activity. 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. Based
on historic capital requirements for network construction in relation to sales
volumes and network expansion plans, the Company anticipates it will commit
approximately $325.0 million over the next two years to fund its capital
expenditures. See 'Certain Relationships and Related Transactions -- Certain
Operating Agreements.'
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. The Company utilizes a number of computer
programs across its entire operation. Year 2000 issues could impact the
Company's information systems as well as computer hardware and equipment that is
part of its telephony network such as switches, termination devices and SONET
rings that may contain embedded software or 'firmware.'
The Company's exposure to potential Year 2000 problems exists in two
general areas: technological operations in the sole control of the Company, and
technological operations dependent in some way on one or more third parties. The
majority of the Company's exposure to potential Year 2000 problems is in the
latter area where the situation is much less within the Company's ability to
predict or control. The Company's business is heavily dependent on third
parties, many of whom are themselves heavily dependent on technology. For
example, like all other telecommunications providers, the Company must
interconnect its networks with other carriers and service providers in order to
provide end-to-end service to customers. The Company cannot control the Year
2000 readiness of those parties but does plan to test its interfaces with them
and to work with those parties to resolve any difficulties. In some cases, the
Company's third party dependence is on vendors of technology who are themselves
working towards solutions to Year 2000 problems, such as suppliers of software
systems for billing, ordering and other key business operations. See 'Risk
Factors -- Dependence on Information Billing Systems.'
The Company has developed a Year 2000 action plan to address identification
and assessment of potential Year 2000 issues, remediation, testing and
implementation of any corrected software or firmware. The Company has completed
the first phase of such action plan which involved making the Company's internal
organizations aware of Year 2000 issues and assigning responsibility internally
for the Year 2000 readiness program. The
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Company has substantially completed the assessment phase of its plan which
involves an inventory and review of software and equipment used in the Company's
operations in order to determine the Year 2000 readiness of that software and
equipment and the identification of remediation measures that could be taken on
a timely basis to alter, validate or replace time-sensitive and date-sensitive
software and equipment. To the extent practicable, the Company plans to assess
its interfaces with interconnecting carriers and service providers for Year 2000
readiness. To that end, the Company has sent out information requests to those
parties and is awaiting their responses.
In the course of the assessment process the Company has determined that
approximately 90% of the equipment comprising its telephony networks depends on
software or firmware that is already represented by its vendor to be Year 2000
ready. The Company is conducting its own validation testing of the equipment to
verify the vendor's representations. The failure of this equipment to perform as
represented could result in delays in the Company's Year 2000 readiness program.
The Company is developing test plans for the remainder of its applications and
systems. The Company intends to complete validation testing of its telephony
switches and transport network equipment by the end of the first quarter of
1999.
Concurrently with the foregoing assessment work, the Company has already
begun implementing certain remedial measures and intends to complete its
remediation efforts with respect to technological operations within its sole
control prior to any anticipated material impact on its computerized information
systems. In the normal course of business, the Company is in the process of
replacing many of the computer programs used by key business operations and its
financial systems. The new programs are expected to be in place and operational
by the end of 1999. The specifications for these new systems are all Year 2000
compliant. The Company will conduct validation testing of those systems as they
are delivered to verify the Year 2000 readiness of those systems. As a
contingency plan, in case the new systems are not fully operational when
planned, the Company plans to remediate certain existing systems so that they
will be Year 2000 ready.
Costs of addressing potential Year 2000 problems have not been material to
date and, based on preliminary information gathered to date 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.
Based on the Company's current Year 2000 action plan, the Company expects
that total 1998 costs incurred with respect to Year 2000 issues will be
approximately $115,000 and that 1999 costs will be approximately $1.5 million.
The majority of the estimated 1999 costs represent the costs of personnel who
will conduct verification testing of equipment and software and costs for
replacement of certain personal computers. These costs do not include the cost
of replacing systems, the replacement of which is not being accelerated due to
Year 2000 issues, or the costs of software maintenance contracts that the
Company would have entered into in the normal course of business. In some cases
Year 2000 compliant upgrades to third party software systems licensed to the
Company are being supplied under these maintenance agreements. However, the
Company's Year 2000 costs could exceed these estimates if third party equipment
or software do not perform as represented, additional unanticipated Year 2000
issues arise or planned remediation efforts are unsuccessful.
Management believes that it has established a sound program to resolve
significant Year 2000 issues within its sole control in a timely manner and that
the Company has made satisfactory progress in addressing issues dependent on
third parties. However, the Company's Year 2000 program is not yet complete. The
Company's failure to correctly identify and remediate all Year 2000 issues
within its control or the failure of suppliers or other third parties with which
the Company interconnects to address their Year 2000 issues could pose various
risks to the Company. Those risks may include the possibility of interruptions
to the Company's basic services and difficulties in passing traffic to or
receiving traffic from other carriers, detecting and resolving trouble in the
networks, provisioning new service to customers, billing customers and other
carriers and collecting revenues. These impacts as well as disruptions
experienced by other parties could result in material adverse consequences to
the Company, including loss of revenue and substantial unanticipated costs, the
amounts of which cannot reasonably be estimated at this time.
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on the Company.
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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,
long distance, data and video transmission services and certain Internet
services. The Company has deployed switches in 16 of its 19 service areas as of
September 30, 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 September 30, 1998, the Company operated
networks in 19 metropolitan areas that spanned 6,500 route miles, contained
252,503 fiber glass miles and offered service to 3,463 buildings. Combined
revenues for the Company, which have historically been primarily derived from
private line services, grew by 122.5% for the nine months ended September 30,
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 1997
the total revenues for the telecommunications industry amounted to approximately
$230.0 billion, of which approximately $130.0 billion was local service and
approximately $100.0 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 September 30, 1998, the Company
operated networks that spanned over 6,500 route miles and contained over 252,503
fiber glass 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 fiber facilities-based services rather
than resales of network capacity of other providers; and (iii) provide better
customer service because the Company can exert greater control over its services
than its competitors that depend on off-net facilities.
Expand Switched Services. The Company provided a broad range of switched
services in 16 of its 19 service areas as of September 30, 1998, and plans to
provide switched services in all of its current service areas by the end of
1999. For the nine months ended September 30, 1998, combined revenues from
switched service grew by 240.8% 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.
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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 Service Areas. The Company groups the 19 service areas in
which the Company currently operates into six geographic clusters across the
United States. See ' -- Telecommunications Networks and
Facilities -- Telecommunications Networks.' The Company plans to interconnect
each service area within a cluster with its own broadband, fiber optic
facilities or with facilities licensed from TW Cable and/or third parties. This
is expected to increase its revenue potential by addressing customers' regional
long distance voice, data and video requirements. The Company began
interconnecting its service areas in 1998.
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 has begun to offer long
distance service on a limited basis and intends to offer additional services
including 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 3 additional service areas by end of 1999. 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
marketplace by opening all local markets to competition and requiring ILECs to
provide increased direct interconnection. According to the FCC, in 1997 the
total revenues for the telecommunications industry amounted to approximately
$230.0 billion, of which approximately $130.0 billion was local service and
approximately $100.0 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.
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SERVICES
The Company provides its customers with a wide range of telecommunications
services, including dedicated transmission, local switched, long distance, 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 to major television networks as well as to advertising agencies and other
customers. Internet services provided by the Company include dedicated Internet
access, website hosting, transport and electronic commerce services for business
customers and local ISPs.
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.
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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
By the end of the first quarter of 1999, all of the Company's metropolitan
service areas will offer facilities based dedicated Internet access services.
These services will be made available to business customers, institutional and
educational organizations and ISPs. The core Internet network is based on a
national ATM backbone connecting the Company's hub cities with Tier 1 peering at
multiple public and private Internet exchange points.
LONG DISTANCE SERVICES
The Company has begun to offer basic long distance services on a limited
basis and intends to offer additional 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 Company
purchases long distance capacity under agreements with major
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IXCs that provide the Company capacity at competitive rates for resale and all
support and billing services. The Company has negotiated a non-exclusive resale
agreement with a long distance carrier and may negotiate additional resale
agreements with other long distance carriers. 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.
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 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
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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 telecommunications networks as of September 30,
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 Sep. 99 (6) 42 13 178,332
Binghamton, New York.................. Jan. 95 TBD 73 16 70,301
Manhattan, New York................... Feb. 96 Feb. 96 160 58 2,375,192
Rochester, New York................... Dec. 94 Feb. 95 347 107 260,423
SOUTHWEST REGION
Austin, Texas......................... Sep. 94 Apr. 97 272 78 321,030
Houston, Texas........................ Jan. 96 Sep. 97 471 130 1,133,864
San Antonio, Texas.................... May 93(4) Nov. 97 520 146 394,536
SOUTHEAST REGION
Charlotte, N. Carolina................ Sep. 94 Dec. 97 609 170 372,714
Greensboro, N. Carolina............... Jan. 96 Sep. 99 (6) 94 14 265,080
Memphis, Tennessee.................... May 95 May 97 467 123 225,342
Raleigh, N. Carolina.................. Oct. 94 Sep. 97 455 112 224,596
MIDWEST REGION
Cincinnati, Ohio...................... Jul. 95 Nov. 97 294 80 493,850
Columbus, Ohio(5)..................... Mar. 91(4) Jul. 97 339 112 393,791
Indianapolis, Indiana................. Sep. 87(4) Dec. 97 267 123 370,621
Milwaukee, Wisconsin.................. Feb. 96 Sep. 97 407 88 399,555
SOUTH REGION
Tampa, Florida........................ Dec. 97 Jan. 98 243 12 626,709
Orlando, Florida...................... Jul. 95 Jul. 97 912 150 439,238
WESTERN REGION
Honolulu, Hawaii...................... Jun. 94 Jan. 98 292 210 197,823
San Diego, California................. Jun. 95 Jul. 97 236 85 1,005,994
----------- ---------- ------------
Total................................. 6,500 1,827 9,748,991
----------- ---------- ------------
----------- ---------- ------------
</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.
(6) Estimated.
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 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
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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 Greenwood Village, Colorado. With
over 400 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, 7 days-a-week 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 network circuits, which allows them to 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.
Technologies currently under evaluation in the lab include Dense Wave Division
Multiplexing ('DWDM'), optical bandwidth management and IP telephony, and
related data applications.
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 outside vendors 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 'Risk Factors -- Relationship with
TW Cable' and '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
September 30, 1998, the Company's networks spanned 6,500 route miles, contained
252,503 fiberglass miles and offered service to 3,463 buildings with 2,478,518
VGE circuits and 54,438 access lines in service.
The Company anticipates that it will construct new networks in certain
cities, using its relationship with TW Cable or other fiber providers, or by
developing the networks in house, whichever is most effective and economical.
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 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
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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 right-of-way agreement or franchise may also be required. Such
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 right-of-way agreements 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 other 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 2002 and is renewable for up to
four 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.
CUSTOMERS AND SALES AND MARKETING
The Company's customers are principally telecommunications-intensive
medium- and large-sized businesses, IXCs, ISPs, wireless communications
companies and various governmental 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 nine months ended September 30, 1998,
the Company's top 10 customers accounted for 40.0% of the Company's total
revenues. The top 3
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customers, which are IXCs, accounted for 27.9% 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 IXCs, 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 IXCs, including AT&T, MCI
Communications Corporation, Sprint Corporation, WorldCom, Inc. and LCI, Inc. By
providing IXCs 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 IXCs to connect their
own switches in both local areas (intra-city) and in wide areas (inter-city).
Additionally, IXCs 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 IXCs uniformity of services, pricing, quality standards and customer
service.
CUSTOMER SERVICE
With over 400 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 service areas to react to any network failures or problems. In
addition, the NOC provides 24 hour-a-day, 7 days-a-week 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 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 or is impacted
favorably 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
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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 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. The ILECs 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.
In addition, the current trend of business combinations and alliances in
the telecommunications industry, including mergers between BOCs, between BOCs
and other ILECs, and between major IXCs and CLECs, may create significant new
competitors for the Company. For example, Bell Atlantic has acquired the LECs
owned by NYNEX and SBC, corporate parent of Southwestern Bell Telephone Company,
has acquired Southern New England Telephone and Pacific Telesis. In addition,
SBC and Ameritech have agreed to merge, as have Bell Atlantic and GTE
Corporation. On July 23, 1998, AT&T announced that it had completed its
acquisition of TCG, a competitor of the Company. In addition, AT&T and TCI, a
major cable operator, have announced their intent to merge, and have applied to
the FCC for consent to the transfer of control of TCI to AT&T.
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
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
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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 entity 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 LECs, 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 1, 1998, the Company has
executed 36 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'
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
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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 was heard in October 1998, and is expected to be
decided prior to the end of the Supreme Court's term in June 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 LECs, 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 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 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 agreements may be replaced by
arrangements which 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.
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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, provides dialing parity, and
provides full number portability, satisfying four 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.
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, five applications have been filed by BOCs with
the FCC for authority pursuant to Section 271 of the Communications Act to
provide interLATA long distance service in states within their operating
territories. All five of those applications have been denied by the FCC. An
application by SBC for FCC authority to provide long distance service in
Oklahoma was denied in June 1997. SBC's appeal of that decision was denied by
the U.S. Court of Appeals for the District of Columbia Circuit in March 1998. In
August 1997, the FCC also denied an application by Ameritech to provide long
distance service in Michigan. BellSouth applications for FCC approval to provide
long distance service in South Carolina and Louisiana also were denied by the
FCC in December 1997 and February 1998, respectively. In July 1998, BellSouth
again applied to the FCC to provide long distance service in Louisiana. That
application was denied by the FCC in October 1998. In addition to those FCC
applications, SBC Corporation brought a lawsuit in the U.S. District Court for
the Northern District of Texas in which it challenged on constitutional grounds
the BOC long distance entry provisions of the Communications Act. In December
1997, the District Court ruled in favor of SBC finding those provisions to be
unconstitutional. Shortly thereafter, the District Court stayed its decision
pending review by the U.S. Court of Appeals for the Fifth Circuit. On September
4, 1998, the U.S. Court of Appeals for the Fifth Circuit reversed that decision
of the District Court concluding that the provisions of Section 271 governing
the BOCs interLATA service entry is not an unconstitutional bill of attainder.
Several parties, including SBC, have filed petitions for certiorari with the
U.S. Supreme Court asking that it review the decision of the Fifth Circuit. On
January 19, 1999, the Supreme Court declined to review that decision. The
Company anticipates that eventually the BOCs will be found to comply with the
requirements of the Communications Act governing in-region long distance entry
and their applications for authority to provide interLATA service will be
approved and they will be permitted to offer interLATA services within their
operating territories.
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
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aspects of universal service, including the formulas to be used to quantify
local service costs remain under study by the FCC. In addition, several parties
appealed the FCC's May 1997 universal service order. Those appeals were
consolidated in the U.S. Court of Appeals for the Fifth Circuit and are pending.
On December 23, 1998, the FCC established rules to govern the manner in
which telecommmunications carriers effectuate and verify selection by consumers
of preferred providers of local exchange and interexchange services. The Company
will be subject to those rules and will be required to comply with the specific
verification requirements established by the FCC. Violation of those rules could
subject the Company to sanctions imposed by the FCC.
Federal Regulation. Following a June 1997 decision of the FCC, the Company
has been permitted to provide its interstate access services without having
tariffs on file with the FCC. Following that decision, the Company withdrew its
interstate access services tariff and now provides such services pursuant to
contracts entered into with customers. This will improve the Company's ability
to rapidly change its access service pricing in response to competition and will
reduce the Company's regulatory compliance costs. The Company is still required
to file with the FCC tariffs for its other interstate telecommunications
services, including long distance service.
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 is 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 LECs. See 'Telecommunications Act of 1996.'
The Communications Assistance for Law Enforcement Act, enacted in 1994,
requires telecommunications carriers, including the Company, to make their
equipment and facilities capable of assisting authorized law enforcement
agencies to conduct electronic surveillance. By September 8, 1998, subject
carriers were required to notify the Attorney General of systems which do not
have the capacity to meet surveillance requirements specified by the Attorney
General. By October 25, 1998, telecommunications carriers, including the
Company, were required to meet the surveillance standards set by the Attorney
General. The FCC has extended the date for compliance with these requirements
until June 30, 2000.
State Regulation. The Company has acquired all state government authority
needed to conduct its business as currently contemplated. 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. These certifications cover 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.
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. Moreover, there can be no
assurance that ILECS with whom the Company competes will not be excluded from
such local franchise fee requirements by previously-enacted legislation allowing
them to utilize rights-of-way throughout their states without being required to
pay franchise fees to local governments.
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
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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.
COMPANY NAME
The use of the 'Time Warner' name by the Company is subject to the License
Agreement. See 'Risk Factors -- Discontinuance of Use of `Time Warner' Name' and
'Certain Relationships and Related Transactions -- Certain Operating
Agreements.'
EMPLOYEES
As of September 30, 1998, the Company employed approximately 858 full-time
employees. The Company believes that its relations with its employees are good.
By succession, the New York City operating entity is a party to a collective
bargaining agreement. 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.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information (as of December 1, 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>
Larissa L. Herda.................... 40 President and Chief Executive Officer and Director
Paul B. Jones....................... 52 Senior Vice President, General Counsel and Regulatory Policy
A. Graham Powers.................... 52 Senior Vice President, Engineering and Technology
David J. Rayner..................... 41 Senior Vice President and Chief Financial Officer
John T. Blount...................... 40 Senior Vice President, Sales
Raymond H. Whinery.................. 44 Senior Vice President, Technical Operations
Mark A. Peters...................... 38 Vice President, Treasurer
Julie A. Rich....................... 45 Vice President, Human Resources and Business Administration
Jill Stuart......................... 44 Vice President, Accounting and Finance and Chief Accounting Officer
Richard J. Bressler................. 41 Director
Glenn A. Britt...................... 49 Director(1)
Stephen A. McPhie................... 45 Director(1)
Robert J. Miron..................... 61 Director
Richard J. Davies................... 49 Director(1)
Audley M. Webster, Jr............... 45 Director(1)
Pearre A. Williams.................. 44 Director
</TABLE>
- ------------
(1) Prior to the completion of the Offering, the Board of Directors will be
expanded and these directors will be selected and nominated in accordance
with the Stockholders' Agreement. Ms. Herda and Messrs. Bressler, Miron and
Williams will remain on the Board of Directors following the Offering.
Ms. Herda has served as President and Chief Executive Officer of the
Company since June 22, 1998. From March 1997 to June 21, 1998, Ms. Herda served
as Senior Vice President, Sales of the Company. From 1989 to 1997, Ms. Herda was
employed by MFS Telecom Inc., a CLEC, most recently as Southeast Regional Vice
President and General Manager. Ms. Herda has served as a Director of the Company
since June 22, 1998.
Mr. Jones has served as Senior Vice President, General Counsel and
Regulatory Policy of the Company since August 1998. Prior to August 1998, Mr.
Jones served as Senior Vice President, Legal and Regulatory Policy of 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. Powers has served as Senior Vice President, Engineering and Technology
of the Company since 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., a technology consulting service, from May 1992 to July 1993 and
previously held various management positions at American Television and
Communications Corporation, a subsidiary of Time Warner Inc.
Mr. Rayner has served as Senior Vice President and Chief Financial Officer
of the Company since June, 1998. From February 1997 to May 1998, Mr. Rayner
served as Vice President, Finance. From May 1994 to February 1997, Mr. Rayner
served as Controller. From 1982 to 1994, Mr. Rayner held various financial and
operational management positions in TW Cable.
Mr. Blount has served as Senior Vice President, Sales of the Company since
June 24, 1998. Prior to that, Mr. Blount served as the Company's Regional Vice
President for the Midwest and Southwest regions from January 1997 and
Milwaukee's Vice President and General Manager from January 1996 to January
1997, having served as its General Manager from February 1995. Prior to joining
the Company, Mr. Blount held various sales positions at US WEST starting in
1988, including Director of Sales for US WEST !nterprise in Minneapolis
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from May 1994 to February 1995 and Sales and Service Manager for South Dakota
from January 1992 to May 1994.
Mr. Whinery has served as Senior Vice President, Technical Operations of
the Company 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. (the predecessor of MediaOne) from
1978 and served as General Manager for Idaho, Montana, North Dakota and South
Dakota from 1992 to 1994.
Mr. Peters has served as Vice President, Treasurer of the Company since
July 15, 1998. From March 1996 to July 1998, Mr. Peters participated in
entrepreneurial start-up ventures. From January 1990 to February 1996, Mr.
Peters was an executive officer with Nextel Communications, Inc. and predecessor
OneComm where he most recently held the position of Vice President of Finance
and Treasurer.
Ms. Rich has served as Vice President, Human Resources and Business
Administration of the Company since 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., a telecommunications
manufacturer, and held positions of Director and Vice President of Human
Resources.
Ms. Stuart has served as Vice President, Accounting and Finance and Chief
Accounting Officer since July 1998. Prior to that, she served as Director,
Finance and Business Planning from September 1994 to July 1998.
Mr. Bressler has served as a director of the Company since February 1998,
as a director of TWT Inc. since July 1998 and as Executive Vice President and
Chief Financial Officer of Time Warner Inc. since January 1998. Prior to that,
he served as Time Warner Inc.'s Senior Vice President and Chief Financial
Officer from March 1995; as Senior Vice President, Finance from January 1995;
and as a Vice President prior to that. Mr. Bressler is also a member of the
Board of Representatives of TWE.
Mr. Britt has served as a director of the Company since July 1998, as Vice
President of the Company since July 1998 and as Chief Executive Officer and
President of Time Warner Cable Ventures, a division of TW Cable, for more than
the past five years.
Mr. McPhie has served as a director of the Company since July 1998, and as
Executive Vice President of MediaOne International, a division of MediaOne,
since August 1998. From January 1997 to June 1998, Mr. McPhie served as
President and Chief Executive Officer of the Company. Prior to that, Mr. McPhie
was Vice President of Business Development at U S WEST, Inc. (the predecessor of
MediaOne) from November 1995. From 1993 to 1995, Mr. McPhie served as Senior
Vice President of MFS Network Technologies, a CLEC, and from 1989 to 1993, he
was the President of Mission Group, a telecommunications consultancy.
Mr. Miron has served as a director of the Company since July 1998, and as
President of Advance/Newhouse Communications since April 1995, having served as
President of Newhouse Broadcasting Corporation from October 1986.
Mr. Davies has served as a director of the Company since October 1998, and
as ____________.
Mr. Webster has served as a director of the Company since July 1998, and as
Vice President -- Shared Corporate Resources of MediaOne since December 1997.
Prior to December 1997, he was Vice President -- Corporate Strategy of MediaOne
from December 1996. Prior to that, Mr. Webster served as Executive Director of U
S WEST since February 1993.
Mr. Williams has served as a director of the Company since July 1998, as
Vice President of MediaOne and as President of Multimedia Ventures of MediaOne
since July 1997. Prior to July 1997, Mr. Williams served as Vice President,
Business Development of MediaOne from June 1995 and as Vice President, Corporate
Development of U S WEST, Inc. prior to that, Mr. Williams is also a member of
the Board of Representatives of TWE.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company or of any of the holders of
Class B Common Stock or their affiliates will receive no compensation for their
services as directors. It is currently anticipated that each director who is not
affiliated with the Company or of any of the holders of Class B Common Stock
will be entitled to receive an annual retainer of $25,000 (to be paid 50% in
cash and 50% in Class A Common Stock) and an additional $1,000 plus reasonable
expenses for attending each meeting of the Board of Directors. Each such
57
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director is also entitled to be paid $1,000 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. The independent directors are expected to be nominated within 90 days
of the Offering. 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 will have two committees: (i) an Audit Committee and
(ii) a Compensation Committee.
The Audit Committee will be comprised of a majority of independent
directors. 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 will be comprised solely of independent
directors. 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 will exercise all authority under the 1998 Option Plan (as defined) of
the Company (unless the Board 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 CEO and each of its four remaining most highly compensated
current executive officers (the 'named executive officers') for services
rendered to the Company during 1998 in their capacities as executive officers.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------- ----------------------------------------
AWARDS(2)
------------
TIME WARNER CLASS A
COMMON STOCK COMMON STOCK PAYOUTS
UNDERLYING UNDERLYING ----------
OPTIONS OPTIONS LTIP ALL OTHER
NAME & PRINCIPAL POSITION SALARY(1) BONUS AWARDED(2) AWARDED(3) PAYOUTS(4) COMPENSATION(5)
- ----------------------------------------- ------------ ------- ------------ ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Larissa L. Herda(6) ..................... $300,000 7,600 $ -- $ --
President and Chief Executive Officer
Paul B. Jones ........................... $259,242 16,700 $ 150,000 $ --
Senior Vice President,
Legal & Regulatory
A. Graham Powers ........................ $175,479 7,600 $ 67,500 $ 1,620
Senior Vice President,
Engineering & Technology
David J. Rayner ......................... $171,000 7,600 $ -- $ 1,200
Senior Vice President and Chief
Financial Officer
John T. Blount .......................... $170,500 -- $ -- $ 1,643
Senior Vice President, Sales
Stephen A. McPhie(6) .................... $234,000 -- $ -- $ --
Former President and Chief Executive
Officer
</TABLE>
- ------------
(1) The information provided under the heading 'Salary' is the annual salary
received by the named executive officers as of December 31, 1998 pursuant to
their employment agreements with the Company (except for Mr. McPhie for whom
the information provided represents his annual salary received prior to
June 22, 1998. See note 6). 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) All of these options are exercisable for the common stock of Time Warner
Inc. ('TW common stock') and have been adjusted to reflect a two-for-one
stock split (the 'TW Stock Split') of TW common stock effected on December
15, 1998. None of these options was awarded with tandem stock appreciation
rights ('SARs'). For information regarding stock options with respect to
Class A Common Stock that were assumed by the Company in connection with the
Reconstitution, see ' -- Stock Option Plan.' Mr. McPhie holds 12,450
restricted shares of common stock of MediaOne awarded in February 1997 by U
S WEST, 11,200 of which will vest on February 6, 1999 and 1,250 of which
will vest on February 21, 1999. No dividends are paid on such shares of
MediaOne common stock. The value of these restricted shares based on the
closing price of MediaOne common stock on the New York Stock Exchange
Composite Listing on December 31, 1998 was $585,150. None of the other named
executive officers was awarded restricted stock of MediaOne, Time Warner
Inc. or the Company during 1998 or holds any such shares.
(3) These options were originally awarded by TWT LLC with respect to equity
interests therein and were assumed by the Company in connection with the
Reconstitution and are exercisable for Class A Common Stock.
(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
(footnotes continued on next page)
59
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<PAGE>
(footnotes continued from previous page)
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 Reorganization, 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.
(6) Ms. Herda became President and Chief Executive Officer of the Company on
June 22, 1998 upon the resignation of Mr. McPhie who, effective August 1,
1998, became an Executive Vice President of MediaOne International, a
division of MediaOne. Prior to June 22, 1998, Ms. Herda served as the Senior
Vice President, Sales.
STOCK OPTION PLAN
GENERAL
In connection with the Reconstitution, Newco assumed the obligations under
the TWT LLC 1998 Option Plan, amended such plan and renamed it the Time Warner
Telecom Inc. 1998 Stock Option Plan (the '1998 Option Plan'). The 1998 Option
Plan provides for the granting of stock options to purchase shares of Class A
Common Stock to directors and current or prospective employees of, and
consultants or other individuals providing services to, 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
key employees.
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 intends to delegate 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 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 during one calendar year 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 Board of
Directors, or to the extent delegated to the Committee, 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').
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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 Board of Directors, or to the extent delegated to the
Committee, 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 Board of Directors, or to the extent delegated to the
Committee, the Committee determines at the time of grant. Each Option may be
exercised in whole or in part at any time or only after a period of time or in
installments, as determined by the Board of Directors or Committee at the time
of grant, or by the Board of Directors' or 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.
The Board of Directors, or to the extent delegated to the Committee, the
Committee will establish Option exercise procedures. Payments may be made in
cash or, unless otherwise determined by the Board of Directors or 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 the 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) a consolidation or
merger in which the Company is not the surviving corporation or pursuant to
which the Class A Common Stock would be converted into cash, securities or other
property, excluding any consolidation or merger in which the stockholders of the
Company immediately prior to the transaction have the same proportionate
ownership of the equity value of the surviving company immediately after the
transaction, (b) the sale of all or substantially all of the assets of the
Company or (c) the liquidation or dissolution of the Company or (ii) (a) 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 CEO and independent
directors; provided that independent directors shall be included in calculating
whether the foregoing majority requirement is satisfied if the directors
nominated by the Existing Stockholders do not constitute a majority of the
committee that selects the Board of Directors' nominees for independent
directors) and (b) a 'person' or 'group' (within the meaning of Sections 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934, as amended (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 Company's securities, on a fully
diluted basis, and such ownership represents a greater percentage of the total
voting power of the Company's securities, on a fully diluted basis, than is held
by the Existing Stockholders as a group on such date.
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 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.
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<PAGE>
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 Board of Directors, or to the extent delegated to the Committee, 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 Board of Directors, or to the extent delegated to the Committee,
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 July 14,
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
In connection with the Reconstitution, Newco assumed options awarded by TWT
LLC that were exercisable for units of Class A limited liability company
interests (each, a 'unit') in TWT LLC. These options were adjusted in the
Reconstitution such that an option with respect to one TWT LLC unit at an
exercise price of $12 per unit became exercisable for shares of Class A
Common Stock at an exercise price of $ per share (subject to adjustment
based on the size of the Offering and the initial public offering price). As a
result of the Reconstitution, each of Ms. Herda and Messrs. Jones, Powers,
Rayner and Blount holds NSOs with respect to , , ,
and shares of Class A Common stock, respectively, and there are options
with respect to an additional shares held by other employees, all with an
exercise price of $ per share (subject to adjustment based on the size of
the Offering and the initial offering price). These options become exercisable
in installments of one-quarter on the first anniversary of the date of grant and
one-sixteenth at the end of each calendar quarter thereafter (subject to
acceleration upon the occurrence of certain events) and will expire ten years
from the date of grant.
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
62
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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 each of the
current named executive officers of the Company. These agreements have been
incorporated by reference 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 July 14, 1998; an annual salary; an annual bonus in the
discretion of the Company, generally targeted at 50% of the named executive
officer's salary; and participation in any pension, profit-sharing, employee
equity 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
Ms. Herda; $259,000 for Mr. Jones; $175,497 for Mr. Powers; $171,000 for Mr.
Rayner and $170,500 for Mr. Blount.
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 elect either (a) 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 or (b) to remain an
employee of the Company for up to 18 months and, without performing any
services, receive the base salary and annual bonus otherwise payable, with a
lump-sum payment, if necessary for any remaining payment, at the end of such 18
months. 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.
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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 date thirty days after the date of death and a pro rata portion of
the executive's bonus for the year of his death.
STOCK OPTIONS AWARDED BY THE COMPANY DURING 1998
The following table sets forth certain information with respect to employee
options to purchase shares of Class A Common Stock assumed by the Company in
connection with the Reconstitution awarded during 1998 with respect to the named
executive officers. All such options were nonqualified options and no SARs,
alone or in tandem with stock options, were awarded during 1998. These are the
only options with respect to Class A Common Stock held by such persons.
STOCK OPTION GRANTS DURING 1998 BY THE COMPANY
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)
---------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES PRICE EXPIRATION
NAME GRANTED IN 1998 ($ /SHARE) DATE
- ------------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Larissa L.
Herda........... 6.3% $ 8/5/08
Paul B. Jones..... 2.8% $ 8/5/08
A. Graham
Powers.......... 1.7% $ 8/5/08
David J. Rayner... 2.1% $ 8/5/08
John T. Blount.... -- 1.7% -- --
Stephen A.
McPhie.......... -- -- -- --
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
OF
STOCK PRICE APPRECIATION
FOR OPTION TERM
-------------------------
NAME 5% ($) 10% ($)
- ------------------ --------- -------------
<S> <C> <C>
Larissa L.
Herda........... $ $
Paul B. Jones..... $ $
A. Graham
Powers.......... $ $
David J. Rayner... $ $
John T. Blount.... -- --
Stephen A.
McPhie.......... -- --
</TABLE>
- ------------
(1) These options were awarded pursuant to the option plan of TWT LLC and were
assumed by the Company and the terms are governed by such plan and the
recipient's option agreement. See ' -- General.'
As required by SEC rules, the dollar amounts in the last two columns
represent the hypothetical gain or 'option spread' that would exist for the
options based on assumed 5% and 10% annual compounded rates of Class A Common
Stock appreciation over the full ten-year option term (resulting in 63% and 159%
appreciation, respectively). These assumed rates of appreciation applied to the
exercise price would result in a Class A Common Stock price on August 5, 2008 of
$ and $ , respectively. These prescribed rates are not intended to
forecast possible future appreciation, if any, of the Class A Common Stock.
STOCK OPTIONS AWARDED BY THE EXISTING STOCKHOLDERS DURING 1998
The following table sets forth certain information with respect to employee
options to purchase shares of TW common stock ('TW Options') awarded by TW
during 1998 to the named executive officers. All such TW Options were
nonqualified options and no SARs, alone or in tandem with stock options, were
awarded during 1998. No options to purchase MediaOne common stock were awarded
to the named executive officers during 1998.
64
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<PAGE>
STOCK OPTION GRANTS DURING 1998 BY THE EXISTING STOCKHOLDERS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)
---------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM
OPTIONS IN 1998 PRICE EXPIRATION ------------------------------
NAME GRANTED (2) ($ /SHARE) DATE 5% ($) 10% ($)
- ------------------ ---------- ---------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Larissa L.
Herda........... 7,600 .04% $ 36.03 3/17/08 $ 172,512 $ 435,387
Paul B. Jones..... 16,700 .1 % $ 36.03 3/17/08 $ 379,072 $ 956,705
A. Graham
Powers.......... 7,600 .04% $ 36.03 3/17/08 $ 172,512 $ 435,387
David J. Rayner... 7,600 .04% $ 36.03 3/17/08 $ 172,512 $ 435,387
John T. Blount.... -- -- -- -- -- --
Stephen A.
McPhie.......... -- -- -- -- -- --
</TABLE>
- ------------
(1) These TW Options were awarded pursuant to stock option plans of Time Warner
Inc. and the terms are governed by such plans and the recipient's option
agreement, and, pursuant to these terms, have been adjusted to reflect the
TW Stock Split. The option exercise price is the fair market value of the TW
common stock on the date of grant. The TW Options shown in the table become
exercisable in installments of one-third on the first three anniversaries of
the date of grant. Payment of the exercise price of a TW Option may be made
in cash or, in whole or in part, in full shares of TW common stock already
owned by the holder of the TW Option. The payment of withholding taxes due
upon exercise of a TW Option may generally be made with shares of TW common
stock.
(2) Represents a percentage of all options granted to employees of TW during
1998.
As required by SEC rules, the dollar amounts in the last two columns
represent the hypothetical gain or 'option spread' that would exist for the
options based on assumed 5% and 10% annual compounded rates of TW common stock
price appreciation over the full ten-year option term (resulting in 63% and 159%
appreciation, respectively). These assumed rates of appreciation applied to the
price on the date of the awards would result in a TW common stock price on
March 17, 2008 of $58.73 and $93.32, respectively. These prescribed rates are
not intended to forecast possible future appreciation, if any, of the TW common
stock.
OPTION EXERCISES AND VALUES IN 1998
None of the options exercisable for Class A Common Stock held by the named
executive officers and listed under the heading 'Stock Option Awarded by the
Company During 1998' have been exercised, are exercisable or are 'in-the-money.'
The dollar value for these options, based on the mid-point of the range of the
public offering price is $ for Ms. Herda, $ for Mr. Jones, $
for Mr. Powers, $ for Mr. Rayner and $ for Mr. Blount.
The following table sets forth as to each of the named executive officers
information with respect to option exercises during 1998 and the status of their
options on December 31, 1998: (i) the number of shares of TW common stock, or
MediaOne common stock in the case of Messrs. Blount and McPhie, underlying
options exercised during 1998; (ii) the aggregate dollar value realized upon
exercise of such options; (iii) the total number of shares of TW common stock,
or MediaOne common stock in the case of Messrs. Blount and McPhie, underlying
exercisable and nonexercisable stock options held on December 31, 1998; and
(iv) the aggregate dollar value of in-the-money exercisable and nonexercisable
stock options on December 31, 1998. None of the named executive officers has
been awarded SARs alone or in tandem with stock options. This information has
been adjusted to reflect the TW Stock Split.
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<PAGE>
<PAGE>
AGGREGATE OPTION EXERCISES DURING 1998 AND
OPTION VALUES ON DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDERLYING DOLLAR VALUE OF
NUMBER OF UNEXERCISED UNEXERCISED
SHARES DOLLAR OPTIONS IN-THE-MONEY OPTIONS
UNDERLYING VALUE ON DECEMBER 31, 1998 ON DECEMBER 31, 1998*
OPTIONS REALIZED ON ---------------------------- ----------------------------
NAME EXERCISED EXERCISE EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
- -------------------------------------- ---------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Larissa L. Herda...................... -- -- 3,334 14,266 $ 134,302 $ 466,370
Paul B. Jones......................... 4,000 $ 110,280 85,078 33,398 $ 3,656,870 $1,109,996
A. Graham Powers...................... -- -- 29,402 15,198 $ 1,222,919 $ 505,103
David J. Rayner....................... 1,600 $ 44,054 668 8,932 $ 26,909 $ 251,503
John T. Blount........................ -- -- 521 --
Stephen A. McPhie(1).................. -- -- 23,049 14,201
</TABLE>
- ------------
* Based on a closing price of $62.0625 per share of TW common stock, and $47.00
per share of MediaOne common stock with respect to stock options held by
Messrs. Blount and McPhie, on December 31, 1998 as reported on the New York
Stock Exchange Composite Listing.
(1) These options to purchase MediaOne common stock become exercisable in
installments of one-third on the first three anniversaries of the date of
grant and include a reload feature that gives the holder the right to
receive a further option, at the then current market price, for a number of
shares equal to the number of shares of stock surrendered in payment of the
exercise price of the original option.
The option exercise price of all options held by the named executive
officers is the fair market value of the stock on the date of grant. All of the
options held by the named executive officers become immediately exercisable in
full upon the occurrence of certain events, including the death or total
disability of the option holder, certain change-of-control transactions and, in
most cases, the Company's breach of the holder's employment agreement. The TW
Options held by the named executive officers generally remain exercisable for
three years after their employment is terminated without cause, for one year
after death or total disability, for five years after retirement and for three
months after termination for any other reason, except that such stock options
awarded before 1996 are exercisable for three months after a termination without
cause and after retirement and those awarded after July 1997 are exercisable for
three years after death or disability. All TW Options terminate immediately if
the holder's employment is terminated for cause. The terms of the options shown
in the chart are ten years.
PENSION COVERAGE
Although the Company does not currently expect to have its own pension
plan, Messrs. Jones, Powers and Rayner will, upon retirement, be entitled to
receive benefits under the Time Warner Cable Pension Plan (the 'TW Cable Pension
Plan') based on service to the Company and/or TW Cable prior to September 30,
1998. Set forth below is a brief description of the 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
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<PAGE>
('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
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.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL PENSION FOR YEARS OF CREDITED SERVICE
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
$150,000.................................... 23,703 35,555 47,407 59,268 71,110 82,962
$200,000.................................... 32,037 48,055 64,074 80,092 96,111 112,129
$250,000.................................... 40,370 60,556 80,741 100,926 121,111 141,296
$300,000.................................... 48,704 73,056 97,408 121,760 146,112 170,464
$350,000.................................... 57,037 85,556 114,075 142,593 171,112 199,631
</TABLE>
The estimated annual benefits payable under the TW Cable Pension Plan and
the Excess Plan, as of May 1, 1998, would be based on average compensation of
$262,674 for Mr. Jones, $220,567 for Mr. Powers and $123,918 for Mr. Rayner with
10.4, 11.4 and 14.9 years of credited service, respectively. In addition, in
connection with the Reorganization, it is expected that Mr. Blount will receive
a lump-sum distribution of pension benefits under the MediaOne Group Qualified
and Non-qualified Pension Plans. As of May 1, 1998, this payment is estimated to
equal $96,532, based on average compensation of $159,357 and 10.3 years of
service.
67
<PAGE>
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT
In connection with the Reconstitution, the Existing Stockholders entered
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, the form of 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
all the members of the Board of Directors, other than the CEO and the
independent directors; provided that if the Existing Stockholders do not have
the right to nominate a total of at least three Class B Nominees, such
nominating committee shall consist of a total of three directors and shall
include such Class B Nominees plus such other director or directors as shall be
determined by a majority of the Board. 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
MediaOne 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, each Existing Stockholder must own at least 9.44%
of the Common Stock to appoint one director. In the case of TW, so long as it
owns at least 18.88% of the Common Stock it will be entitled to nominate three
directors. In the event that TW owns less than 18.88% 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 9.44%, at which point it will not be entitled to nominate any
directors. In the case of MediaOne, so long as a TW Step Event has not occurred
and it owns at least 9.44% of the Common Stock, MediaOne will be entitled to
nominate three directors. If a TW Step Event has occurred, the number of
directors that MediaOne 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 9.44%, at which point it will
not be entitled to nominate any directors. If a TW Step Event has not occurred
but MediaOne owns less than 9.44% 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
9.44% of the Common Stock, Newhouse will be entitled to nominate one director.
The foregoing percentages shall be adjusted, from time to time, in the event
that the Company issues additional shares of Common Stock or takes actions in
respect of Common Stock (such as stock splits or recapitalizations) to reflect
the percentages that would have been in effect had such action been taken as of
the effective date of the Reconstitution and prior to the computation of such
percentages.
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 Stockholder proposes to sell all of the
shares of Class B Common Stock owned by such holder 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. If
the non-selling holders fail to exercise their Right of First Refusal with
respect to all of such shares, 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 the third party offeror on
68
<PAGE>
<PAGE>
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 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 all, but not less than all, of its
Class B Common Stock and shares of its Class A Common Stock that represent an
aggregate of more than one-third of the outstanding shares of 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 A Common Stock and
Class B Common Stock on a pro rata basis along with, and on the same terms and
conditions as, TW provided that such 'tag-along' rights shall be applied to all
Class B Common Stock prior to being applied to any Class A Common Stock. In
connection with such sale, TW (and any other stockholder transferring all of its
shares of Class B Common Stock) shall have the right to transfer all of its
right, if any, to nominate Class B Nominees for election to the Board. In
addition, TW and the other selling stockholders will not be required to convert
their shares of Class B Common Stock to Class A Common Stock prior to such sale.
Except for transfers to affiliates 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. In addition,
except for transfers described above, a stockholder will not have the right to
transfer its right to nominate Class B Nominees. A holder of Class B Common
Stock will not be required to convert its shares into Class A Common Stock, and
such holder's right to nominate Class B Nominees will not terminate, if such
holder is acquired by a third party or such holder distributes to its
stockholders a company holding its shares of Class B Common Stock (as well as
other assets).
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 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. TW
Cable is not obligated to provide such fiber capacity to the Company; however,
the Capacity License provides for the sharing of construction costs between the
Company and TW Cable to the extent that such costs are incurred to build
additional fiber-optic capacity which is licensed 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, plus a permitting fee. 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 portion of other out-of-pocket expenses
incurred by TW Cable with regard to the cable upon
69
<PAGE>
<PAGE>
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. Violations of
the limitations on business activities of the Company contained in the Restated
Certificate of Incorporation or the Capacity License may, subject to the cure
period provided in the Capacity License, result in a termination of the Capacity
License. The Capacity License does not restrict the Company from licensing
fiber-optic capacity from parties other than TW Cable. The Capacity License
expires in 2028. Although TW Cable has agreed to negotiate renewal or
alternative provisions in good faith at that time, there can be no assurance
that the parties will agree on the terms of any renewal or alternative
provisions or that the terms of any renewal or alternative provisions which may
be agreed upon by the parties will be favorable to the Company. If the Capacity
License is not renewed in 2028, the Company will have no residual interest in
the capacity under the Capacity License and may need to build, lease or
otherwise obtain transmission capacity in order to service its customers in the
service areas covered by the Capacity License; the terms of such arrangements
could have a material adverse effect on the Company's business, financial
condition and results of operations. 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. The Capacity License includes
substantial limitations on liability in the event of service interruptions. 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 event that at
least a majority of the ownership of any TW Cable system is not owned by one or
more Parent Companies or of (i) TW's owning less than 30% of the Common Stock,
(ii) TW having the right to nominate less than 3 nominees to 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, 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, 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.
70
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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 expiration of the initial
four year term or any renewal term of such agreement or (i) TW's owning less
than 30% of the Common Stock, (ii) TW having the right to nominate less than 3
nominees to 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.
71
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<PAGE>
PRINCIPAL STOCKHOLDERS
Prior to the Reorganization, the Parent Companies beneficially owned all of
the assets and liabilities of the Company's business. In connection with the
Reorganization, such assets were contributed to the Company by the Parent
Companies and in connection therewith, the Existing Stockholders received all
the limited liability company interests in TWT LLC. These interests will be
exchanged in connection with the Reconstitution for all the outstanding Class B
Common Stock of Newco. The following table sets forth certain information
regarding the beneficial ownership of the equity securities of the Company (a)
immediately following the Reconstitution but immediately prior to the Offering
and (b) immediately following the 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.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK (1) CLASS B COMMON STOCK (1) TOTAL COMMON STOCK
----------------------------------- ------------------------------- ---------------------------------
PERCENT OF CLASS PERCENT OF CLASS PERCENT OF EQUITY
-------------------------- ---------------------- ------------------------
PRIOR TO FOLLOWING PRIOR TO FOLLOWING PRIOR TO FOLLOWING
NO. OF THE THE NO. OF THE THE NO. OF THE THE
SHARES OFFERING (2) OFFERING (2) SHARES OFFERING OFFERING SHARES OFFERING OFFERING
------- ------------ ------------ ------- ---------- ---------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TW (3)(4)............ % % 61.95% 61.95% 61.95%
MediaOne (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)........... * * * * * *
<CAPTION>
% OF
VOTING POWER
FOLLOWING THE
OFFERING
-------------
<S> <C>
TW (3)(4)............
MediaOne (4)(5)......
Newhouse (4)(6)......
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) Excludes shares of Class B Common Stock which are convertible into
an equal number of shares of Class A Common Stock. The shares of Class B
Common Stock held by TW, MediaOne and Newhouse represented on a converted
basis 61.95%, 18.88% and 19.17%, respectively, of the Class A Common Stock
prior to the Offering and %, % and %, respectively, following the
Offering.
(3) Owned by Time Warner Companies, Inc., American Television and Communications
Corporation, Warner Communications Inc., TW/TAE, Inc., FibrCOM Holdings,
L.P. and Paragon Communications, each a direct or indirect 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 -- Stockholders Agreement.'
(5) Owned by MediaOne of Colorado, Inc., a Colorado corporation and wholly owned
subsidiary of MediaOne Group, Inc., a Delaware corporation. The business
address of MediaOne is 188 Inverness Drive West, Englewood, CO 80112.
(6) The business address of Newhouse is 5015 Campuswood Drive, East Syracuse, NY
13057.
(7) 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 May 29, 1998, all directors and executive officers held an aggregate
of 45,202 shares of TW common stock, including 24,571 shares held by trusts
under TW-sponsored benefit plans. In addition, such persons held options
which, on May 29, 1998 were exercisable within 60 days to purchase 678,421
shares of TW common stock.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
THE NOTES
On July 21, 1998, the Company completed the public offering of $400.0
million aggregate principal amount of the Notes. The Notes were issued pursuant
to the Indenture. For the purposes of this section only, the term 'Obligor' (i)
when used in relation to any period prior to the Reconstitution, refers
collectively to TWT LLC and TWT Inc., as co-obligors of the Notes, and does not
include any other consolidated or unconsolidated subsidiary of TWT LLC and (ii)
when used in relation to any period after the Reconstitution, refers to Newco,
as successor obligor of the Notes.
The Notes are unsecured unsubordinated obligations of the Obligor, ranking
pari passu in right of payment with all existing and future unsubordinated
indebtedness of the Obligor and senior in right of payment to all subordinated
indebtedness of the Obligor. Interest on the Notes will accrue at the rate of
9 3/4% per annum from July 21, 1998 or from the most recent interest payment
date to which interest has been paid or provided for, payable semiannually on
January 15 and July 15, commencing January 15, 1999. The Notes will be subject
to redemption at the option of the Obligor, in whole or in part, at any time on
or after July 15, 2003, initially at 104.875% of their principal amount and
declining to 100% of their principal amount at maturity on or after July 15,
2006 plus accrued and unpaid interest thereon to the applicable redemption date.
In addition, at any time prior to July 15, 2001, in the event of an offering of
the Common Stock of the Company for cash, the Obligor may, at its option, within
90 days of each such offering, use the net proceeds of such offering to redeem
up to 35% of the aggregate principal amount at maturity of the Notes at a
redemption price of 109.75% of the principal amount on the redemption date;
provided that at least 65% of the aggregate principal amount at maturity of the
Notes originally issued remain outstanding immediately after each such
redemption. The Company does not intend to use any portion of the proceeds of
the Offering to redeem the Notes. Upon the occurrence of a Change of Control (as
defined in the Indenture), the Obligor must commence, within 30 days of the
later of the occurrence of such Change of Control and the end of the Change of
Control Period (as defined in the Indenture), an offer to purchase the Notes
then outstanding at a purchase price of 101% of the principal amount thereof;
provided that the Obligor shall not be required to commence an offer to purchase
if, at any time within 30 days of the later of the occurrence of the Change of
Control and the end of the Change of Control Period, the Notes shall be rated
Investment Grade (as defined in the Indenture).
The Indenture contains certain covenants, including, but not limited to,
covenants with respect to (i) limitations on indebtedness, (ii) limitations on
restricted payments, (iii) limitations on dividend and other payment
restrictions affecting restricted subsidiaries, (iv) limitations on the issuance
and sale of capital stock of restricted subsidiaries, (v) limitations on
issuances of guarantees by restricted subsidiaries, (vi) limitations on
transactions with stockholders and affiliates, (vii) limitations on liens,
(viii) limitations on sale-leaseback transactions, and (ix) limitations on asset
sales. The Indenture also provides for the repayment of subordinated debt,
including the subordinated indebtednes to the Parent Companies, prior to
maturity with the net proceeds of any offering of common stock or equivalent
interests of the Company, including the Offering.
INTERCOMPANY SUBORDINATED DEBT
As of November 30, 1998 the Company had outstanding approximately $173.8
million of subordinated indebtedness to the Parent Companies, all of which is
subordinated in right of payment to the Notes. This subordinated indebtedness
bears interest (payable in kind) at an annual rate equal to The Chase Manhattan
Bank's prime lending rate as in effect from time to time and matures on August
15, 2008, one month after the maturity of the Notes. The Chase Manhattan Bank's
prime lending rate was 8.5% throughout the periods from July 1, 1997 through
September 29, 1998, was 8.0% for the period from September 30, 1998 through
November 17, 1998 and is presently 7.75%. Such indebtedness may be declared
immediately due and payable only if the maturity of the Notes is similarly
accelerated. Indebtedness to the Parent Companies was approximately $173.8
million at November 30, 1998. Such indebtedness provides that if any event of
default, or event that with notice or the passage of time would be an event of
default, shall have occurred and be continuing (or if such an event of default
or event would occur upon any payment in respect of such subordinated
indebtedness) with respect to any Senior Debt (as defined therein) (as such
event of default is defined in the documents governing such Senior Debt), no
payment shall be made by the Company with respect to amounts owing under such
subordinated indebtedness. Furthermore, upon any distribution of assets of, or
payments by,
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the Company of any kind or character (whether in cash, property or securities)
to creditors upon any dissolution or winding-up or total or partial liquidation
or reorganization of the Company (whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings), all amounts due or
to become due upon all Senior Debt (including, without limitation, interest
accruing after the filing of a petition under any bankruptcy law at the rate
provided for in the documents governing such Senior Debt, whether or not
allowable as a claim under such bankruptcy law) shall first be paid in full in
cash, or duly provided for, before any payment or distribution is made on
account of any amount owing under such subordinated indebtedness and before the
Company shall, directly or indirectly, prepay, repay, redeem, purchase, exchange
or acquire such subordinated indebtedness. Upon any such dissolution,
winding-up, liquidation or reorganization, any payment or distribution of assets
of, or payments by, the Company of any kind or character (whether in cash,
property or securities) in respect of such subordinated indebtedness to which a
Parent Company would be entitled except for the provisions of such subordinated
indebtedness, shall be paid by the Company or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other person making such payment or
distribution, or by a Parent Company if received by it, directly to the holders
of Senior Debt (pro rata to such holders on the basis of the respective amounts
of Senior Debt then held by such holders) for application to the payment of
Senior Debt remaining unpaid until all such Senior Debt has been paid in full in
cash after giving effect to any concurrent payment, distribution or provision
therefor to or for the holders of such Senior Debt. The Indenture provides that
such subordinated indebtedness may be repaid prior to maturity with the net
proceeds of any offering of common stock or equivalent interests of the Company,
including the Offering. The Company intends to use up to $ million of the
net proceeds of the Offering to repay such subordinated indebtedness to the
Parent Companies.
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 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
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described in the next sentence may not be amended, altered or repealed. Under
the Restated Certificate of Incorporation, the Company may not directly or
indirectly (through a subsidiary or affiliate of the Company) (i) engage in the
business of providing, offering, packaging, marketing, promoting or branding
(alone or jointly with or as an agent for other parties) any Residential
Services or (ii) engage in the business of producing, packaging, distributing,
marketing, hosting, offering, promoting, branding or otherwise providing 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
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.
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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.
CORPORATE OPPORTUNITIES
The Restated Certificate of Incorporation provides that the Existing
Stockholders are not restricted from engaging directly or indirectly in the same
or similar business activities or lines of business as the Company. In the event
that any of the Existing Stockholders acquires knowledge of a potential
transaction or matter that may be a corporate opportunity for any of the
Existing Stockholders and the Company, such corporate opportunity shall be
allocated to the Existing Stockholder if offered to any person who is an
officer, employee or director of the Existing Stockholder and/or the Company,
unless such opportunity is expressly offered to such person primarily in his or
her capacity as an officer, employee or director of the Company. Other than in
accordance herewith, the Existing Stockholders shall have no duty to communicate
or present such corporate opportunity to the Company.
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 DGCL. In addition, the Restated
Certificate of Incorporation provides that 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 Offering
which will have the effect of providing such persons indemnification protection
in the event the Restated Certificate of Incorporation is subsequently amended.
NASDAQ TRADING
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 The Bank of New
York.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF COMMON STOCK
GENERAL
The following is a general discussion of U.S. Federal income and estate tax
consequences of the ownership and disposition of Class A Common Stock by a
holder who is not a United States person (a 'Non-U.S. Holder'), as defined
below. This discussion does not address all aspects of U.S. Federal income and
estate taxes and does not address any foreign, state or local tax consequences.
Furthermore, this discussion is based on provisions of the Internal Revenue Code
of 1986, as amended (the 'Code'), existing, temporary and proposed regulations
promulgated thereunder and administrative and judicial interpretations thereof,
all as in effect or proposed on the date hereof and all of which are subject to
change, possibly with retroactive effect, or different interpretations. Each
prospective purchaser of Class A Common Stock is advised to consult a tax
advisor with respect to current and possible future U.S. Federal income and
estate tax consequences of holding and disposing of Class A Common Stock as well
as any tax consequences that may arise under the laws of any state, local,
foreign or other taxing jurisdiction. For purposes of this summary, a 'Non-U.S.
Holder' is a beneficial owner of the Class A Common Stock that is, for U.S.
Federal income tax purposes, (i) a nonresident individual, (ii) a foreign
corporation, (iii) a nonresident alien fiduciary of a foreign estate or trust or
(iv) a foreign partnership one or more of the members of which is, for U.S.
Federal income tax purposes, a nonresident alien individual, a foreign
corporation or a nonresident alien fiduciary of a foreign estate or trust.
DISTRIBUTIONS
The Company does not anticipate paying cash dividends on the Class A Common
Stock in the foreseeable future. See 'Risk Factors -- Absence of Dividends.' In
the event, however, that dividends are paid on shares of Class A Common Stock,
distributions on the shares of Class A Common Stock (other than distributions in
redemption of the shares of Class A Common Stock subject to section 302(b) of
the Code) will constitute dividends for U.S. Federal income tax purposes to the
extent paid from current or accumulated earnings and profits of the Company (as
determined under U.S. Federal income tax principles). Dividends paid to a
Non-U.S. Holder of Class A Common Stock that are not effectively connected with
a U.S. trade or business of the Non-U.S. Holder will be subject to United States
withholding tax at a 30% rate or such lower rate as may be specified by an
applicable income treaty, provided that the Non-U.S. Holder furnishes the
Company or its paying agent a duly completed Form 1001 or Form W-8BEN (or
substitute form) certifying to its qualification for such reduced treaty rate.
Moreover, under U.S. Treasury regulations which are currently in effect,
withholding is generally imposed on the gross amount of the distribution,
without regard to whether the corporation has sufficient earnings and profits to
cause the distribution to be a dividend for U.S. Federal income tax purposes.
Under the Future Regulations (defined below), withholding on post-December 31,
1999 distributions may be on less than the gross amount of the distribution if
the distribution exceeds a reasonable estimate of accumulated and current
earnings and profits. Provided that the Non-U.S. Holder furnishes the Company or
its paying agent a duly completed Form 4224 or Form W-8ECI (or substitute form)
certifying to such fact, dividends that are effectively connected with the
conduct of a trade or business within the U.S. or, if a tax treaty applies, are
attributable to a U.S. permanent establishment of the Non-U.S. Holder, are
exempt from U.S. Federal withholding tax but are subject to U.S. Federal income
tax on a net income basis at applicable graduated individual or corporate rates.
Any such dividends effectively connected with the conduct of a trade or business
within the U.S. or attributable to a U.S. permanent establishment received by a
foreign corporation may, under certain circumstances, be subject to an
additional 'branch profits tax' at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Under currently effective U.S. Treasury regulations, dividends paid before
January 1, 2000 to an address outside the United States are presumed to be paid
to a resident of such country for purposes of the withholding discussed above,
and, under the current interpretation of United States Treasury regulations, for
purposes of determining the applicability of a tax treaty rate. However, U.S.
Treasury regulations, released on October 6, 1997 (the 'Future Regulations') and
applicable to dividends paid after December 31, 1999 (subject to certain
transition rules), eliminate the presumption and, in the case of dividends paid
after December 31, 1999, a Non-U.S. Holder generally will be subject to U.S.
backup withholding tax at a 31% rate under the backup withholding rules
described below, rather than at a 30% rate or a reduced rate under an income tax
treaty, as described above, unless the Non-U.S. Holder complies with certain
Internal Revenue Service ('IRS')
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certification procedures (or, in the case of payments made outside the U.S. with
respect to an offshore account, certain IRS documentary evidence procedures).
Further, in order to claim the benefit of an applicable tax treaty rate for
dividends paid after December 31, 1999, a Non-U.S. Holder must comply with
certain modified IRS certification requirements. The Future Regulations also
provide special rules for dividend payments made to foreign intermediaries, U.S.
or foreign wholly owned entities that are disregarded for U.S. Federal income
tax purposes and entities that are treated as fiscally transparent in the U.S.,
the applicable income tax treaty jurisdiction, or both. Prospective investors
should consult with their own tax advisers concerning the effect, if any, of the
adoption of the Future Regulations on an investment in the Class A Common Stock.
A Non-U.S. Holder may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder will generally not be subject to U.S. Federal income tax
with respect to gain recognized on a sale or other disposition of Class A Common
Stock unless (i) the gain is effectively connected with a trade or business of
the Non-U.S. Holder in the United States (and, if a tax treaty applies, the gain
is attributable to a U.S. permanent establishment maintained by such Non-U.S.
Holder), (ii) in the case of a Non-U.S. Holder who is an individual and holds
Class A Common Stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of the sale or other disposition
and certain other conditions are met, or (iii) the Company is or has been a
'U.S. real property holding corporation' for U.S. Federal income tax purposes at
any time during the five-year period ending on the date of the disposition, or,
if shorter, the period during which the Non-U.S. Holder held the Class A Common
Stock (the 'applicable period'), and, assuming that the Class A Common Stock is
'regularly traded on an established securities market' for such purposes, the
Non-U.S. Holder owns, actually or constructively, at any time during the
applicable period more than five percent of the Class A Common Stock. The
Company believes that it is not currently a 'U.S. real property holding
corporation' for U.S. Federal income tax purposes. Although the Company
considers it unlikely, based on its current business plans and operations, that
it will become a 'U.S. real property holding corporation,' there can be no
assurance that the Company will not become a 'U.S. real property holding
corporation' in the future.
If a Non-U.S. Holder falls under clause (i) above, he will, unless an
applicable treaty provides otherwise, be taxed on his net gain derived from the
sale under regular graduated U.S. Federal income tax rates. If an individual
Non-U.S. Holder falls under clause (ii) above, he will be subject to a flat 30%
tax on the gain derived from the sale, which may be offset by certain U.S.
capital losses.
If a Non-U.S. Holder that is a foreign corporation falls under (i) above,
in addition to being taxed on its net gain under regular graduated U.S. Federal
income tax rates, it may be subject to an additional branch profits tax equal to
30% of its effectively connected earnings and profits within the meaning of the
Code for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable income tax treaty and duly demonstrates
such qualifications.
FEDERAL ESTATE TAX
Class A Common Stock held by an individual Non-U.S. Holder at the time of
death will be included in such holder's gross estate for U.S. Federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under U.S. Treasury regulations, the Company must report annually to the
IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and
the tax withheld with respect to such dividends. These information reporting
requirements apply even if (i) withholding was not required because the
dividends were effectively connected with a U.S. trade or business in the United
States of the Non-U.S. Holder or (ii) withholding was reduced or eliminated by
an applicable income tax treaty. Copies of the information returns reporting
such dividends and withholding may also be made available to the tax authorities
in the country in which the Non-U.S. Holder resides under the provisions of an
applicable income tax treaty.
Under currently effective Treasury regulations, backup withholding (which
generally is a withholding tax imposed at the rate of 31% on certain payments to
persons that fail to furnish certain information under the
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United States information reporting requirements) generally will not apply to
dividends paid to Non-U.S. Holders that either are subject to the U.S.
withholding tax, whether at 30% or a reduced treaty rate, or that are exempt
from such withholding because such dividends constitute effectively connected
income. See discussion under 'Distributions' above for rules regarding Future
Regulations reporting requirements to avoid backup withholding.
As a general matter, information reporting and backup withholding will not
apply to a payment by or through a foreign office of a foreign broker of the
proceeds of a sale of Class A Common Stock effected outside the U.S. However,
information reporting requirements (but not backup withholding) will apply to a
payment by or through a foreign office of a broker of the proceeds of a sale of
Class A Common Stock effected outside the U.S. where that broker (i) is a U.S.
person, (ii) is 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 U.S., (iii)
is a 'controlled foreign corporation' as defined in the Code, or (iv) (for
payments made after December 31, 1999) is of a foreign partnership with certain
U.S. connections, unless the broker has documentary evidence in its records that
the holder is a Non-U.S. Holder and certain conditions are met or the holder
otherwise establishes an exemption. Payment by a U.S. office of a broker of the
proceeds of a sale of Class A Common Stock is subject to both backup withholding
and information reporting unless the holder certifies to the payor in the manner
required as to its non-U.S. status under penalties of perjury or otherwise
establishes an exemption.
Amounts withheld under the backup withholding rules do not constitute a
separate U.S. Federal income tax. Rather, any amounts withheld under the backup
withholding rules will be refunded or allowed as a credit against the holder's
U.S. Federal income tax liability, if any, provided the required information or
appropriate claim for refund is filed with the IRS.
THE FOREGOING DISCUSSION IS A SUMMARY OF CERTAIN U.S. FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF THE CLASS
A COMMON STOCK BY NON-U.S. HOLDERS. ACCORDINGLY, INVESTORS ARE URGED TO CONSULT
WITH THEIR TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES
OF THE OWNERSHIP AND DISPOSITION OF CLASS A COMMON STOCK INCLUDING THE
APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING
JURISDICTION.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be shares of Class A Common
Stock outstanding and shares of Class B Common Stock outstanding (all of
which are convertible into Class A Common Stock on a share for share basis). The
Company has reserved for issuance shares (subject to adjustment based on
the size of the Offering) of Class A Common Stock upon the exercise of stock
options of which are outstanding as a result of Newco's assumption of TWT
LLC's outstanding options in connection with the Reconstitution.
Each of the Company, its directors and executive officers and the Existing
Stockholders has agreed that, subject to certain exceptions, without the prior
written consent of Morgan Stanley & Co. Incorporated, it will not, during the
period ending 180 days after the date of this Prospectus, offer, pledge, sell,
contract to sell or otherwise transfer, lend or dispose of, directly or
indirectly, any shares of Class A Common Stock or any securities convertible
into or exercisable or exchangeable for shares of Class A Common Stock. See
'Underwriters.' Thereafter, no assurance can be given that other holders of the
Class B Common Stock will not decide, based upon then prevailing market and
other conditions, to convert their Class B Common Stock to Class A Common Stock
and to dispose of all or a portion of such stock pursuant to the provisions of
Rule 144 under the Securities Act or pursuant to the demand registration rights
contained in the Stockholders' Agreement. See 'Certain Relationships and Related
Transactions -- Stockholders Agreement.'
Prior to the Offering, there has been no established market for the Class A
Common Stock, and no predictions can be made about the effect, if any, that
market sales of shares of Class A Common Stock or the availability of such
shares for sale would have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of Class A Common Stock in the public
market, or the perception that such sales could occur, may have an adverse
impact on the market price for the shares of Class A Common Stock offered hereby
or on the ability of the Company to raise capital through a public offering of
its equity securities. See 'Risk Factors -- Shares Eligible for Future Sale.'
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UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the 'Underwriting Agreement'), the U.S.
Underwriters named below for whom Morgan Stanley & Co. Incorporated and Lehman
Brothers Inc. are acting as U.S. Representatives, and the International
Underwriters named below whom Morgan Stanley & Co. International Limited and
Lehman Brothers International (Europe) are acting as International
Representatives have severally agreed to purchase, and the Company has agreed to
sell to them, severally, the respective number of shares of Class A Common Stock
set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ----------------------------------------------------------------------------------- ----------------
<S> <C>
U.S. Underwriters
Morgan Stanley & Co. Incorporated.............................................
Lehman Brothers Inc...........................................................
------
Subtotal.................................................................
------
International Underwriters
Morgan Stanley & Co. International Limited....................................
Lehman Brothers International (Europe)........................................
------
Subtotal.................................................................
------
Total....................................................................
------
------
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the 'Underwriters' and the 'Representatives,' respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Class A Common Stock 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 shares of Class A Common Stock offered hereby (other than those covered
by the U.S. Underwriters' over-allotment option described below) if any such
shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined) for the account of anyone other
than a United States or Canadian Person (as defined) and (ii) it has not offered
or sold, and will not offer or sell, directly or indirectly, any Shares or
distribute any prospectus relating to the Shares outside the United States or
Canada or to anyone other than a United States or Canadian Person. Pursuant to
the Agreement between U.S. and International Underwriters, each International
Underwriter has represented and agreed that, with certain exceptions: (i) it is
not purchasing any Shares for the account of any United States or Canadian
Person and (ii) it has not offered or sold, and will not offer or sell, directly
or indirectly, any Shares or distribute any prospectus relating to the Shares in
the United States or Canada or to any United States or Canadian Person. With
respect to any Underwriter that is a U.S. Underwriter and an International
Underwriter, the foregoing representations and agreements (i) made by it in its
capacity as a U.S. Underwriter apply only to it in its capacity as a U.S.
Underwriter and (ii) made by it in its capacity as an International Underwriter
apply only to it in its capacity as an International Underwriter. The foregoing
limitations do not apply to stabilization transactions or to certain other
transactions specified in the Agreement between U.S. and International
Underwriters. As used herein, 'United States or Canadian Person' means any
national or resident of the United States or Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or of any political subdivision thereof (other
than a branch located outside the United States and Canada of any United States
or Canadian Person), and includes any United States or Canadian branch of a
person who is otherwise not a United States or Canadian Person. All shares of
Class A Common Stock to be purchased by the Underwriters under the Underwriting
Agreement are referred to herein as the 'Shares.'
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of Shares as may be mutually agreed. The per share price of any
Shares sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per share
amount of the concession to dealers set forth below.
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<PAGE>
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada or to, for the benefit of, any resident of any province or
territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such Shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the closing date for the sale of
the Shares to the International Underwriters, will not offer or sell, any Shares
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on and will only
issue or pass on in the United Kingdom any document received by it in connection
with the offering of the Shares to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom such document may otherwise
lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that is has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
International Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing such
Shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such Shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese International Underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law, and that
such dealer will send to any other dealer to whom it sells any of such Shares a
notice containing substantially the same statement as is contained in this
sentence.
The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ a share to other Underwriters or to certain dealers. After the initial
offering of the shares of Class A Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of additional shares of Class A
Common Stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The U.S. Underwriters may exercise
such option to purchase solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of Class A Common Stock
offered hereby. To the extent such option is exercised, each U.S. Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares of
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Class A Common Stock as the number set forth next to such U.S. Underwriter's
name in the preceding table bears to the total number of shares of Class A
Common Stock set forth next to the names of all U.S. Underwriters in the
preceding table. If the U.S. Underwriters' option is exercised in full, the
total price to the public would be $ , the total underwriters'
discounts and commissions would be $ and total proceeds to the Company
would be $ .
The Class A Common Stock is expected to be approved for quotation, subject
to official notice of issuance, on the Nasdaq National Market under the symbol
'TWTC.'
Each of the Company and the directors, executive officers and certain other
stockholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not
during the period ending 180 days after the date of this Prospectus (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock; provided that such shares or securities
are either now owned by such party or are hereafter acquired prior to or in
connection with the Offering of the shares of Class A Common Stock offered
hereby) or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the shares of Class A Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Class A Common Stock or
such other securities, in cash or otherwise, other than (x) the sale of Shares
to the Underwriters and (y) the issuance by the Company of (1) shares of Class A
Common Stock upon the exercise of an option or a warrant or the conversion of a
security outstanding on the date of this Prospectus and (2) grants from time to
time of stock options and other incentive compensation pursuant to the 1998
Option Plan.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A Common Stock offered by them.
In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the Class
A Common Stock. Specifically, the Underwriters may over-allot in connection with
the Offering, creating a short position in the Class A Common Stock for their
own account. In addition, to cover over-allotments or to stabilize the price of
the Class A Common Stock, the Underwriters may bid for, and purchase, shares of
Class A Common Stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Class A Common Stock in the Offering, if the syndicate
repurchases previously distributed Class A Common Stock 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 Class A
Common Stock above independent market levels. The Underwriters are not required
to engage in these activities, and may end any of these activities at any time.
At the request of the Company, the Underwriters have reserved up to
shares of Class A Common Stock for sale at the initial public offering price to
the Company's employees, officers and directors and to other individuals having
relationships with the Company. The Company will pay all fees and disbursements
of counsel incurred by the Underwriters in connection with offering the shares
to such persons. The number of shares available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the Underwriters
to the general public on the same basis as the other shares offered hereby.
Reserved shares purchased by such individuals will, except as restricted by
applicable securities laws, be available for resale following the Offering.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
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.
Prior to the Offering, there has been no public market for the shares of
Class A Common Stock of the Company. Consequently, the initial public offering
price for the Class A Common Stock will be determined by negotiation between the
Company and the U.S. and International Representatives of the Underwriters.
Among the factors to be considered in determining the initial public offering
price will be the Company's record of operations, the Company's current
financial condition and future prospects, the experience of its management,
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<PAGE>
the economics of its industry in general, the general condition of the equity
securities market and the market prices of similar securities of companies
considered comparable to the Company and other factors deemed relevant. There
can be no assurance that a regular trading market for the shares of Class A
Common Stock will develop after the Offering or, if developed, that a public
trading market can be sustained. There can also be no assurance that the prices
at which the Class A Common Stock will sell in the public market after the
Offering will not be lower than the price at which it is issued by the
Underwriters in the Offering.
LEGAL MATTERS
The legality of the Class A Common Stock 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.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-1
under the Securities Act with respect to the Class A Common Stock being offered
in the 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 currently subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
periodic reports, 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 shares of Class A
Common Stock 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.
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<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 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.
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FDMA (Frequency Division Multiple Access). A form of wireless
communications technology.
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.
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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.'
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
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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.
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 DS0. One voice grade equivalent
circuit is equal to 64 kilobits of bandwidth.
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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
Unaudited Financial Statements:
Combined Balance Sheet at September 30, 1998 and December 31, 1997.................................... F-16
Combined Statement of Operations for the nine months ended September 30, 1998 and 1997................ F-17
Combined Statement of Cash Flows for the nine months ended September 30, 1998 and 1997................ F-18
Combined Statement of Changes in Stockholders' Equity for the nine months ended
September 30, 1998.................................................................................. F-19
Notes to Combined Financial Statements................................................................ F-20
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of TIME WARNER TELECOM INC.
We have audited the accompanying combined balance sheets 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. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
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 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.
/s/ ERNST & YOUNG LLP
Denver, Colorado
March 13, 1998,
except for Notes 1, 4, 5, 6, and 8 as to
which the date is __________, 1999
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 limited liability company to a corporation.
/s/ ERNST & YOUNG LLP
Denver, Colorado
January 20, 1999
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
Other current liabilities............................................................ 29,304 17,793
-------- --------
Total current liabilities....................................................... 62,212 45,415
Subordinated loans payable to the Parent Companies (including $1,544 of accrued
interest)............................................................................... 75,475 --
Other liabilities......................................................................... -- 1,128
Stockholders' equity
Class A common stock, $ par value, shares authorized, no shares outstanding -- --
Class B common stock, $ par value, shares authorized, shares
outstanding
Contributed 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)
======== ======== ========
Basic and diluted loss per common share....................................... $ $ $
======== ======== ========
Average common shares.........................................................
======== ======== ========
(a) Includes expenses resulting from transactions with affiliates (Note 8):
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 losses 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 investments.......................................... 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 YEAR.................................. -- -- --
--------- --------- ---------
CASH AND EQUIVALENTS AT END OF YEAR........................................ $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
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>
CLASS B TOTAL
COMMON CONTRIBUTED ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
-------- ----------- ----------- --------------
(THOUSANDS)
<S> <C> <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
(collectively, 'Time Warner') and the Time Warner Entertainment-Advance/Newhouse
Partnership ('TWE-A/N') that were acquired or formed in 1995, as well as the
pre-existing commercial telecommunication operations of TWE (collectively, TWE,
TWE-A/N and Time Warner are referred to herein as the 'Parent Companies').
In July 1998, the Company completed a reorganization (the 'Reorganization')
under which the Parent Companies contributed all of the assets and liabilities
of the Company into Time Warner Telecom LLC ('TWT LLC') and in connection
therewith, Time Warner, MediaOne of Colorado, Inc. ('MediaOne') and
Advance/Newhouse Partnership ('A/N') and together with TW and MediaOne, the
('Existing Stockholders') received all of the limited liability company
interests in TWT LLC. On , 1999, TWT LLC was reconstituted as a
corporation through the merger of TWT LLC with and into the Company (the
'Reconstitution'). In connection with the Reconstitution, the Company's
capitalization was authorized to include two classes of common stock, Class A
Common Stock and Class B Common Stock and the Existing Stockholders exchanged
their respective limited liability company interests for all of the outstanding
shares of Class B Common Stock. Following the Reconstitution, Time Warner,
MediaOne and A/N held 61.95%, 18.88% and 19.17%, respectively, of the Class B
Common Stock. Accordingly, the accompanying combined financial statements have
been adjusted to retroactively reflect the authorization of the shares of
Class A Common Stock and the authorization and issuance of shares of Class B
Common Stock for all periods.
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, long distance carriers ('IXCs')
and internet service providers ('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 telecommunications 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 8), which management
believes results in reasonable allocations of such costs.
The combined financial statements also include the contribution of A/N's
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.
F-7
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
RECENT PRONOUNCEMENTS
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.
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 adopted 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 COMBINATION AND 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 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.
F-8
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 6).
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 long-term 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
F-9
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
INCOME TAXES
Had the Company been operating as a corporation on a stand-alone basis,
income tax benefits would not have been provided in the accompanying combined
statement of operations because such benefits would 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.
Basic loss per common share is based upon the net loss applicable to common
shares and the weighted average of common shares outstanding during the period.
Diluted loss per common share adjusts for the effect of stock options only in
the periods presented in which such effect would have been dilutive. As all of
the Company's stock options are antidilutive and none of the stock options have
nominal exercise prices, basic and diluted earnings per share are the same for
all periods presented herein.
In connection with the Reconstitution of the Company that occurred in
1999, the Company was authorized to issue two new classes of common stock,
Class A Common Stock and Class B Common Stock. Accordingly, the accompanying
combined financial statements have been adjusted to retroactively reflect the
authorization of the shares of Class A Common Stock and the authorization and
issuance of shares of Class B Common Stock for all periods.
2. MERGERS AND ACQUISITIONS
On April 1, 1995, in connection with the formation of TWE-A/N, 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 combined 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.
F-10
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 MediaOne, which, through certain
subsidiaries, are partners in TWE. The assets and liabilities of the Company
were also beneficially owned by A/N through TWE-A/N. Time Warner and certain of
its subsidiaries, MediaOne and certain of its subsidiaries and A/N are
collectively referred to herein as the 'Existing Stockholders'.
In July 1998, the Company completed the Reorganization under which the
Parent Companies contributed all of the assets and liabilities of the Company to
TWT LLC and in connection therewith, the Existing Stockholders received all of
the limited liability company interests in TWT LLC. In 1999, TWT LLC
was reconstituted as a corporation through the Reconstitution. In connection
with the Reconstitution, the Company's capitalization was authorized to issue
two classes of common stock, Class A Common Stock and Class B Common Stock and
the Existing Stockholders exchanged their respective limited liability company
interests for all of the outstanding shares of the Class B Common Stock.
Following the Reconstitution, Time Warner, MediaOne and A/N held 61.95%, 18.88%
and 19.17%, respectively, of the Class B Common Stock. Accordingly, the
accompanying combined financial statements have been adjusted to retroactively
reflect the authorization of the shares of Class A Common Stock and the
authorization and issuance of shares of Class B Common Stock for all periods.
Shares of Class A Common Stock and Class B Common Stock are 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 a
class.
5. STOCK OPTION PLANS
Time Warner and MediaOne have various stock option plans under which
options to purchase Time Warner or MediaOne common stock may be granted to
employees of the Company. Such options have been granted to employees of the
Company at fair market value at the date of grant. Accordingly, in accordance
with Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to
Employees' and related interpretations, no compensation cost has been recognized
by Time Warner and MediaOne, nor charged to the Company, related to such stock
option plans. Generally, the options become exercisable over a three-year
vesting period and expire ten years from the date of grant. Had compensation
cost for Time Warner's and MediaOne's stock option plans been determined based
on the fair value at the grant dates for all awards made subsequent to 1994
consistent with the method set forth under FASB Statement No. 123, 'Accounting
for Stock-Based Compensation'
F-11
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
('FAS 123'), the Company's allocable share of compensation cost would have
increased its net loss to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Net loss:
As reported..................................................... $(70,656) $(86,116) $(51,105)
-------- -------- --------
-------- -------- --------
Pro forma....................................................... $(71,228) $(86,500) $(51,198)
-------- -------- --------
-------- -------- --------
Net loss per common share:
As reported..................................................... $ $ $
-------- -------- --------
-------- -------- --------
Pro forma....................................................... $ $ $
-------- -------- --------
-------- -------- --------
</TABLE>
FAS 123 is applicable only to stock options granted subsequent to December
31, 1994. Accordingly, since the Company's compensation expense associated with
such grants would generally be recognized over a three-year vesting period, the
initial impact of applying FAS 123 on pro forma net income for 1996 and 1995 is
not comparable to the impact on pro forma net income for 1997, when the pro
forma effects of the three-year vesting period has been fully reflected.
For purposes of applying FAS 123, the fair value of each option grant by
Time Warner and MediaOne is estimated on the date of grant using the
Black-Scholes option-pricing model. With regard to grants of Time Warner stock
options to the Company's employees in 1997, 1996 and 1995, weighted average
assumptions consisted of: dividend yields of 1% in all periods; expected
volatility of 21.9%, 21.7% and 22.3%, respectively; risk-free interest rates of
6.6%, 6.1% and 6.4%, respectively; and expected lives of 5 years in all periods.
The weighted average fair value of a Time Warner stock option granted to the
Company's employees during the year was $6.48, $6.09 and $5.61 for the years
ended December 31, 1997, 1996 and 1995, respectively. In 1997, MediaOne granted
options to an executive of the Company. The weighted average fair value of a
MediaOne stock option was $7.43, based on the following weighted average
assumptions: no dividend yield; expected volatility of 30%; risk-free interest
rate of 6.8%; and an expected life of 5 years.
A summary of stock option activity with respect to employees of the Company
is as follows:
<TABLE>
<CAPTION>
TIME WARNER MEDIAONE
----------------------------- -----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995................. 155,400 $18.30 -- $ --
Granted............................... 108,950 18.93 -- --
Exercised............................. -- -- -- --
Cancelled (a)......................... -- -- -- --
--------- ---------
Balance at December 31, 1995............... 264,350 $18.56 -- $ --
Granted............................... 113,500 21.32 -- --
Exercised............................. (1,268) 17.69 -- --
Cancelled (a)......................... (13,932) 20.32 -- --
--------- ---------
Balance at December 31, 1996............... 362,650 $19.35 -- $ --
Granted............................... 74,800 21.78 5,350 19.00
Exercised............................. (3,500) 18.88 -- --
Cancelled (a)......................... (19,500) 20.49 -- --
--------- ---------
Balance at December 31, 1997............... 414,450 $19.74 5,350 $19.00
--------- ---------
--------- ---------
</TABLE>
- ------------
(a) Includes all options cancelled and forfeited during the year.
F-12
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The number of exercisable options held by employees of the Company is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Time Warner stock options................................................. 121,433 70,408 33,940
MediaOne stock options.................................................... -- -- --
</TABLE>
6. SUBORDINATED LOANS PAYABLE TO THE PARENT COMPANIES
Effective July 1, 1997 through July 14, 1998, all of the Company's
financing requirements were funded with subordinated loans from the Parent
Companies. These loans bear interest (payable in kind) at The Chase Manhattan
Bank's prime rate which was 8.5% at December 31, 1997. Effective with the
Reorganization, the maturity of these loans was extended until 2008. Interest
expense relating to these loans totaled approximately $1.5 million in 1997.
7. 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 MediaOne, 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.
8. 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 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 includes consulting charges from
MediaOne, 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
MediaOne 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
F-13
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Effective July 1, 1997 through July 14, 1998, all of the Company's
financing requirements were funded with loans from the Parent Companies.
Interest expense relating to these loans totaled approximately $1.5 million in
1997.
9. 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.
10. 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
F-14
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
additional fiber optic capacity from TW Cable could materially affect the
Company's future business and operations.
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.
11. 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>
F-15
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
(THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents...................................................... $ 203,258 $ --
Marketable securities.......................................................... 188,430 --
Receivables, less allowances of $1,644 and $776................................ 25,885 8,882
Prepaid expenses............................................................... 1,727 1,192
------------- ------------
Total current assets................................................. 419,300 10,074
Investments in unconsolidated affiliates............................................ 5,564 4,376
Property, plant and equipment....................................................... 570,149 484,206
Less: accumulated depreciation...................................................... (105,160) (69,048)
------------- ------------
464,989 415,158
Intangible assets, net......................................................... 20,340 8,469
------------- ------------
Total assets.............................................................. $ 910,193 $438,077
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................... $ 50,677 $ 32,908
Other current liabilities...................................................... 55,942 29,304
------------- ------------
Total current liabilities............................................ 106,619 62,212
Long term debt...................................................................... 400,000 --
Subordinated loans payable to the Parent Companies (including $8,146 and $1,544 of
accrued interest, respectively)................................................... 171,597 75,475
Stockholders' equity
Class A common stock, $ par value, shares authorized,
no shares outstanding -- --
Class B common stock, $ par value, shares authorized,
shares outstanding
Contributed capital............................................................ 555,807 555,807
Accumulated deficit prior to Reorganization.................................... (299,340) --
------------- ------------
Total Class B interests.............................................. 256,467 555,807
Accumulated deficit............................................................ (24,490) (255,417)
------------- ------------
Total stockholders' equity........................................... 231,977 300,390
------------- ------------
Total liabilities and stockholders' equity........................... $ 910,193 $438,077
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
F-16
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------------
1998 1997
-------- --------
(UNAUDITED)
(THOUSANDS)
<S> <C> <C>
Revenues:
Dedicated transport services.......................................................... $ 57,871 $ 29,742
Switched services..................................................................... 23,910 7,015
-------- --------
Total revenues................................................................... 81,781 36,757
-------- --------
Costs and expenses:
Operating (a)......................................................................... 46,341 28,050
Selling, general and administrative (a)............................................... 55,294 39,000
Depreciation and amortization (a)..................................................... 36,804 27,866
-------- --------
Total costs and expenses......................................................... 138,439 94,916
-------- --------
Operating loss............................................................................. (56,658) (58,159)
Gain on disposition of investments......................................................... -- 11,018
Equity in losses of unconsolidated affiliates.............................................. (16) (1,722)
Interest income............................................................................ 4,069 --
Interest expense, net (a).................................................................. (15,808) (359)
-------- --------
Net loss................................................................................... $(68,413) $(49,222)
-------- --------
-------- --------
Basic and diluted loss per common share....................................................
Average common shares......................................................................
(a) Includes expenses resulting from transactions with affiliates (Note 4):
Operating expenses.................................................................... $ 1,534 $ 1,299
-------- --------
-------- --------
Selling, general and administrative................................................... $ 3,882 $ 5,615
-------- --------
-------- --------
Depreciation and amortization......................................................... $ 6,705 $ 5,216
-------- --------
-------- --------
Interest expense, net................................................................. $ 8,146 $ 302
-------- --------
-------- --------
</TABLE>
See accompanying notes.
F-17
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
--------- --------
(UNAUDITED)
(THOUSANDS)
<S> <C> <C>
OPERATIONS
Net loss................................................................................. $ (68,413) $(49,222)
Adjustments for noncash and nonoperating items:
Gain on disposition of investments....................................................... -- (11,018)
Depreciation and amortization............................................................ 36,805 27,866
Equity in losses of unconsolidated affiliates............................................ 16 1,722
Changes in operating assets and liabilities:
Accounts receivable and other current assets........................................ (17,538) (3,749)
Accounts payable and other current liabilities...................................... 52,551 (3,228)
Other balance sheet changes......................................................... (94) (1,607)
--------- --------
Cash provided (used) by operations....................................................... 3,327 (39,236)
--------- --------
INVESTING ACTIVITIES
Capital expenditures..................................................................... (87,116) (72,964)
Proceeds from sale of investment......................................................... -- 7,028
Purchases of marketable securities....................................................... (188,430)
--------- --------
Cash used in investing activities........................................................ (275,546) (65,936)
--------- --------
FINANCING ACTIVITIES
Net proceeds from loans from the Parent Companies........................................ 87,977 27,503
Net capital contributions from the Parent Companies...................................... -- 77,669
Net proceeds from debt offering.......................................................... 387,500 --
--------- --------
Cash provided by financing activities.................................................... 475,477 105,172
--------- --------
INCREASE IN CASH AND EQUIVALENTS......................................................... 203,258 --
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.............................................. -- --
--------- --------
CASH AND EQUIVALENTS AT END OF PERIOD.................................................... $ 203,258 $ --
--------- --------
--------- --------
</TABLE>
See accompanying notes.
F-18
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS B TOTAL
COMMON CONTRIBUTED ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
---------- ----------- ----------- -------------
(UNAUDITED)
(THOUSANDS)
<S> <C> <C> <C> <C>
Balance at December 31, 1997............................. $ 555,807 $(255,417) $ 300,390
Net loss prior to Reorganization......................... -- (43,923) (43,923)
---------- ----------- ----------- -------------
555,807 (299,340) 256,467
Effect of Reorganization................................. (299,340) 299,340 --
Net loss after Reorganization............................ -- (24,490) $ (24,490)
---------- ----------- ----------- -------------
BALANCE AT SEPTEMBER 30, 1998............................ $ 256,467 $ (24,490) $ 231,977
========== =========== =========== =============
</TABLE>
See accompanying notes.
F-19
<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
(collectively, 'Time Warner') and the Time Warner Entertainment-Advance/Newhouse
Partnership ('TWE-A/N') that were acquired or formed in 1995, as well as the
pre-existing commercial telecommunication operations of TWE (collectively, TWE,
TWE-A/N and Time Warner are referred to herein as the 'Parent Companies').
In July 1998, the Company completed a reorganization (the 'Reorganization')
under which the Parent Companies contributed all of the assets and liabilities
of the Company to Time Warner Telecom LLC ('TWT LLC') and in connection
therewith, Time Warner, MediaOne of Colorado, Inc. ('MediaOne') and
Advance/Newhouse Partnership ('A/N'), and together with TW and MediaOne, the
('Existing Stockholders') received all of the limited liability company
interests in TWT LLC. In , 1999, TWT LLC was reconstituted as a
corporation through the merger of TWT LLC with and into the Company (the
'Reconstitution'). In connection with the Reconstitution, the Company's
capitalization was authorized to issue two classes of common stock, Class A
Common Stock and Class B Common Stock and the Existing Stockholders exchanged
their respective limited liability company interests for all of the outstanding
shares of Class B Common Stock. Following the Reconstitution, Time Warner,
MediaOne and A/N held 61.95%, 18.88% and 19.17%, respectively, of the Class B
Common Stock. Accordingly, the accompanying combined financial statements have
been adjusted to retroactively reflect the authorization of the shares of
Class A Common Stock and the authorization and issuance of shares of Class B
Common Stock for all periods.
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, long distance carriers ('IXCs')
and Internet service providers ('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 September 30, 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 4), 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
F-20
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
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.
Certain reclassifications have been made to the September 30, 1998
financial statements included herein, which were not included in the financial
statements previously filed by the Company. These reclassifications are intended
to provide increased disclosure regarding the Company's marketable securities
investments.
RECENT PRONOUNCEMENTS
During fiscal 1997, the Financial Accounting Standard Board ('FASB') issued
Statement No. 131, 'Disclosures about Segments of an Enterprise and Related
Information' ('FAS 131'). 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 this standard on the
Company's financial statements is not expected to be
material.
In June 1998, the FASB issued Statement No. 133, 'Accounting for Derivative
Instruments and Hedging Activities' ('FAS 133'), effective for years beginning
after June 15, 1999, with early application encouraged. The new rules establish
standards requiring that all derivative financial instruments, such as interest
rate swap contract and foreign exchange contracts, be recognized and measured at
fair market value regardless of the purpose or intent for holding them. The
Company does not hold any derivative financial instruments.
CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
The Company did not historically maintain any cash or marketable securities
since all funding of the Company's operating, investing and financing activities
were provided by the Parent Companies or by subordinated loans payable to the
Parent Companies (Note 3). This funding consisted of non-interest bearing
capital contributions through June 30, 1997 and subordinated loans during the
period from July 1, 1997 through July 14, 1998. 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 nine months
ended September 30, 1997. The subordinated loans, including accrued interest,
have been reflected as long-term liabilities in the accompanying balance sheets.
Cash, cash equivalents and marketable securities totaling $391.7 million at
September 30, 1998 were principally purchased from the proceeds of the Company's
offering of 9 3/4% Senior Notes due 2008 (see Note 5).
The Company considers all highly liquid debt instruments with an original
maturity of three months or less, when purchased, to be cash equivalents.
The Company records its marketable securities in conformity with the
provisions of Statement of Financial Accounting Standards No. 115, 'Accounting
for Certain Investments in Debt and Equity Securities.' This statement entails
categorizing all debt and equity securities as held-to-maturity securities,
trading securities, or available-for-sale securities, and then measuring the
securities at either fair value or amortized cost.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Interest on securities classified
as held-to-maturity is included in investment income.
At September 30, 1998, the Company's marketable securities portfolio
consisted of shares of money market mutual funds, corporate debt securities,
certificates of deposit with banks, and foreign government debt securities. At
September 30, 1998, all of the Company's marketable securities were categorized
as 'held-to-maturity' and carried at amortized cost.
F-21
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
Marketable securities at September 30, 1998 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Cash Equivalents:
Shares of money market mutual funds............... $ 5,396 $ -- $ -- $ 5,396
Certificates of deposit with banks................ 20,000 -- -- 20,000
Corporate debt securities......................... 177,862 28 1 177,889
--------- ---------- --- ---------
203,258 28 1 203,285
Current Marketable Securities:
Certificates of deposit with banks................ 51,981 37 -- 52,018
Corporate debt securities......................... 131,437 151 15 131,573
Foreign government debt securities................ 5,012 -- 5 5,007
--------- ---------- --- ---------
188,430 188 20 188,598
--------- ---------- --- ---------
Total.................................................. $ 391,688 $216 $ 21 $ 391,883
--------- ---------- --- ---------
--------- ---------- --- ---------
</TABLE>
The amortized cost and estimated fair value of held-to-maturity marketable
securities at September 30, 1998, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less............................................... $ 391,688 $ 391,883
--------- ---------
Total debt related marketable securities.............................. $ 391,688 $ 391,883
--------- ---------
--------- ---------
</TABLE>
2. STOCKHOLDERS' EQUITY
On July 14, 1998, the Company completed the Reorganization, under which the
Parent Companies contributed all of the assets and liabilities of the Company to
TWT LLC and in connection therewith, the Existing Stockholders received all of
the limited liability company interests in TWT LLC. The Reorganization has been
reflected as of July 1, 1998 for accounting purposes. In 1999, the
Company completed the Reconstitution, under which the Company's capitalization
was authorized to issue two classes of common stock, Class A Common Stock and
Class B Common Stock. In connection with the Reconstitution, the Existing
Stockholders exchanged their respective limited liability company interests for
all of the outstanding shares of the Class B Common Stock. Following the
Reconstitution, Time Warner, MediaOne and A/N held 61.95%, 18.88% and 19.17%,
respectively, of the Class B Common Stock.
Shares of Class A Common Stock and Class B Common Stock are 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 a
class.
In August 1998, options to purchase Class A limited liability interests of
TWT LLC representing % of the equity of TWT LLC, which is equivalent to
shares of Class A Common Stock of the Company, were granted to employees of
the Company under the TWT LLC 1998 Option Plan (the 'TWT LLC Option Plan').
In connection with the Reconstitution, the Board of Directors and
stockholders of the Company are expected to assume the obligations under the TWT
LLC Option Plan, amend such Plan and rename it the 1998 Option Plan. In
addition, the Company will assume options previously awarded by TWT LLC that
were exercisable for units of Class A limited liability company interests (each,
'a unit') in TWT LLC. Such assumed option awards will be adjusted in connection
with the Reconstitution such that an option exercisable for $12 per
F-22
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
unit will become exercisable for shares of Class A Common Stock at $ per
share. The 1998 Option Plan is expected to provide for the granting of options
to purchase a maximum of shares of the Company's Class A Common Stock.
Generally, stock options issued under the 1998 Option Plan are expected to
become exercisable over a four-year vesting period and expire ten years from the
date of grant. In addition, the purchase price of the shares of Class A Common
Stock covered by each stock option is not expected to be less than the fair
market value of the Class A Common Stock on the date of grant.
3. SUBORDINATED LOANS PAYABLE TO THE PARENT COMPANIES
Effective July 1, 1997 through July 14, 1998, all of the Company's
financing requirements were funded with subordinated loans from the Parent
Companies. These loans bear interest (payable in kind) at The Chase Manhattan
Bank's prime rate which was 8.5% throughout the period from July 1, 1997 through
September 29, 1998 and mature on August 15, 2008. The prime rate was 8.25% on
September 30, 1998. The Parent Companies do not have any obligation to make
additional equity investments in or loans to the Company. Interest expense
relating to these loans totaled approximately $3.4 million and $8.1 million for
the three and nine months ended September 30, 1998, respectively.
4. 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 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 $1.7
million and $3.8 million for the nine months ended September 30, 1998 and 1997,
respectively.
The Company participates in the Time Warner Cable Pension Plan (the
'Pension Plan'), a noncontributory defined benefit pension plan which covers
approximately 90% of all employees. The remaining 10% of employees are
participating in a pension plan under the administration of MediaOne, 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 costs relating to the Pension Plan were
$973,000 and $825,000 for the nine months ended September 30, 1998 and 1997,
respectively. Relating to the MediaOne pension plan, pension costs were
approximately $484,000 and $447,000 for the nine months ended September 30, 1998
and 1997, respectively.
The Company's contributions of 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 $699,000
and $526,000 for the nine months ended September 30, 1998 and 1997,
respectively.
As of January 1, 1999, the Company will not participate in the Time Warner
Cable Pension Plan, the MediaOne Pension Plan or the Time Warner Cable Employee
Savings Plan, as the Company intends to adopt its own benefit plans.
The Company licenses the right to use the majority of its fiber optic cable
from TW Cable. The Company paid TW Cable approximately $9.3 million and $12.0
million for the nine months ended September 30, 1998 and 1997, respectively, and
such costs have been capitalized by the Company. The amortization of these costs
and fiber previously capitalized in the amount of approximately $6.7 million and
$5.2 million for the nine
F-23
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
months ended September 30, 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 $1.5 million and $1.3 million for the nine months ended
September 30, 1998 and 1997, respectively.
Effective July 1, 1997 through July 14, 1998, all of the Company's
financing requirements were funded with subordinated loans from the Parent
Companies. Interest expense relating to these loans totaled approximately $8.1
million for the nine months ended September 30, 1998.
5. LONG TERM DEBT
On July 21, 1998, the Company issued $400.0 million of 9 3/4% Senior Notes
('Notes') due July 15, 2008. The Notes are unsecured, unsubordinated obligations
of the Company and Time Warner Telecom Inc., a wholly owned subsidiary of the
Company, which are jointly and severally liable, fully and unconditionally, with
respect to the Notes. Interest on the Notes is payable semiannually on January
15 and July 15, beginning January 15, 1999. The net proceeds of approximately
$387.5 million are expected to be used to expand and develop existing and new
networks and for general corporate and working capital purposes through the
second quarter of 2000. The proceeds were immediately invested in short-term
investments. Interest expense relating to the Notes totaled approximately $7.6
million for the nine months ended September 30, 1998. Interest income earned on
the short term investments totaled $4.1 million for the nine months ended
September 30, 1998.
6. COMMITMENTS AND CONTINGENCIES
Pending legal proceedings are substantially limited to litigation
incidential 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.
F-24
<PAGE>
<PAGE>
[Logo]
<PAGE>
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JANUARY 20, 1999
SHARES
[LOGO]
TIME WARNER TELECOM INC.
CLASS A COMMON STOCK
------------------------
TIME WARNER TELECOM INC. IS OFFERING SHARES OF ITS CLASS A COMMON STOCK.
THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR
OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE
BETWEEN $ AND $ PER
SHARE.
TIME WARNER TELECOM INC. HAS TWO CLASSES OF COMMON STOCK CONSISTING OF CLASS A
COMMON STOCK AND CLASS B COMMON STOCK. AFFILIATES OF TIME WARNER TELECOM INC.
CURRENTLY OWN 100% OF THE CURRENTLY OUTSTANDING SHARES OF CLASS B COMMON
STOCK AND WILL RETAIN % OF THE OUTSTANDING COMBINED VOTING POWER OF
THE COMMON STOCK AFTER THE
OFFERING.
----------------------------------------
WE EXPECT THE CLASS A COMMON STOCK TO BE APPROVED FOR QUOTATION ON THE NASDAQ
NATIONAL MARKET OF THE NASDAQ STOCK MARKET UNDER THE SYMBOL 'TWTC'
------------------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE 'RISK FACTORS'
BEGINNING ON PAGE 12.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Per Share........................................... $ $ $
Total............................................... $ $ $
</TABLE>
------------------------
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Time Warner Telecom Inc. has granted the U.S. underwriters the right to purchase
up to an additional shares of Class A Common Stock to cover
over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares
of Class A Common Stock to purchasers on , 1999.
------------------------
JOINT BOOK - RUNNING MANAGERS
MORGAN STANLEY DEAN WITTER LEHMAN BROTHERS
, 1999
<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 shares
of Class A Common Stock 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........................................................................... $ 51,625
Nasdaq National Market Listing Fee......................................................... *
NASD Filing Fee............................................................................ *
Printing and Engraving Fees................................................................ *
Blue Sky Fees and Expenses................................................................. *
Legal Fees and Expenses.................................................................... *
Accounting Fees and Expenses............................................................... *
Registrar and Transfer Agent's Fees........................................................ *
Miscellaneous.............................................................................. *
-------------
Total................................................................................. $
-------------
-------------
</TABLE>
All of the above expenses have been or will be paid by Time Warner Telecom
Inc.
* To be filed by amendment.
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.
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement in
connection with specified actions, suits or proceedings, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation -- a 'derivative action'), 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
proceedings, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in the case of derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) actually
and reasonably incurred in connection with the defense or settlement of such
action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, by-laws,
disinterested director vote, stockholder vote, agreement or otherwise. Article
VIII of the TWT Charter provides that TWT shall indemnify its officers,
directors, employees and agents to the full extent permitted by Delaware law.
The By-laws of Time Warner Inc. ('TWI') require indemnification to the
fullest extent permitted under Delaware law of any person who is or was a
director or officer of TWI who is or was involved or threatened to
II-1
<PAGE>
<PAGE>
be made so involved in any action, suit or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that such person is or
was serving at the request of TWI as a director, officer or employee of any
other enterprise. Mr. Bressler would be covered by this provision. The
Directors' and Officers' Liability and Reimbursement Insurance Policy of TWI is
designed to reimburse TWI for any payments made by it pursuant to the foregoing
indemnification. The policy has coverage of $50,000,000.
The Agreement of Limited Partnership of TWE provides that TWE shall
indemnify, defend and hold harmless each officer of TWE from any personal
liability he or she may incur by reason of his or her action on behalf of TWE to
the fullest extent permitted as if TWE were a Delaware corporation. Messrs.
Bressler, Britt, Davies and Rossetti would be covered by this provision.
The By-laws of MediaOne Group, Inc. ('MediaOne') require indemnification to
the fullest extent permitted under Delaware law of any person who is or was a
director, officer or employee of MediaOne, or was otherwise designated as an
indemnified representative (as defined in the MediaOne By-laws) by MediaOne,
against any liability (as defined in the MediaOne By-laws) incurred by such
person in connection with any proceeding (as defined in the MediaOne By-laws) in
which such person is involved by reason of their past, present or future
services for, or at the request of, MediaOne as a director, officer, employee,
agent, fiduciary or trustee of any other entity or enterprise. Messrs. McPhie,
Williams and Webster are covered by this provision.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, except as set forth in the next sentence, the
Company has not sold any securities without registration under the Securities
Act. Immediately prior to the date of this Registration Statement, the Company
issued shares of its Class B Common Stock to the Existing
Stockholders, in a private placement under Section 4(2) of the Securities Act.
II-2
<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 Underwriting Agreement*
2.1 -- Reorganization Agreement among Time Warner Companies, Inc., MediaOne Group, Inc., Advance/Newhouse
Partnership, Time Warner Entertainment Company, L.P., and Time Warner Entertainment -- Advance Newhouse
Partnership (filed as Exhibit 2.1 to TWT LLC's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998)**
2.2 -- Merger Agreement among the Company, TWT LLC and TWT Inc.*
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., FibrCOM Holdings, L.P., Paragon
Communications, MediaOne Group, Inc., Multimedia Communications, Inc. and Advance/Newhouse Partnership.
4.2 -- Indenture, between TWT LLC, TWT Inc. and The Chase Manhattan Bank, as Trustee (filed as Exhibit 4.1 to
TWT LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)**
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 (filed as Exhibit 10.1 to TWT LLC's Registration Statement on Form S-1
(Registration No. 333-53553))**
10.2 -- Agreement for Assignment of Lease, dated September 12, 1997, between Ingram Micro Inc. and Time Warner
Communications Holdings Inc. (filed as Exhibit 10.2 to TWT LLC's Registration Statement on Form S-1
(Registration No. 333-53553))**
10.3 -- First Amendment to Lease, dated October 15, 1997, by Carramerica Realty, L.P. and Time Warner
Communications Holdings Inc. (filed as Exhibit 10.3 to TWT LLC's Registration Statement on Form S-1
(Registration No. 333-53553))**
10.4 -- Time Warner Telecom Inc. 1998 Stock Option Plan*
10.5 -- Employment Agreement between the Company and Larissa L. Herda (filed as Exhibit 10.6 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**
10.6 -- Employment Agreement between the Company and Paul B. Jones (filed as Exhibit 10.5 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**
10.7 -- Employment Agreement between the Company and A. Graham Powers (filed as Exhibit 10.7 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**
10.8 -- Employment Agreement between the Company and David J. Rayner (filed as Exhibit 10.8 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**
10.9 -- Employment Agreement between the Company and John T. Blount (filed as Exhibit 10.10 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**
10.10 -- Capacity License Agreement (filed as Exhibit 10.3 to TWT LLC's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998)**
10.11 -- Trade Name License Agreement (filed as Exhibit 10.4 to TWT LLC's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998)**
21 -- Subsidiaries of the Company (filed as Exhibit 21 to TWT LLC's Registration Statement on Form S-1
(Registration No. 333-53553))**
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
23.2 -- Consent of Cravath, Swaine & Moore (included in Exhibit 5)*
24.1 -- Power of Attorney of the Company's Officers and Directors
</TABLE>
- ------------
* To be filed by amendment.
** Incorporated by reference.
II-3
<PAGE>
<PAGE>
(b) Financial Statement Schedule
The following financial statement schedule is included in Part II of this
Registration Statement and should be read in conjunction with the combined
financial statements and notes thereto included elsewhere herein.
<TABLE>
<S> <C>
Report of Independent Auditors.................................................................... S-1
Schedule II -- Valuation and Qualifying Accounts.................................................. S-2
</TABLE>
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.
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-4
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Time Warner Telecom Inc. has duly caused Amendment No. 2 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on January 20, 1999.
TIME WARNER TELECOM INC.
By /s/ David J. Rayner
....................................
DAVID J. RAYNER
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment 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
* President and Chief Executive January 20, 1999
..................................................... Officer and Director
LARISSA L. HERDA
(ii) Principal Financial Officer
/s/ David J. Rayner Senior Vice President and January 20, 1999
..................................................... Chief Financial Officer
DAVID J. RAYNER
(iii) Principal Accounting Officer
* Vice President, Accounting January 20, 1999
..................................................... and Finance and
JILL STUART Chief Accounting
Officer
(iv) Directors
* Director January 20, 1999
.....................................................
RICHARD J. BRESSLER
* Director January 20, 1999
.....................................................
LARISSA L. HERDA
* Director January 20, 1999
.....................................................
ROBERT J. MIRON
* Director January 20, 1999
.....................................................
PEARRE A. WILLIAMS
* By: /s/ David J. Rayner
.....................................................
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Time Warner Telecom Inc.
We have audited the combined financial statements of Time Warner Telecom
Inc. (the 'Company') as of December 31, 1997 and 1996, and for each of the three
years in the period ended December 31, 1997 and have issued our report thereon
dated March 13, 1998, except for Notes 1, 4, 5, 6, and 8, as to which the date
is __________, 1999. Our audits also included the financial statement schedule
listed in Item 16(b) of this Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, 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.
/s/ ERNST & YOUNG LLP
Denver, Colorado
March 13, 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 limited liability company to a corporation.
/s/ ERNST & YOUNG LLP
Denver, Colorado
January 20, 1999
S-1
<PAGE>
<PAGE>
TIME WARNER TELECOM LLC
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>
S-2
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- ---------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
1.1 -- Form of Underwriting Agreement*..................................................................
2.2 -- Merger Agreement among the Company, TWT LLC and TWT Inc.*........................................
2.1 -- Reorganization Agreement among Time Warner Companies, Inc., MediaOne Group, Inc.,
Advance/Newhouse Partnership, Time Warner Entertainment Company, L.P., and Time Warner
Entertainment -- Advance Newhouse Partnership (filed as Exhibit 2.1 to TWT LLC's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998)**...............................................
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., FibrCOM Holdings, L.P.,
Paragon Communications, MediaOne Group, Inc., Multimedia Communications, Inc. and Advance/Newhouse
Partnership.......................................................................................
4.2 -- Indenture, between TWT LLC, TWT Inc. and The Chase Manhattan Bank, as Trustee (filed as Exhibit
4.1 to TWT LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)**.............
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 (filed as Exhibit 10.1 to TWT LLC's Registration Statement on
Form S-1 (Registration No. 333-53553))**..........................................................
10.2 -- Agreement for Assignment of Lease, dated September 12, 1997, between Ingram Micro Inc. and Time
Warner Communications Holdings Inc. (filed as Exhibit 10.3 to TWT LLC's Registration Statement on
Form S-1 (Registration No. 333-53553))**..........................................................
10.3 -- First Amendment to Lease, dated October 15, 1997, by Carramerica Realty, L.P. and Time Warner
Communications Holdings Inc. (filed as Exhibit 10.3 to TWT LLC's Registration Statement on Form
S-1 (Registration Statement No. 333-53553))**.....................................................
10.4 -- Time Warner Telecom Inc. 1998 Stock Option Plan*.................................................
10.5 -- Employment Agreement between the Company and Larissa L. Herda (filed as Exhibit 10.6 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**................................
10.6 -- Employment Agreement between the Company and Paul B. Jones (filed as Exhibit 10.5 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**................................
10.7 -- Employment Agreement between the Company and A. Graham Powers (filed as Exhibit 10.7 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**................................
10.8 -- Employment Agreement between the Company and David J. Rayner (filed as Exhibit 10.8 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**................................
10.9 -- Employment Agreement between the Company and John T. Blount (filed as Exhibit 10.10 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**................................
10.10 -- Capacity License Agreement (filed as Exhibit 10.3 to TWT LLC's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998)**................................................................
10.11 -- Trade Name License Agreement (filed as Exhibit 10.4 to TWT LLC's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998)**............................................................
21 -- Subsidiaries of the Company (filed as Exhibit 21 to TWT LLC's Registration Statement on Form S-1
(Registration Statement No. 333-53553))**.........................................................
23.1 -- Consent of Ernst & Young LLP, Independent Auditors...............................................
23.2 -- Consent of Cravath, Swaine & Moore (included in Exhibit 5)*......................................
24.1 -- Power of Attorney of the Company's Officers and Directors........................................
</TABLE>
- ------------
* To be filed by amendment.
** Incorporated by reference.
<PAGE>
<PAGE>
EXHIBIT A
RESTATED 1/ CERTIFICATE OF INCORPORATION
OF
TIME WARNER TELECOM INC.
The undersigned officers of Time Warner Telecom Inc., a
Delaware corporation (the "Corporation"), do hereby certify as follows:
(1) The present name of the Corporation is Time Warner Telecom
Inc. The Corporation was originally incorporated under the same name, and its
original certificate of incorporation was filed with the office of the Secretary
of State of the State of Delaware on [ ].
(2) This Restated Certificate of Incorporation was duly
adopted in accordance with Sections 242 and 245 of the General Corporation Law
of the State of Delaware and by unanimous written consent of stockholders in
accordance with Section 228 of the General Corporation Law of the State of
Delaware.
(3) This Restated Certificate of Incorporation restates and
integrates and further amends the certificate of incorporation of the
Corporation.
(4) The text of the certificate of incorporation of the
Corporation is amended and restated so as to read in its entirety as follows:
ARTICLE I
NAME
The name of this corporation (hereinafter the "Corporation")
is TIME WARNER TELECOM INC.
- --------
1/ In the event that the Corporation is formed pursuant to this Charter,
references to "Restated" will need to be deleted from this document and from the
By-laws, and the provisions relating to the incorporator will need to be added
hereto.
<PAGE>
<PAGE>
2
ARTICLE II
ADDRESS; REGISTERED AGENT
The address of the Corporation's registered office in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801. The name of the Corporation's registered agent at such address
is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "DGCL"); provided, however, that
until the earlier of (i) the date that is five years after the date of filing of
this Restated Certificate of Incorporation and (ii) the date on which the
outstanding shares of Class B Stock (as defined herein) no longer represent at
least fifty percent (50%) of the total voting power in the election of directors
of the Corporation ("Voting Power") of all outstanding shares of all classes and
series of capital stock of the Corporation entitled generally to vote in such
election ("Voting Stock") (the earlier of (i) and (ii) being called the
"Termination Date"), the Corporation shall not, directly or indirectly (through
a subsidiary or affiliate of the Corporation), engage in the business of
providing, offering, packaging, marketing, promoting or branding (alone or
jointly with or as an agent for other parties) any Residential Services or
engage in the business of producing, packaging, distributing, marketing,
hosting, offering, promoting, branding or otherwise providing Content Services,
unless such action shall be approved in advance by the affirmative vote of the
holders of one hundred percent (100%) of the Voting Power of the outstanding
shares of Class B Stock, voting separately as a class.
"Residential Services" shall mean wireline telecommunications services
or other services (including, without limitation, data services) of any
nature provided, directly or indirectly, to third party end-users at
address locations other than Business Locations. "Business Locations"
shall mean (i) address locations that are used solely for business
purposes, including, without limitation, public spaces within business
locations and governmental offices and (ii) hotels, hospitals, jails
and the business offices of
<PAGE>
<PAGE>
3
residential facilities within educational institutions and within
nursing and assisted living complexes.
"Content Services" means entertainment, information or other content
services, whether fixed or interactive, or any services incidental
thereto; provided, however, that Content Services shall not include
acting solely as a carrier of video, audio or data of unaffiliated
third parties by providing transport services, so long as the
Corporation has no other direct or indirect pecuniary interest in the
transmitted information or content.
ARTICLE IV
CAPITAL STOCK
SECTION 1. Authorized Capital Stock. The total number of
shares of all classes of capital stock that the Corporation shall have authority
to issue is [ ] shares, consisting of (i) [ ] shares of Common Stock,
par value of $0.01 per share ("Common Stock"), and (ii) [ ] shares of
Preferred Stock, par value of $0.01 per share ("Preferred Stock"). The Common
Stock shall be divided into classes as follows: [ ] shares of Class A
Common Stock ("Class A Stock") and [ ] shares of Class B Common Stock
("Class B Stock").
SECTION 2. Common Stock. (a) Except as otherwise provided in
this Restated Certificate of Incorporation, the Class A Stock and the Class B
Stock shall have the same rights and privileges and shall rank equally, share
ratably and be identical in all respects as to all matters.
(b) Subject to provisions of law and the terms of any
outstanding Preferred Stock, the holders of the Class A Stock and the Class B
Stock shall be entitled to receive dividends or other distributions with respect
to such stock, in an equal amount per share, at such times and in such amounts
as may be determined by the Board and declared out of any funds lawfully
available therefor, and shares of Preferred Stock of any series shall not be
entitled to share therein except as otherwise expressly provided in the
resolution or resolutions of the Board providing for the issue of such series.
Dividends and other distributions with respect to the Class A Stock and the
Class B Stock shall be payable only when, as and if declared by the Board.
(c) Subject to the provisions of law and the terms of any
outstanding Preferred Stock, if at any time a
<PAGE>
<PAGE>
4
dividend or other distribution with respect to the Class A Stock or Class B
Stock is to be paid in shares of Class A Stock, Class B Stock or any other
securities of the Corporation or any other corporation, partnership, limited
liability company, trust or legal entity ("Person") (hereinafter sometimes
called a "share distribution"), such share distribution shall be declared and
paid only as follows, and share distributions declared and paid as follows shall
be deemed to be equal distributions for purposes of the preceding paragraph:
(i) a share distribution (A) consisting of Class A Stock (or Convertible
Securities that are convertible into, exchangeable for, or evidence
the right to purchase, shares of Class A Stock) to holders of Class A
Stock and Class B Stock, on an equal per share basis; or (B)
consisting of shares of Class B Stock (or Convertible Securities that
are convertible into, exchangeable for or evidence the right to
purchase shares of Class B Stock) to holders of Class A Stock and
Class B Stock, on an equal per share basis; or (C) consisting of
shares of Class A Stock (or Convertible Securities that are
convertible into, exchangeable for or evidence the right to purchase
shares of Class A Stock) to holders of Class A Stock and, on an equal
per share basis, shares of Class B Stock (or Convertible Securities
that are convertible into, exchangeable for or evidence the right to
purchase shares of Class B Stock) to holders of Class B Stock; and
(ii) a share distribution consisting of shares of any class or series of
securities of the Corporation or any other Person other than Class A
Stock or Class B Stock (and other than Convertible Securities that are
convertible into, exchangeable for or evidence the right to purchase
shares of Class A Stock or Class B Stock), either on the basis of a
distribution of identical securities, on an equal per share basis, to
holders of Class A Stock and Class B Stock or on the basis of a
distribution of one class or series of securities to holders of Class
A Stock and another class or series of securities to holders of Class
B Stock, provided that the securities so distributed (and, if
applicable, the securities into which the distributed securities are
convertible, or for which they are exchangeable, or which the
distributed securities evidence the right to purchase) do not differ
in any respect other than
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5
their relative voting rights and related differences in conversion and
share distribution provisions, with holders of shares of Class B Stock
receiving the class or series having the higher relative voting rights
(without regard to whether such rights differ to a greater or lesser
extent than the corresponding differences in voting rights and related
differences in conversion and share distribution provisions between
the Class A Stock and the Class B Stock), provided that if the
securities so distributed constitute capital stock of a Subsidiary of
the Corporation, such rights shall not differ to a greater extent than
the corresponding differences in voting rights, conversion and share
distribution provisions between the Class A Stock and Class B Stock,
and provided in each case that such distribution is otherwise made on
an equal per share basis.
As used herein, the term "Subsidiary" means, when used with
respect to any Person, (i) a corporation in which such Person and/or one or more
Subsidiaries of such Person, directly or indirectly, owns capital stock having a
majority of the Voting Power of such corporation's Voting Stock; and (ii) any
other Person (other than a corporation) in which such Person and/or one or more
Subsidiaries of such Person, directly or indirectly, has (x) a majority
ownership interest or (y) the power to elect or direct the election of a
majority of the members of the governing body of such first-named Person.
As used herein, the term "Convertible Securities" shall mean
any securities of the Corporation (other than any class of Common Stock) that
are convertible into, exchangeable for, or evidence the right to purchase any
class of Common Stock, whether upon conversion, exercise or exchange, pursuant
to anti-dilution provisions of such securities or otherwise.
(d) If the Corporation shall in any manner reclassify,
subdivide or combine the outstanding shares of Class A Stock or Class B Stock,
the outstanding shares of the other class of Common Stock shall be
proportionally reclassified, subdivided or combined in the same manner and on
the same basis as the outstanding shares of Class A Stock or Class B Stock, as
the case may be, that have been reclassified, subdivided or combined so as to
preserve the relative Voting Power of each class and the relative proportion of
the equity of the Corporation represented by
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6
each class immediately prior to the transaction giving rise to an adjustment
pursuant to this paragraph.
(e)
(i) Each share of Class B Stock may at any time be converted
into one fully paid and nonassessable share of Class A Stock. Such
right shall be exercised by the surrender of the certificate
representing such share of Class B Stock to be converted to the
Corporation at any time during normal business hours at the principal
executive offices of the Corporation, or if an agent for the
registration of transfer of shares of Class B Stock is then duly
appointed and acting (said agent being hereinafter called the "Transfer
Agent"), then at the office of the Transfer Agent, accompanied by a
written notice of the election by the holder thereof to convert and (if
so required by the Corporation or the Transfer Agent) by instruments of
transfer, in form satisfactory to the Corporation and to the Transfer
Agent, duly executed by such holder or such holder's duly authorized
attorney, and together with any necessary transfer tax stamps or funds
therefor, if required pursuant to subparagraph (v) of this subsection
(e).
(ii) As promptly as practicable after the surrender for
conversion of a certificate representing shares of Class B Stock in the
manner provided in paragraph (i) of this subsection (e) and the payment
in cash of any amount required by the provisions of paragraphs (i) and
(v) of this subsection (e), the Corporation will deliver or cause to be
delivered at the office of the Transfer Agent to or upon the written
order of the holder of such certificate, a certificate or certificates
representing the number of full shares of Class A Stock issuable upon
such conversion, issued in such name or names as such holder may
direct. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of the surrender of the
certificates representing shares of Class B Stock, and all rights of
the holder of such shares as such holder shall cease at such time and
the person or persons in whose name or names the certificate or
certificates representing the shares of Class A Stock are to be issued
shall be treated for all purposes as having become the record holder or
holders of such shares of Class A Stock at such time; provided,
however, if any such surrender and payment is made on any date when the
stock transfer books of the Corporation shall be closed, the person or
persons in
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7
whose name or names the certificate or certificates representing shares
of Class A Stock are to be issued as the record holder or holders
thereof shall be treated for all purposes as having become the record
holder or holders of such shares immediately prior to the close of
business on the next succeeding day on which such stock transfer books
are open.
(iii) No adjustments in respect of dividends shall be made
upon the conversion of any share of Class B Stock; provided, however,
that if a share shall be converted subsequent to the record date for
the payment of a dividend or other distribution on shares of Class B
Stock but prior to such payment, the registered holder of such share at
the close of business on such record date shall be entitled to receive
the dividend or other distribution payable on such share upon the date
set for payment of such dividend or other distribution notwithstanding
the conversion thereof or the Corporation's default in payment of the
dividend due on such date.
(iv) The Corporation will at all times reserve and keep
available, solely for the purpose of issuance upon conversion of the
outstanding shares of Class B Stock, such number of shares of Class A
Stock as shall be issuable upon the conversion of all such outstanding
shares; provided, however, that nothing contained herein shall be
construed to preclude the Corporation from satisfying its obligations
in respect of the conversion of the outstanding shares of Class B Stock
by delivery of purchased shares of Class A Stock which are held in the
treasury of the Corporation. If any shares of Class A Stock required to
be reserved for purposes of conversion hereunder require registration
with or approval of any governmental authority under any Federal or
state law before such shares of Class A Stock may be issued upon
conversion, the Corporation will cause such shares to be duly
registered or approved, as the case may be. All shares of Class A Stock
which shall be issued upon conversion of the shares of Class B Stock
will, upon issue, be fully paid and nonassessable and not subject to
any preemptive rights.
(v) The issuance of certificates for shares of Class A Stock
upon conversion of shares of Class B Stock shall be made without charge
for any stamp or other similar tax in respect of such issuance.
However, if any such certificate is to be issued in a name other than
that of the holder of the share or
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8
shares of Class B Stock converted, the person or persons requesting the
issuance thereof shall pay to the Corporation the amount of any tax
which may be payable in respect of any transfer involved in such
issuance or shall establish to the satisfaction of the Corporation that
such tax has been paid.
(vi) Any shares of Class B Stock which shall have been
converted into Class A Stock at any time pursuant to the provisions of
this subsection (e) of this Section 2 shall, after such conversion,
have the status of authorized but unissued shares of Class B Stock.
(f) Upon the liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, subject to any preferential or
other amounts to be distributed to the holders of the Preferred Stock and any
other class or series of stock then outstanding, the holders of Class A Stock
and Class B Stock shall be entitled to receive all the assets of the Corporation
available for distribution to its stockholders ratably as a single class in
proportion to the number of shares held by them.
(g) The Class A Stock and the Class B Stock are subject to all
the powers, rights, privileges, preferences and priorities of any series of
Preferred Stock as shall be stated and expressed in any resolution or
resolutions adopted by the Board, pursuant to authority expressly granted to and
vested in it by the provisions of this Article IV.
SECTION 3. Preferred Stock. The Board is hereby expressly
authorized, by resolution or resolutions, to provide, out of the unissued shares
of Preferred Stock, for series of Preferred Stock and, with respect to each such
series, to fix the number of shares constituting such series and the designation
of such series, the voting powers (if any) of the shares of such series, and the
preferences and relative, participating, optional or other special rights, if
any, and any qualifications, limitations or restrictions thereof, of the shares
of such series. The powers, preferences and relative, participating, optional
and other special rights of each series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series at any time outstanding.
SECTION 4. Redemption of Capital Stock. Notwithstanding any
other provision of this Restated Certificate of Incorporation to the contrary,
but subject to the provisions of any resolution or resolutions of the Board
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9
of Directors adopted pursuant to this Article IV creating any series of
Preferred Stock, outstanding shares of Class A Common Stock, Preferred Stock or
any other class or series of stock of the Corporation, other than Class B Stock,
shall always be subject to redemption by the Corporation, by action of the
Board, if in the judgment of the Board such action should be taken, pursuant to
Section 151(b) of the DGCL (or any other applicable provision of law), to the
extent necessary to prevent the loss or secure the reinstatement of any license
or franchise from any governmental agency held by the Corporation or any
Subsidiary to conduct any portion of the business of the Corporation or such
Subsidiary, which license or franchise is conditioned upon some or all of the
holders of the Corporation's stock of any class or series possessing prescribed
qualifications. The terms and conditions of such redemption shall be as follows:
(a) the redemption price of the shares to be redeemed pursuant
to this Section 4 shall be equal to the Fair Market Value of such
shares;
(b) the redemption price of such shares may be paid in cash,
Redemption Securities or any combination thereof;
(c) if less than all the shares held by Disqualified Holders
are to be redeemed, the shares to be redeemed shall be selected in such
manner as shall be determined by the Board, which may include selection
first of the most recently purchased shares thereof, selection by lot
or selection in any other manner determined by the Board of Directors;
(d) at least 30 days' written notice of the Redemption Date
shall be given to the record holders of the shares selected to be
redeemed (unless waived in writing by such holder), provided that the
Redemption Date may be the date on which written notice shall be given
to record holders if the cash or Redemption Securities necessary to
effect the redemption shall have been deposited in trust for the
benefit of such record holders and subject to immediate withdrawal by
them upon surrender of the stock certificates for their shares to be
redeemed;
(e) from and after the Redemption Date, any and all rights of
whatever nature, which may be held by the owners of shares selected for
redemption (including without limitation any rights to vote or
participate in dividends declared on stock of the same class or series
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10
as such shares), shall cease and terminate and they shall thenceforth
be entitled only to receive the cash or Redemption Securities payable
upon redemption; and
(f) such other terms and conditions as the Board shall
determine.
For purposes of this Section 4:
(i) "Disqualified Holder" shall mean any holder of shares of
stock of the Corporation of any class or series whose holding of such
stock may result in the loss of any license or franchise from any
governmental agency held by the Corporation or any Subsidiary to
conduct any portion of the business of the Corporation or any
Subsidiary.
(ii) "Fair Market Value" of a share of the Corporation's stock
of any class or series shall mean the average (unweighted) Closing
Price for such a share for each of the 45 most recent days on which
shares of stock of such class or series shall have been traded
preceding the day on which notice of redemption shall be given pursuant
to paragraph (d) of this Section 4; provided, however, that if shares
of stock of such class or series are not traded on any securities
exchange or in the over-the-counter market, "Fair Market Value" shall
be determined by the Board of Directors in good faith; and provided
further, however, that "Fair Market Value" as to any stockholder who
purchases his stock within 120 days of a Redemption Date need not
(unless otherwise determined by the Board of Directors) exceed the
purchase price paid by him. "Closing Price" on any day means the
reported last sales price regular way or, in case no such sale takes
place, the average of the reported closing bid and asked prices regular
way on the New York Stock Exchange Composite Tape, or, if stock of the
class or series in question is not quoted on such Composite Tape, on
the New York Stock Exchange, or, if such stock is not listed on such
exchange, on the principal United States registered securities exchange
on which such stock is listed, or, if such stock is not listed on any
such exchange, the highest closing sales price or bid quotation for
such stock on The Nasdaq Stock Market or any system then in use, or if
no such prices or quotations are available, the fair market value on
the day in question as determined by the Board of Directors in good
faith.
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11
(iii) "Redemption Date" shall mean the date fixed by the Board
of Directors for the redemption of any shares of stock of the
Corporation pursuant to this Section 4.
(iv) "Redemption Securities" shall mean any debt or equity
securities of the Corporation, any Subsidiary or any other corporation,
or any combination thereof, having such terms and conditions as shall
be approved by the Board of Directors and which, together with any cash
to be paid as part of the redemption price, in the opinion of any
nationally recognized investment banking firm selected by the Board of
Directors (which may be a firm which provides other investment banking,
brokerage or other services to the Corporation or its affiliates), has
a value, at the time notice of redemption is given pursuant to
paragraph (d) of this Section 4, at least equal to the Fair Market
Value of the shares to be redeemed pursuant to this Section 4
(assuming, in the case of Redemption Securities to be publicly traded,
such Redemption Securities were fully distributed and subject only to
normal trading activity).
SECTION 5. Stockholder Voting. (a) Except as otherwise
provided in this Restated Certificate of Incorporation or required by law, with
respect to all matters upon which stockholders are entitled to vote or to which
stockholders are entitled to give consent, the holders of any outstanding shares
of Class A Stock and the holders of any outstanding shares of Class B Stock
shall vote together without regard to class, and every holder of the outstanding
shares of Class A Stock shall be entitled to cast thereon one (1) vote in person
or by proxy for each share of Class A Stock standing in such holder's name, and
every holder of the outstanding shares of Class B Stock shall be entitled to
cast thereon ten (10) votes in person or by proxy for each share of Class B
Stock standing in such holder's name.
(b) Until such time as the outstanding shares of Class B Stock
no longer represent at least fifty percent (50%) of the Voting Power of the
Voting Stock, in addition to any other vote required hereunder or by applicable
law (and notwithstanding the fact that a lesser percentage may be specified by
law or this Restated Certificate of Incorporation), the affirmative vote of the
holders of one hundred percent (100%) of the Voting Power of all outstanding
shares of Class B Stock, voting separately as a class, shall be required:
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12
(i) to amend, alter or repeal any provision of this Restated
Certificate of Incorporation, other than an amendment to Article II to
change the registered office or registered agent of the Corporation,
and other than an amendment effected pursuant to Section 151(g) of the
DGCL (or any successor provision thereto); or
(ii) for (x) the disposition, directly or indirectly, by the
Corporation (or by one or more direct or indirect subsidiaries thereof)
by sale, merger, new issuances or otherwise, to a Person (other than
the Corporation or a direct or indirect wholly owned subsidiary of the
Corporation), in any transaction or series of related transactions, of
shares of the capital stock of one or more direct or indirect
Subsidiaries of the Corporation which, in the aggregate, hold all or
substantially all of the assets of the Corporation and its Subsidiaries
on a consolidated basis or (y) the disposition, directly or indirectly,
by the Corporation (or by one or more direct or indirect subsidiaries
thereof) by sale, merger or otherwise, (other than to the Corporation
or a direct or indirect wholly owned subsidiary of the Corporation) in
any transaction or series of related transactions outside the ordinary
course of the business of the Corporation, of all or substantially all
of the assets of the Corporation and its Subsidiaries on a consolidated
basis, except, in each case referred to in the foregoing clauses (x)
and (y), for pledges, grants of security interests, security deeds,
mortgages or similar encumbrances securing bona fide indebtedness, and
any foreclosure in respect thereof.
(c) In addition to any other vote required hereunder or by
applicable law, the affirmative vote of the holders of a majority of the
combined Voting Power of the Voting Stock, voting together as a single class,
shall be required for (x) the disposition, directly or indirectly, by the
Corporation (or by one or more direct or indirect subsidiaries thereof) by sale,
merger, new issuances or otherwise, to a Person (other than the Corporation or a
direct or indirect wholly owned subsidiary of the Corporation), in any
transaction or series of related transactions, of shares of the capital stock of
one or more direct or indirect Subsidiaries of the Corporation which, in the
aggregate, hold all or substantially all of the assets of the Corporation and
its Subsidiaries on a consolidated basis or (y) the disposition, directly or
indirectly, by the Corporation (or by one or more direct or indirect
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13
subsidiaries thereof) by sale, merger or otherwise, (other than to the
Corporation or a direct or indirect wholly owned subsidiary of the Corporation)
in any transaction or series of related transactions outside the ordinary course
of the business of the Corporation, of all or substantially all of the assets of
the Corporation and its Subsidiaries on a consolidated basis, except, in each
case referred to in the foregoing clauses (x) and (y), for pledges, grants of
security interests, security deeds, mortgages or similar encumbrances securing
bona fide indebtedness, and any foreclosure in respect thereof.
(d) Until such time as the outstanding shares of Class B Stock
no longer represent at least fifty (50%) percent of the Voting Power of the
Voting Stock, in addition to any other vote required hereunder or by applicable
law, the affirmative vote of the holders of a majority of the Voting Power of
all outstanding shares of Class A Stock, voting separately as a class, shall be
required to amend the definition of Termination Date as specified in Article III
so as to extend the date specified in clause (i) thereof or to reduce the
percentage specified in clause (ii) thereof.
ARTICLE V
DGCL SECTION 203
The Company hereby expressly elects not to be governed by the
provisions of Section 203 of the DGCL, and the restrictions and limitations set
forth therein.
ARTICLE VI
DIRECTORS
SECTION 1. Election of Directors. Directors shall be elected
at the annual meeting of stockholders, and each director elected shall hold
office until such director's successor has been elected and qualified. Directors
need not be stockholders of the Corporation.
SECTION 2. Advance Notice of Nominations; Independent
Directors. (a) Advance notice of nominations for the election of directors shall
be given in the manner and to the extent permitted provided in the By-laws of
the Corporation.
(b) The Board of Directors' nominees for election as
independent directors shall be approved by a committee of
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14
the Board comprised of all of the directors other than the Chief Executive
Officer and the independent directors; provided, that if the holders of Class B
Stock of the Corporation cease to have the right, collectively, to designate at
least three nominees to the Board pursuant to the Stockholders' Agreement
referred to in Section 3 below, then such committee of the Board shall be
comprised of three members, including all the directors designated by the
holders of the Class B Stock pursuant to the Stockholders' Agreement, if any,
and such other director or directors as shall be determined by majority vote of
the whole Board.
SECTION 3. Number of Directors. Subject to any rights of the
holders of any series of Preferred Stock outstanding at any time to elect
additional directors to the Board, the number of directors that shall constitute
the whole Board of the Corporation shall be determined from time to time
pursuant to the Stockholders' Agreement dated as of [ ], among Time Warner
Companies, Inc., American Television and Communications Corporation, Warner
Communications Inc., TW/TAE Inc., FibrCOM Holdings L.P., Paragon Communications,
MediaOne Group, Inc., and Advance/Newhouse Partnership (and their successors and
permitted assigns) and the Corporation, as amended from time to time, or, if
such agreement is no longer in effect, as specified in the By-laws of the
Corporation, as the same may be amended from time to time. In the absence of
such a provision in such Stockholders' Agreement or the By-laws of the
Corporation, the number of directors that shall constitute the whole Board of
the Corporation shall be three.
SECTION 4. Limitation on Director Liability. To the fullest
extent that the DGCL or any other law of the State of Delaware as it exists or
as it may hereafter be amended permits the limitation or elimination of the
liability of directors, no director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. No amendment to or repeal of this Article VI shall apply to
or have any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
SECTION 5. Removal of Directors; Filling of Newly Created
Directorships and Vacancies. (a) Subject to the rights of the holders of any
series of Preferred Stock outstanding at any time, directors may be removed from
office with or without cause, but only upon the affirmative vote of the holders
of a majority of the combined Voting
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15
Power of the Voting Stock, voting together as a single class.
(b) Subject to the rights of holders of any series of
Preferred Stock outstanding at any time, any newly created directorship or
vacancy in the office of a director shall be filled only by (A) during the 20
day period following the date such newly created directorship or vacancy comes
into existence, the affirmative vote of the remaining directors or the sole
remaining director, as the case may be, or (B) if not so filled within such 20
day period, either (i) the affirmative vote of the holders of a majority of the
combined Voting Power of the Voting Stock, voting together as a single class, or
(ii) the affirmative vote of the remaining directors or the sole remaining
director, as the case may be.
ARTICLE VII
PROVISIONS RELATING TO FOUNDING STOCKHOLDERS
SECTION 1. Founding Stockholders. In anticipation that the
capital stock of Corporation will cease to be owned exclusively, directly or
indirectly, by affiliates of Time Warner Inc. ("TW"), MediaOne Group, Inc. and
Advance/Newhouse Partnership (collectively and as further defined in Section 4
below, the "Founding Stockholders"), but that the Founding Stockholders will
remain, directly or indirectly, stockholders of the Corporation, and in
anticipation that the Corporation and the Founding Stockholders may engage in
the same or similar activities or lines of business and have an interest in the
same areas of corporate opportunities, and in recognition of the benefits to be
derived by the Corporation through its continued contractual, corporate and
business relations with the Founding Stockholders (including service of
officers, directors or employees of the Founding Stockholders as directors of
the Corporation), the provisions of this Article VII are set forth to regulate,
define and guide, to the fullest extent permitted by the DGCL, the conduct of
certain affairs of the Corporation as they may involve the Founding Stockholders
and their respective officers and directors, and the powers, rights and duties
of the Corporation and the Founding Stockholders and their respective officers
and directors in connection therewith.
SECTION 2. Competition and Corporate Opportunities. None of
the Founding Stockholders shall have any duty to refrain from engaging directly
or indirectly in the same or similar business activities or lines of business
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16
as the Corporation. In the event that any of the Founding Stockholders acquires
knowledge of a potential transaction or matter that may be a corporate
opportunity for any of the Founding Stockholders and the Corporation, subject to
Section 3 of this Article VIII, none of the Founding Stockholders shall have any
duty to communicate or offer such corporate opportunity to the Corporation and
any other Founding Stockholders as applicable shall be entitled to pursue or
acquire such corporate opportunity for itself or to direct such corporate
opportunity to another person or entity. In addition, the fact that a Founding
Stockholder shall engage in a particular business activity shall not, of itself,
provide a basis for determining that there has been a violation of Section 3 of
this Article.
SECTION 3. Allocation of Corporate Opportunities. The
following provisions shall be applicable to the maximum extent consistent with,
and permitted by, applicable Delaware law. In the event that a director, officer
or employee of the Corporation who is also a director, officer or employee of
any of the Founding Stockholders acquires knowledge of a potential transaction
or matter that may be a corporate opportunity for both the Corporation and any
of the Founding Stockholders, such director, officer or employee of the
Corporation shall act in good faith in a manner consistent with the following:
(a) a corporate opportunity offered to any person who is an
officer or employee (whether or not a director) of the Corporation and
who is also a director but not an officer or employee of a Founding
Stockholder shall belong to the Corporation, unless such opportunity is
expressly offered to such person primarily in his or her capacity as a
director of a Founding Stockholder, in which case such opportunity
shall belong to the relevant Founding Stockholder;
(b) a corporate opportunity offered to any person who is a
director but not an officer or employee of the Corporation and who is
also an officer or employee (whether or not a director) of a Founding
Stockholder shall belong to the relevant Founding Stockholder, unless
such opportunity is expressly offered to such person in his or her
capacity as a director of the Corporation, in which case such
opportunity shall belong to the Corporation; and
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17
(c) a corporate opportunity:
(i) offered to any other person who is either (A) an
officer or employee of both the Corporation and a Founding
Stockholder or (B) a director of both the Corporation and a
Founding Stockholder (but not an officer or employee of the
Corporation or any Founding Stockholder), and
(ii) that is expressly offered to such person
(A) in his or her capacity as an officer, employee or director of the
Corporation shall belong to the Corporation; and
(B) in his or her capacity as an officer, employee or director of a
Founding Stockholder shall belong to the relevant Founding Stockholder.
SECTION 4. Certain Matters Deemed Not Corporate Opportunities.
(a) In addition to and notwithstanding the foregoing provisions of this Article
VII, a corporate opportunity shall not be deemed to belong to the Corporation if
it is a business opportunity that the Corporation is not permitted to undertake
under the terms of Article II or that the Corporation is not financially able or
contractually permitted or legally able to undertake, or that is, from its
nature, not in the line of the Corporation's business or is of no practical
advantage to it or that is one in which the Corporation has no interest or
reasonable expectancy.
(b) For purposes of this Article VII only, (i) the term
"Corporation" shall mean the Corporation and all corporations, limited liability
companies, partnerships, joint ventures, associations and other entities in
which the Corporation beneficially owns (directly or indirectly) 50% or more of
the outstanding voting stock, voting power or similar voting interests, except
that for purposes of determining those persons who are directors of the
Corporation, such term shall mean the Corporation without regard to any other
entities in which it may hold an interest and (ii) the term "Founding
Stockholder" shall mean a Founding Stockholder and all corporations, limited
liability companies, partnerships, joint ventures, associations and other
entities (other than the Corporation) in which such Founding Stockholder
beneficially owns (directly or indirectly) 50 percent or more of the outstanding
voting stock, voting power or similar interests and, if a Founding Stockholder
is a partnership, shall also include those entities which constitute its
corporate general partners, except that for purposes of determining
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18
those persons who are directors of Founding Stockholders, such term shall mean
Time Warner Inc., U S West Media Group, Inc. and, in the case of
Advance/Newhouse Partnership, Advance Communication Corp. and Newhouse
Broadcasting Corporation, its general partners.
SECTION 5. Expiration of Certain Provisions. Notwithstanding
anything in this Restated Certificate of Incorporation to the contrary, the
provisions of this Article VII shall expire as to any Founding Stockholder on
the date that both (i) such Founding Stockholder ceases to own beneficially
Common Stock representing at least 5% of the number of outstanding shares of
Common Stock of the Corporation and (ii) no person who is a director or officer
of the Corporation is also a director or officer of such Founding Stockholder.
Neither the alteration, amendment, change or repeal of any provision of this
Article VII nor the adoption of any provision of this Restated Certificate of
Incorporation inconsistent with any provision of this Article VII shall
eliminate or reduce the effect of this Article VII in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article VII,
would accrue or arise, prior to such alteration, amendment, repeal or adoption.
SECTION 6. Deemed Notice. Any person or entity purchasing or
otherwise acquiring any interest in any shares of the Corporation shall be
deemed to have notice of and to have consented to the provisions of this Article
VII.
ARTICLE VIII
STOCKHOLDER MEETINGS
SECTION 1. Meetings Generally. Meetings of stockholders may be
held within or without the State of Delaware, as the By-laws of the Corporation
may provide. The books of the Corporation may be kept (subject to any provision
of Delaware law) outside the State of Delaware at such place or places as may be
designated from time to time by the Board or in the By-laws of the Corporation.
Elections of directors need not be by written ballot unless the By-laws of the
Corporation shall so provide.
SECTION 2. Special Meetings. Special meetings of the
stockholders shall be called only (i) upon written request of the holders of not
less than a majority of the total voting power of the outstanding capital stock
of the Corporation entitled to vote at such meeting or (ii) upon request of any
director. Special meetings of the
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19
stockholders may be held at such time and place as may be stated in the notice
of meeting.
ARTICLE IX
BY-LAWS
In furtherance and not in limitation of the powers conferred
upon it by law, the Board of Directors is expressly authorized to adopt, repeal,
alter or amend the By-laws of the Corporation by the vote of a majority of the
entire Board of Directors. In addition to any requirements of law and any other
provision of this Restated Certificate of Incorporation or any resolution or
resolutions of the Board of Directors adopted pursuant to Article IV of this
Restated Certificate of Incorporation (and notwithstanding the fact that a
lesser percentage may be specified by law, this Restated Certificate of
Incorporation or any such resolution or resolutions), the affirmative vote of
the holders of a majority of the combined Voting Power of the Voting Stock,
voting together as a single class, shall be required for stockholders to adopt,
amend, alter or repeal any provision of the By-laws.
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate of Incorporation to be duly executed this day of [ ],
1998.
TIME WARNER TELECOM INC.,
a Delaware corporation,
---------------------------
Name:
Title:
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EXHIBIT B
BY-LAWS
OF
TIME WARNER TELECOM INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES AND AGENT
SECTION 1. Registered Office and Agent. The address of the
registered office of the Corporation in the State of Delaware is Corporation
Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The name of its
registered agent at such address is The Corporation Trust Company.
SECTION 2. Other Offices. The Corporation may also have
offices at other places, either within or without the State of Delaware, as the
Board of Directors of the Corporation (the "Board") may from time to time
determine or as the business of the Corporation shall require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. Place of Meetings. Meetings of the stockholders for
the election of directors or for any other purpose shall be held at any place,
either within or without the State of Delaware, as shall be designated from time
to time by the Board and stated in the notice of meeting or in a duly executed
waiver of notice thereof. Adjournments of meetings may be held at the place at
which the meeting adjourned is being held, or at any other place determined by
the Board, whether or not a quorum shall have been present at such meeting.
SECTION 2. Annual Meetings. To the extent required by
applicable law or the Restated Certificate of Incorporation of the Corporation,
an annual meeting of the stockholders for the election of directors and the
transaction of such other business as may properly come before the meeting shall
be held at such time and on such date as shall be determined by the Board and
stated in the notice of the meeting.
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SECTION 3. Special Meetings. Except as otherwise provided by
applicable law, special meetings of the stockholders shall be called only in
accordance with the provisions of the Restated Certificate of Incorporation of
the Corporation.
SECTION 4. Notice of Meetings. Written notice of stockholder
meetings, stating the time, place and date, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called, shall be given
by the Chairman of the Board, the President, any Vice President, the Secretary
or an Assistant Secretary to each stockholder entitled to vote at such meeting,
at least ten days but not more than sixty days before the date of the meeting,
unless a different period is prescribed by applicable law.
SECTION 5. Quorum. Except as otherwise provided by applicable
law or by the Restated Certificate of Incorporation of the Corporation, the
holders of a majority in total voting power of the outstanding capital stock of
the Corporation entitled to vote at a meeting of the stockholders, present in
person or represented by proxy, shall constitute a quorum for the transaction of
business at any annual or special meeting of the stockholders; provided, that
where a separate vote by a class or series of capital stock is required, the
holders of a majority in total voting power of the outstanding capital stock of
such class or series, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to such vote on such
matter. In the absence of a quorum, the Chairman of the meeting or the holders
of a majority in voting power of the capital stock entitled to vote thereat that
are present in person or represented by proxy, shall have the power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting of the time and place of the adjourned meeting, until a quorum shall be
present or represented. At such adjourned meeting, any business may be
transacted which may have been transacted at the original meeting. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a written notice of the
adjourned meeting shall be given to each stockholder entitled to vote at the
meeting not less than ten nor more than sixty days before the date of the
meeting, unless a different period is prescribed by applicable law.
SECTION 6. Proxies. Any stockholder entitled to vote at a
meeting of the stockholders may do so in person or by proxy appointed by such
stockholder or by such stockholder's attorney thereto authorized, and bearing a
date not more than three years prior to such meeting, unless
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3
such instrument provides for a longer period. All proxies must be filed with the
Secretary of the Corporation at the beginning of the applicable meeting in order
to be counted in any vote at such meeting.
SECTION 7. Voting. Except as otherwise provided by applicable
law, the Restated Certificate of Incorporation of the Corporation or these
By-laws, and except for the election of directors, any question brought before
any meeting of the stockholders at which a quorum is present shall be decided by
the affirmative vote of the holders of a majority of the total number of votes
of the capital stock present in person or represented by proxy and entitled to
vote on the applicable subject matter.
SECTION 8. Organization; Order of Business. (a) At every
meeting of stockholders, the Chairman of the Board, or in such person's absence,
the President, or in the absence of both of them, any Vice President, shall act
as Chairman of the meeting. In the absence of the Chairman of the Board, the
President, and all Vice Presidents, the Board, or if the Board fails to act, the
stockholders may appoint any stockholder, director or officer of the Corporation
to act as Chairman of any meeting. The Secretary of the Corporation shall act as
Secretary of the meeting, but in the absence of the Secretary, the Chairman of
the meeting may appoint any person to act as Secretary of the meeting.
(b) (1) Nominations of persons for election to the Board of
Directors of the Corporation and the proposal of business to be considered by
the stockholders may be made at any annual meeting of the stockholders, only (i)
pursuant to the Corporation's notice of meeting, (ii) by or at the direction of
the Board of Directors of the Corporation or (iii) by any stockholder who is a
holder of record at the time of the giving of the notice provided for in this
Section 8, who is entitled to vote at the meeting and who complies with the
procedures set forth in this Section 8.
(2) For nominations or business properly to be brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in proper written form to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 70 days nor
more than 120 days prior to the anniversary date of the immediately preceding
annual meeting; provided, however, that in the event that the date of the annual
meeting is more than 30 days earlier or more than 60 days later than such
anniversary date,
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4
notice by the stockholder to be timely must be so delivered or received not
earlier than the 120th day prior to such annual meeting and not later than the
close of business on the later of the 70th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made. To be in proper written form, a stockholder's notice to
the Secretary of the Corporation shall set forth in writing as to each matter
the stockholder proposes to bring before the annual meeting: (i) as to each
person whom the stockholder proposes to nominate for election or re-election as
a director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an election
contest, or is otherwise required pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11
thereunder (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (ii) as to any
other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting and
in the event that such business includes a proposal to amend the by-laws of the
Corporation, the language of the proposed amendment; (iii) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business; (iv) the class or series and number of shares of the Corporation which
are beneficially owned by the stockholder; (v) any material interest of the
stockholder in such business; (vi) a representation that the stockholder is a
holder of record of stock of the Corporation entitled to vote at such annual
meeting and intends to appear in person or by proxy at such meeting to propose
such business; and (vii) if the stockholder intends to solicit proxies in
support of such stockholder's proposal, a representation to that effect. The
foregoing notice requirements shall be deemed satisfied by a stockholder if the
stockholder has notified the Corporation of his or her intention to make a
nomination or present a proposal at an annual meeting and such stockholder's
nominee or proposal has been included in a proxy statement that has been
prepared by management of the Corporation to solicit proxies for such annual
meeting; provided, however, that if such stockholder does not appear or send a
qualified representative to present such nominee or proposal at such annual
meeting, the Corporation need not present such nominee or proposal for a vote at
such meeting notwithstanding that proxies in respect of such vote may have been
received by the Corporation.
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(c) Only such business shall be conducted at a special meeting
of stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for election to the
Board of Directors of the Corporation may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the Corporation's
notice of meeting (i) by or at the direction of the Board of Directors or (ii)
provided that the Board of Directors has determined that directors shall be
elected at such meeting, by any stockholder who is a holder of record at the
time of the giving of notice provided for in this Section 8, who is entitled to
vote at the meeting and who complies with the procedures set forth in this
Section 8. In the event the Corporation calls a special meeting of stockholders
for the purpose of electing one or more directors to the Board of Directors of
the Corporation, any such stockholder may nominate a person or persons (as the
case may be), for election to such position(s) as specified in the Corporation's
notice of meeting, if the stockholder has given timely notice thereof in proper
written form to the Secretary of the Corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation not earlier than the 120th day prior to such special
meeting and not later than the close of business on the later of the 70th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made. To be in proper written
form, such notice must meet the requirements of either of the last two sentences
of paragraph (b)(2) above.
(d) Only such persons who are nominated in accordance with
this Section 8 (including, for avoidance of doubt, pursuant to the last sentence
of paragraph (b)(2) above) shall be eligible to serve as directors of the
Corporation and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 8 (including, for avoidance of doubt,
pursuant to the last sentence of paragraph (b)(2) above). The Chairman of a
meeting shall refuse to permit any business to be brought before the meeting
which fails to comply with the foregoing or if a stockholder solicits proxies in
support of such stockholder's nominee or proposal without such stockholder
having made the representation required by clause (vii) of paragraph (b)(2)
above.
SECTION 9. Action by Written Consent. Except as otherwise
provided by applicable law or by the Restated Certificate of Incorporation of
the Corporation, any action required or permitted to be taken at any annual or
special
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6
meeting of the stockholders may be taken without a meeting, without prior notice
and without a vote if a consent or consents in writing, setting forth the action
so taken, shall be signed by the holders of outstanding stock of the Corporation
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares of stock of the
Corporation entitled to vote thereon were present and voted.
SECTION 10. Voting List. The officer of the Corporation who
has charge of the stock ledger of the Corporation shall prepare and make, at
least ten days before every meeting of the stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof and may be inspected
by any stockholder of the Corporation who is present.
SECTION 11. Stock Ledger. The stock ledger of the Corporation
shall be the only evidence as to the identity of the stockholders entitled to
examine the stock ledger, the list required by Section 10 of this Article II or
the books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
SECTION 12. Record Date. In order that the Corporation may
determine the stockholders entitled to (i) notice of or to vote at any meeting
of the stockholders or any adjournment thereof, (ii) unless otherwise provided
in the Restated Certificate of Incorporation of the Corporation, express consent
to corporate action by written consent without a meeting or (iii) receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion, or
exchange of stock, or (iv) for the purpose of any other lawful action, the Board
may fix a record date, which shall not precede the date upon which the
resolution fixing the record date is adopted by the Board and which record date
shall, unless otherwise required by law, not be: (a) in the case of clause (i)
above, more than sixty nor less than ten days before the date of such meeting,
(b) in
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7
the case of clause (ii) above, more than ten days after the date upon which the
resolution fixing the record date was adopted by the Board, and (c) in the case
of any other action, more than sixty days prior to such other action. If no
record date is fixed: (a) the record date for determining stockholders entitled
to notice of or to vote at a meeting of the stockholders shall be at the close
of business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held; (b) the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting
(unless otherwise provided in the Restated Certificate of Incorporation of the
Corporation), when no prior action by the Board is required under the General
Corporation Law of the State of Delaware, as amended from time to time (the
"General Corporation Law"), shall be the first day on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded; and when prior action by the Board is required under the General
Corporation Law, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the close
of business on the date on which the Board adopts the resolution taking such
prior action; and (c) the record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board adopts
the resolution relating thereto. A determination of stockholders of record
entitled to notice of or to vote at a meeting of the stockholders shall apply to
any adjournment of the meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.
SECTION 13. Inspectors of Election. The Corporation may, and
at the request of any stockholder or if required by law shall, before or at each
meeting of stockholders, appoint one or more inspectors of elections to act at
the meeting and make a written report thereof. The Corporation may designate one
or more persons as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate is able to act at a meeting of the
stockholders, the Chairman of the meeting may, and at the request of any
stockholder or if required by law shall, appoint one or more inspectors to act
at the meeting. Unless otherwise required by law, inspectors may be officers,
employees or agents of the Corporation. Each inspector, before entering upon the
discharge of his or her
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8
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspector or inspectors so appointed or designated shall (i)
ascertain the number of outstanding shares of capital stock of the Corporation
and the voting power of each such share, (ii) determine the shares of capital
stock of the Corporation represented at the meeting and the validity of proxies
and ballots, (iii) count all votes and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors and (v) certify their determination of the
number of shares of capital stock of the Corporation represented at the meeting
and such inspectors' count of all votes and ballots. Such certification and
report shall specify such other information as may be required by law. In
determining the validity and counting of proxies and ballots cast at any meeting
of the stockholders of the Corporation, the inspectors may consider such
information as is permitted by applicable law. No person who is a candidate for
an office at an election may serve as an inspector at such election.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. General Powers. The business of the Corporation
shall be managed by or under the direction of the Board. In addition to the
powers and authority herein or by statute expressly conferred upon them, the
directors are hereby empowered to exercise all such powers and do all such acts
and things as may be exercised or done by the Corporation, subject,
nevertheless, to the provisions of applicable law, the Restated Certificate of
Incorporation of the Corporation and these By-laws; provided, however, that no
By-laws hereafter adopted by the stockholders shall invalidate any prior act of
the directors which would have been valid if such By-laws had not been adopted.
SECTION 2. Number of Directors. Subject to any rights of the
holders of any series of Preferred Stock of the Corporation outstanding at any
time to elect additional directors to the Board, the number of directors that
shall constitute the entire Board of the Corporation shall be determined from
time to time pursuant to the Stockholders' Agreement dated as of [ ], among
Time Warner Companies, Inc., American Television and Communications Corporation,
Warner Communications Inc., TW/TAE Inc., FibrCOM Holdings L.P., Paragon
Communications, MediaOne Group, Inc., and Advance/Newhouse Partnership (and
their successors and
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9
permitted assigns) and the Corporation, as amended from time to time, or, if
such agreement is no longer in effect, the number of directors that shall
constitute the entire Board of the Corporation shall be not less than three
members, the exact number of which shall from time to time be determined by
resolution of the Board.
SECTION 3. Election of Directors. (a) Except as otherwise
required by statute or by the Restated Certificate of Incorporation of the
Corporation, directors shall be elected by a plurality of the votes cast at a
meeting of stockholders by the holders of shares of Class A Common Stock of the
Corporation and Class B Common Stock of the Corporation, voting together as a
single class.
(b) Subject to the provisions of the Restated Certificate of
Incorporation of the Corporation and to this Article III, each director shall
serve until the next succeeding annual meeting of stockholders and until his or
her respective successor has been duly elected and qualified.
SECTION 4. Independent Directors. For so long as any class of
capital stock of the Corporation is traded on a national securities exchange or
authorized for quotation on any nationally recognized over-the-counter quotation
system, the Board shall have at least two independent directors in compliance
with the requirements of any such national securities exchange or quotation
system then applicable to the Corporation. The Board's nominees for election as
independent directors shall be approved by a committee of the Board as set forth
in the Restated Certificate of Incorporation of the Corporation.
SECTION 5. Resignations. Any director of the Corporation may
resign at any time, by giving written notice to the Board, the Chairman of the
Board, the President or the Secretary of the Corporation. Such resignation shall
take effect after receipt of the applicable written notice of resignation by the
Board, the Chairman of the Board, the President or the Secretary of the
Corporation at the time specified in such written notice or, if no time is
specified, immediately upon receipt of such written notice by the Board, the
Chairman of the Board, the President or the Secretary of the Corporation. Unless
otherwise specified in such notice, the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 6. Removal of Directors. Directors may only be removed
as provided in Section 5 of Article VI of
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10
the Restated Certificate of Incorporation of the Corporation.
SECTION 7. Newly Created Directorships and Vacancies. Newly
created directorships resulting from an increase in the number of directors and
any vacancy on the Board occurring for any other reason shall be filled in
accordance with Section 5 of Article VI of the Restated Certificate of
Incorporation of the Corporation.
SECTION 8. Chairman of the Board. The directors shall elect
one of their members to be Chairman of the Board. The Chairman of the Board
shall perform such duties as may from time to time be assigned by the Board. The
Chairman of the Board shall be subject to the control of and may be removed from
such office by the Board.
SECTION 9. Annual Meetings. The Board shall meet for the
election of officers and the transaction of other business as soon as
practicable after each annual meeting of the stockholders, and no notice of such
meeting shall be necessary in order legally to constitute the meeting, provided
a quorum is present. Such meeting may be held at any other time or place
specified in a notice given as hereinafter provided for regular meetings of the
Board.
SECTION 10. Regular Meetings. The Board may hold meetings,
both regular and special, either within or without the State of Delaware.
Regular meetings of the Board may be held at such time and at such place as may
from time to time be determined by the Board. Notice of each regular meeting
shall be furnished in writing to each member of the Board not less than five
days in advance of such meeting, unless such notice requirement is waived in
writing by each such member.
SECTION 11. Special Meetings. Special meetings of the Board
may be called by the Chairman of the Board, and shall be called by the President
or the Secretary of the Corporation upon the written request of not less than a
majority of the members of the Board then in office. Special meetings of the
Board shall be held at such time and place as shall be designated in the notice
of the meeting. The Secretary, or in his or her absence any other officer of the
Corporation, shall give each director notice of the time and place of holding of
special meetings of the Board by mail at least ten days before the meeting, or
by facsimile, telegram, cable or personal service at least three days before the
meeting, unless such notice requirement is waived in writing by each director.
Unless otherwise stated in the notice thereof, any and all business shall be
transacted at
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any meeting without specification of such business in the notice.
SECTION 12. Quorum. Except as otherwise required by applicable
law, the Restated Certificate of Incorporation of the Corporation or these
By-laws, at all meetings of the Board, a majority of the entire Board shall
constitute a quorum for the transaction of business. If a quorum shall not be
present at any meeting of the Board, a majority of those present may adjourn the
meeting from time to time, without notice other than announcement at the meeting
of the time and place of the adjourned meeting, until a quorum shall be present.
For purposes of these By-laws, "the entire Board" means the total number of
directors which the Corporation would have if there were no vacancies or
unfilled newly created directorships.
SECTION 13. Manner of Acting. (a) Except as otherwise provided
by applicable law, the Restated Certificate of Incorporation of the Corporation
or these By-laws, and except for those matters that may be specified in the
Restated Certificate of Incorporation of the Corporation as requiring
stockholder approval, all matters presented to the Board (or a committee
thereof) shall be approved by the affirmative vote of a majority of the
directors present at any meeting of the Board (or such committee) at which there
is a quorum (the foregoing is referred to herein as a "simple majority").
(b) Except as otherwise provided by applicable law, the
Restated Certificate of Incorporation of the Corporation or these By-laws, the
Board may from time to time, by resolution of a simple majority of the Board,
specify, amend, supplement, substitute, remove or add matters that may not be
effected by the Corporation without the affirmative vote of a simple majority of
the Board.
SECTION 14. Organization. Meetings shall be presided over by
the Chairman of the Board, or in the absence of the Chairman of the Board, by
such other person as the directors may select. The Board shall keep written
minutes of its meetings. The Secretary of the Corporation shall act as Secretary
of the meeting, but in the absence of the Secretary, the Chairman of the meeting
may appoint any person to act as Secretary of the meeting.
SECTION 15. Action by Written Consent. Unless otherwise
required by the Restated Certificate of Incorporation of the Corporation or
these By-laws, any action required or permitted to be taken at any meeting of
the Board or of any committee thereof may be taken without a
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meeting, if all the members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee thereof.
SECTION 16. Meetings by Means of Conference Telephone. Unless
otherwise required by the Restated Certificate of Incorporation of the
Corporation or these By-laws, members of the Board, or any committee thereof,
may participate in a meeting of the Board or such committee by means of a
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other. Participation in a
meeting pursuant to this Section 16 shall constitute presence in person at
such meeting.
SECTION 17. Compensation. The directors shall receive such
compensation for attendance at any meetings of the Board and any expenses
incidental to performance of their duties as the Board shall from time to time
determine by resolution. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE IV
COMMITTEES
SECTION 1. Constitution and Powers. Except as provided by
applicable law, the Restated Certificate of Incorporation of the Corporation or
these By-laws, the Board may, by resolution of a simple majority of its members,
designate one or more committees. Except as provided in these By-laws, each
committee shall consist of one or more directors of the Corporation. Except as
provided by applicable law, the Restated Certificate of Incorporation of the
Corporation or these By-laws, the Board, by a simple majority vote of its
members, shall have the right from time to time to delegate to or to remove from
any board committee the authority to approve any matters which would not
otherwise require a higher vote than a simple majority vote of the Board. Except
as required by applicable law, the Restated Certificate of Incorporation of the
Corporation or these By-laws, for those matters that require a higher vote of
the Board than a simple majority vote, the Board, by such requisite higher vote,
shall have the right from time to time to delegate to or to remove from any
board committee
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the authority to approve any such matters requiring such requisite higher vote.
SECTION 2. Organization of Committees. The Board may designate
one or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of such committee. In the absence
or disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not they
constitute a quorum, may unanimously appoint another member of the Board to act
at the meeting in place of any such absent or disqualified member. Each
committee that may be established by the Board may fix its own rules and
procedures. All committees so appointed shall keep regular minutes of the
transactions of their meetings and shall be responsible to the Board for the
conduct of the enterprises and affairs entrusted to them. Notice of meetings of
committees, other than of regular meetings provided for by such rules, shall be
given to committee members.
SECTION 3. Executive Committee. The Board, by the affirmative
vote of all the members of the entire Board may designate an executive committee
of the Board to manage and operate the affairs of the Corporation. Except as
provided by applicable law, the Restated Certificate of Incorporation of the
Corporation or these By-laws, such executive committee shall exercise all powers
and authority of the Board in the management of the business and affairs of the
Corporation; provided, however, that an executive committee shall not have the
authority to approve any matters which (pursuant to applicable law, the Restated
Certificate of Incorporation of the Corporation or these By-laws) require a
higher vote than a simple majority vote of the Board, unless the resolution
establishing such executive committee (or vesting such executive committee with
such authority) states otherwise and such resolution is approved by such
requisite higher vote. The executive committee shall report to the Board not
less often than quarterly.
ARTICLE V
OFFICERS
SECTION 1. Officers. The Board shall elect a Chairman of the
Board, a Chief Executive Officer, a President, one or more Vice Presidents, a
Chief Financial Officer, a Treasurer and a Secretary. The Chairman of the Board
and the Chief Executive Officer shall be chosen from the Board. The Board may
elect from time to time such other officers as, in the opinion of the Board, are
desirable for
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14
the conduct of the business of the Corporation. Any two or more offices may be
held by the same person, provided, however, that the President shall not hold
any other office except that of Chairman of the Board and/or Chief Executive
Officer.
SECTION 2. Chairman of the Board. The Chairman of the Board,
if present, shall preside at all meetings of the stockholders and of the Board.
The Chairman of the Board may enter into and execute in the name of the
Corporation powers of attorney, contracts, bonds and other obligations which
implement policies established by the Board. The Chairman of the Board shall be
a senior officer of the Corporation and in case of the inability or failure of
the President to perform his or her duties, the Chairman of the Board shall
perform the duties of the President. In addition, the Chairman of the Board
shall perform such other duties as may from time to time be assigned to such
officer by the Board.
SECTION 3. Chief Executive Officer. The Chief Executive
Officer shall have supervisory authority over the business, affairs and property
of the Corporation, and over the activities of the President and other executive
officers of the Corporation (excluding the Chairman of the Board). In general,
the Chief Executive Officer shall have all authority incident to the office of
Chief Executive Officer and shall have such other authority and perform such
other duties as may from time to time be assigned by the Board. If the Board
shall not have elected another person to such office, the President shall be the
Chief Executive Officer. If so elected by the Board, the Chairman of the Board
may be the Chief Executive Officer.
SECTION 4. President. The President shall be the chief
operating officer of the Corporation and shall have general supervision of the
daily business, affairs and property of the Corporation. The President shall
have the power to appoint and terminate the appointment or election of officers,
agents or employees other than those appointed or elected by the Board. The
President may enter into and execute in the name of the Corporation powers of
attorney, contracts, bonds and other obligations which implement policies
established by the Board. In general, the President shall have all authority
incident to the office of President and chief operating officer and shall have
such other authority and perform such other duties as may from time to time be
assigned by the Board. The President shall, at the request or in the absence or
disability of the Chairman of the Board or the Chief Executive Officer, perform
the duties and exercise the powers of such officer.
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SECTION 5. Vice Presidents. The Vice Presidents shall have
such powers and shall perform such duties as may from time to time be assigned
to them by the Chairman of the Board, the President, the executive committee, if
any, or the Board. Without limiting the generality of the foregoing, Vice
Presidents may enter into and execute in the name of the Corporation contracts
and other obligations pertaining to the regular course of their duties which
implement policies established by the Board.
SECTION 6. Chief Financial Officer. The Chief Financial
Officer shall be the principal financial officer of the Corporation and shall
have such powers and perform such duties as may be assigned by the Chairman of
the Board, the President, the executive committee, if any, or the Board. Without
limiting the generality of the foregoing, the Chief Financial Officer may sign
and execute contracts and other obligations pertaining to the regular course of
his or her duties which implement policies established by the Board.
SECTION 7. Treasurer. The Treasurer shall, if required by the
Chairman of the Board, the President, the executive committee, if any, the Board
or any other officer to whom the Treasurer reports, give a bond for the faithful
discharge of duties, in such sum and with such sureties as may be so required.
Unless the Board otherwise declares by resolution, the Treasurer shall have
custody of, and be responsible for, all funds and securities of the Corporation;
receive and give receipts for money due and payable to the Corporation from any
source whatsoever; deposit all such money in the name of the Corporation in such
banks, trust companies, or other depositories as the Board may designate;
against proper vouchers, cause such funds to be disbursed by check or draft on
the authorized depositories of the Corporation signed in such manner as shall be
determined by the Board, and be responsible for the accuracy of the amounts of
all funds so disbursed; regularly enter or cause to be entered in books to be
kept by the Treasurer or under the Treasurer's direction, full and adequate
accounts of all money received and paid by the Treasurer for the account of the
Corporation; render to the Board, any duly authorized committee of directors,
the Chairman of the Board, the President or any officer to whom the Treasurer
reports, whenever they or any of them, respectively, shall require the Treasurer
to do so, an account of the financial condition of the Corporation and of all
transactions of the Treasurer; and, in general, have all authority incident to
the office of Treasurer and such other authority and perform such other duties
as from time to time may be assigned by the Board. Any Assistant Treasurer
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shall, in the absence or disability of the Treasurer, perform the duties and
exercise the powers of the Treasurer and shall have such other duties and have
such other powers as the Board may from time to time prescribe.
SECTION 8. Secretary. The Secretary shall act as Secretary of
all meetings of the stockholders and of the Board; shall keep the minutes
thereof in the proper book or books to be provided for that purpose; shall see
that all notices required to be given by the Corporation in connection with
meetings of stockholders and of the Board are duly given; shall be the custodian
of the seal of the Corporation and shall affix the seal or cause it or a
facsimile thereof to be affixed to all certificates for stock of the Corporation
and to all documents or instruments requiring the same, the execution of which
on behalf of the Corporation is duly authorized in accordance with the
provisions of these By-laws; shall have charge of the stock records and also of
the other books, records and papers of the Corporation relating to its
organization and acts as a corporation, and shall see that the reports,
statements and other documents related thereto required by law are properly kept
and filed, all of which shall, at all reasonable times, be open to the
examination of any director; and shall, in general, have all authority incident
to the office of Secretary and such other authority and perform such other
duties as from time to time may be assigned by the Board.
SECTION 9. Removal. Any officer may be terminated or removed
from office, either with or without cause, by the Board at any meeting thereof
or by written consent, provided, however, that such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
SECTION 10. Resignation. Any officer may resign at any time by
giving written notice to the Board, the Chairman of the Board, the President or
the Secretary of the Corporation. Any such resignation shall take effect at the
time therein specified or if no time is specified, immediately. Unless otherwise
specified in such notice, the acceptance of such resignation shall not be
necessary to make it effective.
SECTION 11. Vacancies. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause may be filled
at any time by the Board, or if such officer was appointed by the Chairman of
the Board or the President, then by the Chairman of the Board or the President,
as applicable.
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SECTION 12. Bank Accounts. In addition to such bank accounts
as may be authorized in the usual manner by resolution of the Board, the
Treasurer, with approval of the Chairman of the Board or the President, may
authorize such bank accounts to be opened or maintained in the name and on
behalf of the Corporation as the Treasurer shall deem necessary or appropriate,
provided that payments from such bank accounts are to be made upon and according
to the check of the Corporation as shall be specified in the written
instructions of the Treasurer or Assistant Treasurer of the Corporation with the
approval of the Chairman of the Board or the President of the Corporation.
SECTION 13. Voting of Stock Held. Unless otherwise provided in
the Restated Certificate of Incorporation of the Corporation or directed by the
Board, the Chairman of the Board and the President may from time to time
personally or by an attorney or attorneys or agent or agents of the Corporation,
in the name and on behalf of the Corporation, cast the votes which the
Corporation may be entitled to cast as a stockholder or otherwise in any other
corporation, limited liability company, partnership, trust or legal entity
("Person") any of the stock or securities of which may be held by the
Corporation, at meetings of the holders of the stock or other securities of such
Person, or consent in writing to any action by any such Person, and may instruct
any person or persons so appointed as to the manner of casting such votes or
giving such consent, and may execute or cause to be executed on behalf of the
Corporation and under its corporate seal, or otherwise, such written proxies,
consents, waivers or other instruments as the Secretary may deem necessary or
proper in the premises; or may attend any meeting of the holders of stock or
other securities of any such Person and thereat vote or exercise any or all
other powers of the Corporation as the holder of such stock or other securities
of such Person.
ARTICLE VI
CAPITAL STOCK
SECTION 1. Form of Certificates. (a) Every holder of stock in
the Corporation shall be entitled to have a certificate signed, in the name of
the Corporation (i) by the Chairman of the Board, the President or any of the
Vice Presidents and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by him or her in the Corporation.
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(b) For each class or series of stock that the Corporation
shall be authorized to issue, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences or rights shall be set forth in full or summarized on the face or
back of the certificate which the Corporation shall issue to represent each
class or series of stock, provided that, except as otherwise required by Section
202 of the GCL, in lieu of the foregoing requirements, there may be set forth on
the face or back of the certificate which the Corporation shall issue to
represent such class or series of stock, a statement that the Corporation will
furnish without charge to each stockholder that so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences or rights.
SECTION 2. Signatures. Any or all signatures on the
certificate may be a facsimile. In case an officer, transfer agent or registrar
that has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he or she were such officer, transfer agent or registrar at the date of
issue.
SECTION 3. Lost Certificates. The Board may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of the fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate the
Board may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate, or his
or her legal representative, to advertise the same in such manner as the Board
shall require and/or to give the Corporation a bond in such sum as it may direct
as indemnity against any claim that may be made against the Corporation and its
transfer agents and registrars with respect to the certificate alleged to have
been lost, stolen or destroyed or the issuance of such new certificate.
SECTION 4. Transfers. Except as otherwise prescribed by
applicable law or by the Restated Certificate of Incorporation of the
Corporation, and subject to any transfer restrictions applicable thereto and
conspicuously
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19
noted on the stock certificate, stock of the Corporation shall be transferable
in the manner prescribed in these By-laws. Transfers of stock shall be made on
the books of the Corporation only by the person named in the certificate or by
such person's duly authorized attorney appointed by a power of attorney duly
executed and filed with the Secretary of the Corporation or a transfer agent of
the Corporation, and upon surrender of the certificate or certificates for such
stock properly endorsed. Every certificate exchanged, returned or surrendered
shall be marked "Canceled," with the date of cancelation, by the Secretary or an
Assistant Secretary of the Corporation or the transfer agent thereof. No
transfer of stock shall be valid as against the Corporation, its stockholders or
creditors for any purpose until it shall have been entered in the stock records
of the Corporation by an entry showing from and to whom transferred.
SECTION 5. Transfer Agent and Registrar. The Board may appoint
one or more transfer agents and one or more registrars and may require all
certificates for shares to bear the manual or facsimile signature or signatures
of any of them.
SECTION 6. Beneficial Owners. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise required
by law.
SECTION 7. Regulations. Except as otherwise provided by
applicable law or in the Restated Certificate of Incorporation of the
Corporation, the Board shall have the power and authority to make all such rules
and regulations as it may deem expedient concerning the issue, transfer,
registration, cancelation and replacement of certificates representing stock of
the Corporation.
SECTION 8. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions in the Restated Certificate of
Incorporation of the Corporation, may be declared by the Board at any regular or
special meeting, and may be paid in cash, in property, or in securities of the
Corporation. Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the
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20
Board from time to time, in its absolute discretion, deems proper as a reserve
or reserves to meet contingencies, or for purchasing any of the shares of
capital stock, warrants, rights, options, bonds, debentures, notes, scrip or
other securities or evidences of indebtedness of the Corporation, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for any proper purpose, and the Board may modify or abolish any
such reserve.
ARTICLE VII
INDEMNIFICATION
SECTION 1. Directors' Indemnification. The Corporation shall
indemnify and hold harmless, to the fullest extent permitted by applicable law
as it presently exists or may hereafter be amended, any person that was or is
made or is threatened to be made a party or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(collectively, a "Proceeding"), by reason of the fact that such person is or was
a director or officer of the Corporation or, while a director or officer of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust, enterprise or nonprofit entity, including service with respect
to employee benefit plans, against all liability and loss suffered and expenses
(including attorneys' fees) reasonably incurred by such person in connection
with such proceeding or any claim made in connection therewith. Such right of
indemnification shall inure whether or not the claim asserted is based on
matters which antedate the adoption of this Section 1 of Article VII. Subject to
the second sentence of the next paragraph, the Corporation shall be required to
indemnify or make advances to a person in connection with a Proceeding (or part
thereof) initiated by such person only if the initiation of such Proceeding (or
part thereof) was authorized by the Board.
The Corporation shall pay the expenses (including attorneys'
fees) incurred by any person that is or was a director or officer of the
Corporation or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, in defending any Proceeding in advance of its
final disposition; provided, however, that the payment of expenses incurred by
such a person in defending any Proceeding in advance of its
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21
final disposition shall be made only upon receipt of an undertaking by such
person to repay all amounts advanced if it should be ultimately determined that
such person is not entitled to be indemnified under this Section 1 of Article
VII or otherwise. If a claim for indemnification or payment of expenses under
this Section 1 of Article VII is not paid in full within sixty (60) calendar
days after a written claim therefor has been received by the Corporation, the
claimant may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action, the Corporation shall have the
burden of proving that the claimant was not entitled to the requested
indemnification or payment of expenses under applicable law.
The rights conferred on any person by this Section 1 of
Article VII shall not be exclusive of any other rights which such person may
have or hereafter acquire under any statute, the Restated Certificate of
Incorporation, these By-laws, agreement, vote of stockholders or resolution of
disinterested directors or otherwise. The Corporation's obligation, if any, to
indemnify any person that was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, enterprise or nonprofit entity shall be reduced by any amount such person
may collect as indemnification from such other corporation, partnership, joint
venture, trust, enterprise or nonprofit entity, as applicable.
Any amendment, modification or repeal of the foregoing
provisions of this Section 1 of Article VII shall not adversely affect any right
or protection hereunder of any person in respect of any act or omission
occurring prior to the time of such amendment, modification or repeal.
SECTION 2. Survival of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by or granted
pursuant to this Article VII shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent of the Corporation or other person indemnified hereunder and
shall inure to the benefit of the heirs, executors and administrators of such
person.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 1. Books and Records. The books and record of the
Corporation may be kept at such places within
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or without the State of Delaware as the Board may from time to time determine.
SECTION 2. Seal. The Board shall approve a corporate seal
which shall be in the form of a circle and shall bear the name of the
Corporation, the year of its incorporation and the word "Delaware". The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
SECTION 3. Fiscal Year. The fiscal year of the Corporation
shall be determined and may be changed by resolution of the Board.
SECTION 4. Notices and Waivers Thereof. (a) Whenever written
notice is required by applicable law, the Restated Certificate of Incorporation
of the Corporation or these By-laws to be given to any director, member of a
committee or stockholder, such notice may be given personally, or by mail, or in
the case of directors or officers, by facsimile transmission, addressed to such
address as appears on the books of the Corporation. Any notice given by
facsimile transmission shall be deemed to have been given upon confirmation of
receipt by the addressee.
(b) Whenever any notice is required by applicable law, the
Restated Certificate of Incorporation of the Corporation, or these By-laws, to
be given to any director, member of a committee or stockholder, a waiver thereof
in writing, signed by the person or persons entitled to said notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting, present in person or represented by proxy,
shall constitute a waiver of notice of such meeting, except where the person
attends the meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the stockholders, directors, or members of
a committee of directors needs to be specified in any written waiver of notice
unless so required by applicable law, the Restated Certificate of Incorporation
of the Corporation or these By-laws.
SECTION 5. Amendments. These By-laws may be amended only as
set forth in Article IX of the Restated Certificate of Incorporation of the
Corporation.
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SECTION 6. Saving Clause. These By-laws are subject to the
provisions of the Restated Certificate of Incorporation of the Corporation and
applicable law. If any provision of these By-laws is inconsistent with the
Restated Certificate of Incorporation of the Corporation or the General
Corporation Law, such provision shall be invalid only to the extent of such
conflict, and such conflict shall not affect the validity of any other provision
of these By-laws.
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STOCKHOLDERS' AGREEMENT
AGREEMENT, dated as of ________, 1999, among TIME WARNER TELECOM INC.,
a Delaware corporation (the "Company"), TIME WARNER COMPANIES, INC., a Delaware
corporation ("TWX"), AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION, a
Delaware corporation ("ATC"), WARNER COMMUNICATIONS INC., a Delaware corporation
("WCI"), TW/TAE, INC., a Delaware corporation ("TW/TAE"), FIBRCOM HOLDINGS,
L.P., a Delaware limited partnership that is owned by TW/KBLCOM INC., a Delaware
corporation ("TW/KBLCOM"), PARAGON COMMUNICATIONS, a Colorado general
partnership ("Paragon" and, together with TWX, ATC, WCI, TWI/TAE and TW/KBLCOM,
the "TW Stockholders"), MEDIAONE GROUP, INC. (formerly U S WEST Multimedia
Communications, Inc.), a Colorado corporation (the "MediaOne Stockholder"), and
ADVANCE/NEWHOUSE PARTNERSHIP, a New York general partnership ("A/N").
W I T N E S S E T H:
WHEREAS, the TW Stockholders, the MediaOne Stockholder and A/N own all
of the issued and outstanding shares of Class B Common Stock of the Company; and
WHEREAS, the parties hereto desire to set forth herein their agreement
concerning the composition of the Board of Directors of the Company, the
ownership and transfer of the Common Stock of the Company and such other matters
as are set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1. Definitions. For purposes of this Agreement, the following terms
shall have the meanings set forth below:
"Affiliate" shall mean, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with
such other Person and shall include, with respect to A/N, any Newhouse Family
Member.
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For purposes of this Agreement, neither the Company, nor any Person controlled
by the Company, shall be deemed to be an Affiliate of a Principal Stockholder.
"Agreement" shall mean this Stockholders' Agreement, as it may be
amended, restated, modified or supplemented from time to time in accordance with
its terms.
"beneficially own" (and beneficial ownership, owned beneficially and
other correlative terms) is defined in Rule 13d-3 promulgated under the Exchange
Act; provided, however, that a party shall not be deemed to beneficially own
securities merely as a result of the voting agreements set forth in this
Agreement.
"A/N Stockholder Group" shall mean A/N and any other Affiliates of A/N
that become parties to this Agreement pursuant to Section 3.3.
"Board" shall mean the Board of Directors of the Company.
"Business Day" shall mean any day (other than a day which is a
Saturday or Sunday) on which banks are permitted to be open for business in the
City of New York.
"CEO" shall mean the officer elected by the Board as the chief
executive officer of the Company.
"Certificate of Incorporation" shall mean, as of any date, the
Restated Certificate of Incorporation of the Company as in effect on such date.
"Class A Common Stock" shall mean the Class A Common Stock, par value
$0.01 per share, of the Company.
"Class B Common Stock" shall mean the Class B Common Stock, par value
$0.01 per share, of the Company.
"Common Stock" shall mean the Class A Common Stock and the Class
B Common Stock.
"control" shall mean possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a Person
whether
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through the ownership of equity securities or voting securities, by contract or
otherwise.
"Controlled Affiliate" shall mean, with respect to any Person as of
any relevant date, shall mean the Parent of such Person and each Subsidiary of
such Parent.
"Distribution" shall mean the distribution by a Parent to its
stockholders (whether by divided, redemption, exchange, merger or otherwise) of
the capital stock of a Subsidiary of such Parent the assets of which include all
of the shares of Common Stock beneficially owned by such Parent.
"Equity Securities" shall have the meaning ascribed to such term in
Rule 405 promulgated under the Securities Act, and in any event includes any
security having the attendant right to vote for directors or similar
representatives.
"Exchange Act" shall mean the Securities and Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Independent Director" shall mean a director who is neither employed
by nor affiliated with the Company or any Principal Stockholder.
"Indirect Transfer" shall mean a Transfer of common stock or other
equity interests of a Principal Stockholder or of a Person (other than the
Parent of such Principal Stockholder) of which such Principal Stockholder is a
direct or indirect Subsidiary to any Person after giving effect to which such
Principal Stockholder is no longer a Subsidiary of the Person that was its
Parent prior to such Transfer; provided, however, that a Distribution shall not
constitute an "Indirect Transfer."
"MediaOne" shall mean MediaOne Group, Inc. (formerly U S WEST,
Inc.), a Delaware corporation.
"MediaOne Stockholder Group" shall mean the MediaOne Stockholder and
any other Affiliates of MediaOne that become parties to this Agreement pursuant
to Section 3.3.
"Monetizing Securities" shall mean any security which is convertible
into or exchangeable for Class A Common Stock. As used herein, "Monetizing
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Securities" offered by an Eligible Holder or its Parent shall include securities
offered by an independent trust established at the request of such Eligible
Holder or its Parent.
"NASD" shall mean the National Association of Securities Dealers.
"Newhouse Family Member" shall mean any Person who is a lineal
descendant (including adoptees) of Meyer and Rose Newhouse, or any Person which
is wholly-owned directly or indirectly by one or more of such lineal
descendants, or the trustee of any trust, or a custodian under the Uniform Gift
to Minors Act or similar fiduciary, the primary beneficiaries of which (or the
primary income beneficiaries of which, in the case of a charitable remainder or
similar trust) include only one or more of such lineal descendants (provided
that such trust may grant a general or special power of appointment to any such
Person and may permit trust assets to be used to pay taxes, legacies and other
obligations of the trust or the estate of any such Person, payable by reason of
the death of such Person, as applicable) or the executor, administrator,
guardian or personal representative of the estate of any such lineal descendant.
"Nominating Committee" shall mean (i) so long as the Principal
Stockholder Groups have the right to designate a total of at least three Agreed
Nominees pursuant to Section 2.1(c), a committee of the Board comprised of all
of the members of the Board other than the CEO and the Independent Directors and
(ii) if the Principal Stockholder Groups have the right to designate a total of
less than three Agreed Nominees pursuant to Section 2.1(c), a committee of three
members of the Board comprised of all Agreed Nominees designated by the
Principal Stockholder Groups and such other director or directors as shall be
determined by majority vote of the Board.
"Ownership Percentage" shall mean, with respect to any Principal
Stockholder Group as of any date, the percentage determined by multiplying 100
by a fraction (x) the numerator of which is the number of shares of Common Stock
beneficially owned by the members of such Principal Stockholder Group as of such
date and (y) the denominator of which is the aggregate issued and outstanding
shares of Common Stock as of such date (rounded to the nearest one-hundredth (or
if there shall not be a nearest one-hundredth, to the next highest
one-hundredth).
"Parent" shall mean, with respect to any Person as of any relevant
date, such Person (i) if it is its own ultimate parent entity (within the
meaning of the HartScott-Rodino Antitrust Improvements Act of 1976, as amended,
and the rules and
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regulations promulgated thereunder, as in effect on the date hereof) or (ii) if
it has no ultimate parent entity that is a corporation or partnership;
otherwise, "Parent" shall mean such ultimate (corporate or partnership) parent
entity of such Person as so defined.
"Person" shall mean an individual, corporation, limited liability
company, partnership, trust or unincorporated organization or a government or
any agency or political subdivision thereof.
"Principal Stockholder" shall mean each of the TW Stockholders, the
MediaOne Stockholder, A/N and any other Person that becomes a party to this
Agreement pursuant to Section 3.3, Section 3.4 or Section 3.5.
"Principal Stockholder Group" shall mean (i) the TW Stockholder Group,
(ii) the MediaOne Stockholder Group, (iii) the A/N Stockholder Group or (iv) any
other Principal Stockholder that becomes a party to this Agreement pursuant to
Section 3.4 or 3.5, together with any transferees of such Principal Stockholder
that become parties to this Agreement pursuant to Section 3.3.
"Public Offering" shall mean an offering of Class A Common Stock in
compliance with Section 5 of the Securities Act pursuant to a registration
statement on a form applicable to the sale of securities to the general public.
"Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SEC" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Subsidiary" of any Parent shall mean a Person (a)(i) more than fifty
percent of the voting power of the outstanding shares or securities of which
(representing the right to vote for the election of directors or other managing
authority) are owned or controlled, directly or indirectly through one or more
Subsidiaries, by such Parent or (ii) which does not have outstanding shares or
securities, but more than fifty percent of the ownership interests of which
representing the right to make the decisions for such Person are owned or
controlled, directly or indirectly through one or more Subsidiaries, by such
Parent and (b) that in either case is controlled by such Parent; provided,
however, that in each case, such Person shall be deemed to be a
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Subsidiary of such Parent only for so long as the foregoing requirements remain
satisfied.
"Transfer" shall mean to directly offer for sale, sell, transfer,
tender, pledge, encumber, assign or otherwise dispose of, or enter into any
contract, option, or other arrangement or understanding (other than this
Agreement) with respect to or consent to the direct offer for sale, sale,
transfer, tender, pledge, encumbrance, assignment or other disposition of.
Without limiting the foregoing, any redemption, purchase or other acquisition in
any manner (whether or not for consideration) by the Company of any Common Stock
shall be deemed to be a Transfer of such security. The terms "Transferred,"
"Transferee" and similar variations shall have correlative meanings.
"TWE" shall mean Time Warner Entertainment Company, L.P., a Delaware
limited partnership.
"TWE-A/N" shall mean Time Warner Entertainment-Advance/Newhouse
Partnership, a New York general partnership.
"TW Stockholder Group" shall mean the TW Stockholders and any other
Affiliates of TWX that become parties to this Agreement pursuant to Section 3.3.
1.2 Terms Defined Elsewhere in the Agreement. For purposes of this
Agreement, the following terms shall have the meanings set forth in the sections
indicated:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
A/N............................................recitals
Agreed Nominee...................................2.1(b)
Company Notice...................................4.1(a)
Demand Notice....................................4.1(a)
Demand Registrations.............................4.1(a)
Eligible Holder................................. 4.1(a)
First Refusal Electing Stockholder...............3.4(b)
First Refusal Notice of Sale.....................3.4(a)
First Refusal Rejection Date.....................3.4(d)
First Refusal Shares.............................3.4(a)
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
First Refusal Stockholders.......................3.4(a)
First Refusal Termination Date...................3.4(f)
Incidental Registration .........................4.2(a)
Indemnified Party................................4.6(c)
Indemnifying Party...............................4.6(c)
Inspectors.......................................4.4(g)
Maximum Amount...................................4.1(e)
MediaOne Stockholder...........................recitals
Minimum Condition................................4.1(a)
Qualifying First Offer Amount....................3.4(a)
Records..........................................4.4(g)
Reorganization Agreement.......................recitals
Selling Stockholders.............................3.4(a)
Tag Notice of Sale...............................3.5(e)
Tag Offer........................................3.5(a)
Tag Offeror......................................3.5(a)
Tag Shares.......................................3.5(a)
Tag Stockholders.................................3.5(a)
Third Party Offer................................3.4(a)
Third Party Offeror..............................3.4(a)
TW Selling Stockholders..........................3.5(a)
TW Stockholders................................recitals
TW Shares........................................3.5(a)
</TABLE>
1.2. Other Definitional Provisions. (a) The words "hereof", "herein",
and "hereunder" and words of similar import, when used in this Agreement, shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement.
(b) The terms defined in the singular shall have a comparable meaning
when used in the plural, and vice versa.
(c) The terms "dollars" and "$" shall mean United States dollars.
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<PAGE>
ARTICLE II
BOARD OF DIRECTORS AND STOCKHOLDERS
2.1. Composition of the Board. (a) The Board shall initially consist
of 10 directors. In the event the right of any Principal Stockholder Group to
designate one or more Agreed Nominees pursuant to Section 2.1(c)(i) terminates,
the size of the Board shall be reduced by a number of directors equal to the
number of Agreed Nominees as to which such right to nominate has terminated;
provided, however, that in no circumstances shall the Board consist of less than
six directors. Individuals to serve on the Board shall be nominated in
accordance with this Agreement and nomination procedures established by the
Board, the Company's By-Laws and the rules and regulations of the SEC and the
principal stock exchange or association, if any, on which the Common Stock is
listed. Directors shall be elected in accordance with the Certificate of
Incorporation, the Company's By-Laws and the General Corporation Law of
Delaware.
(b) For purposes of this Agreement, an individual designated as a
director in accordance with Section 2.1(c) or Section 2.3 is referred to as an
"Agreed Nominee." No Principal Stockholder shall nominate any individual to
serve as a director of the Company except an individual designated as an Agreed
Nominee pursuant to the provisions of Section 2.1(c) or Section 2.3. A Principal
Stockholder may nominate for election as a director any individual designated by
its Principal Stockholder Group as an Agreed Nominee pursuant to Section
2.1(c)(i) or Section 2.3 or any individual designated as Agreed Nominee pursuant
to Section 2.1(c)(ii) if, in any such case, such individual was not duly
nominated in connection with such election by the Board or a nominating
committee of the Board pursuant to the Company's nomination procedures. Each
Principal Stockholder hereby agrees to vote (x) all shares of Common Stock held
of record or owned beneficially by such Principal Stockholder at the time of
such vote or action by written consent and (y) all shares of Common Stock as to
which such Principal Stockholder at the time of such vote or action by written
consent has voting control, in each case (A) in favor of the election to the
Board of the Agreed Nominees designated in accordance with Section 2.1(c) and
Section 2.3 and (B) against any other individual nominated to serve as a
director of the Company.
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(c) The Agreed Nominees shall be designated as follows:
(i) (A) So long as the TW Stockholder Group has an Ownership
Percentage which is greater than or equal to 18.88% (as adjusted from time to
time pursuant to Section 2.5), the TW Stockholder Group shall have the right to
designate three Agreed Nominees. If the TW Stockholder Group has an Ownership
Percentage which is less than 18.88% (as adjusted from time to time pursuant to
Section 2.5), the TW Stockholder Group shall have the right to designate a
number of Agreed Nominees determined in accordance with the following table
(with the percentages set forth in such table being adjusted from time to time
pursuant to Section 2.5).
<TABLE>
<CAPTION>
TW Stockholder Group Number of
Ownership Percentage Agreed Nominees
-------------------- ---------------
<S> <C>
14.16% to 18.87% 2
9.44% to 14.15% 1
less than 9.44% 0
</TABLE>
(B) So long as the TW Stockholder Group has an Ownership Percentage
which is greater than or equal to 18.88% (as adjusted from time to time pursuant
to Section 2.5), the MediaOne Stockholder Group shall have the right to
designate a number of Agreed Nominees determined in accordance with the
following table (with the percentages set forth in such table being adjusted
from time to time pursuant to Section 2.5).
<TABLE>
<CAPTION>
MediaOne
Stockholder Group Number of
Ownership Percentage Agreed Nominees
-------------------- ---------------
<S> <C>
9.44% or greater 3
less than 9.44% 0
</TABLE>
If the TW Stockholder Group has an Ownership Percentage which is less than
18.88% (as adjusted from time to time pursuant to Section 2.5), the MediaOne
Stockholder Group shall have the right to designate a number of Agreed Nominees
determined in accordance with the following table (with the percentages set
forth in such table being adjusted from time to time pursuant to Section 2.5).
9
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
MediaOne
Stockholder Group Number of
Ownership Percentage Agreed Nominees
-------------------- ---------------
<S> <C>
18.88% or greater 3
14.16% to 18.87% 2
9.44% to 14.15% 1
less than 9.44% 0
</TABLE>
(C) So long as the A/N Stockholder Group has an Ownership Percentage
which is greater than or equal to 9.44% (as adjusted from time to time pursuant
to Section 2.5), the A/N Stockholder Group shall have the right to designate one
Agreed Nominee. If the A/N Stockholder Group has an Ownership Percentage of less
than 9.44% (as adjusted from time to time pursuant to Section 2.5), the A/N
Stockholder Group shall not have the right to designate any Agreed Nominees.
(D) Except as set forth below, the members of a Principal Stockholder
Group shall not have the right to Transfer or effect an Indirect Transfer of the
rights of such Principal Stockholder Group to designate Agreed Nominees (and any
Indirect Transfer shall result in the termination of the rights of such
Principal Stockholder Group to designate Agreed Nominees). The members of a
Principal Stockholder Group shall have the right to Transfer (or effect an
Indirect Transfer of) all, but not less than all, of the rights of such
Principal Stockholder Group to designate Agreed Nominees pursuant to this
Section 2.1(c)(i) in connection with the Transfer (or Indirect Transfer) by such
Principal Stockholders of all of the shares of Class B Common Stock owned by
them pursuant to the provisions of Section 3.4 or 3.5. In such event, the
acquiring Principal Stockholder Group (and any future Principal Stockholder
Group to which such Principal Stockholder Group transfers its shares of Class B
Common Stock in accordance with the provisions of Section 3.4 or 3.5) shall have
the right to designate Agreed Nominees in the same circumstances as the
transferring Principal Stockholder Group had the right to designate Agreed
Nominees as set forth in Section 2.1(c)(i). It is acknowledged and agreed that
the Transfer of all or a portion of the capital stock of a Parent of a Principal
Stockholder Group (or the consummation of any other indirect transaction which
does not constitute an Indirect Transfer) shall not result in the termination of
the rights of such Principal Stockholder Group to designate Agreed Nominees.
(ii) The CEO shall be an Agreed Nominee.
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<PAGE>
(iii) Two individuals nominated by the Nominating Committee shall be
Agreed Nominees if such individuals would be Independent Directors at the time
of their election and are approved by a majority of the members of the
Nominating Committee.
(iv) If the Principal Stockholder Groups do not have the right to
designate at least three Agreed Nominees pursuant to this Section 2.1(c), the
Nominating Committee shall have the right to designate a number of Agreed
Nominees equal to the difference between (x) three and (y) the number of Agreed
Nominees which the Principal Stockholder Groups have the right to designate at
such time (such Agreed Nominees being "Other Directors").
(d) The Principal Stockholder Groups agree that the initial Board
shall consist of the Agreed Nominees listed on Annex A hereto and shall cause
such Agreed Nominees to be elected as directors promptly following the date
hereof to serve until the next annual meeting of the stockholders of the
Company. Thereafter, Agreed Nominees shall be designated as described in this
Section 2.1 prior to each annual meeting of the stockholders of the Company in a
manner that is consistent with the rules and regulations of the SEC and the
principal stock exchange or association, if any, on which the Common Stock is
listed.
2.2. Removal of Directors. (a) Each Principal Stockholder hereby
agrees to vote or act by written consent with respect to (or cause to be voted
or acted upon by written consent) all shares of Common Stock held of record or
beneficially owned by it at the time of such vote or action by written consent
or as to which such Principal Stockholder has voting control at the time of such
vote or action by written consent to remove or cause the removal from office of
any director who was an Agreed Nominee designated by a Principal Stockholder
Group pursuant to Section 2.1(c)(i) or Section 2.3(c) if the Principal
Stockholder Group that so designated such Agreed Nominee requests such removal
by notice to the other Principal Stockholders.
(b) In the event the right of any Principal Stockholder Group to
designate one or more Agreed Nominees pursuant to Section 2.1(c)(i) terminates
or if the number of Agreed Nominees such Principal Stockholder Group has the
right to designate pursuant to Section 2.1(c)(i) decreases, the members of such
Principal Stockholder Group shall use their reasonable best efforts to cause
specified individual(s) comprising a corresponding number of Agreed Nominees
previously designated by such Principal Stockholder Group to resign from the
Board. In the event that such Principal Stockholder Group is unable to cause
such Agreed Nominees
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<PAGE>
<PAGE>
to promptly resign, each Principal Stockholder hereby agrees to vote or act by
written consent with respect to (or cause to be voted or acted upon by written
consent) all shares of Common Stock held of record or beneficially owned by it
at the time of such vote or action by written consent or as to which such
Principal Stockholder has voting control at the time of such vote or action by
written consent for the removal of such Agreed Nominees.
(c) Each Principal Stockholder hereby agrees to vote or act by written
consent with respect to (or cause to be voted or acted upon by written consent)
all shares of Common Stock held of record or beneficially owned by it at the
time of such vote or action by written consent or as to which such Principal
Stockholder has voting control at the time of such vote or action by written
consent for the removal of an individual designated as an Agreed Nominee
pursuant to Section 2.1(c)(ii) and thereafter elected as a director if such
individual ceases to serve as CEO for any reason. An Independent Director and
any Other Director may be removed in accordance with the Certificate of
Incorporation and the Company's By-laws.
2.3. Vacancies. If, as a result of death, disability, retirement,
resignation, removal (with or without cause) or otherwise there shall exist or
occur any vacancies on the Board, individuals to fill such vacancies shall be
nominated and elected in the manner provided in this Agreement and in the
Certificate of Incorporation and the Company's By-laws including at a special
meeting of the stockholders called by any one director. Agreed Nominees with
respect to an election to fill any such vacancies shall be designated as
follows:
(a) In the case of the CEO, the successor CEO shall be an Agreed
Nominee.
(b) In the case of an Independent Director, an individual nominated in
the manner described in Section 2.1(c)(iii) shall be an Agreed Nominee.
(c) In the case of an Other Director, an individual nominated in the
manner described in Section 2.1(c)(iv) shall be an Agreed Nominee.
(d) In all other cases, the Principal Stockholder Group or Principal
Stockholder Groups that, under Section 2.1(c), are then entitled to designate a
greater number of Agreed Nominees than the number of directors currently sitting
on the Board who are Agreed Nominees designated by such Principal Stockholder
Group or Principal Stockholder Groups shall designate Agreed Nominees for such
vacancies
12
<PAGE>
<PAGE>
(with each such Principal Stockholder Group designating the number of additional
Agreed Nominees that each such Principal Stockholder Group is so entitled to
designate).
(e) In the event that such vacancies are not promptly filled by the
Board of Directors in the manner provided herein, each Principal Stockholder
hereby agrees to vote or act by written consent with respect to (or cause to be
voted or acted by written consent) all shares of Common Stock held of record or
beneficially owned by it at the time of such vote or action by written consent
or as to which such Principal Stockholder has voting control at the time of such
vote or action by written consent for the election of such Agreed Nominees
designated in accordance with the above provisions and for the removal of any
directors whose election is inconsistent with such provisions.
2.4. Conflicting Charter or By-law Provisions. Each Principal
Stockholder shall vote its shares of Common Stock, and shall take all other
actions necessary, to ensure that the Certificate of Incorporation and the
Company's By-laws facilitate and do not at any time conflict with the provisions
of this Agreement.
2.5. Certain Adjustments. In the event the Company from time to time
takes any action which affects the number of issued and outstanding shares of
Common Stock, including, without limitation, (i) primary issuances of shares of
Common Stock (including pursuant to the initial Public Offering of the Company),
(ii) repurchases or redemptions of shares of Common Stock and (iii) stock
splits, reverse stock splits, stock dividends of Common Stock (or any other
class or series of common stock) or similar subdivisions, reclassifications or
recapitalizations, then the percentages used in Section 2.1(c) immediately prior
to such action shall be appropriately adjusted to reflect the percentages that
would have been in effect on the date of this Agreement had such action been
taken on the date of this Agreement prior to the computation of such
percentages.
ARTICLE III
TRANSFERS AND CONVERSIONS
3.1. Transfers; Conversion. (a) Except as permitted by Section 3.3,
3.4 or 3.5, prior to any Transfer or Indirect Transfer by a Principal
Stockholder of shares of Class B Common Stock, such Principal Stockholder shall
be required to
13
<PAGE>
<PAGE>
convert such shares of Class B Common Stock into shares of Class A Common Stock
in accordance with the procedures set forth in the Certificate of Incorporation.
There shall be no restrictions on the ability of a Principal Stockholder to (i)
convert shares of Class B Common Stock into shares of Class A Common Stock or
(ii) transfer shares of Class A Common Stock (including shares of Class A Common
Stock received upon conversion of shares of Class B Common Stock). Nothing set
forth in this Agreement shall prevent the transfer of all or a portion of the
capital stock of a Parent of a Principal Stockholder (or any other indirect
transaction which does not constitute an Indirect Transfer) or require the
conversion of the Class B Common Stock of such Principal Stockholder into Class
A Common Stock in connection therewith.
(b) Except as expressly permitted or required by this Agreement, (i)
each Principal Stockholder shall be the record and beneficial owner of such
shares of Class B Common Stock indicated in the Company's records as being owned
by such Principal Stockholder and (ii) no Principal Stockholder shall enter into
any agreement or arrangement, grant any proxies or powers of attorney or deposit
into a voting trust with or otherwise directly or indirectly transfer voting
power, with respect to the exercise of its rights to designate Agreed Nominees
or to request the removal of a director pursuant to this Agreement (other than
an agreement or arrangement solely among Principal Stockholders that are
included in the same Principal Stockholder Group); provided, however, that the
foregoing shall not be construed to limit the ability of a Principal Stockholder
to enter into agreements with respect to the voting of its shares of Common
Stock pending a sale of such stock permitted by Section 3.1(a).
(c) The Company agrees not to record any transfer of Class B Common
Stock by any Principal Stockholder in the stock transfer books of the Company
unless the transfer complies with the provisions of this Article III.
3.2. Legend. Each certificate evidencing outstanding shares of Class B
Common Stock held by a Principal Stockholder shall bear the following legends:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO, AND
TRANSFERABLE ONLY UPON COMPLIANCE WITH, THE PROVISIONS OF A
STOCKHOLDERS' AGREEMENT, DATED AS OF _____________, 1998, AMONG TIME
WARNER TELECOM INC. AND CERTAIN STOCKHOLDERS THEREOF. A COPY OF THIS
AGREEMENT IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICE OF TIME WARNER
TELECOM INC. AT 5700
14
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<PAGE>
S. QUEBEC STREET, GREENWOOD VILLAGE, COLORADO 80111.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND ACCORDINGLY MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO
THE REQUIREMENTS OF THE SECURITIES ACT OR AN EXEMPTION THEREFROM.
All certificates evidencing shares of Class B Common Stock hereafter issued by
the Company to a Principal Stockholder shall bear the legends set forth above.
Upon termination of this Agreement and surrender to the Company for such purpose
of any certificates bearing the first legend set forth above, the Company shall
reissue such certificates to the owner thereof without such legend. The Company
shall reissue certificates without the second legend set forth above upon the
delivery to the Company of an opinion of counsel to the effect that such legend
is no longer required.
3.3. Transfers to Affiliates. Subject to applicable law, (i) any
Principal Stockholder other than A/N shall have the right to Transfer shares of
Class B Common Stock to its Parent or to any direct or indirect Subsidiary of
its Parent if the transferee assumes the obligations of the transferor under
this Agreement with respect to such shares and becomes a party to this Agreement
and (ii) A/N (and any member of the A/N Stockholder Group which is a transferee
of shares of Class B Common Stock pursuant to this Section 3.3(ii)) shall have
the right to Transfer shares of Class B Common Stock to a Newhouse Family Member
or to an Affiliate of A/N so long as at least 80% of the equity of such
Affiliate is owned directly or indirectly by one or more Newhouse Family Members
and the transferee assumes the obligations of the transferor under this
Agreement with respect to such shares and becomes a party to this Agreement. A
Principal Stockholder shall be permitted to Transfer shares of Class B Common
Stock pursuant to this Section 3.3 without converting such shares into Class A
Common Stock. Notwithstanding any Transfer permitted by this Section 3.3, the
transferor shall remain liable for the performance by any transferee of its
obligations hereunder if the transferee owns no material assets other than the
shares of Common Stock transferred.
3.4. Right of First Refusal. (a) If, other than pursuant to Section
3.3, all of the members of a Principal Stockholder Group (the "Selling
Stockholders") shall propose to sell to an unaffiliated third party (the "Third
Party Offeror") all but
15
<PAGE>
<PAGE>
not less than all of the shares of Class B Common Stock beneficially owned by
the Selling Stockholders at such time (the "First Refusal Shares") or to effect
an Indirect Transfer of such shares (in which case the "First Refusal Shares"
shall be the shares of Class B Common Stock beneficially owned by the Selling
Stockholders) (such proposal being the "Third Party Offer"), the Selling
Stockholders shall deliver to each other Principal Stockholder (the "First
Refusal Stockholders") a notice (a "First Refusal Notice of Sale") containing a
copy of the Third Party Offer, the identity of the Third Party Offeror and an
offer to sell all but not less than all of the First Refusal Shares to the First
Refusal Stockholders on the following terms: (i) if the Third Party Offer
contemplates a purchase of the First Refusal Shares by the Third Party Offeror
for consideration consisting solely of cash, then the Selling Stockholders'
offer shall be to sell the First Refusal Shares for cash in an amount equal to
the purchase price specified in, and otherwise on the terms and conditions
contained in, the Third Party Offer, and (ii) if the Third Party Offer
contemplates an acquisition of the First Refusal Shares by the Third Party
Offeror for consideration any portion of which is not cash or if the Third Party
Offer contemplates an Indirect Transfer, then the Selling Stockholder's offer
shall be to sell the First Refusal Shares for cash in an amount equal to the
cash consideration plus the fair market value of the non-cash consideration (as
determined pursuant to Section 3.6) and otherwise on the terms and conditions
contained in the Third Party Offer. The First Refusal Notice of Sale shall
specify the price at which the First Refusal Shares are offered, as provided in
the preceding sentence, as well as other material terms of the Third Party
Offer. The First Refusal Stockholders shall enter into an appropriate
confidentiality agreement relating to the Third Party Offer on customary terms
if reasonably requested by the Selling Stockholders with respect to the Third
Party Offer.
(b) If a First Refusal Stockholder desires to accept all or any
portion of the offer set forth in a First Refusal Notice of Sale as to any part
of the First Refusal Shares, such First Refusal Stockholder (a "First Refusal
Electing Stockholder") shall, within 45 days of receipt of such First Refusal
Notice of Sale, notify the Selling Stockholders of its intention to acquire
First Refusal Shares and the number of such shares it desires to acquire, and
deliver a copy of such notice to each other First Refusal Stockholder.
(c) If the First Refusal Electing Stockholders desire to acquire, in
the aggregate, all of the First Refusal Shares, then the First Refusal Electing
Stockholders shall have the right to acquire all of the First Refusal Shares,
allocated among them as follows (or in such other manner as the First Refusal
Electing Stockholders may agree):
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(i) The First Refusal Shares shall be allocated among the First
Refusal Electing Stockholders pro rata (based on the number of shares of Class B
Common Stock owned by each of them) until all of the First Refusal Shares have
been allocated or any First Refusal Electing Stockholder has been allocated the
number of First Refusal Shares that it desires to acquire, as specified in its
notice to the Selling Stockholders, as it may have been amended pursuant to
Section 3.4(d).
(ii) If all First Refusal Shares are not allocated pursuant to
paragraph (i) or any prior application of this paragraph (ii), any First Refusal
Shares that were not allocated pursuant to paragraph (i) or any prior
application of this paragraph (ii) shall be allocated among the First Refusal
Electing Stockholders (other than any First Refusal Electing Stockholder that
has been allocated the number of First Refusal Shares that it desires to
acquire), as specified in its notice to the Selling Stockholders, as it may have
been amended pursuant to Section 3.4(d), pro rata (based on the number of shares
of Class B Common Stock owned by each of them). If all First Refusal Shares are
not allocated pursuant to paragraph (i) and any prior application of this
paragraph (ii), any First Refusal Shares that were not allocated pursuant to
paragraph (i) and any prior application of this paragraph (ii) shall be
allocated by continuing to apply this paragraph (ii) as required.
(d) If the First Refusal Electing Stockholders desire to acquire, in
the aggregate, less than all of the First Refusal Shares, then the Selling
Stockholders shall so notify the First Refusal Electing Stockholders. Each First
Refusal Electing Stockholder shall have the right, by written notice sent to the
Selling Stockholder (with a copy of such notice to each other Principal
Stockholder) within 10 days after its receipt of the notice from the Selling
Stockholders pursuant to this Section 3.4(d) to amend its notice to increase the
number of First Refusal Shares that it desires to purchase. If, after giving
effect to any amendment to any First Refusal Electing Stockholder's notice
pursuant to this Section 3.4(d), the First Refusal Electing Stockholders desire
to acquire, in the aggregate, all of the First Refusal Shares, then the First
Refusal Electing Stockholders shall have the right to acquire all the First
Refusal Shares, allocated among them in accordance with Section 3.4(c). If,
after giving effect to any amendment to any First Refusal Electing Stockholder's
notice pursuant to this Section 3.4(d), the First Refusal Electing Stockholders
desire to acquire, in the aggregate, less than all of the First Refusal Shares,
then the Selling Stockholders' offer of the First Refusal Shares shall be deemed
rejected as of the last day for a First Refusal Electing Stockholder to amend
its notice pursuant to this Section 3.4(d) (the "First Refusal Rejection Date").
17
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(e) Any purchase of First Refusal Shares by the First Refusal Electing
Stockholders pursuant to this Section 3.4 shall be subject to the following
terms and conditions:
(i) The Selling Stockholders shall represent and warrant that the
First Refusal Electing Stockholders will receive good and valid title to the
First Refusal Shares to be purchased by them, free and clear of all security
interests, liens, claims, pledges, options, rights of first refusal, limitations
on voting rights, charges and other encumbrances of any nature whatsoever except
as set forth in this Agreement and except for governmental, regulatory and other
third party consents and approvals required for transfers of shares of Common
Stock generally.
(ii) The closing of the purchase of First Refusal Shares by the
First Refusal Electing Stockholders shall be subject to the satisfaction of
following conditions:
(A) All applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
promulgated thereunder, shall have expired or been terminated.
(B) All governmental approvals and other third party consents
expressly required with respect to the transactions to be consummated at such
closing shall have been obtained, to the extent the failure to obtain such
approvals or consents would prevent the Selling Stockholders from performing any
of their material obligations under the transaction documents or would result in
any materially adverse change in, or materially adverse effect on, the business,
assets, results of operations, financial condition or prospects of the Company
and the Persons controlled by the Company taken as a whole.
(C) There shall be no preliminary or permanent injunction or other
order by any court of competent jurisdiction restricting, preventing or
prohibiting the consummation of the transactions to be consummated at such
closing.
(D) The representation and warranty of the Selling Stockholders
contemplated by clause (i) of this sentence shall be true and correct at the
closing of such sale with the same force and effect as if then made.
(iii) The closing of any purchase of First Refusal Shares by the First
Refusal Electing Stockholders pursuant to this Section 3.4 shall take place on
the date
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<PAGE>
and at the place and time determined by the Selling Stockholders and
communicated to the First Refusal Electing Stockholders in writing, at least
seven days prior to such closing, but in any event within sixty days after the
acceptance by the First Refusal Electing Stockholders of the offer, subject to
extension for a maximum of one hundred eighty additional days to the extent
required to obtain all required governmental, regulatory and other third party
consents and approvals.
(f) If (i) the Selling Stockholders' offer of the First Refusal Shares
is rejected as provided in Section 3.4(d) or (ii) the purchase by the First
Refusal Stockholders of the First Refusal Shares is not consummated within the
period set forth in Section 3.4(e)(iii) for any reason other than an action by
the Selling Stockholders, then the Selling Stockholders shall have the right, at
any time during the 90-day period beginning on the First Refusal Rejection Date
or the day following the last day of the period set forth in Section 3.4(e)(iii)
(the "First Refusal Termination Date"), as applicable, to enter into a binding
agreement to sell all of the First Refusal Shares to the Third Party Offeror, or
to effect the Indirect Transfer contemplated by the Third Party Offer, as
applicable, in either case on terms and conditions no less favorable in the
aggregate to the Selling Stockholders (and, in the case of an Indirect Transfer,
the Person receiving the consideration) than those set forth in the Third Party
Offer, and thereafter to sell all of the First Refusal Shares to the Third Party
Offeror or effect the Indirect Transfer, as applicable, pursuant to such
agreement. If the Selling Stockholders do not enter into such an agreement
during such 90-day period, or do not close the sale thereunder within sixty days
after the execution of such agreement (subject to extension for a maximum of one
hundred eighty additional days to the extent required to obtain all required
governmental, regulatory and other third party consents and approvals), the
procedure set forth above with respect to the First Refusal Notice of Sale shall
be repeated with respect to the Third Party Offer or any subsequent proposed
transfer of Class B Common Stock by the Selling Stockholders which is subject to
the provisions of this Section 3.4.
(g) In connection with a sale or Indirect Transfer of shares of Class
B Common Stock to a Third Party Offeror permitted by Section 3.4(f), (i) the
Selling Stockholders shall have the right to sell to the Third Party Offeror
all, but not less than all, of their shares of Class B Common Stock or permit
the Indirect Transfer, as applicable, without converting such shares to Class A
Common Stock, (ii) the Selling Stockholders shall have the right to transfer to
the Third Party Offeror all, but not less than all, of their rights to designate
Agreed Nominees pursuant to Section 2.1(c)(i) and (iii) (A) in the case of a
sale of the First Refusal Shares, the Third Party Offeror shall
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be required to assume the obligations of the Selling Stockholders under this
Agreement with respect to such shares and become a party to this Agreement and
(B) in the case of an Indirect Transfer, the Third Party Offeror, upon taking
control of the Selling Stockholders, shall be required to cause the Selling
Stockholders to confirm in writing the continuing validity and effectiveness of
their obligations under this Agreement.
(h) In furtherance of the rights set forth in this Section 3.4, the
Company agrees that, on reasonable notice following the delivery of a First
Refusal Notice of Sale, at reasonable times and without interfering with the
business or operations of the Company, it will assist the Selling Stockholders
in obtaining all necessary consents to any disposition of the shares to be sold.
3.5. Tag-Along Rights. (a) If the members of the TW Stockholder Group
(the "TW Selling Stockholders") propose to sell to an unaffiliated third party
(the "Tag Offeror") (i) all but not less than all of the shares of Class B
Common Stock and (ii) shares of Class A Common Stock beneficially owned by them
which collectively represent greater than 33% of the issued and outstanding
shares of Common Stock (the "TW Shares) or to effect an Indirect Transfer of
such shares (in which case the "TW Shares" shall be all the shares of Common
Stock owned by the TW Selling Stockholders) (such proposed sale being a "Tag
Offer"), then, as a condition to effecting such sale or Indirect Transfer, the
TW Selling Stockholders shall cause proper provisions to be made so that each
other Principal Stockholder (each, a "Tag Stockholder") shall have the right to
participate in such Tag Offer and sell to the Tag Offeror a number of shares of
Common Stock owned by it equal to the product of (x) the number of shares of
Common Stock owned by such Tag Stockholder multiplied by (y) a fraction, the
numerator of which is the number of TW Shares and the denominator of which is
the number of issued and outstanding shares of Common Stock owned by the TW
Stockholder Group (collectively, with respect to all Tag Stockholders, the "Tag
Shares"); provided, however, that if a Tag Stockholder owns both shares of Class
B Common Stock and Class A Common Stock, the shares of Class B Common Stock
owned by such Tag Stockholder shall be included in the Tag Shares prior to the
inclusion of any shares of Class A Common Stock owned by such Tag Stockholder.
In connection with a Tag Offer, the TW Selling Stockholders shall cause the Tag
Offeror to deliver to each Tag Stockholder a notice (a "Tag Notice of Sale")
containing a copy of the Tag Offer, the identity of the Tag Offeror and an offer
to purchase all of the Tag Shares owned by such Tag Stockholder on the same
terms and conditions (including as to price and form of consideration) as the
terms and conditions contained in the Tag Offer. The Tag Notice of Sale shall
specify the price at which the Tag Shares are to be purchased, as provided in
the preceding sentence. If
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the Tag Offer also constitutes a Third Party Offer pursuant to Section 3.4, the
TW Selling Stockholders shall deliver the Tag Notice of Sale at the same time
that the First Refusal Notice of Sale is delivered. The Tag Stockholders shall
enter into an appropriate confidentiality agreement relating to the Tag Offer on
customary terms if reasonably requested by the TW Selling Stockholders with
respect to the Tag Offer. If the Tag Offer contemplates an Indirect Transfer,
the Tag Offeror shall offer the Tag Stockholders the option of selling the Tag
Shares pursuant to an Indirect Transfer.
(b) If a Tag Stockholder desires to accept the offer set forth in a
Tag Notice of Sale as to all of the Tag Shares beneficially owned by such Tag
Stockholder, such Tag Stockholder shall, within 45 days of receipt of such Tag
Notice of Sale, notify the Tag Offeror and the TW Selling Stockholders of its
intention to sell all but not less than all of its Tag Shares to the Tag
Offeror, and deliver a copy of such notice to each other Tag Stockholder. If a
Tag Stockholder desires to sell its Tag Shares, then the Tag Offeror shall
purchase all of such Tag Shares together with the TW Shares pursuant to Section
3.5(c).
(c) The TW Selling Stockholders shall have the right, at any time
during the 90-day period beginning on the day following the end of the 45-day
period referred to in Section 3.5(b), to enter into a binding agreement to sell
all but not less than all of the TW Shares to the Tag Offeror, or to effect the
Indirect Transfer contemplated by the Tag Offer, as applicable, in either case
on terms and conditions no less favorable in the aggregate to the TW Selling
Stockholders (and, in the case of an Indirect Transfer, the Person receiving the
consideration) than those set forth in the Tag Offer. The Tag Stockholders
electing to sell their Tag Shares pursuant to Section 3.5(b) shall become party
to such agreement and agree to sell all but not less than all of their Tag
Shares to the Tag Offeror (or to effect an Indirect Transfer, as applicable)
pursuant thereto on the terms and conditions set forth therein. In connection
with such agreement, each Tag Stockholder which is a member of a Principal
Stockholder Group which has the right to designate Agreed Nominees pursuant to
Section 2.1(c) at such time shall be required to make the same representations,
warranties and agreements, including as to indemnification, as the TW Selling
Stockholders and each Tag Stockholder which is a member of a Principal
Stockholder Group which does not have the right to designate Agreed Nominees
pursuant to Section 2.1(c) at such time shall not be required to make any
representations or warranties and agreements, including as to indemnification,
other than representations and warranties (and related indemnification) as to
title to the Tag Shares to be transferred and as to organization and due
execution and delivery and enforceability of the transfer agreements (and, in
the case of an Indirect Transfer, such other representations and warranties
regarding
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the entity the equity of which is being sold as are comparable to the foregoing
representations). The TW Stockholders and Tag Stockholders shall thereafter have
the right to sell such TW Shares and Tag Shares to the Tag Offeror and/or effect
the Indirect Transfers, as applicable, pursuant to such agreement. If the TW
Selling Stockholders do not enter into such an agreement during such 90-day
period, or do not close the sale thereunder within sixty days after the
execution of such agreement (subject to extension for delays caused by actions
by the Tag Stockholders and to extension for a maximum of one hundred eighty
additional days to the extent required to obtain all required governmental,
regulatory and other third party consents and approvals), the procedure set
forth above with respect to the Tag Notice of Sale shall be repeated with
respect to the Tag Offer or any subsequent proposed transfer of Common Stock by
the TW Selling Stockholders which is subject to the provisions of this Section
3.5.
(d) In connection with a sale or Indirect Transfers of shares of Class
B Common Stock to a Tag Offeror pursuant to Section 3.5(d), (i) the TW Selling
Stockholders and the Tag Stockholders shall have the right to sell to the Tag
Offeror all but not less than all of their shares of Class B Common Stock or
permit the Indirect Transfers, as applicable, without converting such shares to
Class A Common Stock, (ii) (A) when the TW Selling Stockholders sell all of the
shares of Class B Common Stock owned by them to the Tag Offeror, the TW Selling
Stockholders shall have the right to transfer to the Tag Offeror their rights to
designate Agreed Nominees pursuant to Section 2.1(c)(i) and (B) when all of the
members of any Principal Stockholder Group other than the TW Stockholder Group
sell all of the shares of Class B Common Stock owned by them to the Tag Offeror,
such Tag Stockholders shall have the right to transfer to the Tag Offeror their
rights to designate Agreed Nominees pursuant to Section 2.1(c)(i) and (iii) (A)
in the case of a sale of the TW Shares or Tag Shares, the Third Party Offeror
shall be required to assume the obligations of the TW Selling Stockholders and
the Tag Stockholders under this Agreement with respect to such shares and become
a party to this Agreement and (B) in the case of an Indirect Transfer, the Tag
Offeror, upon taking control of the TW Selling Stockholders or Tag Stockholders,
as applicable, shall be required to cause the TW Selling Stockholders or Tag
Stockholders to confirm in writing the continuing validity and effectiveness of
their obligations under this Agreement.
(e) In furtherance of the rights set forth in this Section 3.5, the
Company agrees that, on reasonable notice following the delivery of a Tag Notice
of Sale, at reasonable times and without interfering with the business or
operations of the Company, it will assist the TW Selling Stockholders and the
Tag Stockholders in
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obtaining all necessary consents to any disposition of the shares to be sold. In
the event the TW Selling Stockholders transfer the TW Shares to the Tag Offeror,
the provisions of this Section 3.5 shall apply to any subsequent transfer by the
Tag Offeror and/or any of its future transferees of shares of Class B Common
Stock which represent greater than 33% of the voting power of the outstanding
Common Stock as if any such transferors were TW Selling Stockholders.
3.6. Valuation of Consideration. Before submitting a First Refusal
Notice of Sale pursuant to Section 3.4(a) in response to a Third Party Offer
that contemplates (i) an acquisition of the First Refusal Shares by the Third
Party Offeror for consideration any portion of which is not cash or (ii) an
Indirect Transfer, the Selling Stockholders and the other Principal Stockholders
shall cause the fair market value of the non-cash consideration to be determined
by an investment banking firm in the following manner. The Selling Stockholders
shall deliver to each other Principal Stockholder a notice stating that the
Selling Stockholders intend to deliver a First Refusal Notice of Sale. The
Selling Stockholders and the Principal Stockholder (other than the Selling
Stockholders) that, together with its Controlled Affiliates, owns the greatest
number of shares of Class B Common Stock, shall each select an investment
banking firm and shall instruct the investment banking firms so selected to
select a third investment banking firm within 30 days following the delivery of
such notice by the Selling Stockholders. The investment banking firm selected in
accordance with the foregoing procedure shall submit a written report setting
forth its determination of its appraisal of the First Refusal Shares no later
than 45 days after the date of its selection. The fees, costs and expenses of
the investment banking firms so selected shall be borne by the Selling
Stockholders. In determining the fair market value of the non-cash
consideration, if applicable, the investment banking firm retained pursuant to
this Section 3.6 shall: (A) assume that the fair market value of the applicable
non-cash consideration asset is the price at which such asset would change hands
between a willing buyer and a willing seller, neither being under any compulsion
to buy or sell and each having reasonable knowledge of all relevant facts; (B)
assume that the applicable non-cash consideration asset would be sold for cash;
(C) take into account any applicable control premium relating to the shares to
be sold; and (D) use valuation techniques then prevailing in the relevant
industry. If the Third Party Offer contemplates a sale of First Refusal Shares
or an Indirect Transfer in exchange for tax-deferred consideration, the fair
market value of the First Refusal Shares shall not be grossed-up to the extent
of any taxes which shall be payable by the Selling Stockholders as a result of a
sale of the First Refusal Shares to the First Refusal Electing Stockholders;
provided, however, that the parties agree to negotiate in good faith to
structure any such transaction in a tax-efficient manner.
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3.7. Transferee Principal Stockholders; Other Parties to Agreement.
(a) A Principal Stockholder shall remain a Principal Stockholder for so long as
it owns any Class B Common Stock regardless of the percentage of Class B Common
Stock it may own from time to time. Any transferee of a Principal Stockholder
required to become a party to this Agreement pursuant to Section 3.3, Section
3.4(g) or Section 3.5(d) shall become a Principal Stockholder by delivering to
the Company (which shall promptly send notice thereof to the Principal
Stockholders) a counterpart signature page to this Agreement. No further action
by the Company or the Principal Stockholders shall be required for such person
to become a party to this Agreement. Following any Indirect Transfer permitted
by this Agreement, the Principal Stockholder with respect to which such Indirect
Transfer has occurred shall confirm to the other Principal Stockholders in
writing the continuing validity and effectiveness of its obligations under this
Agreement.
(b) If any Principal Stockholder Group transfers to any Person shares
of Class A Common Stock which represent at least 5% of the shares of Common
Stock then outstanding, such Person shall have the right to become a party to
this Agreement with respect to the registration rights granted under Article IV
only.
3.8. Cooperation. (a) The Company shall use commercially reasonable
efforts to cooperate with any transferring Principal Stockholder in connection
with its efforts to Transfer any interest in its Common Stock in accordance with
the provisions of this Article III, including making qualified personnel
available for attending hearings and meetings respecting any consents, approvals
and authorizations required for such Transfer and, at the request of the
transferring Principal Stockholder, making all filings with, and giving all
notices to, third parties and governmental authorities that may be necessary or
reasonably required to be made or given by the Company in order to effect the
contemplated Transfers. Each Principal Stockholder also agrees to use
commercially reasonable efforts to cooperate with any transferring Principal
Stockholder by making any filings with, and giving notices to, third parties and
governmental authorities that may be necessary or reasonably required to be made
or given by such Principal Stockholder in connection with such contemplated
Transfer. Subject to the other provisions of this Section, no Principal
Stockholder or the Company shall take any action to delay, impair or impede the
receipt of any required consents, approvals or authorizations. "Commercially
reasonable efforts" as used in this Section shall not require any party to
undertake extraordinary or unreasonable measures to obtain any consents,
approvals or other authorizations, including requiring such party to make any
material expenditures (other than normal filing fees or the like)
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or to accept any material changes in the terms of the contract, license or other
instrument for which a consent, approval or authorization is sought.
(b) Without limiting the foregoing and notwithstanding anything to the
contrary in this Agreement, no party to this Agreement shall be required to
agree to any prohibition, limitation or other requirements, including but not
limited to (i) any prohibition or limitation on the ownership or operation by
such party or any of its Subsidiaries or Affiliates of any portion of the
business or assets of such party or any of its Subsidiaries or Affiliates, or
any prohibition or limitation that would compel such party or any of its
Subsidiaries or Affiliates to dispose of or hold separate any portion of the
business or assets of such party or any of its Subsidiaries or Affiliates, (ii)
any prohibition or limitation on the rights of such party to acquire, own or
enter into any businesses or lines of businesses, (iii) any prohibition or
limitation on the ability of such party to acquire or hold, or exercise full
rights of ownership of, any shares of capital stock of the Company, including
the right to vote the capital stock of the Company acquired by it on all matters
properly presented to the stockholders of the Company, (iv) any prohibition or
limitation on such party or any of its Subsidiaries or Affiliates from
effectively controlling in any material respect the business or operations of
such party or any of its Subsidiaries or Affiliates or (v) any change in any
respect the governance of the Company from that set forth in the Certificate of
Incorporation, the Company's By-Laws and this Agreement, any change in such
party's rights under this Agreement or any limitations on the ability of such
party to exercise any such rights.
ARTICLE IV
REGISTRATION RIGHTS
4.1. Demand Registration. (a) At any time after the date which is 180
days after the closing of the Company's initial Public Offering, any stockholder
of the Company which is a party to this Agreement (an "Eligible Holder") may
request that the Company effect the registration under the Securities Act of all
or part of its shares of Class A Common Stock (including shares of Class A
Common Stock issuable upon conversion of shares of Class B Common Stock held by
it) for sale in the manner specified in such request. A stockholder that
previously owned shares of Class B Common Stock but ceased to be a Principal
Stockholder upon the conversion of its shares of Class B Common Stock to shares
of Class A Common Stock shall continue to be a party to this Agreement so long
as it owns any shares of Class A Common
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Stock and therefore shall be an Eligible Holder. Such request shall be made by
furnishing written notice thereof (a "Demand Notice") to the Company, setting
forth the number of shares of Class A Common Stock requested to be registered
and such Eligible Holder's intended method of distribution. Within ten days
after receipt of any Demand Notice, the Company shall give written notice of
such Demand Notice to all other Eligible Holders. Following receipt of such
notice from the Company (the "Company Notice"), each such other Eligible Holder
shall have the right to give the Company a written request to register any or
all of such Eligible Holder's Class A Common Stock (including shares of Class A
Common Stock issuable upon conversion of shares of Class B Common Stock held by
it) in the registration described in the Company Notice, provided that such
written request is given within fifteen days after the date on which the Company
Notice is given (with such request stating (i) the number of shares of Class A
Common Stock to be so included, (ii) such other Eligible Holder's intended
method of distribution of such shares and (iii) any other information that the
Company Notice reasonably requests be included in such notice from such Eligible
Holder). All registrations requested pursuant to this Section 4.1(a) are
referred to herein as "Demand Registrations." The Company shall not be required
to effect a Demand Registration unless the aggregate number of shares of Class A
Common Stock demanded to be so registered is at least one percent of the number
of shares of Class A Common Stock then outstanding (the "Minimum Condition"). If
the Minimum Condition is met, then, subject to Sections 4.1(c), 4.1(e) and
4.1(f) below, the Company shall, as soon as practicable, file with the SEC and
use its best efforts to cause to become effective as promptly as practicable, a
Registration Statement which shall cover the shares of Class A Common Stock
requested to be registered pursuant to such Demand Notice and Company Notices.
(b) Once a Demand Registration has been effected, the Company shall
not be obligated to register Class A Common Stock pursuant to another Demand
Registration prior to the expiration of 180 days from the date on which the
previous Demand Registration was declared effective; provided, however, that a
registration will not count as a Demand Registration unless it has become
effective, and such effectiveness has been maintained under the Securities Act
(and not subject to any stop order, injunction or other order or requirement of
the SEC or other governmental agency or court for any reason) for the period
specified in Section 4.4(a).
(c) The Company may postpone for a reasonable period (not to exceed
two months) after its receipt of a Demand Notice the filing of a Registration
Statement for a Demand Registration if the Board reasonably believes that such
Demand Registration would have a material adverse effect on any proposal or plan
by
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the Company or any of its Subsidiaries to engage in any financing, acquisition
of assets (other than in the ordinary course of business) or any merger,
consolidation, tender offer or other significant transaction and notifies the
Eligible Holders in writing of such postponement; provided however, that the
Company shall have the right to so postpone a filing only one time during any
period of twelve consecutive months.
(d) In the event that the Demand Notice and the notices in response to
the Company Notices for a Demand Registration contemplate more than one intended
method of distribution by the Eligible Holders, then the Company will use its
best efforts to include in the Registration Statement for such Demand
Registration multiple prospectuses and/or plans of distributions covering each
intended method of distribution. The Company acknowledges and agrees that an
intended method of distribution of an Eligible Holder may include the
registration of shares of Class A Common Stock in connection with an
underwritten offering of Monetizing Securities of such Eligible Holder or its
Parent. If, in the event of such an underwritten offering of Monetizing
Securities, the other Eligible Holders desire to offer their own Monetizing
Securities or to sell shares of Class A Common Stock for cash as part of such
underwritten offering, the Eligible Holders will negotiate in good faith, in
consultation with the managing underwriter for the offering, to include such
securities to the extent practicable.
(e) If a Demand Registration involves an underwriting of shares of
Class A Common Stock for cash (or, to the extent permitted by Section 4.1(d), an
underwriting of Monetizing Securities of one or more Eligible Holders or their
Parents or shares of Class A Common Stock for cash and Monetizing Securities of
one or more Eligible Holders or their Parents) and the managing underwriter
advises the Company and the Eligible Holders in writing that marketing factors
require a limitation of the number of shares of Class A Common Stock (and/or
Monetizing Securities) to be underwritten, then the managing underwriter may
exclude shares (and/or Monetizing Securities) requested to be included in such
Demand Registration from such underwriting. If the managing underwriter imposes
a limit on the number of shares of Class A Common Stock (and/or Monetizing
Securities) to be included in such underwriting, then each Eligible Holder shall
have the right to include in such underwriting up to its pro rata share (based
on the ratio that the number of shares of Class A Common Stock (and/or
Monetizing Securities) proposed to be sold by each Eligible Holder bears to the
total numbers of shares of Class A Common Stock (and/or Monetizing Securities)
proposed to be sold by all Eligible Holders who have elected to participate in
the Demand Registration) of the maximum number of shares (and/or
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Monetizing Securities) permitted by the managing underwriter to be included in
the Demand Registration (the "Maximum Amount").
(f) If, in connection with an underwriting involving the offering of
shares of Class A Common Stock for cash, the managing underwriter has not
limited the number of shares of Class A Common Stock (and/or Monetizing
Securities) to be underwritten or if the number of shares (and/or Monetizing
Securities) which the Eligible Holders have requested to be registered is less
than the Maximum Amount, then the Company may include shares of Class A Common
Stock for its own account or for the account of others in such underwriting if
the managing underwriter so agrees and if the number of shares of Class A Common
Stock (and/or Monetizing Securities) which would otherwise have been included in
such underwriting by Eligible Holders will not thereby be limited. The inclusion
of such shares shall be on the same terms as the offering for cash of shares of
Class A Common Stock by the Eligible Holders. In the event that the managing
underwriter excludes some of the securities to be registered, the securities to
be sold for the account of the Company and any other holders shall be excluded
in their entirety prior to the exclusion of any shares of Class A Common Stock
(and/or Monetizing Securities) of the Eligible Holders.
4.2. Incidental Registration. (a) If the Company proposes to register
any shares of Class A Common Stock under the Securities Act (other than a
registration (i) on Form S-8 or S-4 or any successor or similar forms, (ii)
relating to shares of Common Stock issuable upon exercise of employee share
options or in connection with any employee benefit or similar plan of the
Company or (iii) in connection with a direct or indirect acquisition by the
Company of another Person or any transaction with respect to which Rule 145 (or
any successor provision) under the Securities Act applies), whether or not for
sale for its own account, it will each such time, subject to the provisions of
Section 4.2(b) hereof, give prompt written notice at least 20 days prior to the
anticipated filing date of the Registration Statement relating to such
registration to each Eligible Holder, which notice shall set forth such Eligible
Holder's rights under this Section 4.2 and shall offer all Eligible Holders the
opportunity to include in such Registration Statement such number of shares of
Class A Common Stock as each such Eligible Holder may request (an "Incidental
Registration"); provided, however, that the provisions of Section 4.1 hereof and
not this Section 4.2 shall apply to the ability of any Eligible Holder to
participate in any registration being effected pursuant to a Demand Registration
contemplated by Section 4.1 hereof. Upon the written request of any such
Eligible Holder made within ten days after the receipt of notice from the
Company (which request shall specify the number of shares of Class A Common
Stock intended to be disposed of by such
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Eligible Holder), the Company will use its best efforts to effect the
registration under the Securities Act of all of the Class A Common Stock that
the Company has been so requested to register by such Eligible Holders;
provided, however, that (A) if such registration involves an underwriting, all
such Eligible Holders requesting to be included in the Company's registration
must sell their shares of Class A Common Stock to the underwriters selected as
provided in Section 4.4(f) hereof on the same terms and conditions as apply to
the Company and (B) if, at any time after giving written notice of its intention
to register any shares pursuant to this Section 4.2(a) and prior to the
effective date of the Registration Statement filed in connection with such
registration, the Company shall determine for any reason not to register such
shares, the Company shall give written notice to all such Eligible Holders and,
thereupon, shall be relieved of its obligation to register any shares of Class A
Common Stock owned by the Eligible Holders (without prejudice, however, to
rights of any of the Eligible Holders under Section 4.1 hereof). No registration
effected under this Section 4.2 shall relieve the Company of its obligations to
effect a Demand Registration to the extent required by Section 4.1 hereof.
(b) If an Incidental Registration pursuant to this Section 4.2
involves an underwriting and the managing underwriter thereof advises the
Company and the Eligible Holders in writing that marketing factors require a
limitation of the number of shares to be underwritten, then the managing
underwriter may exclude shares requested to be included in such Incidental
Registration from such underwriting. If the managing underwriter imposes a limit
on the number of shares of Common Stock to be included in such underwriting,
then there shall be included in the offering, (i) first, all shares of Common
Stock proposed by the Company to be sold for its account or the account of any
other party not covered by this Agreement that triggers registration rights and
(ii) second, that number of shares of Class A Common Stock requested to be
included in such underwriting by the Eligible Holders, on a pro rata basis
(based on the ratio that the number of shares of Class A Common Stock proposed
to be sold by each Eligible Holder bears to the total numbers of shares of Class
A Common Stock proposed to be sold by all Eligible Holders who have elected to
participate in the Incidental Registration).
4.3. Lockup Agreements. In the event of an underwritten offering
pursuant to Section 4.1 or Section 4.2, each Eligible Holder agrees not to
effect any public sale or other distribution of Class A Common Stock during the
seven days prior to the effective date of such registration or during the
ninety-day period (or such lesser period as is agreed upon in connection with
such underwritten offering) beginning on such effective date (except in either
case as part of such underwriting), unless the
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managing underwriter otherwise agrees. The Company agrees not to effect any
public sale or other distribution of Class A Common Stock during the seven days
prior to the effective date of any registration or during the ninety-day period
beginning on such effective date (except in either case as part of such
underwriting or pursuant to registrations on Form S-8 or any successor form),
unless the managing underwriter otherwise agrees.
4.4. Registration Procedures. Whenever Eligible Holders request that
any shares of Class A Common Stock be registered pursuant to Section 4.1 or 4.2
hereof, the Company will, subject to the provisions of such Sections, use its
best efforts to effect the registration and the sale of such shares in
accordance with the intended method of distribution thereof and the applicable
provisions of Section 4.1 or 4.2, as appropriate, as promptly as practicable,
and in connection with any such request:
(a) The Company will as expeditiously as possible prepare and file
with the SEC a registration statement on any form for which the Company then
qualifies or which counsel for the Company shall deem appropriate and which form
shall be available for the distribution of the shares of Class A Common Stock to
be registered thereunder in accordance with the intended method of distribution
thereof, and use its best efforts to cause such filed registration statement to
become and remain effective for a period of not less than 120 days. In the event
that an Eligible Holder is to effect an offering of Monetizing Securities which
requires an effective Registration Statement to cover shares of Class A Common
Stock which may be transferred by such Eligible Holder or its Parent to holders
of such Monetizing Securities upon the exchange or conversion of such Monetizing
Securities during the term of such Monetizing Securities, then the Company shall
use its best efforts to cause the Registration Statement filed in connection
with such offering to remain effective until the maturity of such Monetizing
Securities; provided, however, that the Company shall have the right to suspend
the effectiveness of such Registration Statement for a reasonable period (not to
exceed two months) during such period if the Board reasonably believes that the
continued effectiveness of such Registration Statement would have a material
adverse effect on any proposal or plan by the Company or any of its Subsidiaries
to engage in any merger, consolidation, tender offer or other significant
transaction (other than in the ordinary course of business) and notifies the
Eligible Holders in writing of such suspension (provided that the Company shall
have the right to so suspend such effectiveness only one time during any period
of twelve consecutive months).
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(b) The Company will, if requested, prior to filing a Registration
Statement or prospectus or any amendment or supplement thereto, furnish to each
Eligible Holder and each underwriter, if any, of the shares of Class A Common
Stock covered by such Registration Statement copies of such Registration
Statement as proposed to be filed, and thereafter the Company will furnish to
such Eligible Holder and underwriter, if any, such number of copies of such
Registration Statement, each amendment and supplement thereto (in each case
including all exhibits thereto and documents incorporated by reference therein),
the prospectus included in such Registration Statement (including each
preliminary prospectus) and such other documents as such Eligible Holder or
underwriter may reasonably request in order to facilitate the disposition of the
Class A Common Stock owned by such Eligible Holder.
(c) After the filing of the Registration Statement, the Company will
promptly notify each Eligible Holder holding Class A Common Stock covered by
such Registration Statement of any stop order, injunction or other order or
requirement of the SEC and take all reasonable actions required to prevent the
entry of such stop order, injunction or other order or requirement or to remove
or revoke it if entered.
(d) The Company will use its best efforts to (i) register or qualify
the Class A Common Stock covered by such registration statement under such other
securities or blue sky laws of such jurisdictions in the United States as any
Eligible Holder holding such Class A Common Stock reasonably (in light of such
Eligible Holders's intended method of distribution) requests and (ii) cause such
shares of Class A Common Stock to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company and do any and all other acts and things
that may be reasonably necessary or advisable to enable such Eligible Holder to
consummate the disposition of the Class A Common Stock owned by such Eligible
Holder; provided that the Company will not be required to (A) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this paragraph (d), (B) subject itself to taxation in any such
jurisdiction or (C) consent to general service of process in any such
jurisdiction.
(e) The Company will immediately notify each Eligible Holder holding
such shares of Class A Common Stock, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the occurrence
of an event requiring the preparation of a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such Class A
Common Stock, such
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prospectus will contain full, true and plain disclosure of all material facts
relating to the securities covered thereby and will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances in which they were made and promptly prepare and make
available to each such Eligible Holder any such supplement or amendment.
(f) In connection with any underwritten offering pursuant to a Demand
Registration, (i) the Principal Stockholder Group holding the largest number of
the shares of Class A Common Stock to be included in such offering by all
Principal Stockholder Groups shall have the right to select the lead managing
underwriter for such offering, so long as such lead managing underwriter shall
be reasonably satisfactory to the Company, (ii) the Principal Stockholder Group
holding the second largest number of the shares of Class A Common Stock to be
included in such offering by all Principal Stockholder Groups shall have the
right to select the colead managing underwriter for such offering, so long as
such co-lead managing underwriter shall be reasonably satisfactory to the
Company, (iii) each other Principal Stockholder Group participating in the
offering shall have the right to select one comanaging underwriter for such
offering, so long as each such co-managing underwriter shall be reasonably
satisfactory to the Company and (iv) the Company shall have the right to select
one co-managing underwriter for such offering, so long as such comanaging
underwriter shall be reasonably satisfactory to Eligible Holders holding a
majority of the shares of Class A Common Stock to be included in such offering
by Eligible Holders. In connection with any underwritten offering pursuant to an
Incidental Registration, (i) the Company shall have the right to select the lead
managing underwriter for such offering, so long as such managing underwriter
shall be reasonably satisfactory to Eligible Holders holding a majority of the
shares of Class A Common Stock to be included in such offering by Eligible
Holders and (ii) each Principal Stockholder Group participating in such offering
shall have the right to select one co-managing underwriter for such offering, so
long as each such co-managing underwriter shall be reasonably satisfactory to
the Company. The Company will enter into customary agreements (including an
underwriting agreement or indemnity agreement in customary form) and take such
other actions as are reasonably required in order to expedite or facilitate the
disposition of shares in any such underwriting.
(g) Upon the execution of confidentiality agreements in form and
substance satisfactory to the Company, the Company will make available for
inspection by any Eligible Holder and any underwriter participating in any
disposition pursuant to a Registration Statement being filed by the Company
pursuant to this Article IV and
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any attorney, accountant or other professional retained by any such Eligible
Holder or underwriter (collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company
(collectively, the "Records") as shall be reasonably necessary to enable them to
exercise their due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
Inspectors in connection with such Registration Statement. Records that the
Company determines, in good faith, to be confidential and that it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors unless (i)
the disclosure of such Records is necessary to avoid or correct a misstatement
or omission in such Registration Statement or (ii) the release of such Records
is ordered pursuant to a subpoena or other order from a court of competent
jurisdiction. Each Eligible Holder agrees that information obtained by it as a
result of such inspections shall be deemed confidential and shall not be used by
it as the basis for any market transactions in the securities of the Company
unless and until such is made generally available to the public. Each Eligible
Holder further agrees that it will, upon learning that disclosure of such
Records is sought in a court of competent jurisdiction, give notice to the
Company and allow the Company, at its own expense, to undertake appropriate
action to prevent disclosure of the Records deemed confidential.
(h) The Company will furnish to each such Eligible Holder and to each
such underwriter, if any, a signed counterpart, addressed to such underwriter,
of (i) an opinion or opinions of counsel to the Company and (ii) a comfort
letter or comfort letters from the Company's independent public or chartered
accountants, each in customary form and covering such matters of the type
customarily covered by opinions or comfort letters, as the case may be, as the
Eligible Holders or the managing underwriter, if any, reasonably request.
(i) The Company shall use its best efforts to cause all the Class A
Common Stock to be included in any registration under this Article IV to be
listed on the principal securities exchange or included in the over-the-counter
market on which similar securities issued by the Company are then listed or
quoted, as the case may be, or eligible for listing or quotation, or on The
Nasdaq National Market or such other national securities exchange as the Board
may designate.
(j) The Company will otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC including, without limitation,
making available to its security holders, as soon as reasonably practicable, an
earnings statement covering a period of 12 months, beginning within three months
after the
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effective date of the Registration Statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act.
(k) The Company shall make available its executive officers for a
reasonable period of time to participate in road show or other investor
presentations in connection with any underwritten offering of Class A Common
Stock or Monetizing Securities by Eligible Holders.
(l) The Company may require, as a condition to including any Eligible
Holder's Class A Common Stock in any registration under this Article IV, each
such Eligible Holder to promptly furnish in writing to the Company such
information regarding such Eligible Holder, the distribution of the Class A
Common Stock and such other information as the Company may from time to time
reasonably request in connection with such registration in order to comply with
applicable disclosure requirements. The Company shall permit any Eligible
Holder, which holder, in its sole judgment, exercised in good faith, and upon
advice of counsel, might be deemed to be an underwriter or a controlling person
of the Company, to participate in the preparation of such Registration Statement
and to require the insertion therein of material, furnished to the Company in
writing, which in the reasonable judgment of such holder and its counsel should
be included.
(m) Each such Eligible Holder agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind described in Section
4.4(e), such Eligible Holder will forthwith discontinue disposition of shares of
Class A Common Stock pursuant to the registration statement covering such Class
A Common Stock until such Eligible Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 4.4(e) (provided that
such discontinuance shall not be required for a period in excess of two months
and may not occur more than once in any 365 day period), and, if so directed by
the Company, such Eligible Holder will deliver to the Company all copies, other
than any permanent file copies then in such Eligible Holder's possession, of the
most recent prospectus covering such Class A Common Stock at the time of receipt
of such notice. In the event that the Company shall give such notice, the
Company shall extend the period during which such Registration Statement shall
be maintained effective (including the period referred to in Section 4.4(a)) by
the number of days during the period from and including the date of the giving
of notice pursuant to Section 4.4(e) to the date when the Company shall make
available to such Eligible Holder a prospectus supplemented or amended to
conform with the requirements of Section 4.4(e).
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4.5. Expenses. Each Eligible Holder that participates in a Demand
Registration or an Incidental Registration shall pay all underwriting discounts
and commissions and any transfer taxes attributable to the sale of such Eligible
Holder's shares, the fees and expenses of counsel for such Eligible Holder
(other than the fees and expenses for one counsel for the Eligible Holders as
set forth below) and any other out-of-pocket expenses of such Eligible Holder
incurred in connection with its participation in such Demand Registration or
Incidental Registration. The Company shall pay any and all other expenses in
connection with a Demand Registration or an Incidental Registration, including,
without limitation, (i) all SEC, NASD and securities exchange registration and
filing fees, (ii) all fees and expenses of complying with state securities or
blue sky laws (including fees and disbursements of counsel for any underwriters
in connection with blue sky qualifications), (iii) all processing, printing,
copying, messenger and delivery expenses, (iv) all fees and expenses incurred in
connection with the listing of the shares being sold on any securities exchange,
(v) the fees and disbursements of counsel for the Company and of its independent
public accountants and (vi) the reasonable fees and expenses of any special
experts retained in connection with the requested registration and one counsel
representing Eligible Holders and acting as Inspector.
4.6. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Eligible Holder holding shares of Class A Common Stock covered by
a Registration Statement, its officers, directors and agents, and each Person,
if any, who controls such Eligible Holder within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act from and against any and
all losses, claims, damages and liabilities (including those resulting from any
order made or any inquiry, investigation or proceeding commenced or threatened
by any securities regulatory authority, stock exchange or by any other competent
authority) caused by any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement or prospectus relating to
the shares of Class A Common Stock (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) or any preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were made,
except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or omission or alleged untrue statement or omission based
upon information furnished in writing to the Company by such Eligible Holder or
on such Eligible Holder's behalf expressly for use therein; provided however,
that the Company shall not be liable for any untrue statement or omission
contained in a preliminary prospectus, which untrue statement or omission was
corrected in a final
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prospectus or supplement that was furnished to such Eligible Holder. The Company
also agrees to indemnify any underwriters of the Eligible Holders, their
officers, directors, employees and agents, and each Person, if any, who controls
such underwriters (other than in respect of loss of profit or information
relating solely to the underwriters) on substantially the same basis as that of
the indemnification of the Eligible Holders provided in this Section 4.6(a).
(b) Each Eligible Holder holding shares of Class A Common Stock
included in any Registration Statement agrees, severally but not jointly, to
indemnify and hold harmless the Company, its officers, directors and agents and
each Person, if any, who controls the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act to the same
extent as the foregoing indemnity from the Company to such Eligible Holder, but
only with respect to information furnished in writing by such Eligible Holder or
on such Eligible Holder's behalf expressly for use in any Registration Statement
or prospectus relating to the Class A Common Stock, or any amendment or
supplement thereto, or any preliminary prospectus, and only up to an amount
equal to the aggregate purchase price received by such Eligible Holder from the
sale of such Eligible Holder's Class A Common Stock in such registration or from
Monetizing Securities in connection with such registration. As a condition to
including shares of Class A Common Stock in any Registration Statement filed in
accordance with Article IV hereof, the Company may require that it shall have
received an undertaking reasonably satisfactory to it from any underwriter to
indemnify and hold it harmless to the extent customarily provided by
underwriters with respect to similar securities.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any Person in respect of which indemnity may be
sought pursuant to this Section 4.6, such Person (an "Indemnified Party") shall
promptly notify the Person against whom such indemnity may be sought (the
"Indemnifying Party") in writing and the Indemnifying Party shall assume the
defense thereof, including the employment of counsel reasonably satisfactory to
such Indemnified Party, and shall assume the payment of all fees and expenses;
provided, however, that the failure of any Indemnified Party so to notify the
Indemnifying Party shall not relieve the Indemnifying Party of his or its
obligations hereunder except to the extent that the Indemnifying Party is
materially prejudiced by such failure to notify. In any such proceeding, any
Indemnified Party shall have the right to retain his or its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Indemnifying Party and the Indemnified Party shall have
mutually agreed to the retention of such counsel, (ii) the Indemnifying Party
shall
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have failed to assume the defense and employ counsel or (iii) in the reasonable
judgment of such Indemnified Party, representation of both parties by the same
counsel would be inappropriate due to actual or potential differing interests
between them or differing legal defenses available to them. It is understood
that the Indemnifying Party shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees
and expenses of more than one separate firm of attorneys (in addition to any
local counsel) at any time for all such Indemnified Parties, and that all such
fees and expenses shall be reimbursed as they are incurred. In the case of any
such separate firm for the Indemnified Parties, such firm shall be designated in
writing by the Indemnified Parties. The Indemnifying Party shall not be liable
for any settlement of any proceeding effected without his or its written consent
(not to be unreasonably withheld), but if settled with such consent, or if there
be a final judgment for the plaintiff, the Indemnifying Party shall indemnify
and hold harmless such Indemnified Parties from and against any loss or
liability (to the extent stated above) by reason of such settlement or judgment;
provided, however, that, if any case where the fees and expenses of counsel are
at the expense of the Indemnifying Party in accordance with this Section 4.6 and
an Indemnified Party shall have requested the Indemnifying Party to reimburse
the Indemnified Party for such fees and expenses of counsel as incurred, such
Indemnifying Party agrees that it shall be liable for any settlement of any
action effected without its written consent if (i) such settlement is entered
into more than ten (10) Business Days after the receipt by such Indemnifying
Party of the aforesaid request and (ii) such Indemnifying Party shall have
failed to reimburse the Indemnified Party in accordance with such request for
reimbursement prior to the date of such settlement. No Indemnifying Party shall,
without the prior written consent of the Indemnified Party (not to be
unreasonably withheld), effect any settlement of any pending or threatened
proceeding in respect of which any Indemnified Party is or could have been a
party and indemnity could have been sought hereunder by such Indemnified Party,
unless such settlement includes an unconditional release of such Indemnified
Party from all liability arising out of such proceeding.
(d) If the indemnification provided for in this Section 4.6 is
unavailable to the Indemnified Parties in respect of any losses, claims, damages
or liabilities referred to herein, then each such Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) as between the Company and the Eligible Holder holding shares of
Class A Common Stock covered by a registration statement on the one hand and the
underwriters on the other, in such proportion as is appropriate to reflect the
relative benefits received by the Company
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and such Eligible Holders on the one hand and the underwriters on the other,
from the offering of the Class A Common Stock or Monetizing Securities, or if
such allocation is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits but also the relative
fault of the Company and such Eligible Holders on the one hand and of such
underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations and (ii) as between the Company on the one
hand and each such Eligible Holder on the other, in such proportion as is
appropriate to reflect the relative fault of the Company and of each such
Eligible Holder in connection with such statements or omissions, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and such Eligible Holders on the one hand and such underwriters on the
other shall be deemed to be in the same proportion as the total proceeds from
the offering of the Class A Common Stock or Monetizing Securities (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company and such Eligible Holders bear to the total underwriting
discounts and commissions received by such underwriters, in each case as set
forth in the table on the cover page of the applicable prospectus. The relative
fault of the Company and such Eligible Holders on the one hand and of such
underwriters on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company and such Eligible Holders or by such underwriters and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The relative fault of the
Company on the one hand and of each such Eligible Holder on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied in writing by such party, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Company and the Eligible Holders agree that it would not be just
and equitable if contribution pursuant to this Section 4.6(d) were determined by
pro rata allocation (even if the underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of the
losses, claims, damages or liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or
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defending any such action or claim. Notwithstanding the provisions of this
Section 4.6(d), no underwriter shall be required to contribute any amount in
excess of the amount of the total fees, discounts and commissions received by
it, and no Eligible Holder shall be required to contribute any amount in excess
of the amount of the proceeds received by such Eligible Holder in respect of a
sale of its shares of Class A Common Stock or Monetizing Securities. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. Each such Eligible Holder's
obligation to contribute pursuant to this Section 4.6(d) is several in the
proportion that the proceeds of the offering received by such Eligible Holder
bears to the total proceeds of the offering received by all such Eligible
Holders and not joint.
4.7. Unregistered Offerings. In connection with any offering by an
Eligible Holder of Monetizing Securities which do not require the registration
by the Company of the shares of Class A Common Stock issuable upon the
conversion or exchange thereof, the Company shall (i) at the request of such
Eligible Holder, provide reasonable cooperation to such Eligible Holder and its
advisors in connection with such offering, (ii) to the extent relevant, comply
with the other covenants specified in Section 4.4 and provide the Indemnity
specified in Section 4.6 with respect to any unregistered offering and (iii) at
the request of such Eligible Holder, make available its executive officers for a
reasonable period of time to participate in road show or other investor
presentations in connection with such offering.
4.8. Rule 144. The Company agrees that it shall timely file the
reports required to be filed by it under the Securities Act or the Exchange Act
(including, without limitation, the reports under sections 13 and 15 (d) of the
Exchange Act referred to in paragraph (c)(1) of Rule 144 under the Securities
Act), and shall take such further actions as any Eligible Holder may reasonably
request, all to the extent required to enable Eligible Holders to sell Class A
Common Stock, from time to time, pursuant to the resale limitations of (a) Rule
144 under the Securities Act, as such rule may be hereafter amended, or (b) any
similar rules or regulations hereafter adopted by the SEC. Upon the written
request of any Eligible Holder, the Company shall deliver to such Eligible
Holder a written statement verifying that it has complied with such
requirements.
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ARTICLE V
OTHER AGREEMENTS
5.1. Confidentiality. Each Principal Stockholder agrees that it will
not, directly or indirectly, without the prior written consent of the Company,
use or disclose to any person, firm or corporation, any information, trade
secrets, confidential customer information, technical data or know-how relating
to the products, processes, methods, equipment or business practices of the
Company or any of its Subsidiaries, except (a) to the extent any of the
foregoing is or becomes available to the public other than as a result of
disclosure by such Principal Stockholder or any of its Affiliates or the
directors, officers, employees, agents, advisors and controlling persons of it
or any of its Affiliates, (b) as necessary to effect a transaction under and in
compliance with Article III or IV, (c) as may be required by law and (d) as a
Principal Stockholder may disclose to its lenders, rating agencies and business,
legal and financial advisors. In the event any Principal Stockholder is required
by applicable law or regulation or by legal process to disclose any of the
foregoing, it will provide the Company and other Principal Stockholders with
prompt notice thereof to enable them to seek an appropriate protective order.
The covenants made by a Principal Stockholder in this Section 5.1 shall continue
to apply for a period of two years after such Principal Stockholder ceases to be
a Principal Stockholder.
5.2. Issuance of Additional Class B Common Stock. Without the consent
of each Principal Stockholder which has the right to designate Agreed Nominees
pursuant to Article II, the Company shall not issue any additional shares of
Class B Common Stock other than shares of Class B Common Stock issued: (a) in
connection with a stock split; or (b) as a stock dividend with respect to issued
and outstanding shares of Class B Common Stock (in which event any dividend to a
holder of Class B Common Stock shall only be in shares of Class B Common Stock).
5.3. Voting; Written Consent. (a) Any agreement by a Principal
Stockholder herein to vote its shares of Common Stock in a certain manner shall
be deemed, in each instance, to include an agreement by that Principal
Stockholder to use its best efforts to take all actions necessary to call, or
cause the Company and the appropriate officers and directors of the Company to
call, as promptly as practicable, a special meeting of stockholders or to act by
written consent.
(b) When any action is required to be taken by a Principal Stockholder
pursuant to this Agreement, such Principal Stockholder shall take all steps
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necessary to implement such action, including executing or causing to be
executed, as promptly as practicable, a consent in writing in lieu of an annual
or special meeting of the stockholders pursuant to Section 228 of the General
Corporation Law of Delaware or any successor statute thereto to effect such
stockholder action.
ARTICLE VI
GENERAL PROVISIONS
6.1. Expiration and Termination. This Agreement (other than any
provision for which a different term is specified) shall terminate (i) with
respect to the applicability of any voting agreements outlined in Article II to
a particular Principal Stockholder, if and when such Principal Stockholder no
longer holds a number of shares of Class B Common Stock equal to at least two
percent of the number of shares of Common Stock then issued and outstanding;
(ii) with respect to the applicability of any transfer restrictions outlined in
Article III to a particular Principal Stockholder, if and when such Principal
Stockholder no longer holds any shares of Class B Common Stock; and (iii) with
respect to the applicability of any registration rights outlined in Article IV
to a particular Eligible Holder, if and when such Eligible Holder no longer
holds a number of shares of Common Stock equal to at least one percent of the
number of shares of Class A Common Stock then issued and outstanding.
6.2. Amendment and Waiver. Subject to Section 3.7, this Agreement may
not be amended or modified in any respect except by an instrument in writing
signed by all of the parties hereto; provided, however, that the Company need
only be a party to such modifications or amendments the result of which is a
change in the Company's obligations hereunder. Any failure of any party hereto
to comply with any obligation, covenant, agreement or condition contained herein
may be waived by the party or parties entitled to the benefits thereof, but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.
6.3. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the law of the State of New York without reference to choice
of law principles, including all matters of construction, validity and
performance except to the extent the laws of Delaware are mandatorily
applicable.
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6.4. Notices. Notices, requests, permissions, waivers, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if signed by the respective persons giving them (in the case of any
corporation the signature shall be by an officer thereof) and delivered by hand,
mailed by United States mail (registered, return receipt requested) or reputable
overnight courier service, properly addressed and postage prepaid, or delivered
by telecopy:
If to the Company, to:
TIME WARNER TELECOM INC.
5700 S. Quebec Street
Greenwood Village, Colorado 80111
Telephone: (303)
Telecopy: (303)
Attention: General Counsel
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Telephone: (212) 474-1000
Telecopy: (212) 474-3700
Attention: William P. Rogers, Jr.
and to each of the Principal Stockholders at the address provided
below or to such other address provided in accordance with this
Section 6.4.
If to the TW Stockholders, to:
TIME WARNER COMPANIES, INC.
75 Rockefeller Plaza
New York, New York 10019
Telephone: (212) 484-7580
Telecopy: (212) 956-7281
Attention: General Counsel
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with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Telephone: (212) 474-1000
Telecopy: (212) 474-3700
Attention: William P. Rogers, Jr.
If to the MediaOne Stockholder, to:
MEDIAONE GROUP, INC.
188 Inverness Drive West
Englewood, Colorado 80112
Telephone: (303) 858-3562
Telecopy: (303) 858-3487
Attention: Vice President-Law
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Telecopy: (212) 310-8007
Attention: Akiko Mikumo, Esq.
If to A/N, to:
ADVANCE/NEWHOUSE PARTNERSHIP
5015 Campuswood Drive
East Syracuse, New York 13057
Telephone: (315) 463-7675
Telecopy: (315) 463-4127
Attention: Robert J. Miron
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with a copy to:
Sabin, Bermant & Gould LLP
350 Madison Avenue
New York, New York 10017
Telephone: (212) 692-4418
Telecopy: (212) 692-4406
Attention: Arthur J. Steinhauer
Such names and addresses may be changed by notice given in accordance with this
Section 6.4.
6.5. Entire Agreement. This Agreement (including the Schedules and
Exhibits attached hereto, all of which are a part hereof) contains the entire
understanding of the parties hereto with respect to the subject matter contained
herein and supersedes and cancels all prior agreements, negotiations,
correspondence, undertakings and communications of the parties, oral or written,
respecting such subject matter.
6.6. Headings; References. The article, section and paragraph headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. All references
herein to "Articles", "Sections," or "Exhibits" shall be deemed to be references
to Articles or Sections hereof or Exhibits hereto unless otherwise indicated.
6.7. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be an original, but all of which taken
together shall constitute one and the same agreement.
6.8. Parties in Interest; Assignment. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors or assigns. Nothing in this Agreement, express or implied, is
intended to confer upon any Person not a party to this Agreement any rights or
remedies under or by reason of this Agreement. Except as permitted herein, no
party to this Agreement may assign or delegate all or any portion of its rights,
obligations or liabilities under this Agreement without the prior written
consent of the other parties to this Agreement.
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6.9. Severability; Enforcement. The invalidity of any portion hereof
shall not affect the validity, force or effect of the remaining portions hereof.
If any term or other provision of this Agreement is invalid, illegal or
incapable or being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the greatest extent possible.
6.10. Specific Performance. Without intending to limit the remedies
available to any of the parties hereto, each of the parties hereto acknowledges
and agrees that a violation by such party of any term of this Agreement will
cause the other parties hereto irreparable injury for which an adequate remedy
at law is not available. Therefore, the parties hereto agree that each such
party shall be entitled to an injunction, restraining order or other form of
equitable relief from any court of competent jurisdiction restraining any other
party hereto from committing any breach or threatened breach of, or otherwise
specifically to enforce, any provision of this Agreement.
6.11. Arbitration. Any controversy arising under, out of, in connection
with, or relating to, this Agreement, and any amendment hereof, or the breach
hereof or thereof, shall be determined and settled by arbitration in New York,
New York, by a person or persons mutually agreed upon, or in the event of a
disagreement as to the selection of the arbitrator or arbitrators, in accordance
with the rules of the American Arbitration Association. Any award rendered
therein shall specify the findings of fact of the arbitrator or arbitrators and
the reasons of such award, with the reference to and reliance on relevant law.
Any such award shall be final and binding on each and all of the paries thereto
and their personal representatives, and judgment may be entered thereon in any
court having jurisdiction thereof.
45
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Stockholders'
Agreement as of the date and year first above written.
TIME WARNER TELECOM INC.
By:
---------------------------------------
Name:
Title:
TIME WARNER COMPANIES, INC.
By:
---------------------------------------
Name:
Title:
AMERICAN TELEVISION AND
COMMUNICATIONS CORPORATION
By:
---------------------------------------
Name:
Title:
WARNER COMMUNICATIONS INC.
By:
---------------------------------------
Name:
Title:
TW/TAE, INC.
By:
---------------------------------------
Name:
Title:
<PAGE>
<PAGE>
FIBRCOM HOLDINGS, L.P.
By:
---------------------------------------
Name:
Title:
PARAGON COMMUNICATIONS
By:
---------------------------------------
Name:
Title:
MEDIAONE GROUP, INC.
(a Colorado corporation)
By:
---------------------------------------
Name:
Title:
ADVANCE/NEWHOUSE PARTNERSHIP
By: ADVANCE COMMUNICATION CORP.,
General Partner
By:
----------------------------------
Name:
Title:
<PAGE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions 'Experts' and
'Selected Combined Financial and Other Operating Data' and to the use of our
reports dated March 13, 1998 (except Notes 1, 4, 5, 6, and 8, as which the date
is __________, 1999), in Amendment No. 2 to the Registration Statement (Form
S-1) and related Prospectus of Time Warner Telecom Inc. for the registration of
shares of its Class A Common Stock.
/s/ Ernst & Young LLP
Denver, Colorado
__________, 1999
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 this registration
statement and the concurrent change in the Company's operating and legal
structure from a limited liability company to a corporation.
/s/ Ernst & Young LLP
Denver, Colorado
January 20, 1999
<PAGE>
<PAGE>
POWER OF ATTORNEY
STATE OF NEW YORK, )
)
COUNTY OF NEW YORK, )
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
officers and directors of Time Warner Telecom Inc., a Delaware corporation (the
"Company") hereby constitutes and appoints David J. Rayner and Larissa L. Herda,
and each of them, as his or her true and lawful attorneys-in-fact and agents,
with full powers to act without the other and with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign a Registration Statement of the Company on Form
S-1 or other appropriate form and any and all amendments to such Registration
Statement (including post-effective amendments), to be filed with the Securities
and Exchange Commission in connection with the registration under the provisions
of the Securities Act of 1933, as amended, of Class A Common Stock of the
Company with power where appropriate to affix thereto any seal of the Company
and to attest said seal, and to file such Registration Statement, and any and
all amendments and post-effective amendments to such Registration Statement, and
any subsequent registration statement filed by the Company pursuant to Rule
462(b) of the Securities Act of 1933, as amended, 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 or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his or her substitute
or substitutes, or any of them, may lawfully do or cause to be done by virtue
hereof.
EXECUTED this 31st day of August, 1998.
(i) Principal Executive Officer:
/s/ Larissa L. Herda
--------------------------------------
Larissa L. Herda
President and Chief Executive Officer
(ii) Principal Financial Officer:
/s/ David J. Rayner
--------------------------------------
David J. Rayner
Senior Vice President and Chief
Financial Officer
<PAGE>
<PAGE>
2
(iii) Principal Accounting Officer:
/s/ Jill Stuart
--------------------------------------
Jill Stuart
Vice President, Accounting and Finance
and Chief Accounting Officer
(iv) Directors:
/s/ Richard J. Bressler
--------------------------------------
Richard J. Bressler
Director
/s/ Larissa L. Herda
--------------------------------------
Larissa L. Herda
Director
/s/ Robert J. Miron
--------------------------------------
Robert J. Miron
Director
/s/ Pearre A. Williams
--------------------------------------
Pearre A. Williams
Director
<PAGE>
