<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934 for the quarterly period ended March 31, 1999 or
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the transition period from __________ to
___________
Commission File Number 333-49439
TIME WARNER TELECOM INC. *
(Exact name of registrant as specified in its charter)
Delaware 84-1500624
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
5700 S. Quebec Street
Greenwood Village, CO 80111
(303) 566-1000
(Address, including zip code, and telephone number, including
area code, of each registrant's principal executive offices)
TIME WARNER TELECOM LLC
(former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 14, 1999
- ----- ---------------------------
Class A Common Stock, par value $.01 per share 21,007,550 shares
Class B Common Stock, par value $.01 per share 81,250,000 shares
___________________________________
* On May 10, 1999, pursuant to a merger between Time Warner Telecom LLC and Time
Warner Telecom Inc., Time Warner Telecom Inc. assumed the business and became
the successor to the former Time Warner Telecom LLC. Time Warner Telecom LLC
previously filed reports under the Securities Act of 1934 under Registration
Number 333-53553.
<PAGE>
TIME WARNER TELECOM INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION> Page
-----
Part I. Financial Information
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results 1
of Operations
Combined Balance Sheets at March 31, 1999 and December 31, 1998 12
Combined Statements of Operations for the Three Months Ended March 31, 13
1999 and 1998
Combined Statements of Cash Flows for the Three Months Ended March 31, 14
1999 and 1998
Combined Statements of Changes in Stockholder's Equity 15
Notes to Combined Financial Statements 16
Part II. Other Information 22
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Time Warner Telecom Inc. has succeeded to the business of Time Warner
Telecom LLC ("TWT LLC") pursuant to the merger described below. Time Warner
Telecom Inc. is a leading fiber facilities-based competitive local exchange
carrier 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 term "Company" is used throughout this document to refer
to the business that is currently operated by Time Warner Telecom Inc. and was
previously owned and operated as follows.
The business of the Company was commenced in 1993 by Time Warner Cable
which refers to the cable systems owned by Time Warner Entertainment Company,
L.P. ("TWE"), Time Warner Entertainment-Advance/Newhouse Partnership ("TWE-A/N")
and Time Warner Inc. ("Time Warner") and reflects the combined commercial
telecommunications operations under the ownership or management control of Time
Warner Cable. TWE is a partnership of subsidiaries of Time Warner and MediaOne
Group, Inc. ("MediaOne") and TWE-A/N is a partnership of TWE and
Advance/Newhouse Partnership ("Advance"). The Company's business consists of
the commercial telecommunications operations of Time Warner and TWE-A/N that
were each acquired or formed in 1995, as well as the pre-existing commercial
telecommunications operations of TWE. All intercompany accounts and transactions
between the combined entities have been eliminated.
On July 14, 1998, TWT LLC succeeded to the ownership of the Company's
business. TWT LLC and a subsidiary corporation that was named Time Warner
Telecom Inc. ("TWT Inc.") were formed by Time Warner, MediaOne and Advance to
acquire the assets and liabilities of the Company's business from TWE, TWE-A/N
and Time Warner (the "Reorganization") and to conduct the offering on July 21,
1998 of $400 million principal amount of 9 3/4% Senior Notes due July 2008 (the
"Notes"). This transaction resulted in Time Warner, MediaOne and Advance (either
directly or through subsidiaries) becoming the owners of all of the limited
liability company interests in TWT LLC. Time Warner, MediaOne and Advance are
referred to collectively as the "Existing Stockholders." On May 6, 1999,
MediaOne and AT&T Corp. ("AT&T") entered into a merger agreement providing for
MediaOne to be acquired by AT&T. If the merger between AT&T and MediaOne is
consummated, AT&T will succeed to all of MediaOne's rights and obligations as an
Existing Stockholder.
On May 10, 1999, a newly formed Delaware corporation merged with and
became the successor to TWT LLC and TWT Inc., and in connection with the merger
changed its name to Time Warner Telecom Inc. As part of the merger, the Existing
Stockholders exchanged their interests in TWT LLC for Class B Common Stock of
the newly formed corporation. This reconstitution of the Company from a limited
liability company to a corporation is referred to as the "Reconstitution". 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 since the
Reconstitution is that the management of the Company became 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, as a result of the change in the Company's
operating and legal structure from a limited liability company to a corporation.
Prior to the Reconstitution, all net operating loss carryforwards were allocated
to and utilized primarily by Time Warner 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 charge to earnings of
approximately $39 million in the second quarter of 1999, to record a net
deferred tax liability associated with the change from a limited liability
company to a corporation.
1
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
On May 14, 1999, in conjunction with the Reconstitution, the Company
completed an initial public offering of 20,700,000 shares of Class A Common
Stock at a price of $14 per share (the "Offering"). The Offering generated
approximately $269.1 million in proceeds for the Company, net of underwriting
discounts and expenses. The Company will have outstanding two classes of common
stock, Class A Common Stock and Class B Common Stock, and the Existing
Stockholders will have approximately 97.5% of the combined voting power of the
outstanding common stock. Upon completion of the Offering the Existing
Stockholders continued to own all of the outstanding Class B Common Stock.
The majority of the Company's revenues have been derived from the
provision of "private line" and "direct access" telecommunications services.
Because the Company has deployed switches in 16 of its 19 service areas as of
March 31, 1999, 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, long distance
carriers, internet service providers, wireless communications companies and
governmental entities. Such customers are offered a wide range of integrated
telecommunications products and services. In addition, the Company benefits
from its strategic relationship with Time Warner Cable both through network
facilities access and cost-sharing. The Company's networks have been
constructed primarily through the use of fiber capacity licensed from Time
Warner Cable. As of March 31, 1999, the Company operated networks in 19
metropolitan areas that spanned 7,069 route miles, contained 276,692 fiber
glass miles and offered service to 4,617 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. In
May 1999, a definitive agreement was signed to acquire the remaining interest in
this joint venture not already owned by the Company. The Company's combined
revenues were $47.6 million and $22.0 million for the three months ended March
31, 1999 and 1998, respectively. As of March 31, 1999, Existing Stockholders
and affiliates had contributed $555.8 million in capital to the Company and were
owed $178.3 million in debt from the Company. On May 14, 1999, the existing
debt was repaid with the proceeds from the Offering.
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 high-speed dedicated
internet access services. Since its inception in 1993, the Company has
experienced significant growth in revenues and in the geographic scope of its
operations. Management believes an increasing portion of the Company's future
growth will come from the provision of local switched services as a result of
the 16 switches deployed as of March 31, 1999. The Company believes that
switched services provide the opportunity for a higher incremental rate of
return on capital investment than those expected from dedicated 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 high-speed dedicated
internet access services. The Company expects to experience a higher churn rate
for these customers than it has traditionally experienced with dedicated
transport services. The Company intends to minimize this churn for long
distance and internet 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-
2
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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 three additional cities by
the end of 1999. The Company has signed a combination of long-term dark fiber
and conduit leases in Dallas, Texas and Jersey City, New Jersey and plans to
commence offering fiber based telephone services in these metropolitan areas
during the third quarter of 1999. The third city has not yet been selected.
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 incumbent local exchange carriers 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, including costs for which the Company reimburses
affiliates of Existing Stockholders, will continue to increase, but generally 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 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 business, the Company engages
in various transactions with the Existing Stockholders and their affiliates,
generally on terms resulting from negotiation between the affected units that,
in management's view, result in reasonable allocations. In connection with the
Reorganization that occurred on July 14, 1998, the Company entered into several
contracts with the Existing Stockholders or their affiliates in respect of
certain of these transactions. The Company's selling, general and administrative
expenses include charges allocated from the Existing Stockholders or their
affiliates for certain general and administrative expenses, primarily including
office rent and overhead charges for various administrative functions performed
by Time Warner 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 Time Warner 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 affiliates of the Existing
Stockholders. 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 Existing Stockholders and
their affiliates are not obligated to make additional equity investments in or
loans to the Company. On May 14, 1999, the Company repaid the subordinated
indebtedness to affiliates of Existing Stockholders with proceeds from the
Offering.
The Company expects that the net proceeds of the Offering remaining
after repayment of subordinated indebtedness, 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 working capital
needs, through the middle of 2000. After that, 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.
3
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The Company has not historically, and does not currently, generate
positive operating cash flow. However, for the three months ended March 31,
1999, 17 of the Company's 19 service areas generated positive operating cash
flow before corporate allocations and the Company, as a whole, expects to begin
generating positive EBITDA during the second quarter of 1999. EBITDA is defined
as operating income (loss) before depreciation and amortization.
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 together with the Company's financial statements, including the notes,
appearing elsewhere in this report:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
(thousands, except per share amounts)
Statement of Operations Data:
Revenues:
Dedicated transport services........................... $ 29,664 62.3% $ 16,733 75.9%
Switched services...................................... 17,925 37.7 5,315 24.1
-------- ------ -------- ------
Total revenues........................................ 47,589 100.0 22,048 100.0
Costs and expenses (1):
Operating.............................................. 23,995 50.4 13,519 61.3
Selling, general and administrative.................... 24,136 50.7 16,316 74.0
Depreciation and amortization.......................... 14,994 31.5 11,932 54.1
-------- ------ -------- ------
Total costs and expenses.............................. 63,125 132.6 41,767 189.4
Operating loss.......................................... (15,536) (32.6) (19,719) (89.4)
Equity in income (losses) of unconsolidated affiliates.. 188 0.4 (58) (0.3)
Interest Income......................................... 4,217 8.8 -- --
Interest Expense (1).................................... (13,511) (28.4) (2,011) (9.1)
-------- ------ -------- ------
Net loss................................................ $(24,642) (51.8)% $(21,788) (98.8)%
======== ====== ======== ======
Basic and diluted loss per common share................. $(0.30) --- $(0.27) ---
Average common shares outstanding....................... 81,250 --- 81,250 ---
EBITDA (2).............................................. $ (542) (1.1)% $ (7,787) (35.3)%
Cash provided by (used) in operations................... (29,290) --- (15,103) ---
Cash provided by (used) in investing activities......... 415 --- (24,961) ---
Cash provided by financing activities................... --- --- 40,064 ---
- -----------
</TABLE>
(1) Includes expenses resulting from transactions with affiliates of $7.0
million in 1999 and $6.1 million in 1998.
(2) "EBITDA" is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provision 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
4
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
performance and liquidity that investors may consider in addition to those
measures. Management 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 because it eliminates many differences in
financial, capitalization, and tax structures, as well as non-operating and
one-time charges to earnings. EBITDA is used internally by the Company's
management to assess ongoing operations and is a component of a covenant of
the Notes that limits the Company's ability to incur certain additional
future indebtedness. However, EBITDA as used in this report may not be
comparable to similarly titled measures reported by other companies due to
differences in accounting policies.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenues. Revenues increased $25.6 million, or 116.0%, to $47.6 million for
the three months ended March 31, 1999, from $22.0 million for the comparable
period in 1998. Revenues from the provision of dedicated transport services
increased $13.0 million or 77.3%, to $29.7 million for the three months ended
March 31, 1999, from $16.7 million for the comparable period in 1998. Switched
service revenues increased $12.6 million, or 237.3%, to $17.9 million for the
three months ended March 31, 1999, from $5.3 million for the comparable period
in 1998. 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 revenue resulted from the growth of services in
existing markets, including reciprocal compensation. Reciprocal compensation is
the mutual charges by local carriers for reimbursement of costs associated with
the termination of traffic on each others networks. Reciprocal compensation
represented 6.8% and 9.2% of total revenues for the three months ended March 31,
1999 and 1998, respectively. At March 31, 1998 and 1999 the Company offered
dedicated transport services in 18 consolidated metropolitan areas, 16 of which
also offered switched services. The consolidated metropolitan areas do not
include MetroComm AxS, L.P. ("MetroComm"), a 50% owned entity of the Company.
Operating Expenses. Operating expenses increased $10.5 million, or 77.5%, to
$24.0 million for the three months ended March 31, 1999, from $13.5 million in
the same period of 1998. The increase in operating expenses was primarily
attributable to the Company's expansion of its business, principally switched
services, the ongoing development of existing markets resulting in higher local
exchange carrier charges for circuit leases and interconnection and higher
technical personnel costs. As a percentage of revenues, operating expenses
decreased to 50.4% in 1999 from 61.3% in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $7.8 million, or 47.9%, to $24.1 million for
the three months ended March 31, 1999, from $16.3 million for the comparable
period in 1998. The increase in selling, general and administrative expenses
was primarily attributable to higher direct sales costs associated with the
increase in revenues, higher property taxes, an increase in consulting expenses
relating to local regulatory matters, the implementation of new billing and
system software, higher data processing costs and an increase in the provision
for doubtful accounts related to the increase in revenue. As a percentage of
revenues, selling, general and administrative expenses decreased to 50.7% in the
first quarter of 1999 from 74.0% for the comparable period in 1998.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $3.1 million, or 25.7%, to $15.0 million for the three months ended
March 31, 1999, from $11.9 million for the comparable period in 1998. The
increase in depreciation and amortization expenses was primarily attributable to
higher capital expenditures related to the ongoing construction and expansion of
the Company's telecommunications networks in both 1998 and 1999. As a
percentage of revenues, depreciation and amortization expenses decreased to
31.5% in the first quarter of 1999, from 54.1% for the comparable period in
1998.
5
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
EBITDA. The EBITDA loss for the three months ended March 31, 1999 decreased
$7.3 million, or 93.0%, to a loss of $542,000 in 1999, from a loss of $7.8
million in 1998. This improvement was primarily the result of increased
revenues due to the Company's expansion of local telecommunications networks in
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 affiliates of the
Existing Stockholders. On July 21, 1998, the Company issued $400.0 million in
Notes in a public offering. Interest expense relating to these loans and Notes
totaled $13.5 million for the three months ended March 31, 1999, an increase of
$11.5 million compared to the same period in 1998.
Net Loss. Net loss increased $2.8 million, or 13.1% to $24.6 million for the
three months ended March 31, 1999, from a net loss of $21.8 million for the
corresponding period in 1998. The increase resulted from higher depreciation
and amortization expenses relating to the Company's expansion of
telecommunications networks, as well as interest expenses relating to the Notes.
Basic and Diluted Loss per Common Share. Basic and diluted loss per common
share is based upon the net loss applicable to common shares outstanding during
the period. In connection with the Offering which closed on May 14, 1999,
the 20,700,000 Class A shares issued and outstanding will have a future impact
on earnings per share.
Liquidity and Capital Resources
Cash Flows. For the three months ended March 31, 1999, the Company's cash
used in operations was $29.3 million as compared to $15.1 million for the three
months ended March 31, 1998. This increase in cash used in operations of $14.2
million principally resulted from payment of interest on the Notes, which were
not outstanding during the three months ended March 31, 1998, repayment of trade
payables to Time Warner Cable, and working capital requirements in 1999. The
Company expects to continue to have operating cash flow deficiencies for the
near future as it develops and expands its business and services it debt.
Cash provided by investing activities increased $25.4 million to $0.4 million
in the first quarter of 1999, as compared to cash used of $25.0 million in the
first quarter of 1998. The increase was primarily due to net proceeds from the
sale of marketable securities of $43.7 million, offset slightly by an increase
in capital expenditures of $18.3 million.
Cash provided by financing activities in the first quarter of 1999 decreased
by $40.1 million, as compared to the corresponding period in 1998. No financing
activities occurred during the three months ended March 31, 1999. Cash provided
by financing activities in the first quarter of 1998 reflected the receipt of
interest bearing subordinated loans from affiliates of the Existing Stockholders
amounting to $59.2 million, offset by a repayment of loans of $19.1 million.
From July 1, 1997, through July 14, 1998, all of the Company's financing
requirements were funded with interest-bearing loans from affiliates of the
Existing Stockholders. The loans from affiliates of the Existing Stockholders
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.
6
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Financing. Historically, the Company did not maintain cash balances since
all the Company's funding requirements were provided by affiliates of the
Existing Stockholders. The proceeds from the Offering after repayment of
subordinated indebtedness to affiliates of the Existing Stockholders, together
with the net proceeds from the sale of the Notes and cash flow from operations,
are expected to fund the Company's future cash requirements through the middle
of 2000. The Existing Stockholders and their affiliates 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, 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 was primarily accomplished through the receipt of capital
contributions from affiliates of the Existing Stockholders through June 30,
1997. From July 1, 1997 through July 14, 1998, the deficiency has been funded
through interest bearing loans from affiliates of the Existing Stockholders.
Thereafter, the Company expects cash flow deficiencies to be funded with the
proceeds from the Offering, the proceeds of the Notes offering and future
financings as described above. The amounts due to affiliates of the Existing
Stockholders, including interest accrued on those amounts, under this funding
arrangement were $178.3 million and $174.9 million as of March 31, 1999 and
December 31 1998, respectively.
On July 21, 1998, the Company issued $400.0 million principal amount of Notes
in a public offering. Interest on the Notes is payable semiannually on January
15 and July 15. The net proceeds from the sale of the Notes were immediately
invested in short term investments.
On May 14, 1999, the Company repaid outstanding subordinated indebtedness to
affiliates of the Existing Stockholders from proceeds from the Offering. All
remaining proceeds will be used for general corporate and working capital
purposes, which may include payment of interest on the Notes and acquisitions
and joint ventures. Pending these uses, the net proceeds of the Offering will
be invested in short term, money market instruments. 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. Except with respect to the
acquisitions of MetroComm and Internet Connect, Inc. (as summarized below), 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 $283.4 million in cash and marketable securities at
March 31, 1999, along with internally generated funds, will provide sufficient
funds for the Company to meet its 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 middle of 2000. After that, 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
7
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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, 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:
* 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 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:
* expenditures with respect to the Company's management information system
and corporate service support infrastructure and
* operating and administrative expenses with respect to new networks and
debt service.
The Company plans to make substantial capital investments in connection
with the deployment of switches in all of its existing networks, and plans to
construct and develop new networks. Expansion of the Company's networks will
include the geographic expansion of the Company's existing operations and will
consider the development of new markets. In addition, the Company may acquire
existing networks in the future.
During the first three months of 1999, capital expenditures were $43.3
million, an increase of $18.3 million from the three months ended March 31,
1998. The largest commitment of capital was related to the installation of
transport and switch related electronics to support the increase in sales
activity and the addition of 101 route miles of fiber. Based on historic capital
requirements for network construction in relation to sales volumes and network
expansion plans, the Company anticipates it will commit approximately $200
million in 1999 and $195 million in 2000 to fund its capital expenditures.
Acquisitions
In April 1999, the Company consummated its acquisition of Internet Connect,
Inc., pursuant to which Internet Connect, Inc. became a wholly-owned subsidiary
of the Company. Through this subsidiary, the Company will manage its data
networks and new internet products. As part of the consideration, the former
owners of Internet Connect, Inc. received approximately 307,550 shares of Class
A Common Stock of the Company which will be released from escrow over a period
of three years.
On May 4, 1999, the Company announced that it entered into an agreement to
acquire the 50% interest in MetroComm, which serves Columbus, Ohio, that it does
not currently own. In connection with the transaction, the Company will issue
2,190,308 shares of Class A Common Stock to the former partners of MetroComm,
representing approximately 2% of the combined issued and outstanding Class A
Common Stock and Class B Common Stock of the Company after the Offering. The
closing of the acquisition is subject to receipt of antitrust clearance and
other closing conditions.
8
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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 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 to the extent practicable, the Company plans
to assess 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.
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 Company has also completed the
assessment phase of its plan which involved an inventory and review of software
and equipment used in the Company's operations. This was done 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.
In the course of the assessment process the Company determined that all of
the equipment comprising its telephony networks depends on software or firmware
that is already represented by the vendors to be Year 2000 ready. The Company
conducted its own validation testing of that equipment, including its switches,
to verify the vendors' representations. On the basis of the test results, the
Company believes that such equipment will continue to accurately recognize and
process date information on and after January 1, 2000. The Company has developed
test and verification plans for the remainder of its equipment, applications and
systems and is in the process of conducting that testing.
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. The Company's early Year 2000 planning
took into account the Company's plans to replace, in the normal course of
business in 1999, many of the computer programs used by key business operations
and its financial systems. The specifications for these new systems are all
Year 2000 compliant but would require validation testing by the Company to
verify the Year 2000 readiness of those systems. The Company anticipates that
implementation of some back office systems for ordering, workflow management,
service design and
9
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
trouble management may be delayed in implementation so that it may not be
possible to test these systems before the fourth quarter of 1999. The Company's
Year 2000 action plan currently includes a moratorium on the installation of new
hardware or software systems during the last 60 to 90 days of 1999 in order to
avoid the possible creation of new Year 2000 issues during that period and to
allow the Company's information technologies personnel to focus on contingency
planning. Therefore, the implementation of these new systems may not occur until
the first quarter of 2000. As a result, the Company is in the process of testing
and remediating the back office systems that would have been replaced by the new
systems and plans to complete validation testing of the remediated systems
during the third quarter of 1999.
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.
Total costs incurred with respect to Year 2000 issues were approximately
$115,000 in 1998 and $260,000 in the first quarter of 1999. Based on the
Company's current Year 2000 action plan, the Company estimates that total 1999
costs will be approximately $2.0 million. The majority of the estimated 1999
costs represent the costs of personnel who will conduct verification testing of
equipment and software, costs of out-sourcing the testing of some existing
software systems, test equipment 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.
The Company is in the process of developing specific contingency plans in
the event that unanticipated problems arise from Year 2000 issues, including
plans for extra staffing and surveillance of operations at year end,
prioritization of systems for restoral and manual work-arounds for automated
processes. As part of this process, the Company is examining its existing
emergency procedures to determine how those procedures could meet the demand of
failures resulting from Year 2000-related problems. The Company also plans to
conduct tests of its contingency plans by simulating interruptions in a test
laboratory which reproduces the Company's switch and transport environments.
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 third-party suppliers 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 amount of which cannot
reasonably be estimated at this time.
10
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Cautions Concerning Forward Looking Statements
Certain information included in this report contains forward-looking
statements, including statements regarding the Company's expected financial
position, business and financing plans. These forward-looking statements
reflect the Company's views with respect to future events and financial
performance. The words "believe," "expect," "plans," "intends" and "anticipate"
and similar expressions identify forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results
to differ materially from such expectations include the Company's limited
history of operations, the Company's negative cash flow and operating losses,
the significant capital requirements required for the development and expansion
of the Company's business, the Company's substantial leverage and insufficiency
of its earnings to cover its fixed charges, the risks associated with the
expansion of the Company's business and the possible inability of the Company to
manage its growth, the dependence of the Company on its relationship and
agreements with Time Warner Cable, risks related to the Company's expansion into
the provision of long distance services, the Company's dependence upon
interconnection with and use of incumbent local exchange company networks, the
competitive nature of the telecommunications business, the Company's dependence
on its information billing systems, risks related to failure of Year 2000
remediations, the Company's dependence on its significant customers, regulatory
developments and the Company's dependence on governmental and other
authorizations. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. The Company
undertakes no obligations to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
11
<PAGE>
TIME WARNER TELECOM INC.
COMBINED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-----------------------------------
(thousands)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 76,265 $ 105,140
Marketable securities 202,341 231,107
Receivables, less allowances of $3,460 and $2,692 28,445 26,690
Prepaid expenses 2,814 2,176
-----------------------------------
Total current assets 309,865 365,113
Investments in unconsolidated affiliates 5,894 5,707
Property, plant and equipment 655,295 612,119
Less: accumulated depreciation (132,743) (117,961)
-----------------------------------
522,552 494,158
Long-term marketable securities 4,839 19,750
Intangible assets, net 19,162 19,616
-----------------------------------
Total assets $ 862,312 $ 904,344
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 32,308 $ 38,888
Other current liabilities 68,666 82,865
-----------------------------------
Total current liabilities 100,974 121,753
Long term debt 400,000 400,000
Subordinated loans payable to the Parent Companies (including $3,389 and
$3,399 of accrued interest, respectively) 178,329 174,940
Stockholders' equity
Preferred stock, $0.01 par value, 20,000,000 shares authorized, no
shares outstanding - -
Class A common stock, $0.01 par value, 277,300,000 shares authorized,
no shares issued and outstanding - -
Class B common stock, $0.01 par value, 162,500,000 shares authorized,
81,250,000 shares issued and outstanding 813 813
Additional paid in capital 255,654 255,654
Accumulated deficit (73,458) (48,816)
-----------------------------------
Total stockholders' equity 183,009 207,651
-----------------------------------
Total liabilities and stockholders' equity $ 862,312 $ 904,344
===================================
</TABLE>
See accompanying notes.
12
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------------------------
1999 1998
-----------------------------------
(thousands, except per share amounts)
<S> <C> <C>
Revenues:
Dedicated transport services $ 29,664 16,733
Switched services 17,925 5,315
-----------------------------------
Total revenues 47,589 22,048
Costs and expenses (a):
Operating 23,995 13,519
Selling, general and administrative 24,136 16,316
Depreciation and amortization 14,994 11,932
-----------------------------------
Total costs and expenses 63,125 41,767
-----------------------------------
Operating loss (15,536) (19,719)
Equity in income (losses) of unconsolidated affiliates 188 (58)
Interest income 4,217 -
Interest expense (a) (13,511) (2,011)
-----------------------------------
Net Loss $ (24,642) $ (21,788)
===================================
Basic and diluted loss per common share $ (0.30) $ (0.27)
===================================
Average common shares 81,250 81,250
===================================
<CAPTION>
(a) Includes expenses resulting from transactions with affilitates (Note 5):
<S> <C> <C>
Operating expenses $ 508 $ 513
===================================
Selling, general and administrative $ 473 $ 1,358
===================================
Depreciation and amortization $ 2,595 $ 2,193
===================================
Interest expense $ 3,389 $ 2,008
===================================
</TABLE>
See accompanying notes.
13
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
---------------------------
(thousands)
<S> <C> <C>
OPERATIONS
Net loss $ (24,642) $ (21,788)
Adjustments for noncash and nonoperating items:
Depreciation and amortization 14,994 11,932
Equity in (income) loss of unconsolidated affiliates (188) 58
Changes in operating assets and liabilities:
Receivables and other current assets (2,394) (2,452)
Accounts payable and other current liabilities (17,390) (2,878)
Other balance sheet changes 330 25
---------------------------
Cash used by operations (29,290) (15,103)
---------------------------
INVESTING ACTIVITIES
Capital expenditures (43,262) (24,961)
Purchases of marketable securities (26,744) -
Proceeds from maturities of marketable securities 70,421 -
---------------------------
Cash provided by (used ) by investing activities 415 (24,961)
---------------------------
FINANCING ACTIVITIES
Proceeds of loans from Parent Companies - 59,166
Repayment of loans to Parent Companies - (19,102)
---------------------------
Cash provided by financing activities - 40,064
---------------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (28,875) -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 105,140 -
---------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 76,265 $ -
===========================
</TABLE>
See accompanying notes.
14
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Class B
Common Stock Additional Total
---------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
---------------------------------------------------------------------
(thousands)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 81,250 $ 813 $ 554,994 $ (255,417) $ 300,390
Net loss prior to Reorganization - - - (43,923) (43,923)
---------------------------------------------------------------------
81,250 813 554,994 (299,340) 256,467
Effect of Reorganization - - (299,340) 299,340 -
Net loss after Reorganization - - - (48,816) (48,816)
---------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 81,250 813 255,654 (48,816) 207,651
Net loss for three months ended March 31, 1999 - - - (24,642) (24,642)
---------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 81,250 $ 813 $ 255,654 $ (73,458) $ 183,009
=====================================================================
</TABLE>
See accompanying notes.
15
<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., a Delaware corporation (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 telecommunications operations under the ownership or management
control of TW Cable. These operations consist of the commercial
telecommunications 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
telecommunications operations of TWE (TWE, TWE-A/N, and Time Warner are
referred to herein collectively 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 Group, Inc.
("MediaOne") and Advance/Newhouse Partnership ("Advance") (Time Warner,
MediaOne and Advance are collectively referred to as the "Existing
Stockholders") received all of the limited liability company interests in
TWT LLC. Time Warner Telecom Inc. ("TWT Inc.") was formed in connection
with the Reorganization as a subsidiary of TWT LLC for the sole purpose of
being a co-obligor of the Senior Notes referred to in Note 3. The
Reorganization has been reflected as of July 1, 1998 for accounting
purposes.
On May 10, 1999, a newly formed Delaware corporation merged with and
became the successor of TWT LLC and TWT Inc., and in connection with the
merger changed its name to Time Warner Telecom Inc. In connection with the
Reconstitution, the Company's capitalization is authorized to include two
classes of common stock, Class A Common Stock and Class B Common Stock. As
part of the merger, the Existing Stockholders exchanged their interests in
TWT LLC for Class B Common Stock of the newly formed corporation, Time
Warner Telecom Inc. Following the Reconstitution, Time Warner, MediaOne and
Advance held all of the Company's 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, internet service providers, 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 service
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.
16
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
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 March 31, 1999. The combined statements of operations
have 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 which management
believes result in reasonable allocation 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 clearly the financial
position and the results of operations and cash flows for the periods
presented and 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 for the Company for the year ended December 31, 1998.
Recent Pronouncements
Effective December 31, 1998, the Company adopted FASB 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 operates in 19 locations and the Company's management makes
decisions on resource allocation and assesses performance based on total
revenues, EBITDA, and capital spending of these operating locations. Each
of the locations offer the same products and services, have similar
customers and networks, are regulated by the same type of authorities, and
are managed directly by the Company's executives, allowing the 19 sites to
be aggregated under the guidelines of FAS 131, resulting in one reportable
line of business.
Significant Customers
The Company has substantial business relationships with a few large
customers, including the major long distance carriers. For the three
months ended March 31, 1999, the Company's top 10 customers accounted for
35.9% of the Company's consolidated revenues. One of these customers,
AT&T, accounted for more than 10% of the Company's total revenues in 1999
and two customers, AT&T and MCI-Worldcom, each accounted for more than 10%
of the Company's total revenues in 1998. However, a substantial portion of
that revenue results from traffic that is directed to the Company by
customers of the Company that have selected those carriers as their long
distance providers. Revenues include sales to AT&T and MCI-Worldcom
(including sales directed to the Company by customers of the Company) of
approximately $9.4 million and $5.7 million for the three months ended
March 31, 1999 and 1998, respectively.
17
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
Cash, Cash Equivalents, and Marketable Securities
Until July 14, 1998, 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 4). This
funding consisted of 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 subordinated loans, including
accrued interest, have been reflected as long-term liabilities in the
accompanying balance sheets.
On July 21, 1998, the Company issued $400 million principal amount of
Senior Notes (see Note 3). The net proceeds from the sale of the Senior
Notes were invested in cash equivalents and short- and long-term marketable
securities.
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 interest income. Interest on
securities classified as held-to-maturity is included in interest income.
Loss Per Share
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 on May
10, 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.
The Reconstitution was effected in conjunction with an initial public
offering of 20,700,000 shares of Class A Common Stock. The Class A shares
issued and outstanding will have a future impact on earnings per share.
18
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
2. Stockholder's Equity
Prior to the Reorganization in July 1998, the assets and liabilities
of the Company were beneficially owned by Time Warner and MediaOne, which
through certain subsidiaries, are partners in TWE and by Advance through
TWE-A/N.
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 May
1999, TWT LLC was reconstituted as a corporation through 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 the Class B Common Stock. Following the
Reconstitution, Time Warner, MediaOne and Advance held all of the
Company's 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.
The Company also is authorized to issue shares of Preferred Stock.
The Company's Board of Directors has the authority to establish the voting
powers, the preferences and special rights for the Preferred Stock. No
such voting powers, preferences or special rights have been established as
of March 31, 1999 and no shares of Preferred Stock have been issued at
March 31, 1999.
3. Long Term Debt
On July 21, 1998, the Company issued $400 million principal amount of
9 3/4% Senior Notes due July 15, 2008 ("Notes"). The Notes are unsecured,
unsubordinated obligations of the Company. 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
of the Notes were immediately invested in cash equivalents and marketable
securities. Interest expense relating to the Notes totaled approximately
$9.8 million for the three months ended March 31, 1999.
4. 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 from the Parent Companies are subordinated in right
of payment to the Senior Notes, except for provision allowing repayment
prior to maturity with the net proceeds of any offering of common stock or
equivalent interest of the Company. These loans bear interest (payable in
kind) at The Chase Manhattan Bank's prime rate which as 7.75% at March 31,
1999. Effective with the
19
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
Reorganization, the maturity of these loans was extended until 2008.
Interest expense relating to these loans totaled approximately $3.4 million
and $2.0 million for the three months ended March 31, 1999 and 1998,
respectively. In May 1999, proceeds from an initial public offering (see
Note 7) were used to repay the subordinated loans from Parent Companies in
full plus accrued interest.
5. Related Party Transactions
In the normal course of conducting its business, 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 operating unit. 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 $473,000 and $613,000 for the three months
ended March 31, 1999 and 1998, respectively.
During 1998, the Company participated in the Time Warner Cable Pension
Plan (the "TW Pension Plan"), a noncontributory defined benefit pension
plan which covered approximately 75% of all employees. The remaining 25%
of employees participated in a pension plan under the administration of
MediaOne, their previous employer ("MediaOne Pension Plan"). The Company
also participated in the TW Cable Employees Savings Plan (the "Savings
Plan"), a defined contribution plan sponsored by TW Cable. Both the TW
Pension Plan and Savings Plan were administered by a committee appointed by
the Board of Representatives of TWE and covered substantially all
employees.
Benefits under the TW Pension Plan are determined based on formulas
which reflect employees' years of service and compensation levels during
their employment period. Total pension costs were $373,000 for the three
months ended March 31, 1998.
Benefit costs under the MediaOne Pension Plan for certain employees of
the Company were $151,000 for the three months ended March 31, 1998.
The Company's contributions to the Savings Plan represented up to
6.67% of the employees' compensation during the plan year. TWE's Board of
Representatives had the right in any year to set the maximum amount of the
Company's annual contribution. Defined contribution plan expense was
$221,000 for the three months ended March 31, 1998.
As of January 1, 1999, the Company did not participate in the TW
Pension Plan or the Savings Plan because the Company adopted its own
benefit plans, including a 401(k) program.
The Company licenses the right to use the majority of its fiber optic
cable from TW Cable. The Company paid TW Cable $1.1 million and $1.2
million in the three months ended March 31, 1999 and 1998, 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 $2.6 million and $2.2 million for the three months ended March
31, 1999 and 1998, respectively, has been classified as a component of
depreciation and amortization in the accompanying combined statements of
operations. In addition, under this licensing arrangement, the Company
reimburses TW Cable for facility maintenance and pole rental costs,
20
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
which costs amounted to $508,000 for the three months ended March 31, 1999
and $513,000 for the three months ended March 31, 1998.
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 $3.4 million
and $2.0 million for the three months ended March 31, 1999 and 1998,
respectively (see Note 4).
6. Commitments and Contingencies
Pending legal proceedings are substantially limited to litigation
incidental to the business of the Company. In the opinion of management,
the ultimate resolution of these matters will not have a material adverse
effect on the Company's financial statements.
7. Subsequent Events
In April 1999, the Company consummated its acquisition of Internet Connect,
Inc., pursuant to which Internet Connect, Inc. became a wholly-owned
subsidiary of the Company. Through this subsidiary, the Company will
manage its data network and new internet product. As part of the
consideration, the former owners of Internet Connect, Inc. received
approximately 307,550 shares of Class A Common Stock of the Company which
will be released from escrow over a period of three years.
On May 4, 1999, the Company announced that it entered into an agreement to
acquire the 50% interest in MetroComm AxS L.P. ("MetroComm"), which serves
Columbus, Ohio, that it does not currently own. In connection with the
transaction, the Company will issue 2,190,308 shares of Class A Common
Stock to the former partners of MetroComm, representing approximately 2% of
the combined Class A Common Stock and Class B Common Stock of the Company
after the initial public offering (see below). The closing of the
acquisition is subject to receipt of antitrust clearance and other closing
conditions.
On May 14, 1999, in conjunction with the Reconstitution, the Company
completed an initial public offering of 20,700,000 shares of Class A Common
Stock (the "Offering") at a price of $14 per share. The Offering generated
$269.1 million in proceeds for the Company, net of underwriting discounts
and expenses. The net proceeds were used primarily to repay indebtedness to
the Parent Companies (see Note 4). Remaining proceeds will be used for
general corporate and working capital purposes, which may include
acquisitions and joint ventures.
21
<PAGE>
TIME WARNER TELECOM INC.
Other Information
Item 2. Changes in Securities and Use of Proceeds.
(c) In March 1999, the Company granted options covering 41,667 Class A
limited liability interests (which have been converted to options
to purchase 41,667 shares of Class A Common Stock) to its former
president and chief executive officer in settlement of certain
incentive compensation issues. These options have an exercise
price of $12 per share, vest over a three-year period and expire
in 2008. These options were issued in a private placement under
Section 4(2) of the Securities Act of 1933.
(d) Pursuant to a registration statement on Form S-1 effective May 11,
1999, Registration No. 333-49439, the Company commenced an
offering of 20,700,000 shares of its Class A Common stock at an
aggregate price of $14. The Managing Underwriters were Morgan
Stanley & Co., Incorporated, Lehman Brothers Inc., and Bear,
Stearns & Co., Inc. The Offering closed on May 14, 1999, and
20,700,000 shares were sold at an aggregate price of $289.8
million.
The net proceeds of the Offering, of approximately $269.1 million
after underwriters' discounts of $18.8 million and expenses of
approximately $1.9 million (including expenses paid to the
underwriters), were used primarily to repay subordinated
indebtedness to Time Warner, TWE and TWE/A/N, whose affiliates
owned all of the Company's Class B Common Stock immediately
following the Reconstitution and prior to the Offering. Proceeds
remaining after the repayment will be used for general corporate
and working capital purposes, including payment of interest on the
Notes.
Item 4. Submission of Matters to a Vote of Security Holders.
See Item 5.
Item 5. Other Information
Prior to the Company's offering of its Class A Common Stock, a new
Delaware corporation was formed to become the successor to TWT LLC and
TWT Inc. TWT LLC was formed to acquire the telephony business formerly
operated by Time Warner Cable and to conduct an offering of 9 3/4%
Senior Notes due 2008 on July 21, 1998. TWT Inc., a former wholly owned
subsidiary of TWT LLC, was formed solely for the purpose of serving as
co-obligor of the Notes. On May 10, 1999, TWT LLC and TWT Inc. merged
into the newly formed Delaware corporation which then changed its name
to Time Warner Telecom Inc. The members of TWT LLC exchanged their
Class B limited liability company interests for all of the outstanding
Class B Common Stock of the Company and the outstanding Class A limited
liability company interests were exchanged for Class A Common Stock.
Pursuant to the merger, the former Representatives of TWT LLC became
the directors of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as part of this report and such Exhibit Index
is incorporated herein by reference.
22
<PAGE>
TIME WARNER TELECOM INC.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company or its predecessor,
Time Warner Telecom LLC, during the quarter ended March 31, 1999.
23
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIME WARNER TELECOM INC.
(Registrant)
By: /s/ Jill R. Stuart
---------------------------------------
Name: Jill R. Stuart
Title: Vice President and Chief Accounting
Officer
Dated: May 17, 1999
<PAGE>
TIME WARNER TELECOM INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
<TABLE>
<CAPTION>
<C> <S>
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 Time Warner Telecom ("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. (filed as Exhibit 2.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-49439)). *
3.1 -- Restated Certificate of Incorporation of the Company (filed as Exhibit 2.2 to Company's Registration Statement on
Form S-1 (Registration No. 333-49439)).*
3.2 -- Restated By-Laws of the Company (filed as Exhibit 3.2 to Company's Registration Statement on Form S-1 (Registration
No. 333-49439)).*
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 (filed as Exhibit 4.1 to Company's
Registration Statement on Form S-1 (Registration No. 333-49439)).*
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).*
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 LLC 1998 Option Plan (filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1
(Registration No. 333-49439)).*
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).*
</TABLE>
<PAGE>
TIME WARNER TELECOM INC.
<TABLE>
<CAPTION>
<C> <S>
10.12 -- Master Capacity Agreement between MCIMetro Access Transmission Services, Inc., and Time Warner Communications, dated
September 9, 1994, as amended September 9, 1994 and August 28, 1997 (filed as Exhibit 10.12 to Company's
Registration Statement on Form S-1 (Registration No. 333-49439)).*+
10.13 -- Agreement between AT&T Communications, Inc. and Time Warner Communications, dated as of September 15, 1995, as
amended on June 1, 1997 (filed as Exhibit 10.13 to Company's Registration Statement on Form S-1 (Registration No.
333-49439)).*+
27 -- Financial Data Schedule
</TABLE>
* Incorporated by reference.
+ Indicates that portions of the exhibit have been omitted pursuant to a
request for confidential treatment and such portions have been filed with
the Commission separately.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 76,265
<SECURITIES> 202,341
<RECEIVABLES> 31,905
<ALLOWANCES> 3,460
<INVENTORY> 0
<CURRENT-ASSETS> 309,865
<PP&E> 655,295
<DEPRECIATION> 132,743
<TOTAL-ASSETS> 862,312
<CURRENT-LIABILITIES> 100,974
<BONDS> 400,000
0
0
<COMMON> 813
<OTHER-SE> 182,196
<TOTAL-LIABILITY-AND-EQUITY> 862,312
<SALES> 47,589
<TOTAL-REVENUES> 47,589
<CGS> 0
<TOTAL-COSTS> 63,125
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,511
<INCOME-PRETAX> (24,642)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,642)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,642)
<EPS-PRIMARY> 0
<EPS-DILUTED> (.30)
</TABLE>
