<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 June 30, 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.
<TABLE>
<CAPTION>
Class Outstanding at June 30, 1999
- ----- ----------------------------
<S> <C>
Class A Common Stock, par value $.01 per share 23,197,858 shares
Class B Common Stock, par value $.01 per share 81,250,000 shares
</TABLE>
___________________________________
* 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. Prior to May 10, 1999, Time
Warner Telecom LLC 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
----
<S> <C>
Part I. Financial Information
Management's Discussion and Analysis of Financial Condition and
Results of Operations 1
Consolidated and Condensed Balance Sheets at June 30, 1999 and
December 31, 1998 14
Consolidated and Combined Statements of Operations for the Three
Months and Six Months Ended June 30, 1999 and 1998 15
Consolidated and Combined Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 16
Consolidated and Combined Statements of Changes in Stockholder's
Equity 17
Notes to Consolidated, Combined, and Condensed Financial Statements 18
Part II. Other Information 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
</TABLE>
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Time Warner Telecom Inc. is a leading fiber, facilities-based integrated
communications carrier offering local businesses "last-mile" broadband
connections for data, high-speed internet access, local voice, and long-
distance. The Company serves customers in 19 U.S. metropolitan markets. The
markets include: Austin, Houston and San Antonio, Texas; Charlotte, Greensboro
and Raleigh, North Carolina; Albany, Binghamton, New York City and Rochester,
New York; Cincinnati and Columbus, Ohio; Memphis, Tennessee; Orlando and Tampa,
Florida; Indianapolis, Indiana; Milwaukee, Wisconsin; San Diego, California and
Honolulu, Hawaii. The Company added one additional service area, Northern New
Jersey, that became operational in July 1999 and another area under development,
Dallas, Texas, which is expected to commence operations during the fourth
quarter of 1999. 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 described herein.
The Company began its business in 1993 through 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"),
collectively referred to as the "former Parent Companies."
TWE and TWE-A/N are owned as follows:
(1) TWE is a partnership of subsidiaries of Time Warner and MediaOne
Group, Inc. ("MediaOne"); and
(2) TWE-A/N is a partnership of TWE and Advance/Newhouse Partnership
("Advance").
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.
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.
On July 14, 1998, Time Warner Telecom LLC ("TWT LLC") succeeded to the
ownership of the Company's business. At that time, Time Warner, MediaOne and
Advance (collectively referred to as the "Class B Stockholders") formed TWT LLC
to acquire the assets and liabilities of the Company's business from TWE, TWE-
A/N and Time Warner and to conduct the offering on July 21, 1998 of $400 million
principal amount 9 3/4% Senior Notes due July 2008 (the "Notes"). In this
transaction, referred to as the "Reorganization," Time Warner, MediaOne and
Advance (either directly or through subsidiaries) became the owners of all
the limited liability company interests in TWT LLC.
On May 10, 1999, TWT LLC was reconstituted as a Delaware corporation (the
"Reconstitution") under the name Time Warner Telecom Inc. by merging into a
newly formed Delaware corporation. As part of the merger, the Class B
Stockholders exchanged their interests in TWT LLC for Class B Common Stock of
the newly formed corporation. The Company accounted for the Reorganization and
the Reconstitution at each of the Class B 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.
1
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The primary change to the Company's operating structure since the
Reconstitution is that the management of the Company became 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 the former Parent Companies. The Company has not
been, and will not be compensated for such losses. As a result of the
Reconstitution which occurred during the second quarter of 1999, the Company
recognized a one-time charge to earnings for a deferred tax liability of
approximately $39.4 million, offset by a deferred tax benefit of approximately
$4.4 million.
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 $270.2 million in proceeds for the Company, net of underwriting
discounts and expenses. A portion of the proceeds of the Offering were used to
repay $180.0 million of loans from the former Parent Companies that were
generated from the financing requirements of the Company from July 1, 1997
through July 14, 1998. The proceeds of the Offering remaining after repayment of
the Loans, will be used to fund the Company's continued growth, including
expansion of the Company's networks, and for general corporate purposes.
Also during the second quarter, 2,190,308 shares of Class A Common
Stock were issued in exchange for all of the common stock of MetroComm, Inc. and
307,550 shares of Class A Common Stock were issued in exchange for all of the
common stock of Internet Connect, Inc. (see "Acquisitions"). After the
acquisition of the two companies, the total of Class A and B Common Stock issued
and outstanding as of June 30, 1999, is 104,447,858 shares.
As a result of the Offering, the Company has two classes of common
stock outstanding, Class A Common Stock and Class B Common Stock. In general,
holders of Class A Common Stock have one vote per share and 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, some
matters require the approval of 100% of the holders of the Class B Common Stock
voting separately as a class, and some matters require the approval of a
majority of the holders of the Class A Common Stock, voting separately as a
class. The Class B Stockholders have approximately 97.2% of the combined voting
power of the outstanding common stock. Upon completion of the Offering, the
Class B Stockholders owned all of the 81,250,000 shares of outstanding Class B
Common Stock.
In connection with the Reconstitution, the Company assumed the
obligations under the former TWT LLC 1998 Option Plan, amended such plan, and
renamed it Time Warner Telecom's 1998 Stock Option Plan ("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. As of June 30, 1999, options for approximately 6.1 million
shares were granted. Options for approximately 1.4 million shares vested on
August 5, 1999.
The Company's consolidated revenues were $58.4 million and $27.0
million for the three months ended June 30, 1999 and 1998, respectively, and
$106.0 million and $49.1 million for the six months ended June 30, 1999 and
1998, respectively.
The Company's revenues have been derived primarily from business
telephony services, including dedicated transmission, local switched, long
distance, as well as data and high-speed dedicated internet access services. The
Company's customers are principally telecommunications-intensive
2
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
business end-users, long distance carriers, internet service providers, wireless
communications companies, and governmental entities. Since its inception in
1993, the Company has experienced significant growth in revenues and in the
geographic scope of its operations. An increasing portion of the Company's
growth in revenues has come from the provision of local switched services as a
result of the 16 switches deployed as of June 30, 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 to customers
that are generally smaller than those who purchase dedicated transport services.
Key to the Company's strategy is leveraging its existing fiber optic networks by
adding additional services such as internet and data services and an integrated
product for smaller customers. These smaller customers are also expected to be
the principal users of the Company's long distance 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 in long distance and internet services to smaller customers by
offering such service under minimum one-year contracts.
The Company benefits from its strategic relationship with the former
Parent Companies both through network facilities access and cost-sharing. The
Company's networks have been constructed primarily through the use of fiber
capacity licensed from the former Parent Companies. As of June 30, 1999, the
Company operated networks in 19 metropolitan areas that spanned 7,326 route
miles, contained 289,803 fiber glass miles and offered service to 4,828
buildings. The Company added one additional service area that became operational
in July 1999 and another area under development, which is expected to commence
operations during the fourth quarter of 1999.
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.
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 incurred from the incumbent local exchange carriers,
other competitors and long distance providers 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 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 sales and marketing,
information technology, billing, 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 former 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
that occurred on July 14, 1998, the Company entered into several contracts with
the former Parent Companies in respect of certain of these transactions. The
Company's selling, general and administrative expenses include charges allocated
from the former Parent Companies for office rent and overhead
3
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
charges for various administrative functions they perform for the Company. 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 the former Parent
Companies through prepaid right-to-use agreements and reimburses the former
Parent Companies for facility maintenance and pole rental costs. These
maintenance and pole rental costs are included in the Company's operating
expense.
From July 1997 through July 1998, all of the Company's financing
requirements were funded with loans from the former Parent Companies. These
loans were subordinated in right of payment to the Notes and bore 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 had a maturity date of August
15, 2008. The Company believed that this rate was comparable to rates that could
have been obtained from unrelated third parties. On May 14, 1999, the Company
repaid, in full, the subordinated loans to the former Parent Companies with
proceeds from the Offering. The former Parent Companies are not obligated to
make additional equity investments in or loans to the Company.
The Company has not historically generated positive EBITDA. EBITDA is
defined as operating income (loss) before depreciation and amortization (see
more detailed definition in footnote 3 to the financial table under the Results
of Operations section). However, the Company generated positive EBITDA for the
second quarter and year-to-date 1999.
The Company has incurred and will continue to incur significant capital
expenditures. These expenditures support sales growth, network expansion in new
and existing markets, and building regional networks.
Acquisitions
During the second quarter of 1999, the Company acquired all of the
outstanding stock of Internet Connect, Inc. ("Inc.Net"), an internet service
provider, for a combination of cash and Class A limited liability interests in
TWT LLC, the Company's predecessor. At the time of the Offering, the Class A
limited liability interests were converted to 307,550 shares of Class A Common
Stock of the Company. Those shares will be held in escrow to be released to the
former Inc.Net's shareholders over a period of three years. Through the
acquisition of this subsidiary, the Company plans to manage current and future
data networks and provide new internet products.
During the second quarter of 1999, the Company acquired all of the
outstanding stock of MetroComm, Inc. through the issuance of 2,190,308 shares of
Class A Common Stock of the Company. Through the acquisition of MetroComm, Inc.,
the Company acquired the 50% interest of MetroComm AxS, L.P. ("MetroComm"), a
competitive local exchange carrier in Columbus, Ohio, not already owned by the
Company.
4
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Results of Operations
The following table sets forth certain consolidated and condensed
statements 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 Six Months
Ended June 30, Ended June 30,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
--------------------------------------------------------------------------------------
(thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues:
Dedicated transport services $ 35,396 60.6% $ 19,240 71.1% $ 65,061 61.4% $ 35,973 73.3%
Switched services 22,985 39.4% 7,807 28.9% 40,909 38.6% 13,122 26.7%
-------- ------ -------- ----- -------- ----- -------- -----
Total revenues 58,381 100% 27,047 100.0% 105,970 100.0% 49,095 100.0%
Costs and expenses (1):
Operating 27,466 47.0% 16,207 59.9% 51,461 48.6% 29,726 60.5%
Selling, general and
Administrative 26,268 45.0% 17,854 66.0% 50,404 47.6% 34,170 69.6%
Depreciation & amortization 15,987 27.4% 12,393 45.8% 30,981 29.2% 24,325 49.5%
-------- ------ -------- ----- -------- ----- -------- -----
Total costs & expenses 69,721 119.4% 46,454 171.8% 132,846 125.4% 88,221 179.7%
Operating loss (11,340) (19.4%) (19,407) (71.8%) (26,876) (25.4%) (39,126) (79.7%)
Equity in income (losses) of
Unconsolidated affiliates 97 0.2% (29) (0.1%) 285 0.3% (87) (0.2%)
Interest income 4,771 8.2% --- --- 8,988 8.5% --- ---
Interest expense (11,644) (19.9%) (2,699) (10.0%) (25,156) (23.7%) (4,710) (9.6%)
-------- ------ -------- ----- -------- ----- -------- -----
Net loss before tax $(18,116) (31.0%) $(22,135) (81.8%) $(42,759) (40.4%) $(43,923) (89.5%)
-------- ------ -------- ----- -------- ----- -------- -----
Income tax expense (2) 35,062 60.1 -- -- 35,062 33.1% --- ---
-------- ------ -------- ----- -------- ----- -------- -----
Net loss $(53,178) (91.1)% $(22,135) (81.8%) $(77,821) (73.4%) $(43,923) (89.5%)
======== ====== ======== ===== ======== ===== ======== =====
Basic and diluted loss per common
share $ ( 0.57) --- $ (0.27) --- $(0.89) --- $ (0.54) ---
---
Average common shares 92,885 --- 81,250 --- 87,099 --- 81,250 ---
EBITDA (3) 4,647 8.0% (7,014) (25.9%) 4,105 3.9% (14,801) (30.1%)
Cash provided by (used) in operations
16,563 --- (3,801) --- (12,727) --- (18,904) ---
Cash provided by (used) in investing
activities 15,261 --- (28,473) --- 15,676 --- (53,434) ---
Cash provided by financing activities
73,060 --- 32,274 --- 73,060 --- 72,338 ---
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
___________
(1) Includes expenses resulting from transactions with affiliates of $5.3
million and $6.8 million in the three months ended June 30, 1999 and 1998,
respectively, and $12.3 million and $12.9 million in the six months ended
June 30, 1999 and 1998, respectively.
(2) A one-time charge to earnings of $39.4 million was recorded in the second
quarter of 1999 to reflect the deferred tax liability associated with the
change from a limited liability company to a corporation. The income tax
expense for the second quarter of 1999 reflects the $39.4 million charge,
net of a $4.4 million deferred income tax benefit, resulting in net tax
expense and deferred tax liability of approximately $35.0 million.
(3) "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
5
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
performance and liquidity reported in accordance with generally accepted
accounting principles. Rather, EBITDA is a measure of operating 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 June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues. Revenues increased $31.4 million, or 116%, to $58.4 million for
the three months ended June 30, 1999, from $27.0 million for the comparable
period in 1998. Revenues from the provision of dedicated transport services
increased $16.2 million or 84%, to $35.4 million for the three months ended June
30, 1999, from $19.2 million for the comparable period in 1998. Switched service
revenues increased $15.2 million, or 194%, to $23.0 million for the three months
ended June 30, 1999, from $7.8 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, the mutual charges by local carriers
for recovery of costs associated with the termination of traffic on each other's
networks. Reciprocal compensation represented 6.7% and 7.5% of total revenues
for the three months ended June 30, 1999 and 1998, respectively. At June 30,
1998 and 1999 the Company offered dedicated transport services in 19
consolidated metropolitan areas, 16 of which also offered switched services.
Prior to June 30, 1999, the consolidated operations did not include MetroComm, a
50% owned entity of the Company. During the second quarter of 1999, MetroComm,
as well as the other acquisition, Inc.Net, are included in the consolidated and
condensed financial statements of the Company.
Operating Expenses. Operating expenses increased $11.3 million, or 69%, to
$27.5 million for the three months ended June 30, 1999, from $16.2 million in
the same period of 1998. The increase in operating expenses was primarily
attributable to the expansion of Company's business, the ongoing development of
existing markets resulting in higher local exchange carrier charges for circuit
leases and interconnection and increased headcount for technical personnel. As a
percentage of revenues, operating expenses decreased to 47.0% in 1999 from 59.9%
in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $8.4 million, or 47%, to $26.3 million for the
three months ended June 30, 1999, from $17.9 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, increase in office rent, the implementation
of new billing and system software, higher data processing costs, an increase in
employee headcount 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 45.0% in 1999 from 66.0% for
the comparable period in 1998.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $3.6 million, or 29%, to $16.0 million for the three months
ended June 30, 1999, from $12.4 million for the comparable period in 1998. The
increase in depreciation and amortization expenses was primarily attributable to
amortization related to the $30.0 million in goodwill generated from the
acquisitions and increased depreciation due to the increase in capital
expenditures for network growth and expansion.
6
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
EBITDA. EBITDA for the three months ended June 30, 1999 increased $11.6
million, or 166%, to $4.6 million in 1999, from a loss of $7.0 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. During the period July 1, 1997 through July 14, 1998, all
of the Company's financing requirements were funded with loans from the former
Parent Companies. 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
$11.6 million and $2.7 million for the three months ended June 30, 1999 and
1998, respectively. This represents an increase of $8.9 million compared to the
same period in 1998. The loans from former Parent Companies were repaid in full
with the proceeds from the Offering in May 1999.
Net Loss. Net loss increased $31.1 million, or 140% to $53.2 million for
the three months ended June 30, 1999, from a net loss of $22.1 million for the
corresponding period in 1998. The net loss increase is primarily due to a one-
time charge to earnings of $39.4 million in deferred tax liability, net of a
deferred tax benefit of $4.4 million, related to activity since the
Reconstitution.
Basic and Diluted Loss per Common Share. The basic and diluted 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. Shares of Class
A and Class B Common Stock issued and outstanding during the quarter increased
by 23,197,858 as a result of the Offering and acquisitions. Diluted loss per
common share adjusts for the effect of stock options only in 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. For the three months ended June 30, 1999, the basic and
diluted loss per common share increased $0.30 per share or 111% to ($0.57) per
share from ($0.27) per share for the three months ended June 30, 1998. The
fluctuation in the basic and diluted loss per common share is primarily related
to the one-time charge to earnings of $39.4 million in deferred tax liability,
net of a deferred tax benefit, related to activity since the Reconstitution.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues. Revenues increased $56.9 million, or 116%, to $106.0 million for
the six months ended June 30, 1999, from $49.1 million for the comparable period
in 1998. Revenues from the provision of dedicated transport services increased
$29.1 million or 81%, to $65.1 million for the six months ended June 30, 1999,
from $36.0 million for the comparable period in 1998. Switched service revenues
increased $27.8 million, or 212%, to $40.9 million for the six months ended June
30, 1999, from $13.1 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 an
increase in reciprocal compensation, the mutual charges by local carriers for
recovery of costs associated with the termination of traffic on each other's
networks. Reciprocal compensation represented 6.7% and 8.3% of total revenues
for the six months ended June 30, 1999 and 1998, respectively. At June 30, 1998
and 1999 the Company offered dedicated transport services in 19 consolidated
metropolitan areas, 16 of which also offered switched services.
7
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Operating Expenses. Operating expenses increased $21.8 million, or 73%, to
$51.5 million for the six months ended June 30, 1999, from $29.7 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 increased
headcount for technical personnel. As a percentage of revenues, operating
expenses decreased to 48.6% in 1999 from 60.5% in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $16.2 million, or 47%, to $50.4 million for
the six months ended June 30, 1999, from $34.2 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, increase in office rent, an increase in
consulting expenses relating to local regulatory matters, the implementation of
new billing and system software, higher data processing costs, an increase in
employee headcount 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 47.6% in the second quarter of
1999 from 69.6% for the comparable period in 1998.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $6.7 million, or 27%, to $31.0 million for the six months
ended June 30, 1999, from $24.3 million for the comparable period in 1998. The
increase in depreciation and amortization expenses was primarily attributable to
the amortization related to the $30.0 million in goodwill generated from the
acquisitions and increased depreciation due to the increase in capital
expenditures.
EBITDA. EBITDA for the six months ended June 30, 1999 increased $18.9
million, or 128%, to $4.1 million in 1999, from a loss of $14.8 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. During the period July 1, 1997 through July 14, 1998, all
of the Company's financing requirements were funded with loans from the former
Parent Companies. 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
$25.2 million and $4.7 million for the six months ended June 30, 1999 and 1998,
respectively. This represents an increase of $20.5 million compared to the same
period in 1998. The loans from the former Parent Companies were repaid in full,
with proceeds from the Offering in May 1999.
Net Loss. Net loss increased $33.9 million, or 77% to $77.8 million for the
six months ended June 30, 1999, from a net loss of $43.9 million for the
corresponding period in 1998. The net loss increase is primarily related to a
one-time charge to earnings of $39.4 million in deferred tax liability, net of a
$4.4 million deferred tax benefit, related to activity since the Reconstitution.
Basic and Diluted Loss per Common Share. The basic and diluted loss per
share is based upon the net loss applicable to common shares and the weighted
average of common shares outstanding during the period. Shares of Class A and
Class B Common Stock issued and outstanding during the quarter increased by
23,197,858 as a result of the Offering and acquisitions. Diluted loss per common
share adjusts for the effect of stock options only in 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.
The basic and diluted loss per common share increased from ($0.54) per share to
($0.89) per share for the six
8
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
months ended June 1999 and 1998, respectively. The loss per share increased from
1998 to 1999 by $0.35 or 65%. The fluctuation in the basic and diluted loss per
common share is primarily related to the one-time the one-time charge to
earnings of $39.4 million in deferred tax liability, net of a $4.4 million
deferred income tax benefit for a net deferred tax liability and tax expense
effect of $35.0 million, related to activity since the Reconstitution.
Liquidity and Capital Resources
Cash Flows. For the six months ended June 30, 1999, the Company's cash
used in operations was $12.7 million as compared to $18.9 million for the six
months ended June 30, 1998, resulting in an improvement of $6.2 million. This
decrease in cash used in operations is principally the result of an increase of
EBITDA of $18.9 million, offset by payments of interest on the Notes, which were
not outstanding during the six months ended June 30, 1998, and the repayment of
trade payables to the former Parent Companies.
Cash provided by investing activities increased $69.1 million to $15.7
million for the first six months of 1999, as compared to cash used of $53.4
million in the first six months of 1998. The increase was primarily due to
increased net proceeds from the maturities of marketable securities, offset by
increased capital expenditures and acquisitions.
Cash provided by financing activities for the first six months of 1999
increased by $722,000, as compared to the corresponding period in 1998. Net cash
provided by financing for the six months ending June 30, 1999, reflects the net
proceeds from the Offering of $270.2 million, offset by the repayment of loans
from the former Parent Companies of $180.0 million, as well as acquired debt and
capital lease obligations. Cash provided by financing activities in the six
months ending June 30, 1998, reflected the receipt of interest bearing
subordinated loans from the former Parent Companies of $114.7 million, offset by
a repayment of loans of $42.4 million.
Financing. Historically, the Company did not maintain cash balances since
all of the Company's funding requirements were provided by the former Parent
Companies. 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. From 1993 to July of
1997, the Company was funded by capital contributions from the former Parent
Companies. From July 1, 1997, through July 14, 1998, all of the Company's
financing requirements were funded with interest-bearing loans (the "Loans")
from the former Parent Companies. On July 21, 1998, the Company issued Notes in
the principal amount of $400.0 million, due July 2008. Additional funding was
provided by the May 14, 1999 Offering. The Offering generated $270.2 million in
net proceeds to the Company. The proceeds of the Offering remaining after
repayment of the Loans, will be used for general corporate purposes and to fund
the Company's continued growth, which includes expansion of the Company's
networks. In May 1999, the Loans, with a balance of approximately $180.0
million, were paid off in full, with the net proceeds of the Offering. The
former Parent Companies are not under any obligation to make any additional
equity investments or loans to the Company. If necessary, 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 to the Company on acceptable terms.
Although the primary use of the remaining proceeds of the Offering and the
Notes will be to fund ongoing business operations through the middle of 2001,
the Company intends to continue to evaluate potential acquisitions and joint
ventures. Currently, the Company has no new definitive
9
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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 the former Parent Companies, on an ongoing basis.
The Company expects that its future cash requirements will principally be
for capital expenditures and funding future growth. The Company expects that the
$324.5 million in cash and marketable securities at June 30, 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 and pay interest on the Notes through the middle of 2001.
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 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 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.
The Company plans to make substantial capital investments in connection
with its sales growth and network expansion in new and existing markets.
Expansion of the Company's networks will include the geographic expansion of the
Company's existing operations, as well as the development of new markets. In
addition, the Company may acquire existing networks in the future.
During the first six months of 1999, capital expenditures were $89.3
million (net of capital leases incurred of $4.9 million), an increase of $35.9
million from the six months ended June 30, 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 358
route miles of fiber. Based on historic capital requirements for network
construction in relation to sales volume and network expansion plans, the
Company anticipates it will commit approximately $200 million total in each of
1999 and 2000 to fund its capital expenditures.
10
<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 relies upon many computer
systems spanning its entire operations. 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 developed and is executing 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
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 also
completed the second phase of its plan, identification and assessment, which
involved an inventory and review of software and equipment used in the Company's
operations, and the third phase, remediation measures that were identified as
necessary in the assessment process. The Company also completed the great
majority of its validation testing, including all of the equipment comprising
its telephony networks and switches that were already represented by the vendors
to be Year 2000 ready. On the basis of the results of this validation testing,
the Company believes that such equipment will continue to accurately recognize
and process date information on and after January 1, 2000. In addition, the
Company completed validation testing of its operational support systems, its
billing systems and end-to-end telephony system testing in a laboratory
environment. This testing has not revealed the need for further remediation of
those systems. The Company is still in the process of assessing the Year 2000
readiness of Inc.Net, which the Company purchased in April 1999. Inc.Net's
sellers represented to the Company that its hardware and software is Year 2000
compliant. Consistent with its treatment of other vendor warranties, the Company
is conducting its own assessment and validation of Inc.Net's Year 2000
readiness.
The Company determined that implementation of some new back office systems
for ordering, workflow management, service design and trouble management
originally planned for 1999 could not be completed in time for validation
testing 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 creation of
new Year 2000 issues during that period and to allow the Company's information
technologies personnel to focus on contingency planning. In order to accommodate
the deferred implementation of these new systems, the Company has
11
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
remediated and is conducting validation testing of the back office systems that
would have been replaced by the new systems and plans to complete that testing
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 $1.4 million in the first half of 1999. Based on the
Company's current Year 2000 action plan, the Company estimates that total 1999
costs will be approximately $2.6 million. The majority of the estimated 1999
costs represent the costs of personnel who will conduct verification testing of
equipment and software, costs of remediating certain back office systems, costs
of out-sourcing the testing of some existing software systems, test equipment
and costs for replacement of certain personal computers. The current 1999 Year
2000 cost estimate represents a $600,000 increase over the Company's previous
estimate, primarily due to increased temporary personnel costs for remediation
and testing. Estimated Year 2000 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 and
by testing contingency processes in its field operations.
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.
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
12
<PAGE>
TIME WARNER TELECOM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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 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
the former Parent Companies, 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.
13
<PAGE>
TIME WARNER TELECOM INC.
CONSOLIDATED AND CONDENSED
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(unaudited)
(thousands)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....................................................... $ 181,149 $ 105,140
Marketable securities........................................................... 143,325 231,107
Receivables, less allowances of $4,720 and $2,692............................... 35,828 26,690
Prepaid expenses................................................................ 2,098 2,176
--------- ---------
Total current assets....................................................... 362,400 365,113
Investments in unconsolidated affiliates............................................. - 5,707
Property, plant and equipment........................................................ 739,608 612,119
Less: accumulated depreciation....................................................... (155,665) (117,961)
--------- ---------
583,943 494,158
Long-term marketable securities...................................................... - 19,750
Intangible assets, net............................................................... 48,055 19,616
--------- ---------
Total assets............................................................... $ 994,398 $ 904,344
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................................................ $ 39,120 $ 38,888
Other current liabilities....................................................... 88,954 82,865
--------- ---------
Total current liabilities................................................. 128,074 121,753
Long term debt and other............................................................. 403,386 400,000
Deferred tax liability............................................................... 35,062 -
Subordinated loans payable to the Parent Companies (including
$3,399 of accrued interest in 1998)............................................. - 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,
23,197,858 shares issued and outstanding at June 30, 1999................... 232 -
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...................................................... 553,468 255,654
Accumulated deficit............................................................. (126,637) (48,816)
--------- ---------
Total stockholders' equity................................................. 427,876 207,651
--------- ---------
Total liabilities and stockholders' equity................................. $ 994,398 $ 904,344
========= =========
</TABLE>
See accompanying notes
14
<PAGE>
TIME WARNER TELECOM INC.
CONSOLIDATED AND COMBINED
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ----------
(thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Dedicated transport services..................... $ 35,396 $ 19,240 $ 65,061 $ 35,973
Switched services................................ 22,985 7,807 40,909 13,122
--------- --------- --------- ---------
Total revenues.............................. 58,381 27,047 105,970 49,095
--------- --------- --------- ---------
Costs and expenses (a):
Operating........................................ 27,466 16,207 51,461 29,726
Selling, general and administrative.............. 26,268 17,854 50,404 34,170
Depreciation and amortization.................... 15,987 12,393 30,981 24,325
--------- --------- --------- ---------
Total costs and expenses.................... 69,721 46,454 132,846 88,221
--------- --------- --------- ---------
Operating loss......................................... (11,340) (19,407) (26,876) (39,126)
Equity in income (losses) of unconsolidated affiliates. 97 (29) 285 (87)
Interest income........................................ 4,771 - 8,988 -
Interest expense (a)................................... (11,644) (2,699) (25,156) (4,710)
--------- --------- --------- ---------
Net loss before taxes.................................. (18,116) (22,135) (42,759) (43,923)
Income tax expense..................................... 35,062 - 35,062 -
--------- --------- --------- ---------
Net loss............................................... $ (53,178) $ (22,135) $ (77,821) $ (43,923)
========= ========= ========= =========
Basic and diluted loss per common share................ $ (0.57) $ (0.27) $ (0.89) $ (0.54)
========= ========= ========= =========
Average common shares.................................. 92,885 81,250 87,099 81,250
========= ========= ========= =========
(a) Includes expenses resulting from transactions with affilitates (Note 7):
Operating expenses........................ $ 508 $ 513 $ 1,015 $ 1,026
========= ========= ========= =========
Selling, general and administrative....... $ 467 $ 1,225 $ 947 $ 2,643
========= ========= ========= =========
Depreciation and amortization............. $ 2,622 $ 2,260 $ 5,216 $ 4,453
========= ========= ========= =========
Interest expense, net..................... $ 1,689 $ 2,763 $ 5,078 $ 4,771
========= ========= ========= =========
</TABLE>
See accompanying notes.
15
<PAGE>
TIME WARNER TELECOM INC.
CONSOLIDATED AND COMBINED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1999 1998
---------- ----------
(thousands)
<S> <C> <C>
OPERATIONS
Net loss.............................................................................. $ (77,821) $ (43,923)
Adjustments for noncash and nonoperating items:
Depreciation and amortization...................................................... 30,981 24,325
Equity in (income) loss of unconsolidated affiliates............................... (285) 87
Deferred taxes..................................................................... 35,062 -
Changes in operating assets and liabilities, net of effect from acquired interests:
Receivables and other current assets............................................... (7,011) (5,718)
Accounts payable and other current liabilities..................................... 6,347 6,302
Other balance sheet changes........................................................ - 23
---------- ----------
Cash used in operations............................................................... (12,727) (18,904)
---------- ----------
INVESTING ACTIVITIES
Capital expenditures.................................................................. (89,290) (53,434)
Acquisitions, net of cash acquired.................................................... (2,566) -
Purchases of marketable securities.................................................... (18,409) -
Proceeds from maturities of marketable securities..................................... 125,941 -
---------- ----------
Cash provided (used ) by investing activities......................................... 15,676 (53,434)
---------- ----------
FINANCING ACTIVITIES
Proceeds of loans from Parent Companies............................................... - 114,751
Repayment of loans to Parent Companies................................................ (180,018) (42,413)
Payment of capital lease obligation................................................... (1,537) -
Repayment of acquired debt............................................................ (15,567)
Net proceeds from initial public offering............................................. 270,182 -
---------- ----------
Cash provided by financing activities................................................. 73,060 72,338
---------- ----------
INCREASE IN CASH AND EQUIVALENTS...................................................... 76,009 -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........................................... 105,140 -
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD................................................. $ 181,149 $ -
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest $ 20,876 $ -
========== ==========
</TABLE>
Supplemental schedule for noncash investing and financing activities:
Time Warner Telecom issued Class A Common Stock of $27.9 million to purchase the
stock of Internet Connect, Inc. and MetroComm, Inc.
In 1999 the Company incurred capital lease obligations of $4.9 million for the
purchase of fiber, equipment and furniture leases.
There were no material capital leases in 1998.
See accompanying notes.
16
<PAGE>
TIME WARNER TELECOM INC.
CONSOLIDATED AND COMBINED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B Additional Total
Common Stock Common Stock Paid-in Accumulated Stockholders'
------------------- -------------------
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
(thousands)
<S> <C> <C> <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
Initial Public Offering
net of offering expenses of $19,618.......... 20,700 207 - - 269,975 - 270,182
Acquisitions................................... 2,498 25 - - 27,839 - 27,864
Net loss for six months ended June 30, 1999.... - - - - - (77,821) (77,821)
-------- ------ ------- ------ --------- ---------- ---------
BALANCE AT JUNE 30, 1999....................... 23,198 $ 232 81,250 $ 813 $ 553,468 $ (126,637) $ 427,876
======== ====== ======= ====== ========= ========== =========
</TABLE>
See accompanying notes.
17
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED, and
CONDENSED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Description of Business
Time Warner Telecom Inc., a Delaware corporation (the "Company"), is a
leading fiber, facilities-based integrated communications carrier in
selected metropolitan markets across the United States, offering local
businesses "last-mile" broadband connections for data, high-speed internet
access, local voice and long distance.
The Company began its business in 1993 through 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"), collectively referred to as the "former Parent Companies."
TWE and TWE-A/N are owned as follows:
(1) TWE is a partnership of subsidiaries of Time Warner and MediaOne
Group, Inc. ("MediaOne"); and
(2) TWE-A/N is a partnership of TWE and Advance/Newhouse Partnership
("Advance").
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.
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.
In July 1998, the Company completed a reorganization (the
"Reorganization") under which the former Parent Companies contributed all
of the assets and liabilities of the Company into Time Warner Telecom LLC
("TWT LLC"), the predecessor to the Company, 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 "Class B 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 5. 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. The 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 Class B Stockholders' historical cost
basis of accounting and, except as noted below, the Reorganization and
Reconstitution had no effect on the Company's total stockholders' equity,
which has been presented on a consistent basis. 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. As
part of the merger, the Class B Stockholders exchanged their Class B
limited liability interests in
18
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED, and
CONDENSED FINANCIAL STATEMENTS - (continued)
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 consolidated 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 Company's revenues have been derived primarily from the provision
of "private line" or "direct access" telecommunications services; however,
an increasing portion is derived from the provision of 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, long distance,
data and high-speed internet access services. In addition, the Company
benefits from its strategic relationship with the former Parent Companies
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 the former Parent Companies.
Basis of Presentation
Until July 14, 1998, 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 former 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 as a partnership structure through May 10, 1999. The consolidated
and combined statements of operations have been adjusted to retroactively
reflect an allocation of certain expenses pursuant to the final terms of
agreements related to the Reorganization, primarily relating to office
rent, overhead charges for various administrative functions performed by
the former Parent Companies 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 consolidated and combined 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.
19
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED, and
CONDENSED FINANCIAL STATEMENTS - (continued)
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.
Basis of Consolidation and Accounting for Investments
The consolidated and 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. Intercompany accounts and transactions between the entities
have been eliminated. Accounts and transactions with the former 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, 1998, the Company's investments in
unconsolidated affiliates consisted solely of a 50% investment in MetroComm
AxS, L.P. ("MetroComm"), 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 consolidated balance sheet, and only
the Company's share of the investee's earnings are included in the
consolidated operating results. In addition, only the Company's share of
the cash distributions and cash paid to the investee are included in the
consolidated cash flows. During the second quarter of 1999, the remaining
50% of MetroComm was acquired (see Note 2) and, accordingly, is accounted
for on a consolidated basis as of May 31, 1999.
Significant Customers
The Company has substantial business relationships with a few large
customers, including the major long distance carriers. For the six months
ended June 30, 1999 and 1998, the Company's top 10 customers accounted for
37.8% and 39.7% respectively, 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, accounted
for more than 10% of the Company's total revenues in 1998. However, a
substantial portion of that revenue resulted 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 $21.2 million and $11.3 million for the six
months ended June 30, 1999 and 1998, respectively.
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 former Parent
Companies or by subordinated loans payable to the former Parent Companies
(see Note 6). This funding consisted of subordinated loans during the
period from July 1, 1997 through July 14, 1998. The capital contributions
of the former Parent Companies, which are non-interest bearing, have been
included in paid-in capital. Prior to repayment of the debt in May 1999,
the subordinated loans, including accrued interest, have been reflected as
long-term liabilities in the accompanying balance sheets.
20
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED, and
CONDENSED FINANCIAL STATEMENTS - (continued)
On July 21, 1998, the Company issued $400 million principal amount of
Senior Notes (see Note 5). 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
The basic loss per common share is based upon the net loss applicable
to common shares divided by the weighted average of common shares
outstanding for 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 Class A and Class B limited liability interests of the
Company were converted into shares of Class A Common Stock and Class B
Common Stock, respectively. Accordingly, the accompanying consolidated and
condensed 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. An additional
2,190,308 shares of Class A Common Stock and 307,550 shares of Class A
Common Stock were issued in exchange for the common stock of MetroComm,
Inc. and Internet Connect, Inc. ("Inc.Net"), respectively (see Note 2).
2. Mergers and Acquisitions
During the second quarter of 1999, the Company acquired all of the
outstanding stock of Internet Connect, Inc. ("Inc.Net"), for a
consideration of Class A limited liability interests in TWT LLC, the
Company's predecessor and approximately $3.8 million in cash. At the time
of the Offering, the Class A limited liability interests were converted to
307,550 shares of Class A Common Stock of the Company. The Class A Common
Stock of the Company into which the limited liability interests were
converted will be held in escrow to be released to the former
21
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED, and
CONDENSED FINANCIAL STATEMENTS - (continued)
Inc.Net's shareholders over a period of three years. The total purchase
price of the acquisition was approximately $7.6 million. The 307,550 shares
of Class A Common Stock issued were valued at $12.26 per share, for a total
stock issued consideration of approximately $3.8 million. Through the
acquisition of this subsidiary, the Company plans to manage current data
networks and provide new internet products. The acquisition was accounted
for as a purchase that generated $6.9 million in goodwill, which is
amortized on a straight-line basis over a ten year period. The amortization
expense for the three month period ending June 30, 1999, was approximately
$115,000.
During the second quarter of 1999, the Company acquired all of the
outstanding stock of MetroComm, Inc. through the issuance of 2,190,308
shares of Class A Common Stock of the Company. The total purchase price of
the acquisition was approximately $24.1 million. The 2,190,308 shares of
Class A Common Stock issued were valued at $11.00 per share for a total
stock issued consideration of $24.1 million. Through the acquisition of
MetroComm, Inc., the Company acquired the 50% interest of MetroComm AxS,
L.P. ("MetroComm") not already owned by the Company. After the
acquisition, the Company's Columbus assets were transferred to MetroComm
and all operations in Columbus will now be reported under the new entity.
The acquisition was accounted for as a purchase that generated $18.8
million in goodwill, which is amortized on a straight-line basis over a ten
year period. The amortization expense for the three month period ending
June 30, 1999, was approximately $158,000.
Both acquisitions are accounted for as purchases, which are
consolidated with the Company's operations as of the acquisition dates. The
allocation of the purchase price for these acquisitions is preliminary,
subject to further evaluation of the assets and liabilities assumed.
3. Initial Public Offering
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
$270.2 million in proceeds for the Company, net of underwriting discounts
and expenses. The net proceeds were used primarily to repay indebtedness
to the former Parent Companies (see Note 6). Remaining proceeds will be
used for general corporate purposes and to fund the Company's continued
growth, which may include acquisitions and joint ventures.
4. 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
former Parent Companies contributed all of the assets and liabilities of
the Company to TWT LLC and in connection therewith, the Class B
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 Class B Stockholders
exchanged their respective limited liability company interests for all of
the outstanding shares of the Class B Common Stock. Accordingly, the
accompanying consolidated and condensed financial statements have been
adjusted to
22
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED, and
CONDENSED FINANCIAL STATEMENTS-(continued)
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 June 30, 1999, and no shares of Preferred Stock have been issued at June
30, 1999.
5. 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 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 June 30, 1999 and
$19.5 million for the six months ended the same period.
6. Subordinated Loans Payable to the Former Parent Companies
During the period July 1, 1997 through July 14, 1998, all of the
Company's financing requirements were funded with subordinated loans from
the former Parent Companies. These loans from the former Parent Companies
were subordinated in right of payment to the Senior Notes, except for a
provision allowing repayment prior to maturity with the net proceeds of any
offering of common stock or equivalent interest of the Company. These
loans bore interest (payable in kind) at The Chase Manhattan Bank's prime
rate, which was 7.75% throughout 1999 to the payoff of the loan in May
1999. Interest expense relating to these loans totaled approximately $1.7
million and $2.8 million for the three months ended June 30, 1999 and 1998,
respectively and $5.1 million and $4.8 for the six months ended June 30,
1999 and 1998, respectively. In May 1999, proceeds from the Offering (see
Note 3) were used to repay the subordinated loans from former Parent
Companies in full, plus accrued interest. The total amount of principal
and interest repaid was approximately $180.0 million.
7. Related Party Transactions
In the normal course of conducting its business, the Company has
various transactions with the former Parent Companies, generally on terms
resulting from negotiation between the affected units that, in management's
view, result 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. Prior to the Reorganization, these
allocations are based on direct labor, total expenses, or headcount
relative to each
23
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED, and
CONDENSED FINANCIAL STATEMENTS-(continued)
operating unit. The Company is also allocated rent based on the square
footage of space occupied by the Company at TW Cable facilities. After the
Reorganization, these costs are based on contractual agreements with Time
Warner Cable. The aggregate of these charges totaled approximately $467,000
and $1.2 million for the three months ended June 30, 1999 and 1998,
respectively, and $947,010 and $2.6 million for the six months ended June
30, 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 $273,000 and $644,000
for the three months and six months ended June 30, 1998.
Benefit costs under the MediaOne Pension Plan for certain employees of
the Company were $185,000 and $336,000 for the three and six months ended
June 30, 1998, respectively.
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
$220,000 and $442,000 for the three and six months ended June 30, 1998,
respectively.
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 $5.6 million and $2.0
million in the three months ended June 30, 1999 and 1998, respectively and
$6.7 million and $3.2 million for the six months ended June 30, 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 June 30, 1999 and 1998 and $5.2 million and $4.5
million for the six months ended June 30, 1999 and 1998, respectively, has
been classified as a component of depreciation and amortization in the
accompanying consolidated and condensed statements of operations. In
addition, under this licensing arrangement, the Company reimburses TW Cable
for facility maintenance and pole rental costs, which costs amounted to
$508,000 and $513,000 for the three months ended June 30, 1999 and 1998,
respectively and $1.0 million and $1.0 million for the six months ended
June 30, 1999 and 1998, respectively.
During the period July 1, 1997 through July 14, 1998, all of the
Company's financing requirements were funded with loans from the former
Parent Companies. Interest expense relating to these loans totaled
approximately $1.7 million and $2.8 million for the three months ended June
30, 1999 and 1998, respectively and $5.1 million and $4.8 million for the
six months ended 1999 and 1998, respectively (see Note 6).
24
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED, and
CONDENSED FINANCIAL STATEMENTS-(continued)
8. 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.
9. Income Taxes
On May 14, 1999, in conjunction with the Reconstitution, a one-time
charge to earnings of $39.4 million was recorded to recognize the net
deferred tax liability associated with the change from a limited liability
company to a corporation, as all of the Company's tax operating losses
prior to May 14, 1999 were absorbed by the former Parent Companies. The
income tax benefit for the quarter ended June 30, 1999, shown below
includes the effect of the Reconstitution and the tax impact of operations
from the date of the Reconstitution through June 30, 1999.
Current and deferred tax expense is as follows:
Current $ ---
Deferred $ 35,062,000
-------------
Total $ 35,062,000
=============
Variations from the federal statutory rate for activity since the
Reconstitution date are as follows:
Expected federal income tax benefit at statutory rate 35.00%
Effect of permanent differences (0.73%)
State income tax benefit, net of federal 5.09%
-------------
Income tax benefit 39.37%
=============
Significant components of Time Warner Telecom's net deferred tax liability
at June 30, 1999 are as follows:
Deferred Tax Assets
Allowance for Doubtful Accounts $ 1,897,000
Net Operating Losses since the Reconstitution $ 5,677,000
-------------
Total Deferred Tax Assets $ 7,574,000
Deferred Tax Liabilities
Depreciation and Amortization $ (42,636,000)
-------------
Total Deferred Tax Liabilities $ (42,636,000)
-------------
Net Deferred Tax Liabilities $ (35,062,000)
=============
25
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED, and
CONDENSED FINANCIAL STATEMENTS - (continued)
At June 30, 1999, the Company has a net operating loss carryforward since
the Reconstitution for federal income tax purposes of approximately $13.4
million. The net operating loss carryforward is scheduled to expire in
2019.
10. Stock Option Plan
In connection with the Reconstitution, the Company assumed the
obligations under the former TWT LLC 1998 Option Plan, amended such plan
and renamed it the Time Warner Telecom's 1998 Stock Option Plan ("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. As of June 30, 1999,
approximately 6.1 million shares of stock options were granted.
Approximately 1.4 million stock options vested on August 5, 1999.
26
<PAGE>
TIME WARNER TELECOM INC.
Part II
Other Information
Item 2. Changes in Securities and Use of Proceeds.
(a) On May 10, 1999, TWT LLC was reconstituted as a Delaware
corporation by the merger of TWT LLC and TWT Inc. into a 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. After the Reconstitution, the rights of the holders
of the Class A Common Stock and Class B Common Stock are governed
by the Company's Restated Certificate of Incorporation and Restated
Bylaws rather than TWT LLC's Amended and Restated Limited Liability
Company Operating Agreement. In general, holders of Class A Common
Stock have one vote per share and 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, some matters require the approval of 100% of the holders
of the Class B Common Stock voting separately as a class, and some
matters require the approval of a majority of the holders of the
Class A Common Stock, voting separately as a class.
(c) On April 21, 1999, the Company issued 307,550 Class A limited
liability company interests and paid additional consideration in
cash to the eight shareholders of Internet Connect, Inc. to acquire
all of the outstanding shares of capital stock of that company in a
private placement under Section 4(2) of the Securities Act of 1934.
The limited liability company interests were exchanged for 307,550
shares of the Company's Class A Common Stock in the reconstitution
described in item 2(a).
During the second quarter of 1999, the Company issued 2,190,308
shares of Class A Common Stock to the four individual shareholders
of MetroComm, Inc. in connection with the merger of MetroComm, Inc.
with a newly-created, wholly owned subsidiary of the Company,
whereby MetroComm, Inc. became a wholly owned subsidiary of the
Company. MetroComm, Inc. owns 50% of the partnership interests of
MetroComm AxS, L.P., in which the Company already held the other
50% through a wholly owned entity. The shares were issued in a
private placement under Section 4(2) of the Securities Act of 1933.
During the second quarter of 1999, the Company granted options
covering 170,000 shares of Class A Common Stock to employees under
the Company's 1998 Stock Option Plan. The option price is the
market value of the Class A Common Stock on the date of grant.
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 per share. 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, were approximately $270.2 million
after underwriters' discounts of $18.8 million and expenses of
approximately $1.8 million (including expenses paid to the
underwriters). Of the net proceeds, the Company used approximately
$180.0 million to repay subordinated indebtedness to the former
Parent Companies. The Company advanced an additional $14.6 million
to MetroComm to repay senior debt. The balance of the proceeds was
invested in short-term marketable securities.
27
<PAGE>
TIME WARNER TELECOM INC.
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.
(b) Reports on Form 8-K.
- 8-K dated May 3, 1999 filed by Time Warner Telecom LLC, the
Company's predecessor, reporting the execution of a definitive
agreement to acquire the remaining 50% interest in MetroComm
AxS, L.P. not already held by it.
- 8-K dated May 11, 1999 filed by the Company, reporting the
pricing of its initial public offering of Class A Common Stock.
28
<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: August 16, 1999
<PAGE>
TIME WARNER TELECOM INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
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 -- Amended and Restated 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).*
<PAGE>
TIME WARNER TELECOM INC.
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
* 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.
<PAGE>
As amended and
restated as of:
May 10, 1999
EXHIBIT 10.4
TIME WARNER TELECOM INC.
1998 STOCK OPTION PLAN
ARTICLE I
Purpose of the Plan
-------------------
The purpose of the Time Warner Telecom Inc. (the "Company") 1998 Stock
Option Plan (hereinafter the "Plan") is to provide for the granting of options
to directors and employees of the Company and its Subsidiaries in recognition of
the valuable services provided, and contemplated to be provided, by such
directors and employees. The general purpose of the Plan is to promote the
interests of the Company and its stockholders and to reward dedicated directors
and employees of the Company and its Subsidiaries by providing them additional
incentives to continue and increase their efforts with respect to, and to remain
in the employ of, the Company or its Subsidiaries.
ARTICLE II
Certain Definitions
-------------------
The following terms (whether used in the singular or plural) have the
meanings indicated when used in the Plan:
(a) "Agreement" means the option agreement specified in Article XI.
(b) "Approved Transaction" means any transaction in which the Board
(or, if approval of the Board is not required as a matter of law, the
stockholders of the Company) shall approve (i) any consolidation or merger of
the Company in which the Company is not the continuing or surviving company or
pursuant to which shares of Class A Common Stock would be converted into cash,
securities or other property, other than a merger of the Company in which the
equity holders of the Company immediately prior to the merger have the same
proportionate ownership of the equity value of the surviving company immediately
after the merger or (ii) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (iii) the adoption of any plan or proposal for
the liquidation or dissolution of the Company; provided that the reconstitution
-------- ----
of the Company as a corporation or other entity or a public offering of the
equity of the Company (or its successor) shall not constitute an Approved
Transaction.
(c) "Award" means grants of Options under this Plan.
(d) "Board" means the Board of Directors of the Company.
(e) "Board Change" means such time as the Class B Stockholders and
their respective affiliates as a group cease to have the ability to elect a
majority of the Board of Directors (other than the chief executive officer of
the Company 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 Class B Stockholders and their
respective affiliates do not constitute a majority of the committee that selects
the Board's nominees for independent directors) and a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) (other
than the Class B Stockholders and their respective affiliates) has become the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
more than 35% of the total voting power of the voting interests of the Company
on a fully diluted basis and such ownership represents a greater percentage
<PAGE>
of the total voting power of the voting interests of the Company, on a fully
diluted basis, than is held by the Class B Stockholders and their respective
affiliates as a group on such date.
(f) "Class A Common Stock" means the class A common stock, par value
$.01 per share, of the Company.
(g) "Class B Stockholders" means Time Warner Inc., Media One Group,
Inc., Advance/Newhouse Partnership and the affiliates of each of the foregoing.
(h) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute or statutes thereto. Reference to any
specific Code section shall include any successor section.
(i) "Committee" means the Committee comprised of members of the Board
appointed pursuant to Article IV.
(j) "Company" means Time Warner Telecom Inc, a Delaware corporation,
and any successor thereto.
(k) "Effective Date" means the date the Plan becomes effective
pursuant to Article XV.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or statutes thereto.
Reference to any specific Exchange Act section shall include any successor
section.
(m) "Fair Market Value" of a share of Class A Common Stock shall mean
the fair market value of such a share of Class A Common Stock as determined in
good faith by the Board after consultation with an independent appraiser or
other third party deemed appropriate by the Board. In the event of an Approved
Transaction involving the sale of shares of Class A Common Stock of the
Company, the Fair Market Value of a share shall be based upon the price per
share paid by the acquirer in connection with such Approved Transaction, subject
to appropriate adjustment to reflect relative differences among the shares as
determined in good faith by the Board.
(n) "Holder" means a director or an employee of the Company or any of
its Subsidiaries who has received an Award under this Plan. An individual shall
continue to be considered a Holder for purposes of this Plan during the period
such individual holds shares of Class A Common Stock acquired pursuant to an
exercise of an Option.
(o) "Option" means any option granted pursuant to this Plan.
(p) "Plan" has the meaning ascribed thereto in Article I.
(q) "Subsidiary" of a person means any present or future subsidiary
of such person as such term is defined in Section 425 of the Code and any
present or future trade or business, whether or not incorporated, controlled by
or under common control with such person. An entity shall be deemed a
Subsidiary of a person only for such periods as the requisite ownership or
control relationship is maintained.
(r) "Total Disability" means a permanent and total disability as
defined in Section 22(e)(3) of the Code.
ARTICLE III
Shares Subject to the Plan
--------------------------
SECTION 3.01. Number of Shares. Subject to the provisions of Section
-----------------
3.02 and Section 6.06, the maximum number of shares of Class A Common Stock in
respect of which Awards may be granted under the Plan shall be determined by the
Board as of the date of the initial grant of Awards under the Plan, but shall in
no
2
<PAGE>
event represent more than 10% of the total number of shares of the Company
outstanding as of that date. The maximum number of shares of Class A Common
Stock in respect of which Awards may be granted during any calendar year to any
one individual under the Plan shall not exceed one-half the number of shares
that may be subject to Awards granted under the Plan under the preceding
sentence. If and to the extent that an Option shall expire, terminate or be
canceled for any reason without having been exercised, the shares subject to
such expired, terminated or canceled portion of the Option shall again become
available for purposes of the Plan.
SECTION 3.02. Adjustments. In addition to the adjustment in the
------------
Options as described in Section 6.06, in the event that the Board determines
that any dividend or other distribution (whether in the form of cash, shares of
Class A Common Stock, securities or other property), recapitalization,
reorganization, merger, consolidation, issuance or exchange of shares of Class A
Common Stock, other ownership interests or other securities of the Company,
issuance of warrants or other rights to purchase shares of Class A Common Stock,
other ownership interests or other securities of the Company or other similar
corporate transaction or event affects the shares of Class A Common Stock such
that an adjustment is determined by the Board in its discretion to be
appropriate in order to prevent inappropriate dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan,
then the Board may, in such manner as it may deem equitable, adjust any or all
of (a) the number of shares of Class A Common Stock, other ownership interests
or other securities of the Company (or number and kind of other securities or
property) with respect to which Awards may be granted, (b) the number of shares
of Class A Common Stock, other ownership interests or other securities of the
Company (or number and kind of other securities or property) subject to
outstanding Awards or the percentage of Interests, other ownership interests or
other securities of the Company subject to shares of Class A Common Stock and
(c) the exercise price with respect to any Option or, if deemed appropriate,
make provision for a cash payment to the Holder of an outstanding Option in
consideration for the cancellation of such Option. No adjustment shall be made
on account of the issuance of shares of Class A Common Stock with respect to
Options.
ARTICLE IV
Administration
--------------
SECTION 4.01. Powers. The Plan shall be administered by the Board.
-------
Subject to the express provisions of the Plan, the Board shall have plenary
authority, in its discretion, to grant Awards under the Plan and to determine
the terms and conditions (which need not be identical) of all Awards so granted,
including without limitation, (a) the individuals to whom, and the time or times
at which, Awards shall be granted or awarded, (b) the number of shares of Class
A Common Stock to be subject to each Award, (c) when an Option can be exercised
and whether in whole or in installments, and (d) the form, terms and provisions
of any Agreement (which terms may be amended, subject to Article XIII).
SECTION 4.02. Factors to Consider. In making determinations
--------------------
hereunder, the Board may take into account the nature of the services rendered
by the respective directors and employees, their dedication and past
contributions to the Company and its Subsidiaries, their present and potential
contributions to the success of the Company and its Subsidiaries and such other
factors as the Board in its discretion shall deem relevant.
SECTION 4.03. Interpretation. Subject to the express provisions of
---------------
the Plan, the Board shall have plenary authority to interpret the Plan, to
prescribe, amend and rescind the rules and regulations relating to it and to
make all other determinations deemed necessary or advisable for the
administration of the Plan. The determinations of the Board on the matters
referred to in this Article IV shall be conclusive.
SECTION 4.04. Delegation to Committee. Notwithstanding anything to
------------------------
the contrary contained herein, the Board may at any time, or from time to time,
appoint a Committee and delegate to such Committee the authority of the Board to
administer the Plan, including to the extent provided by the Board, the power to
further delegate such authority. Upon such appointment and delegation, any such
Committee shall have all the powers, privileges and duties of the Board in the
administration of the Plan to the extent provided in such delegation, except for
the power to appoint members of the Committee and to terminate, modify or amend
the Plan. The Board may from time to time appoint members of any such Committee
in substitution for or in addition to members previously appointed, may fill
vacancies in such Committee and may discharge such Committee.
3
<PAGE>
Any such Committee shall hold its meetings at such times and places as
it shall deem advisable. A majority of members shall constitute a quorum and
all determinations shall be made by a majority of such quorum. Any
determination reduced to writing and signed by all of the members shall be fully
as effective as if it had been made by a majority vote at a meeting duly called
and held.
ARTICLE V
Eligibility
-----------
Awards may be made only to (a) directors, employees, including
officers and directors who are also employees, of, and consultants to, the
Company or any of its Subsidiaries, (b) prospective employees of the Company or
any of its Subsidiaries and (c) any other individuals providing services to the
Company or any of its Subsidiaries. The exercise of Options granted to a
prospective employee shall be conditioned upon such person becoming an employee
of the Company or any of its Subsidiaries. For purposes of the Plan, the term
"prospective employee" shall mean any person who holds an outstanding offer of
employment on specific terms from the Company or any of its Subsidiaries.
Awards may be made to employees who hold or have held Awards under this Plan or
any similar or other awards under any other plan of the Company or its
Subsidiaries.
ARTICLE VI
Options
-------
SECTION 6.01. Option Price. The purchase price of the shares of
-------------
Class A Common Stock under each Option shall be determined by the Board and set
forth in the applicable Agreement, but shall not be less than 100% of the Fair
Market Value of such shares on the date of grant.
SECTION 6.02. Term of Options. The term of each Option shall be for
----------------
such period as the Board shall determine, as set forth in the applicable
Agreement, but not more than 10 years from the date of grant.
SECTION 6.03. Exercise of Options. An Option granted under the Plan
--------------------
shall become (and remain) exercisable during the term of the Option to the
extent provided in the applicable Agreement and this Plan and, unless the
Agreement otherwise provides, may be exercised to the extent exercisable, in
whole or in part, at any time and from time to time during such term; provided,
--------
however, that subsequent to the grant of an Option, the Board, at any time
- -------
before complete termination of such Option, may accelerate the time or times at
which such Option may be exercised in whole or in part (without reducing the
term of such Option). The Agreement may contain conditions precedent to the
exercisability of Options, including without limitation, the achievement of
minimum performance criteria.
SECTION 6.04. Manner of Exercise. Payment of the Option purchase
-------------------
price shall be made in cash or in whole shares of Class A Common Stock already
owned by the person exercising an Option or, partly in cash and partly in such
shares of Class A Common Stock; provided, however, that such payment may be made
-------- -------
in whole or in part in shares of Class A Common Stock held for six months and
only if and to the extent permitted by the applicable Agreement. The Company
shall effect the transfer of the shares purchased under the Option as soon as
practicable. No Holder or other person exercising an Option shall have any of
the rights of a stock holder of the Company with respect to shares of Class A
Common Stock subject to an Option granted under the Plan until due exercise and
full payment has been made.
SECTION 6.05. Limited Transferability of Options. Except as set
-----------------------------------
forth in this Section 6.05 and Article XX, Options shall not be transferable
other than by will or the laws of descent and distribution, and Options may be
exercised during the lifetime of the Holder thereof only by such Holder (or his
or her court appointed legal representative). The Agreement may provide that
Options are transferable by gift to such persons or entities and upon such terms
and conditions specified in the Agreement.
SECTION 6.06. Adjustment of Options. Upon the issuance or redemption
----------------------
of shares of Class A Common Stock in the Company, the number of shares available
under the Plan and the number of shares of Class A Common Stock subject to
outstanding Options shall be equitably adjusted as determined by the Board in
4
<PAGE>
its sole discretion to prevent inappropriate dilution or enlargement of the
economic interest represented by such Options.
SECTION 6.07. Section 83(b) election. Unless the Board determines
-----------------------
otherwise, an individual exercising an Option will be required to make a timely,
valid election under Section 83(b) of the Code.
SECTION 6.08. Tax Treatment of Exercise. Solely for purposes of
-------------------------
determining the appropriate tax treatment of the Class B Stockholders and the
Holder, upon exercise of an Option, a Holder will be treated as if the Company
paid him or her an amount equal to the aggregate difference between the exercise
price and the Fair Market Value of the shares of Class A Common Stock subject to
the Option and the Holder then purchased from the Company for cash the
applicable number of shares of Class A Common Stock at the then-current Fair
Market Value of such shares.
ARTICLE VII
Acceleration of Options
-----------------------
Notwithstanding any contrary waiting period or installment period in
any Agreement or in the Plan, or unless the applicable Agreement provides
otherwise, if a Holder's employment shall terminate by reason of death or Total
Disability, or in the event of any Approved Transaction or Board Change each
outstanding Option granted under the Plan shall immediately become exercisable
in full in respect of the aggregate number of shares of Class A Common Stock
covered thereby.
ARTICLE VIII
Termination of Employment
-------------------------
SECTION 8.01. General. If a Holder's employment shall terminate
--------
prior to the complete exercise of an Option, then such Option shall thereafter
be exercisable in accordance with the provisions of the applicable Agreement
(including the provisions of any other agreement referred to in the Agreement);
provided, however, that (a) no Option may be exercised after the scheduled
- -------- -------
expiration date of such Option; (b) if the Holder's employment terminates by
reason of death or Total Disability, Options shall remain exercisable for a
period of at least one year following such termination (but not later than the
scheduled expiration of such Option); and (c) any termination by the employing
company for cause will be treated in accordance with the provisions of Section
8.02.
SECTION 8.02. Termination for Cause. If a Holder's employment with the
----------------------
Company or any of its Subsidiaries shall be terminated for cause, by the Company
or such Subsidiary prior to the exercise of any Option, then all Options held by
such Holder and any permitted transferee pursuant to Section 6.05 shall
immediately terminate. For the purposes of this Section 8.02, cause shall have
the meaning ascribed thereto in any employment agreement to which such Holder is
a party. In the absence of an employment agreement, cause shall include but not
be limited to, insubordination, dishonesty, incompetence, moral turpitude, other
misconduct of any kind and the refusal to perform his duties and
responsibilities for any reason other than illness or incapacity; provided,
--------
however, that if such termination occurs within 12 months after an Approved
- -------
Transaction or Board Change, termination for cause in the absence of an
employment agreement shall mean only a felony conviction for fraud,
misappropriation or embezzlement.
SECTION 8.03. Miscellaneous. The Board may determine whether any
--------------
given leave of absence constitutes a termination of employment. Awards made
under the Plan shall not be affected by any change of employment so long as the
Holder continues to be an employee of the Company or one of its Subsidiaries.
ARTICLE IX
Right of Company to Terminate Employment
----------------------------------------
Nothing contained in the Plan or in any Award shall confer on any
Holder any right to continue in the employ of the Company or any of its
Subsidiaries or interfere in any way with the right of the Company or
5
<PAGE>
a Subsidiary to terminate the employment of the Holder at any time, with or
without cause; subject, however, to the provisions of any employment agreement
between the Holder and the Company or any of its Subsidiaries.
ARTICLE X
Nonalienation of Benefits
-------------------------
Except as specifically provided in Section 6.05 and Article XX, no
right or benefit under the Plan shall be subject to anticipation, alienation,
sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or
charge, and any attempt to anticipate, alienate, sell, assign, hypothecate,
pledge, exchange, transfer, encumber or charge the same shall be void. No right
or benefit hereunder shall in any manner be liable for or subject to the debts,
contracts, liabilities or torts of the person entitled to such benefits.
ARTICLE XI
Written Agreement
-----------------
Each grant of an Option shall be evidenced by an Option Agreement in
such form and containing such terms and provisions not inconsistent with the
provisions of the Plan as the Board from time to time shall approve; provided,
--------
however, that such Awards shall be evidenced by a single agreement. The
- -------
effective date of the granting of an Award shall be the date on which the Board
approves such grant. Each grantee of an Option shall be notified promptly of
such grant and a written Agreement shall be promptly executed and delivered by
the Company and the grantee; provided that such grant of Options shall terminate
-------- ----
if such written Agreement is not signed by such grantee (or his attorney) and
delivered to the Company within 90 days after the date the Agreement is sent to
such grantee for signature. Any such written Agreement may contain (but shall
not be required to contain) such provisions as the Board deems appropriate to
ensure that the penalty provisions of section 4999 of the Code will not apply to
any stock or cash received from the Company or any of its Subsidiaries by the
Holder or a transferee of such Holder if the Award, or any part thereof, has
been transferred pursuant to Section 6.05 or Article XX.
ARTICLE XII
Right of First Refusal
----------------------
The Agreement may contain such provisions as the Board shall determine to the
effect that if a Holder, or such other person exercising an Option, elects to
sell all or any shares of Class A Common Stock that such Holder or other person
acquired upon the exercise of an Option awarded under the Plan, then such Holder
or other person shall not sell such shares unless such Holder or other person
shall have first offered in writing to sell such shares to the Company at Fair
Market Value on a date specified in such offer (which date shall be at least
three business days and not more than 10 business days following the date of
such offer). If the Company does not accept such offer within 10 days, the
shares may be sold on terms no more favorable than those offered to the Company.
If the shares (i) are not sold within 10 days of the date the Company declined
to purchase such shares or (ii) would be sold on terms more favorable than those
offered to the Company, the holder of the shares must again offer the shares for
sale to the Company in accordance with this Article XII before any subsequent
sale of such shares. Any transfer of shares that occurs after any violation of
this Article XII shall be null and void.
ARTICLE XIII
Termination And Amendment
-------------------------
SECTION 13.01. General. Unless the Plan shall theretofore have been
--------
terminated as hereinafter provided, no Awards may be made under the Plan on or
after the tenth anniversary of the Effective Date. The Board may at any time
prior to the tenth anniversary of the Effective Date terminate the Plan, and the
Board may at any time modify or amend the Plan in such respects as it shall deem
advisable.
SECTION 13.02. Modification. No termination, modification or
-------------
amendment of the Plan may, without the consent of the person to whom any Award
shall theretofore have been granted (or a transferee of such person if the
Award, or any part thereof, has been transferred pursuant to Section 6.05 or
Article XX), adversely affect the rights of such person with respect to such
Award. No modification, extension, renewal or other change
6
<PAGE>
in any Award granted under the Plan shall be made after the grant of such Award,
unless the same is consistent with the provisions of the Plan. With the consent
of the Holder (or a transferee of such Holder if the Award, or any part thereof,
has been transferred pursuant to Section 6.05 or Article XX) and subject to the
terms and conditions of the Plan (including Section 13.01), the Board may amend
outstanding Agreements with any Holder (or any such transferee), including,
without limitation, any amendment which would (a) accelerate the time or times
at which the Award may be exercised and/or (b) extend the scheduled expiration
date of the Award. Without limiting the generality of the foregoing, the Board
may, but solely with the Holder's consent, agree to cancel any Award under the
Plan held by such Holder and issue a new Award in substitution therefor;
provided that the Award so substituted shall satisfy all of the requirements of
- -------- ----
the Plan as of the date such new Award is made.
SECTION 13.03. Sale or Merger Transaction.
--------------------------
(a) The Board shall have the right to require all Holders to
participate in a sale or merger transaction and to sell their shares of Class A
Common Stock to a third party purchaser in connection with such sale or merger.
Such right shall be exercisable by written notice (the "Buyout Notice") given to
each Holder which shall state (i) that there has been a proposal to effect the
sale of the Class A Common Stock, par value $.01 per share, of the Company to
such third party purchaser, (ii) the proposed purchase price per share to be
paid by the third party purchaser, and (iii) the name of the third party
purchaser, and to which shall be attached a copy of all writings between such
selling stockholder and the other parties to such transaction necessary to
establish the terms of such transaction. Each such Holder agrees that, upon
receipt of a Buyout Notice, each such Holder shall be obligated to sell his
Option Interests upon the terms and conditions of such transaction (and
otherwise take all reasonably necessary action to cause consummation of the
proposed transaction, including voting any such Option Interest in favor of such
transaction). The third party purchaser shall furnish evidence reasonably
satisfactory to the Board to the effect that it has the financial ability to
consummate the proposed purchase of the Interests of all of the stockholders.
For purposes of this paragraph, "Holder" means a person who holds an unexercised
Option or who holds shares of Class A Common Stock acquired upon exercise of an
Option. The term "Option Interest" means either an Option or a share of Class A
Common Stock acquired pursuant to exercise of an Option.
ARTICLE XIV
Effectiveness of the Plan
-------------------------
The Plan became effective on August 5, 1998, upon approval by the
affirmative vote of a majority of the members of the Management Committee of
Time Warner Telecom LLC, the predecessor of the Company. Pursuant to Article
XIII, this amended and restated Plan became effective on June 10, 1999, upon
approval by the affirmative vote of a majority of the Board of Directors of the
Company.
ARTICLE XVI
Government and Other Regulations
--------------------------------
The obligation of the Company with respect to Awards shall be subject
to all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation, the
effectiveness of any registration statement required under the Securities Act of
1933, and the rules and regulations of any applicable securities exchange.
ARTICLE XVI
Withholding
-----------
The Company's obligation to deliver shares of Class A Common Stock in
respect of any Award under the Plan shall be subject to applicable Federal,
state and local tax withholding requirements. Federal, state and local
withholding taxes paid upon the exercise of any Option may be paid in shares of
Class A Common Stock upon such terms and conditions as the Board shall
determine; provided, however, that the Board in its sole discretion may
-------- -------
disapprove such payment and require that such taxes be paid in cash.
7
<PAGE>
ARTICLE XVII
Separability
------------
If any of the terms or provisions of this Plan conflict with the
requirements of applicable law or applicable rules and regulations thereunder,
including the applicable requirements, if any, of Section 162(m) of the Code or
Rule 16b-3 under the Exchange Act, then such terms or provisions shall be deemed
inoperative to the extent necessary to avoid the conflict with applicable law,
or applicable rules and regulations, without invalidating the remaining
provisions hereof.
ARTICLE XVIII
Non-Exclusivity of the Plan
---------------------------
Neither the adoption of the Plan by the Board nor the submission of
the Plan to the Board of Directors of the Company for approval shall be
construed as creating any limitations on the power of the Board to adopt such
other incentive arrangements as it may deem desirable, including, without
limitation, the granting of stock options and the awarding of stock and cash
otherwise than under the Plan, and such arrangements may be either generally
applicable or applicable only in specific cases.
ARTICLE XIX
Exclusion from Pension and Profit-Sharing Computation.
------------------------------------------------------
By acceptance of an Award, each Holder shall be deemed to have agreed
that such Award is special incentive compensation that will not be taken into
account, in any manner, as salary, compensation or bonus in determining the
amount of any payment under any pension, retirement or other employee benefit
plan of the Company or any of its Subsidiaries. In addition, each beneficiary of
a deceased Holder shall be deemed to have agreed that such Award will not affect
the amount of any life insurance coverage, if any, provided by the Company or
any of its Subsidiaries on the life of the Holder which is payable to such
beneficiary under any life insurance plan covering employees of the Company or
any of its Subsidiaries.
ARTICLE XX
Beneficiaries
-------------
Each Holder may designate any person(s) or legal entity(ies),
including his or her estate, as his or her beneficiary under the Plan. Such
designation shall be made in writing on a form filed with the Secretary of the
Company or his or her designee and may be revoked or changed by such Holder at
any time by filing written notice of such revocation or change with the
Secretary of the Company or his or her designee. If no person shall be
designated by a Holder as his or her beneficiary or if no person designated as a
beneficiary survives such Holder, the Holder's beneficiary shall be his or her
estate.
ARTICLE XXI
Governing Law
-------------
The Plan shall be governed by, and construed in accordance with, the
laws of the State of New York.
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 181,149
<SECURITIES> 143,325
<RECEIVABLES> 40,548
<ALLOWANCES> 4,720
<INVENTORY> 0
<CURRENT-ASSETS> 362,400
<PP&E> 739,608
<DEPRECIATION> 155,665
<TOTAL-ASSETS> 994,398
<CURRENT-LIABILITIES> 128,074
<BONDS> 400,000
0
0
<COMMON> 1,045
<OTHER-SE> 426,831
<TOTAL-LIABILITY-AND-EQUITY> 994,398
<SALES> 58,381
<TOTAL-REVENUES> 58,381
<CGS> 0
<TOTAL-COSTS> 69,721
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,644
<INCOME-PRETAX> (18,116)
<INCOME-TAX> 35,062
<INCOME-CONTINUING> (53,178)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,178)
<EPS-BASIC> 0
<EPS-DILUTED> (.57)
</TABLE>
