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UNITED STATES
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 September 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 0-30218
TIME WARNER TELECOM INC. *
------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1500624
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5700 South Quebec Street
Greenwood Village, Colorado 80111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 566-1000
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 [_]
The number of shares outstanding of Time Warner Telecom Inc.'s common stock as
of October 31, 1999, was:
Time Warner Telecom Inc. Class A common stock -- 23,287,980 shares
and
Time Warner Telecom Inc. Class B common stock -- 81,250,000 shares
___________________________________
* On May 10, 1999, pursuant to a merger between Time Warner Telecom LLC and Time
Warner Telecom Inc., Time Warner Telecom Inc. assumed the business and became
the successor to the former Time Warner Telecom LLC. Prior to May 10, 1999,
Time Warner Telecom LLC filed reports under the Securities Act of 1934 under
Registration Number 333-53553.
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TIME WARNER TELECOM INC.
INDEX TO FORM 10-Q
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Page
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Part I. Financial Information
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Items 1 and 2. Financial Statements and Management's Discussion
------------------------------------------------
and Analysis of Financial Condition and Results
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of Operations:
--------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations 1
Consolidated and Condensed Balance Sheets at September 30,
1999 and December 31, 1998 13
Consolidated and Combined Statements of Operations for the
Three Months and Nine Months Ended September 30, 1999
and 1998 14
Consolidated and Combined Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 15
Consolidated and Combined Statements of Changes in
Stockholders' Equity 16
Notes to Consolidated, Combined and Condensed Financial
Statements 17
Part II. Other Information 24
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Item 2. Changes in Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
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TIME WARNER TELECOM INC.
Part I
Financial Information
Items 1 and 2. Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Cautions Concerning Forward Looking Statements
The following discussion and analysis provides information concerning the
results of operations and financial condition of Time Warner Telecom Inc. (the
"Company"). Such discussion should be read in conjunction with the accompanying
financial statements and notes thereto. Additionally, the following discussion
and analysis should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements included in Part II of Time Warner Telecom LLC's Annual Report on
Form 10-K for the year ended December 31, 1998.
Certain information included in this report contains forward-looking
statements, including statements regarding the Company's expected financial
position, business and financing plans. These forward-looking statements
reflect the Company's views with respect to future events and financial
performance. The words "believe," "expect," "plans," "intends" and "anticipate"
and similar expressions identify forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results
to differ materially from such expectations are set forth under "Risk Factors"
in the Company's Registration Statement on Form S-1 (Registration No. 333-53553)
and 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, as defined
below, 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.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company 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 services. The Company
serves customers in 20 metropolitan markets in the United States. The markets
include: Austin, Houston and San Antonio, Texas; Charlotte, Greensboro and
Raleigh, North Carolina; Albany, Binghamton, New York City and Rochester, New
York; Northern New Jersey; Cincinnati and Columbus, Ohio; Memphis, Tennessee;
Orlando and Tampa, Florida; Indianapolis, Indiana; Milwaukee, Wisconsin; San
Diego, California and Honolulu, Hawaii. The Company plans to enter Dallas, Texas
later this year and plans to enter Fayetteville, North Carolina and Dayton, Ohio
by the middle of 2000. The Company has also announced its intention to enter the
Orange County, California market and
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TIME WARNER TELECOM INC.
connect San Diego, California to Los Angeles, California with fiber optic
networks and to connect Austin, Houston, San Antonio, Dallas, Fort Worth and
Waco, Texas with an inter-city fiber network ring. 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
below.
The Company began its business in 1993 by providing telephony services
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, Time Warner 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 the Former
Parent Companies and to conduct the offering on July 21, 1998 of $400 million
principal amount 9 3/4% Senior Notes due July 2008 (the "Senior Notes"). In the
transaction, referred to as the "Reorganization," the Class B Stockholders
(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 outstanding Class
A limited company interests were converted into Class A common stock and 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 and, except as noted below, the Reorganization and the
Reconstitution had no effect on the Company's total stockholders' equity, which
has been presented on a consistent basis.
The primary change to the Company's operating structure since the
Reconstitution is that the management of the Company became accountable to the
Board of Directors, instead of to the management committee of TWT LLC. In
addition, all future net operating loss carryforwards, from the date of the
Reconstitution, 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 net operating losses utilized by the Former Parent Companies. 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, which, for the period through
September 30, 1999, has been partially offset by a net deferred income tax
benefit of approximately $9.9 million.
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TIME WARNER TELECOM INC.
On May 14, 1999, in conjunction with the Reconstitution, the Company
completed an initial public offering of 20,700,000 shares, including an over-
allotment of 2,700,000 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 was used to repay $180 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, which had remained
outstanding, accruing interest, through May 14, 1999. The proceeds of the
Offering remaining after repayment of such loans, have been and will continue to
be used to fund the Company's continued growth, which may include acquisitions
and joint ventures, and for general corporate purposes.
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 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. As of
September 30, 1999, the Class B Stockholders had 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 Time Warner Telecom LLC 1998 Option Plan, amended such plan,
and renamed it the Time Warner Telecom 1998 Stock Option Plan (the "1998 Option
Plan"). The 1998 Option Plan provides for the granting of stock options to
purchase shares of Class A common stock to directors and current or prospective
employees of, and consultants or other individuals providing services to, the
Company and its subsidiaries. As of September 30, 1999, options for
approximately 6.3 million shares are outstanding.
Acquisitions
During the second quarter of 1999, the Company acquired all of the
outstanding common stock of Internet Connect, Inc. ("Inc.Net"), an internet
service provider, for 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, such Class A limited liability interests were
converted into 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 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 common stock of MetroComm, Inc. ("MetroComm") through the issuance
of 2,190,308 shares of Class A common stock of the Company. Through the
acquisition of MetroComm, the Company acquired the 50% interest of MetroComm
AxS, L.P., a competitive local exchange carrier in Columbus, Ohio, not already
owned by the Company.
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TIME WARNER TELECOM INC.
Results of Operations
The following table sets forth certain consolidated and combined
statements of operations data of the Company, in thousands of dollars and
expressed as a percentage of total revenue, for each of the periods presented.
This table should be read together with the Company's financial statements,
including the notes thereto, appearing elsewhere in this report:
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Three Months Ended Nine Months Ended
September 30, September 30,
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1999 1998 1999 1998
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(amounts in thousands, except per share amounts)
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Statements of Operations Data:
Revenue:
Dedicated transport services $ 40,666 57.0 % $ 21,898 67.0 % $ 105,727 59.6 % $ 57,871 70.8 %
Switched services 30,649 43.0 10,788 33.0 71,558 40.4 23,910 29.2
--------- ------- -------- ------- --------- ------- -------- -------
Total revenue 71,315 100.0 32,686 100.0 177,285 100.0 81,781 100.0
--------- ------- -------- ------- --------- ------- -------- -------
Costs and expenses (1):
Operating 30,488 42.8 16,615 50.9 81,949 46.2 46,341 56.7
Selling, general and administrative 30,097 42.2 21,124 64.6 80,501 45.4 55,294 67.6
Depreciation and amortization 19,291 27.0 12,479 38.1 50,272 28.4 36,804 45.0
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Total costs and expenses 79,876 112.0 50,218 153.6 212,722 120.0 138,439 169.3
--------- ------- -------- ------- --------- ------- -------- -------
Operating loss (8,561) (12.0) (17,532) (53.6) (35,437) (20.0) (56,658) (69.3)
Equity in income (losses) of
unconsolidated affiliate -- -- 71 0.2 285 0.2 (16) --
Interest income 3,840 5.4 4,069 12.5 12,828 7.2 4,069 5.0
Interest expense (1) (9,983) (14.0) (11,098) (34.0) (35,139) (19.8) (15,808) (19.4)
--------- ------- -------- ------- --------- ------- -------- -------
Net loss before income taxes (14,704) (20.6) (24,490) (74.9) (57,463) (32.4) (68,413) (83.7)
Income tax (benefit) expense (2) (5,589) (7.8) -- -- 29,473 16.6 -- --
--------- ------- -------- ------- --------- ------- -------- -------
Net loss $ (9,115) (12.8)% $(24,490) (74.9)% $ (86,936) (49.0)% $(68,413) (83.7)%
========= ======= ======== ======= ========= ======= ======== =======
Basic and diluted loss per
common share $ (0.09) (0.30) (0.94) (0.84)
Basic and diluted loss per
common share before income taxes (2) $ (0.14) (0.30) (0.62) (0.84)
Average common shares outstanding 104,480 81,250 92,957 81,250
EBITDA (3) $ 10,730 15.0 % (5,053) (15.5)% 14,835 8.4 % (19,854) (24.3)%
Net cash provided by (used in)
operating activities (467) 22,231 (13,194) 3,327
Net cash used in investing activities (140,480) (33,682) (124,804) (87,116)
Net cash provided by financing
activities 2,192 403,139 75,252 475,477
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(1) Includes expenses resulting from transactions with affiliates of $3.6
million and $7.5 million in the three months ended September 30, 1999 and
1998, respectively, and $15.9 million and $20.3 million in the nine months
ended September 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. Income tax
expense for the nine months ended September 30, 1999 reflects the $39.4
million charge, net of a $9.9 million deferred income tax benefit,
resulting in net income tax expense and deferred tax liability of
approximately $29.5 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 (loss), cash flow and other measures of
financial performance and liquidity reported in accordance with generally
accepted accounting principles. Rather, EBITDA is a measure of operating
performance and liquidity that
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TIME WARNER TELECOM INC.
investors may consider in addition to such 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 Senior 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.
General
The Company's revenue has 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 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 revenue and the geographic scope of its
operations. An increasing portion of the Company's growth in revenue has come
from the provision of local switched services as a result of the 18 digital
voice switches deployed as of September 30, 1999. The Company believes that
switched services provide the opportunity for a higher incremental rate of
return on capital invested than those expected from dedicated transport
services. The shift of the revenue growth to switched services may cause the
Company's revenue 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
revenue 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. 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 churn in 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 September 30, 1999,
the Company operated networks in 20 metropolitan areas that spanned 7,704 route
miles, contained 313,549 fiber miles and offered service to 5,211 buildings.
The Company plans to continue expanding its revenue base by fully utilizing
available network capacity in its existing markets, by adding networks in new
markets and by continuing to develop and selectively tailor new services in
competitively-priced packages to meet the needs of its medium and large-sized
business customers. The Company intends to expand its product offerings on a
continuous basis to achieve a diverse revenue base. As part of that process,
the Company is targeting the expansion of data products that can be offered on
the Company's existing network.
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 revenue. The Company expects such costs to
continue to increase as the Company's revenue growth continues, but generally at
a slower rate than revenue growth.
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TIME WARNER TELECOM INC.
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 revenue.
The Company expects these costs to continue to increase as the Company's revenue
growth continues, but generally at a slower rate than revenue growth.
In the normal course of business, the Company engages in various
transactions with the Former Parent Companies, generally on negotiated terms
among the affected units that, in management's view, result in reasonable
allocations. In connection with the Reorganization, the Company entered into
several contracts with the Former Parent Companies with respect to certain of
such transactions. The Company's selling, general and administrative expenses
include charges allocated from the Former Parent Companies for office rent and
overhead 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. Such maintenance and pole rental costs are included in the Company's
operating expenses.
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenue. Revenue increased $38.6 million, or 118%, to $71.3 million for
the three months ended September 30, 1999, from $32.7 million for the comparable
period in 1998. Revenue from the provision of dedicated transport services
increased $18.8 million or 86%, to $40.7 million for the three months ended
September 30, 1999, from $21.9 million for the comparable period in 1998.
Switched service revenue increased $19.8 million, or 183%, to $30.6 million for
the three months ended September 30, 1999, from $10.8 million for the comparable
period in 1998. Exclusive of the effects of acquisitions, dedicated transport
service and switched service revenue increased 71% and 177%, respectively. The
increase in revenue from dedicated transport services primarily reflects a 53%
increase in dedicated transport customers and a broader array of products and
services offered in existing markets. The increase in switched service revenue
reflects a 125% increase in switched service customers, and an increase in
revenue from switched access services, reciprocal compensation, and a broader
array of products and services offered in existing markets. Reciprocal
compensation, the mutual charges by local carriers for recovery of costs
associated with the termination of traffic on each other's networks, represented
7% and 9% of total revenue for the three months ended September 30, 1999 and
1998, respectively. At September 30, 1999 the Company offered dedicated
transport and switched services in 20 consolidated metropolitan areas. At
September 30, 1998, the Company offered dedicated transport services in 19
consolidated metropolitan areas, 16 of which also offered switched services.
Operating Expenses. Operating expenses increased $13.9 million, or 84%, to
$30.5 million for the three months ended September 30, 1999, from $16.6 million
for the comparable period in 1998. Exclusive of the effects of acquisitions,
such expenses increased 69%. The increase in operating expenses was primarily
attributable to the expansion of the 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 revenue, operating expenses decreased to 43% for
the three months ended September 30, 1999 from 51% for the comparable period in
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $9.0 million, or 43%, to $30.1 million for the
three months ended September 30, 1999, from $21.1 million for the comparable
period in 1998. Exclusive of the effects of acquisitions, such expenses
increased 38%. The increase in selling, general and administrative expenses was
primarily attributable to higher direct sales costs associated with the increase
in revenue, increased property taxes, training and data
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TIME WARNER TELECOM INC.
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 revenue, selling, general and administrative expenses decreased to
42% for the three months ended September 30, 1999 from 65% for the comparable
period in 1998.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $6.8 million, or 54%, to $19.3 million for the three months
ended September 30, 1999, from $12.5 million for the comparable period in 1998.
Exclusive of the effects of acquisitions, such expense increased 48%. The
increase in depreciation and amortization expense was primarily attributable to
increased increased capital expenditures and increased goodwill generated from
acquisitions.
EBITDA. EBITDA for the three months ended September 30, 1999 increased
$15.8 million, or 310%, to $10.7 million in 1999, from a loss of $5.1 million in
1998. Exclusive of the effects of acquisitions, such amount increased 303%.
This improvement was primarily the result of increased revenue 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 subordinated loans
payable from the Former Parent Companies. Such loans remained outstanding,
accruing interest, through May 14, 1999. On July 21, 1998, the Company issued
$400 million in Senior Notes in a public offering. On May 14, 1999,
approximately $180 million of the proceeds from the Offering were used to repay
the subordinated loans payable to the Former Parent Companies in full, including
accrued interest. Interest expense relating to the Senior Notes was $10.0
million for the three months ended September 30, 1999 and interest expense
relating to such Senior Notes and subordinated loans payable aggregated $11.1
million for the three months ended September 30, 1998. Such decrease of $1.1
million is primarily due to the lower weighted average debt balance during the
three months ended September 30, 1999.
Net Loss. Net loss decreased $15.4 million, or 63% to $9.1 million for the
three months ended September 30, 1999, from a net loss of $24.5 million for the
comparable period in 1998. The net loss decrease is primarily due to the
improvement in EBITDA.
Loss per Common Share. The basic and diluted loss per common share was
computed by dividing the net loss applicable to common shares by the weighted
average outstanding common shares for the period. Potential common shares were
not included in the computation of weighted average shares outstanding because
their inclusion would be anti-dilutive. The increase in the weighted average
shares outstanding is due to the issuance of Class A common stock for the
Offering, for acquisitions and upon the exercise of stock options. For the
three months ended September 30, 1999, the basic and diluted loss per common
share decreased ($0.21) per share or 70% to ($0.09) per share from ($0.30) per
share for the comparable period in 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenue. Revenue increased $95.5 million, or 117%, to $177.3 million for
the nine months ended September 30, 1999, from $81.8 million for the comparable
period in 1998. Revenue from the provision of dedicated transport services
increased $47.8 million or 83%, to $105.7 million for the nine months ended
September 30, 1999, from $57.9 million for the comparable period in 1998.
Switched service revenue increased $47.7 million, or 200%, to $71.6 million for
the nine months ended September 30, 1999, from $23.9 million for the comparable
period in 1998. Exclusive of the effects of acquisitions, dedicated transport
service and switched service revenue increased 76% and 194%, respectively. The
increase in revenue from dedicated transport services primarily reflects a 60%
increase in dedicated transport customers and a broader array of products and
services offered in existing markets. The increase in
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TIME WARNER TELECOM INC.
switched service revenue reflects a 152% increase in switched service customers,
and an increase in revenue from switched access services, reciprocal
compensation, and a broader array of products and services offered in existing
markets. Reciprocal compensation, the mutual charges by local carriers for
recovery of costs associated with the termination of traffic on each other's
networks, represented 7% and 8% of total revenue for the nine months ended
September 30, 1999 and 1998, respectively. At September 30, 1999 the Company
offered dedicated transport and switched services in 20 consolidated
metropolitan areas. At September 30, 1998, the Company offered dedicated
transport services in 19 consolidated metropolitan areas, 16 of which also
offered switched services.
Operating Expenses. Operating expenses increased $35.6 million, or 77%, to
$81.9 million for the nine months ended September 30, 1999, from $46.3 million
for the comparable period in 1998. Exclusive of the effects of acquisitions,
such expenses increased 70%. 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 revenue, operating
expenses decreased to 46% for the nine months ended September 30, 1999 from 57%
for the comparable period in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $25.2 million, or 46%, to $80.5 million for
the nine months ended September 30, 1999, from $55.3 million for the comparable
period in 1998. Exclusive of the effects of acquisitions, such expenses
increased 43%. The increase in selling, general and administrative expenses was
primarily attributable to higher direct sales costs associated with the increase
in revenue, 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 revenue, selling,
general and administrative expenses decreased to 45% for the nine months ended
September 30, 1999 from 68% for the comparable period in 1998.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $13.5 million, or 37%, to $50.3 million for the nine months
ended September 30, 1999, from $36.8 million for the comparable period in 1998.
Exclusive of the effects of acquisitions, such expense increased 33%. The
increase in depreciation and amortization expense was primarily attributable to
increased capital expenditures and increased goodwill generated from
acquisitions.
EBITDA. EBITDA for the nine months ended September 30, 1999 increased
$34.7 million, or 174%, to $14.8 million in 1999, from a loss of $19.9 million
in 1998. Exclusive of the effects of acquisitions, such amount increased 172%.
This improvement was primarily the result of increased revenue 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. Such loans remained outstanding, accruing interest,
through May 14, 1999. On July 21, 1998, the Company issued $400 million in
Senior Notes in a public offering. On May 14, 1999, approximately $180 million
of the proceeds from the Offering were used to repay the subordinated loans
payable to the Former Parent Companies in full, including accrued interest.
Interest expense relating to these loans and Senior Notes totaled $35.1 million
and $15.8 million for the nine months ended September 30, 1999 and 1998,
respectively. Such increase of $19.3 million is primarily due to the higher
weighted average debt balance during the nine months ended September 30, 1999.
Net Loss. Net loss increased $18.5 million, or 27% to $86.9 million for
the nine months ended September 30, 1999, from a net loss of $68.4 million for
the comparable period in 1998. The increase in
8
<PAGE>
TIME WARNER TELECOM INC.
net loss is primarily related to a one-time charge to earnings of $39.4 million
in deferred income tax expense, partially offset by a $9.9 million deferred
income tax benefit, related to activity since the Reconstitution, and partially
offset by improved results from operations.
Loss per Common Share. The basic and diluted loss per share was computed
by dividing net loss applicable to common shares by the weighted average
outstanding common shares for the period. Potential common shares were not
included in the computation of weighted average shares outstanding because their
inclusion would be anti-dilutive. The increase in the weighted average shares
outstanding is due to the issuance of Class A common stock for the Offering, for
acquisitions and upon the exercise of stock options. For the nine months ended
September 30, 1999, the basic and diluted loss per common share increased $0.10
per share or 12% to ($0.94) per share from ($0.84) per share for the comparable
period in 1998.
Liquidity and Capital Resources
Cash Flows. For the nine months ended September 30, 1999, net cash used in
operating activities was $13.2 million as compared to net cash provided by
operating activities of $3.3 million for the nine months ended September 30,
1998. This change in cash used in operating activities is principally the
result of a change in accounts payable and other current liabilities in 1998
partially offset by an improvement in EBITDA in 1999.
Net cash used in investing activities increased $37.7 million to $124.8
million for the nine months ended September 30, 1999, as compared to net cash
used in investing activities of $87.1 million for the nine months ended
September 30, 1998. The increase was primarily due to increased capital
expenditures.
Net cash provided by financing activities for the nine months ended
September 30, 1999 decreased by $400.2 million, as compared to the corresponding
period in 1998. Net cash provided by financing activities for the nine months
ending September 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. Net cash
provided by financing activities for the nine months ended September 30, 1998,
reflects proceeds from issuance of the Senior Notes and loans from the Former
Parent Companies.
Financing. During the period from July 1, 1997 through July 14, 1998, all
of the Company's financing requirements were funded with subordinated loans from
the Former Parent Companies. Such loans remained outstanding, accruing
interest, through May 14, 1999. Such 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. On July 21,
1998, the Company issued $400 million principal amount of the Senior Notes. The
Senior Notes are unsecured, unsubordinated obligations of the Company. On May
14, 1999, approximately $180 million of the proceeds from the Offering were used
to repay the subordinated loans payable to the Former Parent Companies in full,
including accrued interest. The proceeds of the Offering remaining after
repayment of the subordinated loans payable, combined with the proceeds from the
Senior Notes, have been and will continue to be used to fund the Company's
continued growth, which includes expansion of the Company's networks, and for
general corporate purposes.
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 or on acceptable terms.
Although the primary use of the remaining proceeds of the Offering and the
Senior 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 agreement with
9
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TIME WARNER TELECOM INC.
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.
The Company expects that its future cash requirements will principally be
for funding future growth and capital expenditures. The Company expects that
the $277.2 million in cash, cash equivalents and marketable securities at
September 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 Senior
Notes through the middle of 2001. After such time, 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 is
considering geographic expansion plans, which would require additional
financing. The Company's revenue 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 revenue 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
construction of central office facilities in new and existing markets,
. the acquisition and expansion of networks currently owned and operated
by other companies, and
. the evolution of the network to support new products, services and
technologies.
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 existing and new
networks.
During the first nine months of 1999, capital expenditures were $138.3
million (net of capital leases incurred of $3.4 million), an increase of $51.2
million from the nine months ended September 30, 1998. The largest commitment
of capital has been related to the installation of transport and switch related
electronics to support the increase in sales activity and the addition of 736
route miles of fiber since December 31, 1998. Based on historic capital
requirements for network construction in relation to sales volume and network
expansion plans, the Company anticipates it will commit approximately $220
million in 1999 and approximately $250 million in 2000 to fund its capital
expenditures. The estimate for Year 2000 capital expenditures does not include
additional capital expenditures that may be necessary in connection with a plan
that the Company has under consideration to accelerate its geographic expansion.
There is no assurance that such expansion will occur.
10
<PAGE>
TIME WARNER TELECOM INC.
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 operation. Year 2000 issues could impact the
Company's information systems as well as computer hardware and equipment that is
part of its telephony network such as switches, termination devices and SONET
rings that may contain embedded software or "firmware."
The Company's exposure to potential Year 2000 problems exists in two
general areas: technological operations in the sole control of the Company, and
technological operations dependent in some way on one or more third parties.
The majority of the Company's exposure to potential Year 2000 problems is in the
latter area where the situation is much less within the Company's ability to
predict or control. The Company's business is heavily dependent on technology.
For example, like all other telecommunications providers, the Company must
interconnect its networks with other carriers and service providers in order to
provide end-to-end service to customers. The Company cannot control the Year
2000 readiness of those parties but to the extent practicable, the Company has
assessed its interfaces with them in accordance with guidelines established by
national telecommunications industry testing organizations and is working with
those parties to resolve any difficulties identified in that process. 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 its planned
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, existing back
office systems, 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's original Year 2000 action plan was
revised to include the equipment and software operated by 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 and Inc.Net has obtained
vendor documentation and confirmation with respect to the Year 2000 readiness of
its critical components that has been reviewed by the Company's Year 2000 staff.
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
remediated and completed validation testing of the back office systems that
would have been replaced by the new systems.
11
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TIME WARNER TELECOM INC.
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 $2.4 million in the first nine months 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.
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 has developed 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 examined its existing emergency procedures to determine how
those procedures could meet the demand of failures resulting from Year 2000-
related problems and updated such procedures as needed. 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
is 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 revenue. 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.
12
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TIME WARNER TELECOM INC.
CONSOLIDATED AND CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
(amounts in thousands,
except share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 42,394 105,140
Marketable securities.................................................. 229,793 231,107
Receivables, less allowances of $6,151 and $2,692...................... 37,001 26,690
Prepaid expenses....................................................... 2,120 2,176
--------- --------
Total current assets................................................ 311,308 365,113
--------- --------
Investment in unconsolidated affiliate (note 2)........................... - 5,707
Property, plant and equipment............................................. 786,496 612,119
Less accumulated depreciation.......................................... (173,359) (117,961)
--------- --------
613,137 494,158
--------- --------
Long-term marketable securities........................................... 4,996 19,750
Intangible assets, net of accumulated amortization (note 2)............... 46,934 19,616
--------- --------
Total assets........................................................ $ 976,375 904,344
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 30,237 38,888
Other current liabilities.............................................. 93,673 82,865
--------- --------
Total current liabilities........................................... 123,910 121,753
--------- --------
Long-term debt and capital lease obligations (note 3)..................... 403,342 400,000
Deferred income taxes (note 7)............................................ 29,473 -
Subordinated loans payable to the Former Parent Companies (including
$3,399 of accrued interest in 1998) (note 4)............................ - 174,940
Stockholders' equity (note 1):
Preferred stock, $0.01 par value, 20,000,000 shares authorized,
no shares issued and outstanding..................................... - -
Class A common stock, $0.01 par value, 277,300,000 shares authorized,
23,Z71,907 shares issued and outstanding in 1999..................... 233 -
Class B common stock, $0.01 par value, 162,500,000 shares authorized,
81,250,000 shares issued and outstanding in 1999 and 1998............ 813 813
Additional paid-in capital............................................. 554,356 255,654
Accumulated deficit.................................................... (135,752) (48,816)
--------- --------
Total stockholders' equity.......................................... 419,650 207,651
--------- --------
Total liabilities and stockholders' equity.......................... $ 976,375 904,344
========= ========
</TABLE>
See accompanying notes.
13
<PAGE>
TIME WARNER TELECOM INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Dedicated transport services.................................. $ 40,666 21,898 105,727 57,871
Switched services............................................. 30,649 10,788 71,558 23,910
-------- ------- ------- -------
Total revenue.............................................. 71,315 32,686 177,285 81,781
-------- ------- ------- -------
Costs and expenses (a):
Operating..................................................... 30,488 16,615 81,949 46,341
Selling, general and administrative........................... 30,097 21,124 80,501 55,294
Depreciation and amortization................................. 19,291 12,479 50,272 36,804
-------- ------- ------- -------
Total costs and expenses................................... 79,876 50,218 212,722 138,439
-------- ------- ------- -------
Operating loss................................................... (8,561) (17,532) (35,437) (56,658)
Equity in income (losses) of unconsolidated affiliate (note 2)... - 71 285 (16)
Interest income.................................................. 3,840 4,069 12,828 4,069
Interest expense (a)............................................. (9,983) (11,098) (35,139) (15,808)
-------- ------- ------- -------
Net loss before income taxes..................................... (14,704) (24,490) (57,463) (68,413)
Income tax (benefit) expense (note 7)............................ (5,589) - 29,473 -
-------- ------- ------- -------
Net loss......................................................... $ (9,115) (24,490) (86,936) (68,413)
======== ======= ======= =======
Basic and diluted loss per common share.......................... $ (0.09) (0.30) (0.94) (0.84)
======== ======= ======= =======
Average common shares outstanding................................ 104,480 81,250 92,957 81,250
======== ======= ======= =======
(a) Includes expenses resulting from transactions with
affiliates (note 5):
Operating..................................................... $ 749 508 1,764 1,534
======== ======= ======= =======
Selling, general and administrative........................... $ 312 1,299 1,259 3,882
======== ======= ======= =======
Depreciation and amortization................................. $ 2,626 2,252 7,842 6,705
======== ======= ======= =======
Interest expense.............................................. $ - 3,375 5,078 8,146
======== ======= ======= =======
</TABLE>
See accompanying notes.
14
<PAGE>
TIME WARNER TELECOM INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1999 1998
--------- ---------
(amounts in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................................................... $ (86,936) (68,413)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization.................................................... 50,272 36,804
Equity in (income) losses of unconsolidated affiliate............................ (285) 16
Deferred income tax expense...................................................... 29,473 -
Changes in operating assets and liabilities, net of the effect of acquisitions:
Receivables and other current assets........................................... (8,641) (17,538)
Accounts payable and other current liabilities................................. 1,986 52,551
Other balance sheet changes.................................................... 937 (93)
--------- ---------
Net cash provided by (used in) operating activities.......................... (13,194) 3,327
--------- ---------
INVESTING ACTIVITIES
Capital expenditures............................................................... (138,305) (87,116)
Cash paid for acquisitions, net of cash acquired................................... (2,567) -
Purchases of marketable securities................................................. (116,557) -
Proceeds from maturities of marketable securities.................................. 132,625 -
--------- ---------
Net cash used in investing activities........................................ (124,804) (87,116)
--------- ---------
FINANCING ACTIVITIES
Proceeds of loans from Former Parent Companies..................................... - 87,977
Repayment of loans to Former Parent Companies...................................... (180,018) -
Payment of capital lease obligations............................................... (133) -
Repayment of acquired debt......................................................... (15,668) -
Net proceeds from issuance of debt................................................. - 387,500
Net proceeds from issuance of common stock upon exercise of stock options.......... 889 -
Net proceeds from initial public offering.......................................... 270,182 -
--------- ---------
Net cash provided by financing activities.................................... 75,252 475,477
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................... (62,746) 391,688
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................... 105,140 -
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................... $ 42,394 391,688
========= =========
Supplemental disclosures of cash flow information--cash paid during
the period for interest.......................................................... $ 46,825 -
========= =========
</TABLE>
Supplemental schedule for noncash investing and financing activities: Time
Warner Telecom Inc. (the "Company") issued Class A common stock aggregating
$27.9 million to purchase the common stock of Internet Connect, Inc. ("Inc.
Net") and MetroComm, Inc. ("MetroComm").
In 1999, the Company incurred capital lease obligations of $3.4 million for the
purchase of fiber, equipment and furniture leases.
See accompanying notes.
15
<PAGE>
TIME WARNER TELECOM INC.
CONSOLIDATED AND COMBINED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
---------------------------------
Class A Class B Additional Total
-------------- --------------- paid-in Accumulated stockholders'
Shares Amount Shares Amount capital deficit equity
------ ------ ------ ------ --------- ----------- -----------
<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 (note 1)..................... -- -- -- -- (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 (note 1)............... 20,700 207 -- -- 269,975 -- 270,182
Issuance of common stock for acquisitions (note 2).... 2,498 25 -- -- 27,839 -- 27,864
Issuance of common stock upon exercise
of stock options.................................... 74 1 -- -- 888 -- 889
Net loss.............................................. -- -- -- -- -- (86,936) (86,936)
------ ------ ------ ------ -------- --------- ---------
BALANCE AT SEPTEMBER 30, 1999......................... 23,272 $ 233 81,250 $ 813 554,356 (135,752) 419,650
====== ====== ====== ====== ======== ========= ========
</TABLE>
See accompanying notes.
16
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED AND
CONDENSED FINANCIAL STATEMENTS
September 30, 1999
(unaudited)
1. Organization and Summary of Significant Accounting Policies
Description of Business and Capital Structure
The Company, a Delaware corporation, 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 services.
The Company began its business in 1993 by providing telephony services
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, Time Warner 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, Timer 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 the Former Parent Companies and to conduct the
offering on July 21, 1998 of $400 million principal amount 9 3/4% Senior
Notes due July 2008 (the "Senior Notes"). In such transaction, referred to
as the "Reorganization," the Class B Stockholders (either directly or
through subsidiaries) became the owners of all the limited liability
company interests in TWT LLC. The Reorganization has been reflected as of
July 1, 1998 for accounting purposes.
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. The Company accounted for the
Reorganization and the Reconstitution at each of the Class B Stockholders'
historical cost basis 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 outstanding Class A limited company interests were
converted into Class A common stock and the Class B Stockholders exchanged
their Class B limited liability company interests in TWT LLC for Class B
common
17
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED AND
CONDENSED FINANCIAL STATEMENTS--(continued)
stock of the newly formed corporation, Time Warner Telecom Inc. Following
the Reconstitution, the Class B Stockholders held all of the Company's
Class B common stock. Accordingly, the accompanying financial statements
have been adjusted to retroactively reflect the authorization and issuance
of the shares of Class A common stock and Class B common stock for all
periods presented.
On May 14, 1999, in conjunction with the Reconstitution, the Company
completed an initial public offering of 20,700,000 shares, including an
over-allotment of 2,700,000 shares, of Class A common stock at a price of
$14 per share (the "Offering"). 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 4). Remaining proceeds have been and will continue to
be used to fund the Company's continued growth, which may include
acquisitions and joint ventures, and for general corporate purposes.
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 September 30, 1999, and no shares of Preferred Stock have been issued at
September 30, 1999.
The Company's revenue has 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 historical financial statements of the
Company reflected 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 in 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 interim consolidated, combined and condensed
financial statements are unaudited, but in the opinion of management,
reflect all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the results for such periods. The results of
operations for any interim period are not necessarily indicative of results
for the full year. The
18
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED AND
CONDENSED FINANCIAL STATEMENTS--(continued)
accompanying financial statements should be read in conjunction with the
audited combined financial statements and notes thereto for the year ended
December 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
Basis of Consolidation and Accounting for Investments
The consolidated and combined financial statements include the
accounts of the Company and all entities in which the Company has a
controlling voting interest ("subsidiaries"). Significant intercompany
accounts and transactions have been eliminated. Significant 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 investment in
unconsolidated affiliate consisted solely of a 50% investment in MetroComm
AxS, L.P. ("MetroComm L.P."), a joint venture providing commercial
telecommunications services in the central Ohio area. Under the equity
method, only the Company's investment in and amounts due to and from the
equity investee are included in the consolidated and condensed balance
sheets, and only the Company's share of the investee's income (losses) are
included in the consolidated and combined statements of operations. During
the second quarter of 1999, the remaining 50% of MetroComm L.P. 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 nine months
ended September 30, 1999 and 1998, the Company's top 10 customers accounted
for 39% and 40%, respectively, of the Company's consolidated and combined
revenue. AT&T and MCI WorldCom, Inc., accounted for more than 10% of the
Company's total revenue in 1999 and 1998. However, a substantial portion
of such revenue results from traffic that is directed to the Company by the
Company's customers who have selected such carriers as their long distance
providers. Revenue includes sales to AT&T and MCI WorldCom, Inc.
(including sales directed to the Company by the Company's customers) of
approximately $36.2 million and $20.8 million for the nine months ended
September 30, 1999 and 1998, respectively.
Segment Reporting
The Company operates in 20 locations and the Company's management
makes decisions on resource allocation and assesses performance based on
total revenue, 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 20 locations
to be aggregated, resulting in one reportable line of business.
19
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED AND
CONDENSED FINANCIAL STATEMENTS--(continued)
Cash, Cash Equivalents and Marketable Securities
Prior to July 14, 1998, the Company did not maintain any cash or
marketable securities since all funding of the Company's operating,
investing and financing activities was provided by capital contributions
from the Former Parent Companies or by subordinated loans payable to the
Former Parent Companies (see note 4). Such funding consisted of
subordinated loans during the period from July 1, 1997 through July 14,
1998, and remained outstanding until May 14, 1999. The capital
contributions of the Former Parent Companies, which are non-interest
bearing, have been included in additional paid-in capital. Prior to
repayment of the subordinated loans in May 1999, the subordinated loans,
including accrued interest, had been reflected as long-term liabilities in
the accompanying consolidated and condensed balance sheets.
Loss Per Common Share
The basic and diluted loss per common share for all periods presented
herein was computed by dividing the net loss attributable to common shares
by the weighted average outstanding common shares for the period.
Potential common shares were not included in the computation of weighted
average shares outstanding because their inclusion would be anti-dilutive.
2. Acquisitions
During the second quarter of 1999, the Company acquired all of the
outstanding common stock of Inc.Net, an internet service provider, for
consideration consisting 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, such Class A limited liability interests were
converted into 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 Inc.Net's shareholders over a period of three years. The total
purchase price of the acquisition was approximately $7.6 million. Through
the acquisition of this subsidiary, the Company plans to manage current and
future data networks and provide new internet products. The transaction
was accounted for under the purchase method of accounting and generated
$6.9 million in goodwill, which is being amortized on a straight-line basis
over a ten-year period. Amortization expense for the nine month period
ended September 30, 1999, was approximately $289,000.
During the second quarter of 1999, the Company acquired all of the
outstanding common stock of MetroComm through the issuance of 2,190,308
shares of Class A common stock of the Company, for a total stock issued
consideration of $24.1 million. Through the acquisition of MetroComm, the
Company acquired the 50% interest of MetroComm L.P. not already owned by
the Company. After the acquisition, the Company's Columbus, Ohio assets
were transferred to MetroComm L.P. and all operations in Columbus, Ohio
will now be reported under the new entity. The transaction was accounted
for under the purchase method of accounting and generated $18.8 million in
goodwill, which is being amortized on a straight-line basis over a ten-year
period. Amortization expense for the nine month period ended September 30,
1999, was approximately $627,000.
Both acquisitions are accounted for as purchases, which are
consolidated with the Company's operations as of the respective acquisition
dates. The allocation of the purchase price for these acquisitions is
preliminary, subject to further evaluation of the assets and liabilities
assumed.
20
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED AND
CONDENSED FINANCIAL STATEMENTS--(continued)
3. Long-Term Debt
The Senior Notes are unsecured, unsubordinated obligations of the
Company. Interest on the Senior Notes is payable semi-annually on January
15 and July 15, beginning January 15, 1999. Interest expense, including
amortization of debt discount, relating to the Senior Notes totaled
approximately $30.0 million for the nine months ended September 30, 1999
and $7.7 million for the three months ended September 30, 1998.
4. Subordinated Loans Payable to the Former Parent Companies
During the period from July 1, 1997 through July 14, 1998, all of the
Company's financing requirements were funded with subordinated loans from
the Former Parent Companies. Such loans remained outstanding, accruing
interest, through May 14, 1999. Such 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.
Such loans bore interest (payable in kind) at The Chase Manhattan Bank's
prime rate, which was 7.75% from January 1, 1999 through the payoff of the
loan in May 1999. Interest expense relating to such loans totaled
approximately $5.1 million and $8.1 million for the nine months ended
September 30, 1999 and 1998, respectively. On May 14, 1999, approximately
$180 million of the proceeds from the Offering were used to repay the
subordinated loans payable to the Former Parent Companies in full,
including accrued interest.
5. Related Party Transactions
In the normal course of business, the Company engages in various
transactions with the Former Parent Companies, generally on negotiated
terms among the affected units that, in management's opinion, result in
reasonable allocations.
The Company licenses the right to use the majority of its fiber optic
cable from TWE and TWE-A/N. The Company paid TWE and TWE-A/N $13.7 million
and $9.3 million for the nine months ended September 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 $7.8 million and $6.7 million for the nine
months ended September 30, 1999 and 1998, respectively, has been classified
as a component of depreciation and amortization expense in the accompanying
consolidated and combined statements of operations. In addition, under this
licensing arrangement, the Company reimburses TWE and TWE-A/N for facility
maintenance and pole rental costs, which aggregated $1.8 million and $1.5
million for the nine months ended September 30, 1999 and 1998,
respectively.
The Company's operations, which in certain cases are co-located with
TWE's cable divisions, are allocated a charge for various overhead expenses
for services provided by such divisions. Prior to the Reorganization, such
allocations were based on direct labor, total expenses or headcount
relative to each operating unit. The Company is also allocated rent based
on the square footage of space occupied by the Company at TWE's
facilities. After the Reorganization, these costs are based on contracts
with TWE. Such charges aggregated approximately $1.3 million and $1.7
million for the nine months ended September 30, 1999 and 1998,
respectively.
During the period July 1, 1997 through May 14, 1999, the Former Parent
Companies provided all or a portion of the Company's financing
requirements. Interest expense relating to such loans aggregated
approximately $5.1 million and $8.1 million for the nine months ended 1999
and 1998, respectively (see note 4).
21
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED AND
CONDENSED FINANCIAL STATEMENTS--(continued)
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 (the "MediaOne Pension Plan"). The
Company also participated in the Time Warner Cable Employees Savings Plan
(the "Savings Plan"), a defined contribution plan. 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 cost aggregated $973,000 the nine
months ended September 30, 1998.
Benefit costs under the MediaOne Pension Plan for certain employees of
the Company aggregated $484,000 for the nine months ended September 30,
1998.
The Company's contributions to the Savings Plan represented up to
6.67% of the employees' compensation during the plan year. Defined
contribution plan expense was $699,000 for the nine months ended September
30, 1998.
As of January 1, 1999, the Company did not participate in the TW
Pension Plan or the Savings Plan because the Company adopted its own
benefit plans, including a 401(k) plan.
6. Commitments and Contingencies
Pending legal proceedings are substantially limited to litigation
incidental to the business of the Company. In the opinion of management,
the ultimate resolution of these matters will not have a material adverse
effect on the Company's financial statements.
7. 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 six months ended September 30, 1999, shown below
includes the effect of the Reconstitution and the tax impact of operations
from the date of the Reconstitution through September 30, 1999.
Current and deferred income tax expense is as follows:
<TABLE>
<CAPTION>
<S> <C>
Current $ ---
Deferred 29,473,000
-----------
Total $29,473,000
===========
</TABLE>
22
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED, COMBINED AND
CONDENSED FINANCIAL STATEMENTS--(continued)
Variations from the federal statutory rate for activity since the
Reconstitution date are as follows:
<TABLE>
<CAPTION>
<S> <C>
Expected federal income tax benefit at statutory rate (35.0%)
Effect of net operating losses incurred prior to the Reconstitution 19.2
Effect of the initial deferred tax liability recorded at the
time of the Reconstitution 68.8
Effect of permanent differences 0.6
State income tax benefit, net of federal income tax benefit (2.3)
----
Income tax expense 51.3%
====
</TABLE>
Significant components of the Company's net deferred tax liability at
September 30, 1999 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 2,473,000
Net operating losses since the Reconstitution 15,754,000
-----------
Total deferred tax assets 18,227,000
-----------
Deferred tax liability - depreciation and amortization 47,700,000
-----------
Net deferred tax liability $29,473,000
===========
</TABLE>
At September 30, 1999, the Company has a net operating loss
carryforward since the Reconstitution for federal income tax purposes of
approximately $39.2 million. The net operating loss carryforward is
scheduled to expire in 2019.
8. Stock Option Plan
In connection with the Reconstitution, the Company assumed the
obligations under the former Time Warner Telecom LLC 1998 Option Plan,
amended such plan, and renamed it the Time Warner Telecom 1998 Stock Option
Plan (the "1998 Option Plan"). The 1998 Option Plan provides for the
granting of stock options to purchase shares of Class A common stock to
directors and current or prospective employees of, and consultants or other
individuals providing services to, the Company and its subsidiaries. As of
September 30, 1999, options for approximately 6.3 million shares are
outstanding. Approximately 1.4 million stock options vested on August 5,
1999.
23
<PAGE>
TIME WARNER TELECOM INC.
Part II
Other Information
Item 2. Changes in Securities and Use of Proceeds.
(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 $0.8 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 and
since the Offering, a portion has been used for working capital
purposes.
Item 5. Other Information.
The Company's first annual stockholders' meeting is scheduled for May
31, 2000. The Board of Directors of the Company has established
December 15, 1999 as the deadline for submission of any proposals that
a stockholder wishes to present at the Company's annual meeting, if the
stockholder wishes to have the proposal included in the Company's proxy
materials. The Company may exclude a stockholder proposal, even if
submitted in a timely manner if the proposal is excludable under
applicable law or the rules of the Securities and Exchange Commission.
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.
24
<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.
Date: November 12, 1999 By: /s/ Jill R. Stuart
----------------------------------------
Jill R. Stuart
Vice President, Accounting and Finance and
Chief Accounting Officer
25
<PAGE>
TIME WARNER TELECOM INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C> <C>
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).*
27 -- Financial Data Schedule
</TABLE>
* Incorporated by reference.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 42,394
<SECURITIES> 229,793
<RECEIVABLES> 43,152
<ALLOWANCES> 6,151
<INVENTORY> 0
<CURRENT-ASSETS> 311,308
<PP&E> 786,496
<DEPRECIATION> 173,359
<TOTAL-ASSETS> 976,375
<CURRENT-LIABILITIES> 123,910
<BONDS> 400,000
0
0
<COMMON> 1,046
<OTHER-SE> 418,604
<TOTAL-LIABILITY-AND-EQUITY> 976,375
<SALES> 0
<TOTAL-REVENUES> 177,285
<CGS> 0
<TOTAL-COSTS> 81,949
<OTHER-EXPENSES> 50,272
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,139
<INCOME-PRETAX> (57,463)
<INCOME-TAX> 29,473
<INCOME-CONTINUING> (86,936)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (86,936)
<EPS-BASIC> 0
<EPS-DILUTED> (.94)
</TABLE>
