<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 1999
REGISTRATION NO. 333-49439
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TIME WARNER TELECOM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4813 84-1452416
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
5700 S. QUEBEC STREET
GREENWOOD VILLAGE, CO 80111
(303) 566-1000
(ADDRESS, INCLUDING EACH ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID J. RAYNER
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
TIME WARNER TELECOM INC.
5700 S. QUEBEC STREET
GREENWOOD VILLAGE, CO 80111
(303) 566-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
<TABLE>
<CAPTION>
COPIES TO:
<S> <C> <C>
WILLIAM P. ROGERS, JR. PETER R. HAJE FAITH D. GROSSNICKLE
CRAVATH, SWAINE & MOORE EXECUTIVE VICE PRESIDENT, SECRETARY SHEARMAN & STERLING
WORLDWIDE PLAZA AND GENERAL COUNSEL 599 LEXINGTON AVENUE
825 EIGHTH AVENUE TIME WARNER INC. NEW YORK, NY 10022-6069
NEW YORK, NY 10019-7415 75 ROCKEFELLER PLAZA (212) 848-4000
(212) 474-1270 NEW YORK, NY 10019
(212) 484-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
<PAGE>
EXPLANATORY NOTE
THIS REGISTRATION STATEMENT CONTAINS TWO FORMS OF PROSPECTUS: ONE TO BE
USED IN CONNECTION WITH AN OFFERING OF THE COMPANY'S CLASS A COMMON STOCK IN THE
UNITED STATES AND CANADA, AND ONE TO BE USED IN A CONCURRENT OFFERING OF THE
COMPANY'S CLASS A COMMON STOCK OUTSIDE THE UNITED STATES AND CANADA. THE
PROSPECTUSES ARE IDENTICAL EXCEPT FOR THE FRONT COVER PAGE. THE U.S. PROSPECTUS
IS INCLUDED IN THIS REGISTRATION STATEMENT AND IS FOLLOWED BY THE ALTERNATE
FRONT COVER PAGE TO BE USED IN THE INTERNATIONAL PROSPECTUS. THE ALTERNATE PAGE
FOR THE INTERNATIONAL PROSPECTUS INCLUDED IN THIS REGISTRATION STATEMENT IS
LABELED 'ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS.' FINAL FORMS OF EACH
PROSPECTUS WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER RULE
424(b) OF THE GENERAL RULES AND REGULATIONS UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
<PAGE>
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED MAY 11, 1999
18,000,000 SHARES
[LOGO]
TIME WARNER TELECOM INC.
CLASS A COMMON STOCK
------------------------
TIME WARNER TELECOM INC. IS OFFERING 18,000,000 SHARES OF ITS CLASS A COMMON
STOCK. INITIALLY, THE U.S. UNDERWRITERS ARE OFFERING 14,400,000 SHARES OF
OUR CLASS A COMMON STOCK IN THE UNITED STATES AND CANADA, AND THE
INTERNATIONAL UNDERWRITERS ARE OFFERING 3,600,000 SHARES OF OUR CLASS A
COMMON STOCK OUTSIDE THE UNITED STATES AND CANADA. THIS IS OUR INITIAL
PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR
SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $9 AND $11 PER SHARE.
IMMEDIATELY AFTER THE OFFERING, THE FOUNDING STOCKHOLDERS OF TIME WARNER TELECOM
INC. WILL OWN 100% OF THE CLASS B COMMON STOCK, WHICH WILL REPRESENT 97.8% OF
THE COMBINED VOTING POWER OF BOTH CLASSES OF OUTSTANDING COMMON STOCK.
------------------------
WE EXPECT THE CLASS A COMMON STOCK TO BE APPROVED FOR QUOTATION ON THE NASDAQ
NATIONAL MARKET OF THE NASDAQ STOCK MARKET UNDER THE SYMBOL 'TWTC.'
------------------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS.
SEE 'RISK FACTORS' BEGINNING ON PAGE 14.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
--------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total................................... $ $ $
</TABLE>
------------------------
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Time Warner Telecom Inc. has granted the U.S. Underwriters the right to purchase
up to an additional 2,700,000 shares of Class A Common Stock to cover
over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares
of Class A Common Stock to purchasers on , 1999.
------------------------
JOINT BOOK - RUNNING MANAGERS
MORGAN STANLEY DEAN WITTER LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
, 1999
<PAGE>
<PAGE>
[TIME WARNER TELECOM NETWORK MAP]
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................... 5
Risk Factors..................................... 14
Use of Proceeds.................................. 23
Dividend Policy.................................. 23
The Reconstitution............................... 24
Capitalization................................... 25
Dilution......................................... 26
Selected Combined Financial and Other Operating
Data........................................... 27
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 29
Qualitative and Quantitative Disclosures about
Market Risk.................................... 38
Business......................................... 39
Management....................................... 57
Certain Relationships and Related Transactions... 69
Principal Stockholders........................... 73
Description of Certain Indebtedness.............. 74
Description of Capital Stock..................... 76
Certain United States Federal Tax Consequences to
Non-United States Holders of Common Stock...... 79
Shares Eligible for Future Sale.................. 82
Underwriters..................................... 83
Legal Matters.................................... 86
Experts.......................................... 86
Where You Can Find More Information.............. 86
Glossary......................................... 88
Index to Combined Financial Statements........... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of Class A Common
Stock and seeking offers to buy shares of Class A Common Stock only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or any sale of the Class A Common
Stock.
Until , 1999 all dealers that buy, sell or trade shares of
Class A Common Stock, whether or not participating in this Offering, may be
required to deliver a prospectus. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
This prospectus contains forward-looking statements, including statements
regarding, among other items, our business and operating strategy, operations,
economic performance and financial condition. These forward-looking statements
are subject to risks, uncertainties and assumptions, some of which are beyond
our control. Actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause such
differences include, but are not limited to, those discussed under 'Risk
Factors.' We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this prospectus might not
occur.
3
<PAGE>
<PAGE>
4
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding the Company, the Class A Common Stock being sold in this
Offering and our financial statements and the notes to these financial
statements appearing elsewhere in this prospectus.
We have summarized the complex history and structure of our company under
'Background of the Company and Reconstitution.' For simplicity, we use the terms
'we' and the 'Company' throughout this prospectus to refer to the business that
is owned and conducted by the corporation that became Time Warner Telecom Inc.
shortly prior to the Offering of the Class A Common Stock, and that was owned
and conducted by its predecessors prior to that time.
Other important terms are defined in 'Background of the Company and
Reconstitution.' In addition, to assist you in understanding certain terms
relating to the telephony business that we explain and use in the body of this
prospectus, we have also included a glossary at the back of this prospectus.
THE COMPANY
The Company is a leading fiber facilities-based competitive local exchange
carrier in selected metropolitan areas across the United States. It offers a
wide range of business telephony services, primarily to medium- and large-sized
telecommunications-intensive business end-users, long distance carriers,
internet service providers, wireless communications companies and governmental
entities. These business telephony services include dedicated transmission,
local switched, long distance, data and video transmission services and
high-speed dedicated internet access. The Company had deployed digital telephony
switches in 16 of its 19 service areas as of December 31, 1998. As of that date,
the Company operated networks in 19 metropolitan areas that spanned 6,968 route
miles, contained 272,390 fiber glass miles and offered service to 4,321
buildings.
The Company believes that the Telecommunications Act of 1996 (the '1996
Act') and certain state regulatory initiatives provide increased opportunities
in the telecommunications marketplace by opening all local service areas to
competition and requiring existing local telephone companies, which are often
referred to as incumbent local exchange carriers, to provide increased direct
interconnection.
BUSINESS STRATEGY
The key elements of the Company's business strategy are discussed in detail
under 'Business -- Business Strategy,' which we urge you to read carefully
because we believe it is important to understanding our business. The following
is a summary of the Company's business strategy.
LEVERAGE EXISTING FIBER OPTIC NETWORK. The Company has a substantial
in-place fiber optic network that it plans to emphasize in seeking to expand its
business with existing and new customers. Its ownership of these facilities
should provide competitive advantages over providers that must resell and/or
bundle services provided on other companies' networks.
EXPAND SWITCHED SERVICES. The Company is rapidly expanding the switched
services portion of its business, which represented approximately one-third of
revenues in 1998. To meet the anticipated increase in demand, the Company is
rapidly installing switches and expects to be able to offer switched services in
all current service areas by early 2000.
EXPAND DATA SERVICES CAPACITY. To enhance the Company's capacity to offer
high quality, long-haul data products, the Company is completing a fully
managed, high speed nationwide fiber optic infrastructure, which is expected to
be completed during the second quarter of 1999.
TARGET MEDIUM- AND LARGE-SIZED BUSINESS CUSTOMERS. The Company targets
medium- and large-sized business customers because these companies are often
high volume users of telecommunications services who require the high quality
networks that we operate. The Company can also achieve economies of scale in
sales, marketing and operations by focusing on these customers.
INTERCONNECT COMPANY SERVICE AREAS. The Company is interconnecting its 19
existing service areas with owned or leased fiber optic and conventional
facilities. This will allow the Company to increase revenue by offering regional
long distance services over facilities it controls.
LEVERAGE STRATEGIC RELATIONSHIP WITH TIME WARNER INC. The Company has
agreements with Time Warner Inc. and its subsidiaries that allow the Company to
use the 'Time Warner' brand name in its business and derive economies of scale
by licensing and sharing the cost of developing and building existing and new
fiber optic
5
<PAGE>
<PAGE>
transmission facilities. The Company may also benefit from certain of Time
Warner's existing regulatory approvals and licenses. Time Warner Inc. is the
largest multiple system cable operator in the United States.
ENTER NEW GEOGRAPHIC AREAS. The Company plans to commence construction or
operations in three additional metropolitan areas by December 31, 1999,
including Jersey City, New Jersey and Dallas, Texas.
CONTINUE DISCIPLINED EXPENDITURE PROGRAM. The Company increases operating
efficiencies by pursuing a capital expenditure program that focuses on projects
that meet stringent financial criteria. The Company also considers acquisitions
and strategic alliances with other telecommunications providers to share the
costs and risks of new projects. On May 4, 1999, the Company announced that it
has an agreement to acquire the 50% interest in MetroComm AxS, LP ('MetroComm'),
which serves Columbus, Ohio, that it does not currently own for 2,190,308 shares
of Class A Common Stock. See 'Business -- Business Strategy.'
FINANCING PLAN
On July 21, 1998, the Company completed the public offering of $400.0
million principal amount of its 9 3/4% Senior Notes due 2008 (the 'Notes'). See
'Description of Certain Indebtedness -- The Notes.'
We expect that the net proceeds of the offering after repayment of
subordinated indebtedness to affiliates of the Existing Stockholders, together
with proceeds received from the sale of the Notes and internally generated
funds, will provide sufficient funds to expand the Company's business as
currently planned, pay interest on the Notes and fund its currently expected
losses through the second quarter of 2000. After that, the Company expects to
require additional financing. See 'Use of Proceeds.'
RECENT FINANCIAL RESULTS
On April 19, 1999, the Company announced its financial results for the
quarter ended March 31, 1999. The following table sets forth certain combined
statement of operations data of the Company for each of the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1999
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Dedicated transport services..................................................... $ 16,733 $ 29,664
Switched services................................................................ 5,315 17,925
-------- --------
Total revenues............................................................... 22,048 47,589
Costs and expenses:
Operating........................................................................ 13,519 23,995
Selling, general and administrative.............................................. 16,316 24,136
Depreciation and amortization.................................................... 11,932 14,994
-------- --------
Operating loss................................................................... (19,719) (15,536)
Equity in income (losses) of unconsolidated affiliates............................... (58) 188
Interest expense, net................................................................ (2,011) (9,294)
-------- --------
Net loss............................................................................. $(21,788) $(24,642)
-------- --------
-------- --------
Basic and diluted loss per common share.............................................. $ (.27) $ (.30)
-------- --------
-------- --------
Average common shares................................................................ 81,250 81,250
-------- --------
-------- --------
OTHER FINANCIAL DATA:
EBITDA (1)........................................................................... $ (7,787) $ (542)
Cash used in operations.............................................................. (15,103) (29,290)
Cash provided by (used in) investing activities...................................... (24,961) 415
Cash provided by financing activities................................................ 40,064 --
</TABLE>
(table continued on next page)
6
<PAGE>
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
--------------------
<S> <C>
SELECTED OPERATING DATA (2):
Operating Networks.................................................................... 19
Route miles........................................................................... 7,069
Fiber miles........................................................................... 276,692
Buildings -- on net................................................................... 1,975
Voice grade equivalent circuits (approximate)......................................... 3,344,000
Digital telephone switches............................................................ 16
Employees............................................................................. 987
Access lines.......................................................................... 101,365
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
--------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
SELECTED BALANCE SHEET DATA:
Cash and marketable securities........................................................ $283,445
Property, plant and equipment, gross.................................................. 655,295
Long-term debt........................................................................ 578,329
Total stockholders' equity............................................................ 183,009
</TABLE>
- ------------
(1) 'EBITDA' is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provision for income taxes. Accordingly, EBITDA is not intended to replace
operating income, net income, cash flow and other measures of financial
performance and liquidity reported in accordance with generally accepted
accounting principles. Rather, EBITDA is a measure of operating performance
and liquidity that you 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 prospectus may not be
comparable to similarly titled measures reported by other companies due to
differences in accounting policies.
(2) Includes all managed properties, including unconsolidated affiliates. The
unconsolidated affiliate consists of MetroComm in Columbus, Ohio. The
Company has an agreement to acquire the 50% interest in MetroComm that it
does not currently own. See 'Business -- Business Strategy.'
Revenues. Revenues increased $25.5 million, or 116%, to $47.6 million for
the three months ended March 31, 1999, from $22.0 million for the same period in
1998. First quarter revenues from dedicated transport services increased 77% as
compared to the first quarter of 1998, reflecting growth in existing markets.
First quarter revenues from switched services increased 237%, from $5.3 million
for the first quarter of 1998 to $17.9 million for the first quarter of 1999,
primarily from growth in previously served markets and introduction of new
products. Switched services represent 38% of first quarter revenues in 1999 from
24% of first quarter revenues in 1998.
Operating Expenses. Operating expenses increased $10.5 million, or 78%, to
$24.0 million for the first quarter of 1999, from $13.5 million for the first
quarter of 1998. This increase was primarily due to an increase in costs
directly associated with an increase in customer base including local exchange
carrier expenses, back office support and the Company's overall expansion of its
business. As a percentage of revenues, operating costs decreased to 50% for the
first quarter of 1999 from 61% for the first quarter of 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $7.8 million, or 48%, to $24.1 million for the
first quarter of 1999 from $16.3 million for the first quarter of 1998,
primarily resulting from higher direct sales and sales support cost, and data
processing costs associated with
7
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<PAGE>
increased revenues. As a percentage of revenues, selling, general and
administrative expenses decreased to 51% for the first quarter of 1999, compared
to 74% for the same period of 1998.
Operating Loss. Operating Loss for the first quarter of 1999 decreased
$4.2 million or 21.2% to $15.5 million, compared to $19.7 million for the first
quarter of 1998.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $3.1 million, or 25.7%, to $15.0 million for the first three
months of 1999, from $11.9 million for the same period in 1998.
Interest Expense, Net. Effective July 1, 1997 to July 14, 1998, all of the
Company's financing requirements were funded with loans from affiliates of the
Existing Stockholders. On July 21, 1998, the Company issued $400.0 million in
Notes. Interest expense, net relating to these loans and Notes totaled $9.3
million for the first quarter of 1999, compared to $2.0 million for the same
period a year ago.
Net Loss. Net loss increased $2.8 million, or 13.1%, to a loss of $24.6
million for the first quarter of 1999, from a loss of $21.8 million for the
first quarter of 1998.
Capital Expenditures. Capital expenditures were $43.3 million for the first
quarter of 1999 primarily associated with central office expansions, the
purchase of switches and switch upgrades, fiber construction for intercity
networks, and transport equipment to support the growth of the business.
8
<PAGE>
<PAGE>
BACKGROUND OF THE COMPANY AND RECONSTITUTION
The structure and history of the Company is complicated and is summarized
as follows:
(1) Prior to July 14, 1998, our business was operated by Time Warner
Cable, which refers to the cable systems owned by Time Warner Entertainment
Company, L.P. ('TWE'), Time Warner Entertainment-Advance/Newhouse
Partnership ('TWE-A/N') and Time Warner Inc. ('Time Warner'). TWE and TWE-
A/N are owned as follows:
(a) TWE is a partnership of subsidiaries of Time Warner and
MediaOne Group, Inc. ('MediaOne'); and
(b) TWE-A/N is a partnership of TWE and Advance/Newhouse
Partnership ('Newhouse').
(2) On July 14, 1998, Time Warner Telecom LLC ('TWT LLC') succeeded to
the ownership of our business. TWT LLC and a subsidiary corporation that,
prior to the Reconstitution, was named Time Warner Telecom Inc. ('TWT
Inc.') were formed by Time Warner, MediaOne and Newhouse to conduct the
Notes offering that closed on July 21, 1998, and to acquire the assets and
liabilities of our business from TWE, TWE-A/N and Time Warner. This
transaction resulted in Time Warner, MediaOne and Newhouse (either directly
or through subsidiaries) becoming the owners of all of the limited
liability company interests in TWT LLC. We refer to Time Warner, MediaOne
and Newhouse collectively as the 'Existing Stockholders.' On May 6, 1999,
MediaOne and AT&T Corp. ('AT&T') entered into a merger agreement providing
for MediaOne to be acquired by AT&T. If the merger between AT&T and Media
One is consummated, AT&T will succeed to all of MediaOne's rights and
obligations as an Existing Stockholder.
(3) Shortly prior to the date of this prospectus, a newly formed
corporation that we call 'New Time Warner Telecom' merged with and became
the successor to TWT LLC and TWT Inc., and changed its name to Time Warner
Telecom Inc. As part of that merger, the Existing Stockholders exchanged
their interests in TWT LLC for Class B Common Stock of New Time Warner
Telecom. We refer to this reconstitution of the Company from a limited
liability company to a corporation as the 'Reconstitution.'
As a result of the Reconstitution, the ownership of the Class B Common
Stock is as follows:
<TABLE>
<S> <C>
Time Warner................................................... 61.98%
MediaOne...................................................... 18.85%
Newhouse...................................................... 19.17%
</TABLE>
See 'The Reconstitution' for additional information.
Throughout this prospectus we use the terms defined in this section. In
addition, as described above, we use the term the 'Company' throughout this
prospectus to refer to our business:
(a) as it was owned and conducted by Time Warner Cable prior to
July 14, 1998;
(b) that, prior to the Reconstitution, was owned and conducted by
TWT LLC; and
(c) that since the Reconstitution is owned and conducted by New
Time Warner Telecom.
The Company's principal executive offices are located at 5700 S. Quebec
Street, Greenwood Village, CO 80111, and its telephone number is (303) 566-1000.
9
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<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered........... 18,000,000 shares
Class A Common Stock offered in:
U.S. Offering..................... 14,400,000 shares
International Offering............ 3,600,000 shares
---------
Total........................ 18,000,000 shares
==========
Common Stock outstanding after the
Offering:
Class A Common Stock.............. 18,000,000 shares(1)
Class B Common Stock.............. 81,250,000 shares
Total........................ 99,250,000 shares(1)
----------
Over-allotment option.................. 2,700,000 shares
=========
The Offering........................... The sale of the Class A Common Stock is referred to in this prospectus
as the 'Offering.' We also completed a Notes offering in July 1998.
Use of Proceeds........................ The Company will use the net proceeds from the Offering primarily to
repay outstanding subordinated indebtedness plus accrued interest owed
to affiliates of the Existing Stockholders. Any remaining proceeds will
be used for general corporate and working capital purposes, which may
include payment of interest on the Notes and acquisitions of and joint
ventures with other telecommunications service providers. See 'Use of
Proceeds.'
Voting Rights.......................... After the Offering:
the Company will have outstanding two classes of common stock: the
Class A Common Stock and the Class B Common Stock (which are together
called the 'Common Stock'); and
the Existing Stockholders will have approximately 97.8% of the
combined voting power of the outstanding Common Stock. As a result,
they generally will have the collective ability to control all matters
requiring stockholder approval, including the election of directors.
Holders of Class A Common Stock have one vote per share.
Holders of Class B Common Stock have ten votes per share.
Holders of the Class A Common Stock and Class B Common Stock generally
vote together as a single class. However, 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.
See 'Principal Stockholders,' 'Description of Capital Stock' and
'Certain Relationships and Related Transactions -- Stockholders
Agreement.'
Conversion............................. Each share of Class B Common Stock is convertible into one share of
Class A Common Stock.
Proposed Nasdaq National Market
Symbol............................... 'TWTC'
</TABLE>
- ------------
(1) The number excludes approximately 6,186,667 shares of Class A Common Stock
issuable upon the exercise of employee stock options that will not
immediately be exercisable. See 'Management -- Stock Option Plan.' Depending
upon the final initial public offering price, the Company may in connection
with the Offering grant additional options to employees having an exercise
price equal to the initial public offering price. The number excludes
307,550 shares of Class A Common Stock issued to the former owners of
Internet Connect, Inc. as a result of the Company's acquisition of Internet
Connect, Inc. See 'Business -- Services -- Internet Services.' The number
also excludes 2,190,308 shares of Class A Common Stock issuable upon the
closing of the acquisition of the 50% interest in MetroComm that the Company
does not currently own, if such acquisition is consummated. See
'Business -- Business Strategy.'
RISK FACTORS
You should consider all of the information contained in this prospectus
before making an investment in the Class A Common Stock. In particular, you
should consider the factors described under 'Risk Factors,' beginning on page
14.
10
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<PAGE>
SUMMARY COMBINED FINANCIAL AND OTHER OPERATING DATA
The summary statement of operations data for the years ended December 31,
1996, 1997 and 1998 are derived from the audited financial statements of the
Company, including the notes, appearing elsewhere in this prospectus. The
summary statement of operations data for the years ended December 31, 1994 and
1995 have been derived from audited financial statements of the Company not
included in this prospectus. The pro forma other operating data have been
derived from the accounting records of the Company and have not been audited.
The financial statements of the Company for all periods prior to the
reorganization of the Company that occurred on July 14, 1998 reflect the 'carved
out' historical financial position, results of operations, cash flows and
changes in stockholders' equity of the commercial telecommunications operations
of the predecessors of the Company, as if they had been operating as a separate
company. The summary financial and other operating data set forth below should
be read together with the information contained in 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' and the Company's
financial statements, including the notes, appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
-------- --------- --------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Dedicated transport services....................... $ 2,169 $ 6,505 $ 20,362 $ 44,529 $ 84,024
Switched services.................................. -- 350 3,555 10,872 37,848
-------- --------- --------- --------- ---------
Total revenues................................. 2,169 6,855 23,917 55,401 121,872
-------- --------- --------- --------- ---------
Costs and expenses:
Operating (1)...................................... 10,454 15,106 25,715 40,349 67,153
Selling, general and administrative (1)............ 26,066 34,222 60,366 54,640 77,401
Depreciation and amortization (1).................. 1,213 7,216 22,353 38,466 50,717
-------- --------- --------- --------- ---------
Total costs and expenses....................... 37,733 56,544 108,434 133,455 195,271
-------- --------- --------- --------- ---------
Operating loss......................................... (35,564) (49,689) (84,517) (78,054) (73,399)
Gain on disposition of investments (2)................. -- -- -- 11,018 --
Equity in income (losses) of unconsolidated
affiliates........................................... (1,611) (1,391) (1,547) (2,082) 127
Interest income........................................ -- -- -- -- 9,731
Interest and other, net (1)............................ (3) (25) (52) (1,538) (29,198)
-------- --------- --------- --------- ---------
Net loss............................................... $(37,178) $ (51,105) $ (86,116) $ (70,656) $ (92,739)
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Basic and diluted loss per common share................ $ (.46) $ (.63) $ (1.06) $ (.87) $ (1.14)
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Average common shares outstanding...................... 81,250 81,250 81,250 81,250 81,250
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
OTHER OPERATING DATA:
EBITDA (3)............................................. $(34,351) $ (42,473) $ (62,164) $ (39,588) $ (22,682)
EBITDA Margin (4)...................................... (1,583.7)% (619.6)% (259.9)% (71.5)% (18.6)%
Capital expenditures................................... 50,293 141,479 144,815 127,315 126,023
Cash provided (used) by operations..................... (14,873) (35,605) (52,274) (29,419) (343)
Cash used in investing activities...................... (52,632) (145,293) (149,190) (120,621) (378,083)
Cash provided by financing activities.................. 67,505 180,898 201,464 150,040 483,566
Pro forma interest expense, net (5)(6)................. (38,611)
Pro forma net loss (5)................................. (102,152)
Pro forma basic and diluted loss per common share
(5).................................................. (1.03)
Pro forma average common shares outstanding (5)........ 99,250
</TABLE>
(footnotes on next page)
11
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<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------
1994 1995 1996 1997 1998
------- -------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA (7):
Operating Networks........................................... 8 15 18 19 19
Route miles.................................................. 880 3,207 5,010 5,913 6,968
Fiber miles.................................................. 24,995 116,286 198,490 233,488 272,390
Voice grade equivalent circuits.............................. 39,002 158,572 687,001 1,702,431 2,953,454
Digital telephone switches................................... -- 1 2 14 16
Employees.................................................... 239 508 673 714 919
Access lines................................................. -- 493 2,793 16,078 78,036
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
---------------------------
(THOUSANDS)
AS ADJUSTED
FOR THE
RECONSTITUTION
AND THE
ACTUAL OFFERING (8)
-------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $105,140 $ 105,140
Marketable securities..................................................................... 250,857 250,857
Property, plant and equipment, net........................................................ 494,158 494,158
Total assets.............................................................................. 904,344 904,344
Long-term debt (9)........................................................................ 574,940 408,940
Total stockholders' equity................................................................ 207,651 334,251
</TABLE>
- ------------
(1) Includes expenses resulting from transactions with affiliates of $1.9
million in 1994, $6.5 million in 1995, $12.4 million in 1996, $17.1 million
in 1997 and $27.7 million in 1998. See note 7 to the Company's financial
statements appearing elsewhere in this prospectus for an explanation of
these expenses.
(2) In September 1997, the Company completed a series of transactions related to
its interests in the Hyperion Partnerships, a group of unconsolidated
telecommunication partnerships serving the New York area. In these
transactions, the Company sold its interests in the partnerships serving the
Buffalo and Syracuse markets in exchange for $7.0 million of cash and all of
the minority interests in the partnerships serving the Albany and Binghamton
markets that were not already owned by the Company. In connection with these
transactions, the Company recognized a gain of approximately $11.0 million.
(3) 'EBITDA' is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provision for income taxes. Accordingly, EBITDA is not intended to replace
operating income, net income, cash flow and other measures of financial
performance and liquidity reported in accordance with generally accepted
accounting principles. Rather, EBITDA is a measure of operating performance
and liquidity that you 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 prospectus may not be
comparable to similarly titled measures reported by other companies due to
differences in accounting policies.
(4) EBITDA Margin represents EBITDA as a percentage of revenues.
(5) The pro forma statement of operations data for the year ended December 31,
1998 gives effect to the Reconstitution, the Offering and the sale of the
Notes as if they had occurred at the beginning of 1998. The pro forma
amounts are presented for informational purposes only and do not necessarily
indicate the actual amounts that would have been reported if the
transactions had been consummated at that date, nor do they necessarily
indicate future results. The pro forma data excludes a one-time $39.4
million charge to earnings, recognized by the Company on the Reconstitution
date, to record a net deferred tax liability associated with the change from
a limited liability company to a corporation.
(footnotes continued on next page)
12
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(footnotes continued from previous page)
(6) Pro forma interest expense gives effect to:
the issuance of $400.0 million principal amount of the Notes at an
interest rate of 9.75% at the beginning of 1998 and
the use of $166.0 million of the net proceeds from the Offering to
repay subordinated indebtedness to affiliates of the Existing
Stockholders,
in each case as if the transactions had occurred at the beginning of 1998
assuming approximately 4.0% of the interest on the Notes would have been
capitalized under FASB Statement No. 34, 'Capitalization of Interest Costs.'
In addition, pro forma interest expense includes $1.25 million for the year
ended December 31, 1998 relating to the amortization of approximately $12.5
million of debt issuance costs over a ten-year period.
(7) Includes all managed properties, including unconsolidated affiliates. The
unconsolidated affiliates consist of MetroComm in Columbus, Ohio and the
Albany and Binghamton, New York networks. Albany and Binghamton were wholly
owned at December 31, 1997. The Company has an agreement to acquire the 50%
interest in MetroComm that it does not currently own. See 'Business --
Business Strategy.'
(8) Adjusted to give effect to:
the issuance by the Company and distribution to the Existing
Stockholders of shares of Class B Common Stock pursuant to the
Reconstitution,
the issuance and sale by the Company of 18,000,000 shares of Class A
Common Stock in the Offering at an assumed initial public offering
price per share of $10, the midpoint of the range set forth on the
cover page of this prospectus,
the application of the net proceeds to the Company from the Offering
to repay $166.0 million of subordinated indebtedness to affiliates of
the Existing Stockholders and
a reduction in stockholders' equity that reflects a one-time charge
to earnings of approximately $39.4 million to record a net deferred
tax liability associated with the change from a limited liability
company to a corporation. See 'Use of Proceeds' and 'Capitalization.'
(9) As of March 31, 1999, long-term debt consisted of (a) $400.0 million
principal amount of Notes and (b) $178.3 million principal amount of
subordinated loans payable to affiliates of the Existing Stockholders.
13
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RISK FACTORS
Prior to investing in the Class A Common Stock, you should carefully
consider the following risks.
OUR LIMITED OPERATING HISTORY MAY NOT BE A RELIABLE BASIS FOR EVALUATING OUR
PROSPECTS.
Time Warner Cable began the Company's business in 1993. Since the beginning
of 1997, our business has changed substantially as it has rapidly expanded into
switched services. As a result, prospective purchasers have limited historical
financial information available to evaluate our likely future performance. When
making a decision to invest in the Class A Common Stock, prospective purchasers
should consider the risks, expenses and difficulties frequently encountered by
companies that are in the development stage.
WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW.
The Company has incurred operating losses and negative cash flow since
inception. For the years ended December 31, 1997 and 1998, the Company had
combined operating losses of $78.1 million and $73.4 million. The Company had
negative EBITDA for the year ended December 31, 1997 of $39.6 million, and for
the year ended December 31, 1998 of $22.7 million.
EBITDA has the meaning described in footnote 3 under 'Summary Combined
Financial and Other Operating Data.'
WE EXPECT TO EXPERIENCE NEGATIVE CASH FLOW AND OPERATING LOSSES FOR THE
FORESEEABLE FUTURE.
The Company expects to continue to incur operating losses and negative cash
flow as the Company builds its networks and expands its customer base. This will
reduce our ability to meet working capital needs and increase our need for
external financing.
The development of our business requires substantial capital expenditures.
A substantial part of these expenditures are incurred before any related
revenues are realized. Capital expenditures and other operating expenditures
will result in negative cash flow and operating losses until and unless we
develop an adequate customer base and revenue stream. We expect that each
network will produce negative cash flow for at least two and a half years after
it begins operations in that network. Moreover, the Company may never develop an
adequate customer base, sustain profitability, or generate sufficient cash flow.
WE WILL REQUIRE SUBSTANTIAL CAPITAL TO EXPAND OUR OPERATIONS.
The development and expansion of the Company's networks requires
substantial capital. If this capital is not available when needed, our business
will be adversely affected. We expect our principal capital requirements in the
next two years to be:
$345.0 million to purchase and install switches, electronics, fiber and
other technologies in existing and future networks; and
$50.0 million for capital expenditures on the Company's management
information system infrastructure.
WE EXPECT TO REQUIRE ADDITIONAL THIRD PARTY FINANCING BEGINNING IN 2000.
We expect to require additional financing beginning in 2000, or possibly
sooner, as explained below. When we seek additional financing, the terms offered
may place significant limits on our financial and operating flexibility, or may
not be acceptable to us. The failure to raise sufficient funds when needed and
on reasonable terms may require us to modify or significantly curtail our
business expansion plans. This could have a material adverse impact on the
Company's growth, ability to compete, and ability to service its existing debt.
The Company expects the proceeds of the Offering, after repayment of
subordinated indebtedness to affiliates of the Existing Stockholders, the
proceeds of the Notes offering, and internally generated funds to provide
sufficient capital to fund its current business plans through the middle of
2000. We expect to require additional financing after that date and may seek a
revolving bank credit facility and vendor financing prior to that time. The
Company may also be required to seek additional financing sooner than 2000 if:
the Company's business plans and cost estimates prove to be inaccurate;
14
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the Company decides to accelerate the expansion of its business and
existing networks;
the Company consummates acquisitions or joint ventures that require
capital; or
the Company is not able to lease additional capacity from Time Warner
Cable at acceptable rates.
Although the Existing Stockholders financed the Company's business prior to
the offering of the Notes, they are not required to provide any future
financing.
OUR SIGNIFICANT INDEBTEDNESS MAY IMPAIR OUR FINANCIAL AND OPERATING FLEXIBILITY.
The Company has a significant amount of debt outstanding. This substantial
indebtedness may have an adverse impact on the Company. For example:
the Company's ability to obtain additional financing may be limited;
a substantial portion of its cash flow will be dedicated to pay interest
and principal on its debt;
the Company's ability to satisfy its debt obligations may be diminished;
the Company may be more vulnerable to economic downturns; and
the Company's ability to withstand competitive pressure may be more
limited.
As of December 31, 1998, after giving pro forma effect to the
Reconstitution, the Offering, the sale of the Notes, and the repayment of $166.0
million of indebtedness, the Company would have $408.9 million of consolidated
total debt. This includes $8.9 million of subordinated debt to affiliates of the
Existing Stockholders.
THE INDENTURE FOR THE NOTES CONTAINS RESTRICTIVE COVENANTS THAT MAY LIMIT OUR
FLEXIBILITY.
The indenture limits, and in some circumstances prohibits, the ability of
the Company to:
incur additional debt;
pay dividends;
make investments or other restricted payments;
engage in transactions with stockholders and affiliates;
create liens;
sell assets;
issue or sell capital stock of subsidiaries; and
engage in mergers and consolidations.
These covenants may limit our financial and operating flexibility. In
addition, if the Company does not comply with these covenants, the holders of
the Notes may accelerate the Company's debt under the Notes and the holders of
other indebtedness of the Company may also have the right to accelerate their
debt.
THE MARKET VALUE OF YOUR INVESTMENT MAY BE ADVERSELY AFFECTED IF WE DO NOT
SUCCESSFULLY MANAGE THE EXPANSION OF THE SWITCHED SERVICES BUSINESS AND OUR
EXPANSION INTO NEW MARKETS AND SERVICES.
Since 1997, the Company has been implementing switched services at a rapid
rate. We expect switched services, which provided one-third of revenues in 1998,
to be the predominant source of future growth and revenues. In addition, the
Company plans to offer new telecommunications services, expand service in its
existing markets, interconnect its existing markets and enter new markets. If we
are not successful in implementing these changes, our results of operations and
stock price will likely be adversely affected.
Our ability to manage this expansion depends on many factors, including the
ability to:
attract new customers and sell new services to existing customers;
design, acquire and install transmission and switching facilities;
obtain any required governmental permits and rights-of-way;
implement interconnection with local exchange carriers;
expand, train and manage its employee base;
15
<PAGE>
<PAGE>
improve its financial, operating and information systems to effectively
manage its growth; and
accurately predict and manage the cost and timing of its capital
expenditure programs.
Even if the Company is successful in completing the infrastructure to
support its expanded business, that business may not be profitable and may not
generate positive cash flow for the Company.
WE MAY NEED TO OBTAIN ADDITIONAL FIBER OPTIC CAPACITY BEYOND WHAT TIME WARNER
CABLE PROVIDES US.
The Company licenses much of its fiber optic capacity on Time Warner
Cable's networks. However, Time Warner Cable is not obligated to provide
additional capacity to the Company and may or may not choose to do so. If we
cannot obtain additional capacity from Time Warner Cable at acceptable rates,
the increased costs may adversely affect our business in some locations. Also,
if Time Warner Cable fails to maintain the necessary permits, rights-of-way and
governmental authorization, or if the Company cannot rely on Time Warner Cable's
licenses and permits, the Company's business may be adversely affected in some
locations.
OUR BUSINESS MAY BE LIMITED IF THE CAPACITY LICENSE WITH TIME WARNER CABLE
EXPIRES OR IS TERMINATED.
If the capacity license is not renewed on expiration in 2028 or is
terminated prior to that time, the Company may need to build, lease, or
otherwise obtain fiber optic capacity. The terms of those arrangements may be
materially less favorable to the Company than the terms of its existing capacity
license. See 'Certain Relationships and Related Transactions -- Certain
Operating Agreements.'
At expiration of the capacity license, Time Warner Cable is obligated to
negotiate a renewal in good faith, but the Company may be unable to reach
agreement with Time Warner Cable on acceptable terms. In addition, Time Warner
Cable may terminate the capacity license before expiration upon:
a material impairment of Time Warner Cable's ability to provide the
license by law;
a material breach of the capacity license by the Company; or
the institution of any proceedings to impose any public utility or common
carrier status or obligations on Time Warner Cable, or any other
proceedings challenging Time Warner Cable's operating authority as a
result of the services provided to the Company under the capacity license.
The capacity license prohibits the Company from offering residential
services or content services with the capacity licensed from Time Warner Cable.
WE MAY LOSE THE RIGHT TO USE THE 'TIME WARNER' NAME.
The Company believes the 'Time Warner' brand name is valuable and its loss
could have an adverse effect on the Company. Under a license agreement with Time
Warner, the Company is required to discontinue use of the 'Time Warner' name in
the following circumstances:
the license agreement expires after an initial term of four years or any
permitted renewal;
Time Warner no longer owns at least 30% of the Common Stock;
Time Warner no longer has the right to nominate at least three members of
the Company's board of directors;
the Company violates covenants in the capacity license with Time Warner
Cable relating to residential services and content services; or
an Existing Stockholder transfers its Class B Common Stock and its rights
to designate nominees to the board of directors to a third party.
Under these circumstances, the Company may change its name to TW Telecom
Inc.
THE COMPANY DEPENDS ON INTERCONNECTION WITH INCUMBENT LOCAL EXCHANGE CARRIERS.
The Company's services may be less attractive if it cannot obtain high
quality, reliable and reasonably priced interconnection from incumbent local
exchange carriers. The 1996 Act requires incumbent local
16
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exchange carriers to allow the Company to connect to their networks, thereby
connecting to end users not on the Company's networks ('interconnection').
However, negotiating interconnection agreements with the incumbent local
exchange carriers takes considerable time, effort and expense. The agreements
are also subject to state and local regulation. The Company may be unable to
obtain interconnection at rates that are both competitive and profitable.
WE MAY NOT BE ABLE TO OFFER LONG DISTANCE SERVICES ON A PROFITABLE BASIS.
The Company has begun to offer long distance services. The long distance
market is extremely competitive. The risks associated with this market for the
Company include the following:
we may need to engage in significant price competition and discounting to
attract and retain customers;
we may experience high average customer turnover or 'churn' rates;
we will rely on other carriers for a portion of our transmission and
termination services; and
we may have difficulty in estimating future supply and demand.
Among other things, we may be obligated to pay underutilization charges to other
carriers if we overestimate our needs for transmission services. We may also
face higher prices if we underestimate our transmission needs.
THE LOCAL SERVICES MARKET IS HIGHLY COMPETITIVE, AND MANY OF OUR COMPETITORS
HAVE SIGNIFICANT ADVANTAGES THAT MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE
WITH THEM.
The Company operates in an increasingly competitive environment and some
companies may have competitive advantages over the Company. Most incumbent local
exchange carriers offer substantially the same services as those offered by the
Company. Incumbent local exchange carriers benefit from:
longstanding relationships with their customers;
greater financial and technical resources;
the ability to subsidize local services from revenues in unrelated
businesses; and
recent regulations that relax price restrictions and decrease regulatory
oversight of incumbent local exchange carriers.
The Company also faces competition from new entrants into the local
services business, who may also be better established and have greater financial
resources. These advantages may impair the Company's ability to compete in price
and service offerings or require the Company to sustain prolonged periods of
operating losses in order to retain customers. The current trend of
consolidation of telecommunications companies and strategic alliances within the
industry could give rise to significant new or stronger competitors for the
Company. Some long distance carriers who are customers of the Company are
pursuing alternative ways to obtain local telecommunications services, including
by acquiring local exchange carriers or constructing their own facilities.
COMPETITION IN LOCAL SERVICES HAS ALSO INCREASED AS A RESULT OF CHANGING
GOVERNMENT REGULATIONS.
The 1996 Act has increased competition in the local telecommunications
business. The 1996 Act:
requires incumbent local exchange carriers to interconnect their networks
with those of requesting telecommunications carriers and to allow
requesting carriers to collocate equipment at the premises of the
incumbent local exchange carriers;
requires all local exchange providers to offer their services for resale;
allows long distance carriers to resell local services;
requires incumbent local exchange carriers to offer to requesting
telecommunications carriers network elements on an unbundled basis; and
requires incumbent local exchange carriers to offer to requesting
telecommunications carriers the services they provide to end-users to
other carriers at wholesale rates.
Competition may also increase as a result of a recent World Trade
Organization agreement on telecommunications services. As a result of the
agreement, the FCC has made it easier for foreign companies to enter the U.S.
telecommunications market.
17
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SEVERAL CUSTOMERS ACCOUNT FOR A SIGNIFICANT AMOUNT OF OUR REVENUES.
The Company has substantial business relationships with a few large
customers. For the year ended December 31, 1998, the Company's top 10 customers
accounted for 37.8% of the Company's total revenues. The Company's two largest
customers for the year ended December 31, 1998, AT&T and MCI-Worldcom,
represented 13.4% and 10.3% of the Company's total revenues. However, a
substantial portion of that revenue results from traffic that is directed to the
Company by customers that have selected those long distance carriers
(approximately 27.3% of the 1998 AT&T revenue and 34.0% of the 1998 MCI-Worldcom
revenue). No other customer, including customers who direct their business
through long distance carriers, accounted for 10% or more of revenues.
WE ARE SUBJECT TO SIGNIFICANT FEDERAL AND STATE REGULATION THAT CAN
SIGNIFICANTLY AFFECT PRICING AND PROFITABILITY.
Existing Federal and state regulations, or new regulations, could have a
material impact on the prices and revenues of the Company. Certain rates charged
by the Company to its customers must be filed with the FCC and/or state
regulators, which provides price transparency to customers and competitors.
In addition, when the Company provides local exchange services in a market,
the Communications Act of 1934 ('Communications Act') and FCC rules require it
to:
not unreasonably limit the resale of its services;
provide telephone number portability if technically feasible;
provide dialing parity to competing providers;
provide access to poles, ducts and conduits owned by it; and
establish reciprocal compensation arrangements for the transport and
termination of telecommunications.
WE MAY RECEIVE LESS REVENUE IF INCUMBENT LOCAL EXCHANGE CARRIERS SUCCESSFULLY
CHALLENGE RECIPROCAL COMPENSATION.
The Company currently receives compensation from incumbent local exchange
carriers for terminating local calls at the premises of internet service
providers. Some companies have challenged the right of the Company and others to
receive this compensation. Determinations by the FCC or by state utility
commissions that such traffic should not be subject to termination compensation
could be adverse to the Company. See 'Business -- Government Regulation.'
WE DEPEND ON GOVERNMENTAL AND OTHER AUTHORIZATIONS.
The development, expansion and maintenance of the Company's networks will
depend on, among other things, its ability to obtain rights-of-way and other
required governmental authorizations and permits. Any increase in the difficulty
or cost of obtaining these authorizations and permits could adversely affect the
Company, particularly where it must compete with companies that already have the
necessary permits. In order to compete effectively, the Company must obtain
these authorizations in a timely manner, at reasonable costs and on satisfactory
terms and conditions. In certain of the cities or municipalities where the
Company provides network services, it pays license or franchise fees. The 1996
Act permits municipalities to charge these fees only if they are competitively
neutral and nondiscriminatory, but certain municipalities may not conform their
practices to the requirements of the 1996 Act in a timely manner or without
legal challenge. The Company also faces the risks that other cities may start
imposing fees, fees will be raised or franchises will not be renewed. Some of
the Company's franchise agreements also provide for increases or renegotiation
of fees at certain intervals. Any increases in these fees may have a negative
impact on the Company's financial condition.
WE ARE DEPENDENT ON TIME WARNER CABLE'S PERMITS, LICENSES AND RIGHTS-OF-WAY.
The Company currently licenses a significant portion of its capacity from
Time Warner Cable. Municipalities that regulate Time Warner Cable may or may not
seek to impose additional franchise fees or otherwise charge Time Warner Cable.
The Company must reimburse Time Warner Cable for any new fees or increases. Time
Warner Cable or the Company may not be able to obtain all necessary permits,
licenses or agreements from governmental authorities or private rights-of-way
providers necessary to effect future license transactions. This would hinder the
Company's ability to expand its existing networks or develop new networks
successfully in locations served by Time Warner Cable.
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WE MAY FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS.
The Company may acquire other businesses that will complement its existing
business. These acquisitions will likely involve some or all of the following
risks:
the difficulty of assimilating the acquired operations and personnel;
the potential disruption of the Company's ongoing business;
diversion of resources;
the possible inability of management to maintain uniform standards,
controls, procedures and policies;
the possible difficulty of managing its growth and information systems;
the risks of entering markets in which the Company has little experience;
and
the potential impairment of relationships with employees or customers.
WE EXPECT THAT OUR QUARTERLY OPERATING RESULTS WILL FLUCTUATE.
As a result of the limited revenues and significant expenses associated
with the expansion and development of its networks and services, the Company
anticipates that its operating results could vary significantly from quarter to
quarter. Changes in the usage or payment patterns of significant customers may
also cause operating results to vary.
SOME OF OUR ASSETS MAY FLUCTUATE IN VALUE.
After the Offering, the Company will hold a significant part of the
proceeds of the Notes offering in marketable securities, including investment
grade corporate debt securities. The value of these securities will likely be
affected by changes in interest rates and general market conditions. Periodic
fluctuations in the value of these assets will affect our quarterly results.
WE EXPECT TO DEPEND ON THIRD PARTY VENDORS FOR INFORMATION SYSTEMS.
The Company has entered into agreements with vendors that provide for the
development and operation of back office systems, such as ordering, provisioning
and billing systems. The failure of those vendors to perform their services in a
timely and effective manner at acceptable costs could have a material adverse
effect on the Company's growth and its ability to monitor costs, bill customers,
provision customer orders and achieve operating efficiencies. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000.'
AFTER THE OFFERING, THE EXISTING STOCKHOLDERS WILL CONTINUE TO CONTROL THE
COMPANY.
After the Offering, the Existing Stockholders will hold all the outstanding
shares of Class B Common Stock. The Existing Stockholders generally will have
the collective ability to control all matters requiring stockholder approval,
including the nomination and election of directors. The Class B Common Stock is
not subject to any mandatory conversion provisions other than pursuant to
certain transfer restrictions. The disproportionate voting rights of the Class B
Common Stock relative to the Class A Common Stock may delay or prevent a change
in control of the Company, and may make the Company a less attractive takeover
target. See 'Principal Stockholders' and 'Description of Capital Stock.'
THE HOLDERS OF CLASS B COMMON STOCK CAN SELL CONTROL OF THE COMPANY AT A TIME
WHEN THEY DO NOT HAVE A MAJORITY ECONOMIC INTEREST IN THE COMPANY, AND EXCLUDE
THE HOLDERS OF CLASS A COMMON STOCK FROM PARTICIPATING IN THE SALE.
The stockholders agreement provides that, subject to the rights of first
refusal of the other holders of Class B Common Stock, the Existing Stockholders
may transfer their Class B Common Stock. If a holder sells all, but not less
than all, of its Class B Common Stock as shares of Class B Common Stock, such
holder may transfer its right to nominate Class B nominees for election to the
board of directors. In addition, all of the holders of Class B Common Stock have
the right to participate in certain sales by Time Warner of its Class B Common
Stock. Accordingly, majority control of the Company could be transferred by one
or more holders of Class B Common Stock at a time when such holder or holders of
Class B Common Stock do not have a majority of the economic interest in the
Company and with no assurance that the holders of Class A Common Stock would be
given the opportunity to participate in the transaction or, if they were
permitted to participate in the transaction, to receive the same amount and type
of consideration for their stock in the Company as the holders of Class B Common
Stock.
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In addition, the Company has elected not to be subject to Section 203 of
the Delaware General Corporation Law, which would otherwise provide certain
restrictions on 'business combinations' between the Company and any person
acquiring a significant (15% or greater) interest in the Company other than in a
transaction approved by the board of directors and in certain cases by
stockholders of the Company.
THE EXISTING STOCKHOLDERS MAY COMPETE WITH THE COMPANY.
The Existing Stockholders are in the cable television business. There is no
restriction on the Existing Stockholders' ability to compete with the Company.
They may, now or in the future, provide the same or similar services to those
provided by the Company. Time Warner and AT&T have also announced their
intention to form a joint venture to offer any distance telephone services to
residential and small business customers in Time Warner Cable's service areas,
utilizing its cable facilities. Although the Company primarily targets large-
and medium-size business customers in the same services areas, the proposed
joint venture could compete directly with the Company with respect to small
business customers.
LIMITATIONS ON THE COMPANY'S BUSINESS ACTIVITIES.
The Company's restated certificate of incorporation restricts the Company's
business activities. These restrictions limit our ability to expand our business
and could deprive the Company of valuable future opportunities. Under the
restated certificate of incorporation, the Company may not, directly or through
a subsidiary or affiliate:
provide residential services, or
produce or otherwise provide entertainment, information, or any other
content services, with certain limited exceptions.
The Company may engage in these activities with the affirmative vote of all
the holders of the Class B Common Stock or on the earlier of:
five years from the date of the restated certificate of incorporation, or
the date the Class B Common Stock represents less than 50% of the voting
power of the Company.
See 'Description of Capital Stock.'
The Company is subject to the same restrictions under the capacity license
with Time Warner Cable, except that those restrictions apply only to the
Company's use of the leased capacity but last until the capacity license expires
in 2028 or is terminated. The Company believes these restrictions will not
materially affect its ability to operate its business as currently planned.
SOME OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST.
Some directors of the Company are also directors, officers or employees of
the Existing Stockholders or their affiliates. Although these directors have
fiduciary obligations to the Company under Delaware law, they may face conflicts
of interest. For example, conflicts of interest may arise with respect to
certain business opportunities available to, and certain transactions involving,
the Company. The Existing Stockholders have not adopted any special voting
procedures to deal with such conflicts of interest. The resolution of these
conflicts may be unfavorable to the Company. The Company's restated certificate
of incorporation provides for the allocation of corporate opportunities between
the Company and the Existing Stockholders. See 'Description of Capital Stock'
and 'Certain Relationships and Related Transactions.'
IF WE DO NOT ADAPT TO RAPID CHANGES IN THE TELECOMMUNICATIONS INDUSTRY, WE COULD
LOSE CUSTOMERS OR MARKET SHARE.
The telecommunications industry will continue to experience rapid changes
in technology. The Company's future success may depend on its ability to adapt
to any changes in the industry. A failure by the Company to adopt new
technology, or the Company's choice of one technological innovation over
another, may have an adverse impact on the Company's ability to compete or meet
customer demands.
20
<PAGE>
<PAGE>
FUTURE SALES OF SHARES OF CLASS A COMMON STOCK COULD DEPRESS THE PRICE OF THE
CLASS A COMMON STOCK.
The market price of the Class A Common Stock could drop as a result of
sales in the market after the Offering. The perception that such sales could
occur may also affect its trading price. These factors could also make it more
difficult for the Company to raise funds through future offerings of Common
Stock.
In connection with the Offering, the officers, directors and Existing
Stockholders have agreed that, with certain exceptions, they will not sell
shares of Common Stock for 180 days after the date of this prospectus without
the consent of Morgan Stanley & Co. Incorporated. After the 180 day period, the
officers, directors and Existing Stockholders may decide to dispose of their
shares of Class A Common Stock. Sales of shares at that time may have an adverse
effect on the price of the Class A Common Stock.
There will be 18,000,000 shares of Class A Common Stock and 81,250,000
shares of Class B Common Stock outstanding after the Offering. There will also
be 307,550 shares of Class A Common Stock outstanding held by the former owners
of Internet Connect, Inc. and, if the MetroComm transaction is consummated,
2,190,308 shares of Class A Common Stock held by the former owners of the 50%
interest in MetroComm that the Company does not currently own. In addition, if
the underwriters exercise the over-allotment option, there will be an additional
2,700,000 shares of Class A Common Stock outstanding. The Class B Common Stock
is convertible into Class A Common Stock on a one-to-one ratio. The shares of
Class A Common Stock sold in the Offering will be freely transferrable without
further registration, except for any shares purchased by 'affiliates,' as that
term is defined in Rule 144 under the Securities Act. The remaining shares of
Class A Common Stock and any shares of Class A Common Stock converted from
Class B Common Stock are 'restricted securities' within the meaning of the
Securities Act. These shares may only be sold under a registration statement or
an exemption under the Securities Act. The Existing Stockholders have rights to
require the Company to register sales of shares of Class A Common Stock and
shares of Class B Common Stock.
The Company has also initially reserved 9,027,000 shares of Class A Common
Stock for the exercise of employee stock options. The amount of this reservation
may be increased depending upon the size of the Offering. Approximately
6,186,667 stock options are outstanding as of April 1999. See 'Underwriters.'
THE CLASS A COMMON STOCK HAS NOT BEEN PUBLICLY TRADED BEFORE THIS OFFERING AND
THE STOCK PRICE MAY BE VOLATILE.
The Class A Common Stock has not been publicly traded prior to the
Offering. The Company expects the Class A Common Stock to be approved for
quotation on the Nasdaq National Market. However, an active trading market may
not develop or be sustained. The Company and the underwriters will determine the
initial public offering price. The initial public offering price may not be
indicative of the trading prices after the Offering. The price after the
Offering may be volatile, and may fluctuate due to factors such as:
actual or anticipated fluctuations in quarterly and annual results;
announcements of technological innovations;
introduction of new services;
mergers and strategic alliances in the telecommunications industry; and
changes in government regulation.
In recent years, the market for stock in technology, telecommunications, and
computer companies has been highly volatile. This is particularly true for
companies with relatively small capitalizations, such as the Company.
WE DO NOT EXPECT TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE.
The Company is effectively prohibited from paying dividends on its Common
Stock for the foreseeable future under the terms of the indenture for the Notes.
Moreover, we plan to retain all earnings for investment in our business, and do
not plan to pay dividends at any time in the foreseeable future. See 'Dividend
Policy.'
PURCHASERS WILL HAVE SUBSTANTIAL AND IMMEDIATE DILUTION.
Purchasers of the Class A Common Stock will incur immediate and substantial
dilution of $6.83 in the pro forma net tangible book value per share (assuming
an offering price of $10 per share). See 'Dilution.'
21
<PAGE>
<PAGE>
IF WE FAIL TO TIMELY RESOLVE POTENTIAL YEAR 2000 PROBLEMS, WE COULD EXPERIENCE
MAJOR SYSTEM FAILURES.
If the Company or its significant vendors or suppliers experience Year 2000
problems, those problems could have a negative impact on the Company's networks,
customer order processing and provisioning systems, customer billing and data
interfaces to and from these systems. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Year 2000.' The Company has
implemented comprehensive efforts to assess and remediate its computer systems
and related software and equipment to ensure that those systems, software and
equipment recognize, process and store information in the Year 2000 and later
years. The Company is also verifying the Year 2000 readiness of its significant
suppliers and vendors. Our management believes that it has established a program
to resolve significant Year 2000 issues in a timely manner. However, the process
for addressing these issues is not yet complete.
22
<PAGE>
<PAGE>
USE OF PROCEEDS
The Company estimates the net proceeds from the sale of 18,000,000 shares
of Class A Common Stock in the Offering to be approximately $166.0 million (or
approximately $191.2 million if the U.S. underwriters exercise their
over-allotment option). This is based on the assumption that the initial public
offering price is $10 per share, the midpoint of the range set forth on the
cover page of this prospectus, after deducting estimated underwriting discounts
and commissions and other expenses.
The Company intends to use the net proceeds of the Offering primarily to
repay outstanding subordinated indebtedness, plus accrued interest, owed to
affiliates of the Existing Stockholders. At March 31, 1999, this indebtedness
equaled $178.3 million. Any remaining proceeds will be used for general
corporate and working capital purposes, which may include acquisitions and joint
ventures. Pending these uses, the net proceeds of the Offering will be invested
in short-term, money market instruments. This subordinated indebtedness that
will be repaid bears interest payable in kind at an annual rate equal to The
Chase Manhattan Bank's prime lending rate as in effect from time to time, and
matures on August 15, 2008.
The Company, from time to time, evaluates potential acquisitions of, and
joint ventures relating to, networks currently owned and operated by other
companies, including affiliates of the Existing Stockholders, and expects to
continue to do so. If the Company enters into a definitive agreement with
respect to any acquisition or joint venture, it may require additional financing
or it may elect to use a portion of the proceeds of the Offering or the proceeds
from the sale of the Notes not previously expended for other purposes.
The Company expects that any net proceeds of the Offering that remain after
repayment of subordinated indebtedness to affiliates of the Existing
Stockholders, together with the net proceeds received from the sale of the Notes
and internally generated funds, will provide sufficient funds for the Company
to:
expand its business as currently planned,
pay interest on the Notes and
fund its currently expected losses,
in each case through the middle of 2000. After that, the Company expects to
require additional financing. However, if 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 the
Company cannot control, such as regulatory changes, changes in technology and
increased competition. Due to the uncertainty of these and other factors, actual
revenues and costs may vary from expected amounts, possibly to a material
degree, and such variations are likely to affect the Company's future capital
requirements. Sources of financing may include public or private debt or equity
financing by the Company or its subsidiaries, vendor financing or other
financing arrangements. At a future date, the Company may negotiate a bank
credit facility to provide it with working capital and enhance its financial
flexibility. This financing may not be available on terms acceptable to the
Company or at all. The Company's issuance of additional equity securities could
cause substantial dilution of your interest in the Company.
DIVIDEND POLICY
The Company intends to retain any future earnings to finance its growth
strategy and the development and expansion of its networks and operations. We do
not anticipate paying any dividends in the foreseeable future. The decision
whether to pay dividends will be made by the Company's board of directors in
light of conditions then existing, including the Company's results of
operations, financial condition and requirements, business conditions, covenants
under loan agreements and other contractual arrangements, and other factors. In
addition, the indenture for the Notes contains covenants that effectively
prevent the Company from paying dividends on the Common Stock for the forseeable
future.
23
<PAGE>
<PAGE>
THE RECONSTITUTION
Shortly prior to the date of this prospectus, New Time Warner Telecom was
formed to conduct the Offering and merged with and became the successor to both
of TWT LLC and TWT Inc. TWT LLC was formed to acquire the telephony business
formerly operated by Time Warner Cable and to conduct the Notes offering. TWT
Inc. was formed solely for the purpose of serving as co-obligor of the Notes. In
connection with the reorganization of the Company that occurred on July 14,
1998, the Existing Stockholders received all the limited liability company
interests of TWT LLC. These interests were exchanged in connection with the
Reconstitution for all the outstanding Class B Common Stock of New Time Warner
Telecom.
The Company's authorized capital includes two classes of Common Stock,
Class A Common Stock and Class B Common Stock, are identical in all respects
except that
(a) 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;
(b) certain matters require the approval of 100% of the outstanding
Class B Common Stock, voting separately as a class; and
(c) certain other matters require the approval of a majority of the
outstanding Class A Common Stock, voting separately as a class. Each share
of Class B Common Stock is convertible into one share of Class A Common
Stock.
See 'Description of Capital Stock' and 'Principal Stockholders.'
The following diagram is the organizational structure of the Company
immediately following the Offering. This diagram assumes that shares of Class A
Common Stock are issued in the Offering and excludes (a) 2.7 million shares of
Class A Common Stock issuable upon exercise of the U.S. underwriters'
over-allotment option, (b) approximately 6,186,667 shares of Class A Common
Stock issuable upon the exercise of employee stock options that will not
immediately be exercisable, (c) 307,550 shares of Class A Common Stock issued in
the Reconstitution to the former owners of Internet Connect, Inc., and (d)
2,190,308 shares of Class A Common Stock that will be issued to the former
owners of the 50% of MetroComm that the Company does not currently own, if that
transaction is consummated. See 'Management -- Stock Option Plan.' The interests
of Time Warner, MediaOne and Newhouse consist of Class B Common Stock. Assuming
18,000,000 shares of Class A Common Stock are issued in the Offering, Time
Warner, MediaOne (or, if the merger between MediaOne and AT&T is consummated,
AT&T) and Newhouse would hold Class B Common Stock representing 60.64%, 18.44%
and 18.75% of the voting power, respectively.
[CHART]
24
<PAGE>
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1998, as adjusted to reflect:
the issuance and sale of the 18,000,000 shares of Class A Common Stock
offered in the Offering and the application of the net proceeds from the
Offering to repay $166.0 million of subordinated indebtedness to
affiliates of the Existing Stockholders and
the Reconstitution, including a reduction in stockholders' equity
resulting from a one-time charge to earnings of approximately $39.4
million to record a net deferred tax liability associated with the change
from a limited liability company to a corporation.
See 'Use of Proceeds' and 'The Reconstitution.'
The assumed public offering price is $10 per share, the midpoint of the
range set forth on the cover of this prospectus. The table further assumes that
the U.S. underwriters do not exercise their over-allotment option and excludes
approximately 6,186,667 shares of Class A Common Stock issuable upon the
exercise of employee stock options that are not immediately exercisable. See
'Management -- Stock Option Plan.' This table should be read together with
'Selected Combined Financial and Other Operating Data,' 'Management's Discussion
and Analysis of Financial Condition and Results of Operations,' and the
Company's financial statements, including the notes, appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-----------------------------------
(THOUSANDS)
AS ADJUSTED
FOR THE RECONSTITUTION
ACTUAL AND THE OFFERING
--------- ----------------------
<S> <C> <C>
Cash and cash equivalents...................................................... $ 105,140 $ 105,140
--------- ------------
--------- ------------
Marketable securities.......................................................... $ 250,857 $ 250,857
--------- ------------
--------- ------------
Long-term debt:
Notes..................................................................... $ 400,000 $ 400,000
Subordinated loans payable to affiliates of the Existing
Stockholders(1)......................................................... 174,940 8,940
--------- ------------
Total long-term debt................................................. 574,940 408,940
Stockholder's equity (deficit):
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, 0
and 18,000,000 shares issued and outstanding on an actual and a pro
forma basis, respectively(2)............................................ -- 180
Class B Common Stock, $0.01 par value; 162,500,000 shares authorized,
81,250,000 shares issued and outstanding on an actual and a pro forma
basis................................................................... 813 813
Additional paid-in capital:
Contributed capital in excess of par value.............................. 554,994 720,814
Accumulated deficit prior to Reorganization............................. (299,340) (299,340)
--------- ------------
Total additional paid-in capital..................................... 255,654 421,474
Accumulated Deficit....................................................... (48,816) (88,216)
--------- ------------
Total stockholders' equity..................................................... 207,651 334,251
--------- ------------
Total capitalization................................................. $ 782,591 $ 743,191
--------- ------------
--------- ------------
</TABLE>
- ------------
(1) As of March 31, 1999, the Company had outstanding approximately $178.3
million of indebtedness to affiliates of the Existing Stockholders, all of
which is subordinated in right of payment to the Notes. The indenture for
the Notes provides that subordinated indebtedness may be repaid prior to
maturity with the net proceeds of any offering of common stock or equivalent
interests of the Company, including the Offering.
(2) Excludes 307,550 shares of Class A Common Stock that were issued in the
Reconstitution to the former owners of Internet Connect, Inc. See
'Business -- Services -- Internet Services.' Also excludes 2,190,308 shares
of Class A Common Stock issuable upon the closing of the acquisition of the
50% interest in MetroComm that the Company does not currently own.
25
<PAGE>
<PAGE>
DILUTION
The net tangible book value of the Company as of December 31, 1998 was
$188.0 million, or $2.31 per share of Class B Common Stock. Pro forma net
tangible book value per share is determined by dividing the tangible net worth
of the Company (total assets less intangible assets and total liabilities) by
the aggregate number of shares of Class A Common Stock and Class B Common Stock
outstanding, assuming the Reconstitution and the Offering had taken place on
December 31, 1998. After giving effect to the sale of the 18,000,000 shares of
Class A Common Stock offered in the Offering at an assumed initial public
offering price of $10 per share, the midpoint of the range set forth on the
cover page of this prospectus, and the receipt and application of the net
proceeds from the Offering, pro forma net tangible book value of the Company as
of December 31, 1998, would have been approximately $314.6 million, or $3.17 per
share. This represents an immediate increase in pro forma net tangible book
value of $0.86 per share to the Existing Stockholders of the Company and an
immediate dilution in pro forma net tangible book value of $6.83 per share to
purchasers of Class A Common Stock in the Offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................................... $10.00
Net tangible book value per share at December 31, 1998................................ $2.31
Increase in pro forma net tangible book value per share attributable to purchasers in
the Offering........................................................................ 0.86
-----
Pro forma net tangible book value per share after the Offering........................ 3.17
------
Dilution in pro forma net tangible book value per share to purchasers of Class A
Common Stock in the Offering(1)..................................................... $ 6.83
------
------
</TABLE>
- ------------
(1) Dilution is determined by subtracting pro forma net tangible book value per
share after the Offering from the initial public offering price per share.
------------------------
The following table summarizes, on a pro forma basis, as of December 31,
1998, the numbers of shares purchased, the total consideration paid or to be
paid and the average price per share paid or to be paid by the Existing
Stockholders and the purchasers of Class A Common Stock in the Offering, at the
initial public offering price of $10 per share, the midpoint of the range set
forth on the cover page of this prospectus, before deducting estimated Offering
expenses of $14.0 million including underwriting discounts and commissions. The
calculations in the table exclude an aggregate of: (a) 2,700,000 shares of Class
A Common Stock issuable pursuant to the U.S. underwriters' over-allotment
option, (b) approximately 6,186,667 shares of Class A Common Stock issuable upon
the exercise of employee stock options that are not immediately exercisable and
(c) 3,111,833 additional shares of Class A Common Stock reserved for awards
under the Company's stock option plan, (d) 307,550 shares of Class A Common
Stock issued in the Reconstitution to the former owners of Internet Connect,
Inc. and (e) 2,190,308 shares of Class A Common Stock issuable upon the closing
of the Company's acquisition of the 50% interest in MetroComm that it does not
currently own, if such acquisition is consummated. See 'Management -- Stock
Option Plan.'
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders...................... 81,250,000 81.9% $256,467,000 58.8% $ 3.16
Purchasers of Class A Common Stock in the
Offering................................. 18,000,000 18.1 180,000,000 41.2 10.00
---------- ------- ------------ ------- ---------
Total................................. 99,250,000 100.0% $436,467,000 100.0% $ 4.40
---------- ------- ------------ ------- ---------
---------- ------- ------------ ------- ---------
</TABLE>
26
<PAGE>
<PAGE>
SELECTED COMBINED FINANCIAL AND OTHER OPERATING DATA
The selected statement of operations data for the years ended December 31,
1996, 1997 and 1998, and the selected balance sheet data as of December 31, 1997
and 1998, are derived from, and are qualified by reference to, the financial
statements of the Company, including the notes, audited by Ernst & Young LLP,
independent auditors, appearing elsewhere in this prospectus. The selected
statement of operations data for the year ended December 31, 1994 and 1995 and
the selected balance sheet data as of December 31, 1994, 1995 and 1996 have been
derived from audited financial statements of the Company not included in this
prospectus. The pro forma other operating data have been derived from the
accounting records of the Company and have not been audited. The financial
statements of the Company for all periods prior to the reorganization of the
Company that occurred on July 14, 1998 reflect the 'carved out' historical
financial position, results of operations, cash flows and changes in
stockholders' equity of the commercial telecommunications operations of
predecessors of the Company, as if they had been operating as a separate
company. The selected financial and other operating data set forth below should
be read together with 'Management's Discussion and Analysis of Financial
Condition and Results of Operations' and the Company's financial statements,
including the notes, appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
-------- --------- ----------- --------- ---------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Dedicated transport
services................ $ 2,169 $ 6,505 $ 20,362 $ 44,529 $ 84,024
Switched services......... -- 350 3,555 10,872 37,848
-------- --------- ----------- --------- ---------
Total revenues........ 2,169 6,855 23,917 55,401 121,872
-------- --------- ----------- --------- ---------
Costs and expenses:
Operating (1)............. 10,454 15,106 25,715 40,349 67,153
Selling, general and
administrative (1)...... 26,066 34,222 60,366 54,640 77,401
Depreciation and
amortization (1)........ 1,213 7,216 22,353 38,466 50,717
-------- --------- ----------- --------- ---------
Total costs and
expenses............ 37,733 56,544 108,434 133,455 195,271
-------- --------- ----------- --------- ---------
Operating loss................ (35,564) (49,689) (84,517) (78,054) (73,399)
Gain on disposition of
investments (2)............. -- -- -- 11,018 --
Equity in income (losses) of
unconsolidated affiliates... (1,611) (1,391) (1,547) (2,082) 127
Interest income............... -- -- -- -- 9,731
Interest and other, net (1)... (3) (25) (52) (1,538) (29,198)
-------- --------- ----------- --------- ---------
Net loss...................... $(37,178) $ (51,105) $ (86,116) $ (70,656) $ (92,739)
-------- --------- ----------- --------- ---------
-------- --------- ----------- --------- ---------
Basic and diluted loss per
common share................ $ (.46) $ (.63) $ (1.06) $ (.87) $ (1.14)
-------- --------- ----------- --------- ---------
-------- --------- ----------- --------- ---------
Average common shares
outstanding................. 81,250 81,250 81,250 81,250 81,250
-------- --------- ----------- --------- ---------
-------- --------- ----------- --------- ---------
OTHER OPERATING DATA:
EBITDA (3).................... $(34,351) $ (42,473) $ (62,164) $ (39,588) $ (22,682)
EBITDA Margin (4)............. (1,583.7)% (619.6)% (259.9)% (71.5)% (18.6)%
Capital expenditures.......... 50,293 141,479 144,815 127,315 126,023
Cash provided (used) by
operations.................. (14,873) (35,605) (52,274) (29,419) (343)
Cash used in investing
activities.................. (52,632) (145,293) (149,190) (120,621) (378,083)
Cash provided by financing
activities.................. 67,505 180,898 201,464 150,040 483,566
Pro forma interest expense,
net (5)(6).................. (38,611)
Pro forma net loss (5)........ (102,152)
Pro forma basic and diluted
loss per common share (5)... (1.03)
Pro forma average common
shares outstanding (5)...... 99,250
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------
1994 1995 1996 1997 1998
------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA (7):
Operating Networks............ 8 15 18 19 19
Route miles................... 880 3,207 5,010 5,913 6,968
Fiber miles................... 24,995 116,286 198,490 233,488 272,390
Voice grade equivalent
circuits.................... 39,002 158,572 687,001 1,702,431 2,953,454
Digital telephone switches.... -- 1 2 14 16
Employees..................... 239 508 673 714 919
Access lines.................. -- 493 2,793 16,078 78,036
</TABLE>
(table continued on next page)
27
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------
1994 1995 1996 1997 1998
------- -------- --------- ---------- ----------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..... $ -- $ -- $ -- $ -- $ 105,140
Marketable securities......... -- -- -- -- 250,857
Property, plant and equipment,
net......................... 53,139 199,005 323,161 415,158 494,158
Total assets.................. 60,604 214,963 341,480 438,077 904,344
Long-term debt (8)............ -- -- -- 75,475 574,940
Total stockholders' equity.... 33,749 179,589 294,937 300,390 207,651
</TABLE>
- ------------
(1) Includes expenses resulting from transactions with affiliates of $1.9
million in 1994, $6.5 million in 1995, $12.4 million in 1996, $17.1 million
in 1997 and $27.7 million in 1998. See note 7 to the Company's financial
statements appearing elsewhere in this prospectus for an explanation of
these expenses.
(2) In September 1997, the Company completed a series of transactions related to
its interests in the Hyperion Partnerships, a group of unconsolidated
telecommunication partnerships serving the New York area. In these
transactions, the Company sold its interests in the partnerships serving the
Buffalo and Syracuse markets in exchange for $7.0 million of cash and all of
the minority interests in the partnerships serving the Albany and Binghamton
markets that were not already owned by the Company. In connection with these
transactions, the Company recognized a gain of approximately $11.0 million.
(3) 'EBITDA' is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provision for income taxes. Accordingly, EBITDA is not intended to replace
operating income, net income, cash flow and other measures of financial
performance and liquidity reported in accordance with generally accepted
accounting principles. Rather, EBITDA is a measure of operating performance
and liquidity that you 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 prospectus may not be
comparable to similarly titled measures reported by other companies due to
differences in accounting policies.
(4) EBITDA Margin represents EBITDA as a percentage of revenues.
(5) The pro forma statement of operations data for the year ended December 31,
1998 gives effect to the Reconstitution, the Offering and the sale of the
Notes as if they had occurred at the beginning of 1998. The pro forma
amounts are presented for informational purposes only and do not necessarily
indicate the actual amounts that would have been reported if the
transactions had been consummated at that date, nor do they necessarily
indicate future results. The pro forma data excludes a one-time charge to
earnings of approximately $39.4 million, to record a net deferred tax
liability associated with the change from a limited liability company to a
corporation.
(6)Pro forma interest expense gives effect to:
the issuance of $400.0 million principal amount of the Notes at an
interest rate of 9.75% at the beginning of 1998 and
the use of $166.0 million of the net proceeds from the Offering to
repay subordinated indebtedness to affiliates of the Existing
Stockholders,
in each case as if the transactions had occurred at the beginning of 1998
assuming approximately 4.0% of the interest on the Notes would have been
capitalized under FASB Statement No. 34, 'Capitalization of Interest Costs.'
In addition, pro forma interest expense includes $1.25 million for the year
ended December 31, 1998 relating to the amortization of approximately $12.5
million of debt issuance costs over a ten-year period.
(7) Includes all managed properties including unconsolidated affiliates. The
unconsolidated affiliates consist of MetroComm in Columbus, Ohio and the
Albany and Binghamton, New York networks. Albany and Binghamton were wholly
owned at December 31, 1997. The Company has an agreement to acquire the 50%
interest in MetroComm that it does not currently own. See 'Business --
Business Strategy.'
(8) As of December 31, 1998, long-term debt consisted of (a) $400.0 million
principal amount of Notes and (b) $174.9 million principal amount of
subordinated loans payable to affiliates of the Existing Stockholders.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with the
Company's financial statements, including the notes, appearing elsewhere in this
prospectus. Certain information contained in the discussion and analysis set
forth below and elsewhere in this prospectus, including information with respect
to the Company's plans and strategy for its business and related financing,
includes forward-looking statements that involve risk and uncertainties. See
'Risk Factors' for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the
forward-looking statements contained in this prospectus.
OVERVIEW
The Company is a leading fiber facilities-based competitive local exchange
carrier in selected metropolitan markets across the United States. We offer a
wide range of business telephony services, primarily to medium-and large-sized
business customers. The business of the Company was commenced in 1993 by Time
Warner Cable and reflects the combined commercial telecommunications operations
under the ownership or management control of Time Warner Cable. These operations
consist of the commercial telecommunication operations of Time Warner and
TWE-A/N that were each acquired or formed in 1995, as well as the pre-existing
commercial telecommunication operations of TWE. All intercompany accounts and
transactions between the combined entities have been eliminated.
In connection with the reorganization of the Company that occurred on July
14, 1998, the assets and liabilities of the Company's business were contributed
to TWT LLC by affiliates of the Existing Stockholders and the Existing
Stockholders received all of the limited liability company interests of TWT LLC.
These interests were exchanged in connection with the Reconstitution for all of
the outstanding Class B Common Stock of New Time Warner Telecom. The Company
accounted for the reorganization and the Reconstitution at each of the Existing
Stockholders' historical cost basis of accounting and, except as noted below,
the reorganization and the Reconstitution had no effect on the Company's total
stockholders' equity, which has been presented on a consistent basis.
The primary change to the Company's operating structure since the
Reconstitution is that the management of the Company became directly accountable
to the board of directors, instead of to the management committee of TWT LLC. In
addition, all future net operating loss carryforwards can be utilized against
future earnings of the Company, concurrent with the change in the Company's
operating and legal structure from a limited liability company to a corporation.
Prior to the Reconstitution, all net operating loss carryforwards were allocated
to and utilized primarily by Time Warner and its affiliates. The Company has
not, and will not, be compensated for such losses. Also, in connection with the
Reconstitution, the Company recognized a one-time charge to earnings of
approximately $39.4 million, to record a net deferred tax liability associated
with the change from a limited liability company to a corporation.
The majority of the Company's revenues have been derived from the provision
of 'private line' and 'direct access' telecommunications services. Because the
Company has deployed switches in 16 of its 19 service areas as of December 31,
1998, management expects that a growing portion of its revenues will be derived
from providing switched services. The Company's customers are principally
telecommunications-intensive business end-users, long distance carriers,
internet service providers, wireless communications companies and governmental
entities. Such customers are offered a wide range of integrated
telecommunications products and services, including dedicated transmission,
local switched, data and video transmission services and internet services. In
addition, the Company benefits from its strategic relationship with Time Warner
Cable both through network facilities access and cost-sharing. The Company's
networks have been constructed primarily through the use of fiber capacity
licensed from Time Warner Cable. As of December 31, 1998, the Company operated
networks in 19 metropolitan areas that spanned 6,968 route miles, contained
272,390 fiber glass miles and offered service to 4,321 buildings. The Company's
19 service areas include 18 networks that are wholly owned and one that is owned
through a 50% joint venture and is not combined with the Company's financial
results. The Company's combined revenues were $55.4 million and $121.9 million
for the years ended December 31, 1997 and 1998, respectively. As of December 31,
1998, affiliates of the Existing Stockholders had contributed $555.8 million in
capital and $174.9 million in debt in the Company.
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The Company's revenues have been derived primarily from business telephony
services, including dedicated transmission, local switched, long distance, data
and video transmission services and certain high-speed dedicated internet access
services. Since its inception in 1993, the Company has experienced significant
growth in revenues and in the geographic scope of its operations. Management
believes an increasing portion of the Company's future growth will come from the
provision of local switched services as a result of the 16 switches deployed as
of December 31, 1998. The Company believes that switched services provide the
opportunity for higher incremental rate of return on capital investment than
those expected from transport services. The shift of the revenue growth to
switched services may cause the Company's revenues to become less predictable
since a portion of such services are billed to customers on a usage basis.
Dedicated transport customers are typically billed a flat monthly rate which
produces a less variable stream of revenues for the Company. Furthermore, it is
expected that the growth in the switched service offerings will expand the
Company's customer base by making more services available to customers that are
generally smaller than those who purchase dedicated transport services. These
smaller customers are also expected to be the principal users of the Company's
long distance services (which were launched in the third quarter of 1998) and
high-speed dedicated internet access services. The Company expects to experience
a higher churn rate for these customers than it has traditionally experienced
with transport services. The Company intends to minimize this churn for long
distance and internet services to smaller customers by offering such service
under minimum one-year contracts.
The Company plans to expand its revenue base by fully utilizing available
network capacity in its existing markets and by continuing to develop and
selectively tailor new services in competitively-priced packages to meet the
needs of its medium- and large-sized business customers. The Company plans on
selectively entering new markets and intends to have networks under construction
or operational in three additional cities by the end of 1999. The Company has
signed a combination of long-term dark fiber and conduit leases in Dallas, Texas
and Jersey City, New Jersey and plans to commence offering fiber based telephone
services in these metropolitan areas during the third quarter of 1999. The third
city has not yet been selected.
Operating expenses consist of costs directly related to the operation and
maintenance of the networks and the provision of the Company's services. This
includes the salaries and related expenses of operations and engineering
personnel as well as costs from the incumbent local exchange carriers and other
competitors for facility leases and interconnection. These costs have increased
over time as the Company has increased its operations and revenues. It is
expected that these costs (including the costs described below for which the
Company reimburses affiliates of Existing Stockholders) will continue to
increase, but generally at a slower rate than revenue growth.
Selling, general and administrative expenses consist of salaries and
related costs for employees other than those involved in operations and
engineering. Such expenses also include costs related to non-technical
facilities, sales and marketing, regulatory and legal costs. These costs have
increased over time as the Company has increased its operations and revenues.
The Company expects these costs to continue to increase as the Company's revenue
growth continues, but at a slower rate than revenue growth.
In the normal course of conducting its businesses, the Company engages in
various transactions with the Existing Stockholders and their affiliates,
generally on terms resulting from negotiation between the affected units that,
in management's view, result in reasonable allocations. In connection with the
reorganization that occurred on July 14, 1998, the Company entered into several
contracts with the Existing Stockholders or their affiliates in respect of
certain of these transactions. See 'Certain Relationships and Related
Transactions -- Certain Operating Agreements.' The Company's selling, general
and administrative expenses include charges allocated from the Existing
Stockholders or their affiliates for certain general and administrative
expenses, primarily including office rent and overhead charges for various
administrative functions performed by Time Warner Cable. These charges are
required to reflect all costs of doing business and are based on various
methods, which management believes result in reasonable allocations of such
costs that are necessary to present the Company's operations as if they are
operated on a stand alone basis. In addition, the Company licenses the right to
use the majority of its fiber optic cable capacity from Time Warner Cable and
reimburses it for facility maintenance and pole rental costs. These costs are
included in the Company's operating expense. Finally, effective July 1, 1997
through July 14, 1998, all of the Company's financing requirements were funded
with loans from affiliates of the Existing Stockholders. These loans are
subordinated in right of payment to the Notes, bear interest (payable in kind)
at an annual rate equal to The Chase Manhattan Bank's prime lending rate as in
effect from time-to-time and mature on August 15, 2008. The Company believes
that this rate is comparable to
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rates that could have been obtained from unrelated third parties. The Existing
Stockholders and their affiliates are not obligated to make additional equity
investments in or loans to the Company.
The Company expects that any net proceeds of the Offering remaining after
repayment of up to $166.0 million of subordinated indebtedness to affiliates of
the Existing Stockholders, together with the net proceeds received from the sale
on July 21, 1998, of $400.0 million principal amount of the Notes and internally
generated funds, will provide sufficient funds for the Company to expand its
business as currently planned, pay interest on the Notes and to fund its
currently expected working capital needs through the second quarter of 2000.
After that, the Company expects to require additional financing. However, in the
event that the Company's plans or assumptions change or prove to be inaccurate,
or if the Company consummates acquisitions or joint ventures, the Company may be
required to seek additional capital sooner than currently anticipated.
The Company has not historically, and does not currently, generate positive
operating cash flow. However, for the year ended December 31, 1998, 16 of the
Company's 19 service areas generated positive operating cash flow before
corporate allocations and the Company, as a whole, expects to begin generating
positive EBITDA during the second quarter of 1999. The following comparative
discussion of the results of financial condition and results of operations of
the Company includes an analysis of changes in revenues and EBITDA.
The Company has had and will continue to have significant capital
expenditures. These expenditures pertain to the historical construction and
expansion of the networks and to the future expansion of the existing networks
as well as the construction of new networks.
RESULTS OF OPERATIONS
The following table sets forth certain combined statement of operations
data of the Company, in thousands of dollars and expressed as a percentage of
revenues, for each of the periods presented. This table should be read together
with the Company's financial statements, including the notes, appearing
elsewhere in this prospectus:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- -----------------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Dedicated transport services..................... $ 20,362 85.1% $ 44,529 80.4% $ 84,024 68.9%
Switched services................................ 3,555 14.9 10,872 19.6 37,848 31.1
-------- -------- -------- -------- -------- -----
Total revenues............................... 23,917 100.0 55,401 100.0 121,872 100.0
Costs and expenses:
Operating (1).................................... 25,715 107.5 40,349 72.8 67,153 55.1
Selling, general and administrative (1).......... 60,366 252.4 54,640 98.6 77,401 63.5
Depreciation and amortization (1)................ 22,353 93.5 38,466 69.4 50,717 41.6
-------- -------- -------- -------- -------- -----
Total costs and
expenses................................... 108,434 453.4 133,455 240.8 195,271 160.2
Operating loss....................................... (84,517) (353.4) (78,054) (140.8) (73,399) (60.2)
Gain on disposition of
investments (2).................................... -- -- 11,018 19.9 -- --
Equity in income (losses) of unconsolidated
affiliates......................................... (1,547) (6.5) (2,082) (3.8) 127 .1
Interest income...................................... -- -- -- -- 9,731 8.0
Interest and other, net (1).......................... (52) (.2) (1,538) (2.8) (29,198) (24.0)
-------- -------- -------- -------- -------- -----
Net loss............................................. $(86,116) (360.1)% $(70,656) (127.5)% $(92,739) (76.1)%
-------- -------- -------- -------- -------- -----
-------- -------- -------- -------- -------- -----
Basic and diluted loss per common share.............. $ (1.06) $ (.87) $ (1.14)
Average common shares outstanding.................... 81,250 81,250 81,250
EBITDA (3)........................................... $(62,164) (259.9)% $(39,588) (71.5)% $(22,682) (18.6%)
Cash provided (used) by operations................... (52,274) -- (29,419) -- (343) --
Cash used in investing activities.................... (149,190) -- (120,621) -- (378,083) --
Cash provided by financing activities................ 201,464 -- 150,040 -- 483,566 --
</TABLE>
- ------------
(1) Includes expenses resulting from transactions with affiliates of $12.4
million in 1996, $17.1 million in 1997 and $27.7 million in 1998.
(2) In September 1997, the Company completed a series of transactions related to
its interests in the Hyperion Partnerships, a group of unconsolidated
telecommunication partnerships serving the New York area. In these
transactions, the Company sold its interests in the partnerships serving the
Buffalo and Syracuse markets in exchange for $7.0 million of cash and all of
the minority interests in the partnerships serving the Albany and Binghamton
markets that were not already owned by the Company. In connection with these
transactions, the Company recognized a gain of approximately $11.0 million.
(footnotes continued on next page)
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(footnotes from previous page)
(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
performance and liquidity reported in accordance with generally accepted
accounting principles. Rather, EBITDA is a measure of operating performance
and liquidity that you 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 prospectus may not be
comparable to similarly titled measures reported by other companies due to
differences in accounting policies.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased $66.5 million, or 120.0%, to $121.9 million
for the year ended December 31, 1998, from $55.4 million in 1997. Revenues from
the provision of dedicated transport services increased $39.5 million, or 88.7%,
to $84.0 million for the year ended December 31, 1998, from $44.5 million in
1997. Switched service revenue increased $27.0 million, or 248.1%, to $37.8
million for the year ended December 31, 1998, from $10.9 million in 1997. The
increase in revenues from dedicated transport services primarily reflects growth
of services and new products offered in existing markets. The increase in
switched services resulted from the offering of services in new markets and the
growth of services in existing markets, including reciprocal compensation.
Reciprocal compensation represented 8.3% and 8.6% of total revenues for the
years ended December 31, 1998 and 1997 respectively. At December 31, 1998, the
Company offered dedicated transport services in 18 consolidated metropolitan
areas, 16 of which also offered switched services, as compared to offering
dedicated transport services in 18 consolidated metropolitan areas, 14 of which
also offered switched services at December 31, 1997. The consolidated
metropolitan areas do not include MetroComm AxS, L.P., a 50% owned entity of the
Company.
Operating Expenses. Operating expenses increased $26.8 million, or 66.4%,
to $67.2 million for the year ended December 31, 1998, from $40.3 million in
1997. The increase in operating expenses was primarily attributable to the
Company's expansion of its business, principally switched services, and the
ongoing development of existing markets resulting in higher local exchange
carrier charges for circuit leases and interconnection and higher technical
personnel costs. As a percentage of revenues, operating expenses decreased to
55.1% in 1998 from 72.8% in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $22.8 million, or 41.7%, to $77.4 million for
the year ended December 31, 1998, from $54.6 million in 1997. The increase in
selling, general and administrative expenses was primarily attributable to
higher direct sales costs associated with the increase in revenues, higher
property taxes, an increase in consulting expenses relating to local regulatory
matters, the implementation of new billing and system software, higher data
processing costs and an increase in the provision for doubtful accounts related
to the increase in revenue. As a percentage of revenues, selling, general and
administrative expenses decreased to 63.5% in 1998 from 98.6% in 1997.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $12.2 million, or 31.8%, to $50.7 million for the year ended
December 31, 1998, from $38.5 million in 1997. The increase in depreciation and
amortization expense was primarily attributable to higher capital expenditures
related to the ongoing construction and expansion of the Company's
telecommunications networks in both 1997 and 1998. As a percentage of revenues,
depreciation and amortization expenses decreased to 41.6% in 1998, from 69.4% in
1997.
EBITDA. The EBITDA loss for the year ended December 31, 1998 decreased
$16.9 million, or 42.7%, to a loss of $22.7 million in 1998, from a loss of
$39.6 million in 1997. This improvement was primarily the result of increased
revenues due to the Company's expansion of local telecommunications networks in
new and existing markets and growth of the Company's customer base, partially
offset by higher operating expenses in
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support of the larger customer base, and higher selling, general and
administrative expenses required to support the expansion.
Interest Expense. Effective July 1, 1997 through July 14, 1998, all of the
Company's financing requirements were funded with loans from affiliates of the
Existing Stockholders. On July 21, 1998, the Company issued $400.0 million in
Notes. Interest expense relating to these loans and Notes totaled $29.2 million
for the year ended December 31, 1998, an increase of $27.7 million compared to
1997.
Income Taxes. On a pro forma basis, had the Company been operating as a
corporation on a stand-alone basis, for the year ended December 31, 1998, net
income tax benefits would have increased $16.4 million, or 57.7%, to $44.8
million, from $28.4 million for the same period in 1997. The net income tax
benefits would have been fully offset by corresponding increases in the
valuation allowance due to the uncertainty of realizing the benefit for tax
losses on a separate return basis. On a pro forma basis, had the Company been
operating as a corporation on a stand alone basis, the Company would have had
net operating loss carryforwards. However, the Company, which operated as a
partnership for tax purposes during the periods presented in this prospectus,
has no net operating loss carryforwards for tax purposes because those losses
were primarily allocated to and utilized by Time Warner and its affiliates. The
Company has not, and will not, be compensated for such losses.
Net Loss. Net loss increased $22.1 million, or 31.3%, to $92.7 million for
the year ended December 31, 1998, from a net loss of $70.7 million in 1997. This
increase resulted from higher depreciation and amortization expenses relating to
the Company's expansion of telecommunications networks in new and existing
markets, as well as interest expense relating to the subordinated loans payable
to affiliates of the Existing Stockholders and the Notes.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues increased $31.5 million, or 131.6%, to $55.4 million in
1997, from $23.9 million in 1996. Revenues from the provision of dedicated
transport services increased $24.1 million, or 118.7%, to $44.5 million in 1997,
from $20.4 million in 1996. Revenues from dedicated transport service increased
115.9% in those markets in which dedicated transport services were offered as of
December 31, 1996. Switched service revenues increased $7.3 million, or 205.8%,
to $10.9 million in 1997, from $3.6 million in 1996. Switched services revenues
increased 183.9% in those markets in which switched services were offered as of
December 31, 1996. The increase in revenues from dedicated transport services
primarily reflected growth of services offered in existing markets. The increase
in switched services resulted from the offering of services in new markets and
the growth of services in existing markets, including reciprocal compensation.
Reciprocal compensation represented 8.6% and 7.4% of total revenues for the
years ended December 31, 1997 and 1996, respectively. At December 31, 1997, the
Company offered dedicated transport services in 18 consolidated metropolitan
areas, 14 of which also offered switched services, as compared to offering
dedicated transport services in 15 consolidated metropolitan areas, 2 of which
also offered switched services at December 31, 1996.
Operating Expenses. Operating expenses increased $14.6 million, or 56.9%,
to $40.3 million in 1997, from $25.7 million in 1996. The increase in operating
expenses was primarily attributable to the Company's expansion of its business,
principally switched services, and the ongoing development of existing markets
resulting in higher technical personnel costs, higher local exchange carrier
charges for circuit leases and interconnection and higher data processing costs.
As a percentage of revenues, operating expenses decreased to 72.8% in 1997 from
107.5% in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $5.8 million, or 9.5%, to $54.6 million in
1997, from $60.4 million in 1996. The decrease in selling, general and
administrative expenses was primarily attributable to the absence of a $5.5
million charge recorded in 1996 to terminate certain employees as a result of
the Company's reorganization at the end of 1996 as well as the on-going cost
reduction due to lower employee headcount, partially offset by higher direct
sales costs associated with the increase in revenues. As a percentage of
revenues, selling, general and administrative expenses decreased to 98.6% in
1997 from 252.4% in 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $16.1 million, or 72.1%, to $38.5 million in 1997, from $22.4
million in 1996. The increase in depreciation and amortization expense was
primarily attributable to higher capital expenditures related to the ongoing
construction and
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expansion of the Company's telecommunications networks in both 1997 and 1996. As
a percentage of revenues, depreciation and amortization expenses decreased to
69.4% for 1997 from 93.5% for the same period in 1996.
Gain on Disposition of Investments. In September 1997, the Company
completed the Hyperion Transactions. In connection with these transactions, the
Company recognized a gain of approximately $11.0 million.
EBITDA. The EBITDA loss in 1997 decreased $22.6 million, or 36.3%, to $39.6
million, from a loss of $62.2 million in 1996. This improvement was primarily
the result of increased revenues due to the Company's expansion of local
telecommunications networks in new and existing markets and growth of the
Company's customer base, partially offset by higher operating expenses in
support of the larger customer base.
Interest and Other, Net. Effective July 1, 1997 all of the Company's
financing requirements were funded with loans from affiliates of the Existing
Stockholders. Interest expense relating to these loans totaled approximately
$1.5 million in 1997.
Income Taxes. On a pro forma basis, had the Company been operating as a
corporation on a stand-alone basis, net income tax benefits would have decreased
by $6.2 million, or 17.9%, to $28.4 million in 1997, from $34.6 million in 1996.
These net income tax benefits would have been fully offset by corresponding
increases in the valuation allowance due to the uncertainty of realizing the
benefit for tax losses on a separate return basis.
Net loss. Net loss decreased $15.4 million, or 18.0%, to $70.7 million in
1997, from a net loss of $86.1 million in 1996. This improvement principally
resulted from the one-time $11.0 million gain resulting from the Hyperion
Transactions and from increased revenues generated by the Company's expanded
networks, partially offset by increased operating and depreciation and
amortization expenses relating to the Company's expansion of telecommunications
networks in new and existing markets.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. For the year ended December 31, 1998, the Company's cash used
in operations was $343,000 as compared to $29.4 million for the year ended
December 31, 1997. This decrease in cash used in operations of $29.1 million
principally resulted from lower EBITDA losses and working capital requirements
in 1998. The Company expects to continue to have operating cash flow
deficiencies for the near future as it develops and expands its business.
For the year ended December 31, 1997, the Company's cash used in operations
decreased to $29.4 million from $52.3 million for the year ended December 31,
1996. This decrease in cash used in operations of $22.9 million principally
resulted from lower EBITDA losses during 1997.
Cash used in investing activities increased $257.5 million to $378.1
million in 1998, as compared to $120.6 million in 1997. The increase was
primarily due to higher purchases of marketable securities of $286.4 million.
The Company did not receive any proceeds from the sale of investments in 1998.
Cash used in investing activities decreased $28.6 million to $120.6 million
in 1997, as compared to $149.2 million in 1996. This decrease resulted
principally from lower capital expenditures due to a slower rate of expansion
and $7.0 million of cash proceeds received in 1997 relating to the Hyperion
Transactions. As discussed more fully above, the Company has made substantial
capital expenditures in order to develop and expand its business.
Cash provided by financing activities in 1998 reflected the receipt of
interest bearing subordinated loans from affiliates of the Existing Stockholders
amounting to $96.1 million and net proceeds from the sale of the Notes of $387.5
million. Prior to July 1, 1997, the Company's cash flow deficiencies were
entirely funded by non-interest bearing capital contributions from affiliates of
the Existing Stockholders. In 1997, cash provided by financing activities
reflected the receipt of interest bearing loans from affiliates of the Existing
Stockholders of $73.9 million, and net capital contributions from affiliates of
the Existing Stockholders of $76.1 million. The total increase in cash provided
by financing activities of $333.5 million was primarily due to the proceeds from
the sale of the Notes.
Cash provided by financing activities reflected the receipt of non-interest
bearing capital contributions from affiliates of the Existing Stockholders to
fund the Company's cash flow deficiencies through June 30, 1997. Effective July
1, 1997 through July 14, 1998, all of the Company's financing requirements were
funded with interest-bearing loans from affiliates of the Existing Stockholders.
The loans from affiliates of the Existing
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Stockholders are subordinated in right of payment to the Notes, bear interest
(payable in kind) at an annual rate equal to The Chase Manhattan Bank's prime
lending rate as in effect from time-to-time and mature on August 15, 2008, one
month after the maturity of the Notes. The aggregate of net capital
contributions and loans from affiliates of the Existing Stockholders decreased
$51.5 million to $150.0 million in 1997 as compared to $201.5 million in 1996.
This decrease was primarily due to lower cash funding requirements principally
due to operating cash flow associated with the Company's expansion of its
customer base and services in new and existing markets and lower capital
expenditure requirements.
Financing. Historically, the Company did not maintain cash balances since
all the Company's funding requirements were provided by affiliates of the
Existing Stockholders. The proceeds from the Offering after repayment of
subordinated indebtedness to affiliates of the Existing Stockholders, together
with the net proceeds from the sale of the Notes and cash flow from operations,
are expected to fund the Company's future cash requirements through the second
quarter of 2000. The Existing Stockholders and their affiliates are not under
any obligation to make any additional equity investments in or loans to the
Company. At a future date, the Company may negotiate a bank credit facility to
provide it with working capital and enhance its financial flexibility. There can
be no assurance that such financing will be available on terms acceptable to the
Company or at all.
The development of the Company's business and the installation and
expansion of the Company's communications networks, combined with the
development and operation of the Company's network operations center, have
resulted in substantial capital expenditures. These capital expenditures, as
well as the Company's historical operating losses, have resulted in substantial
negative cash flow for the Company since inception in 1993. Funding of this
historical cash flow deficiency has been primarily accomplished through the
receipt of capital contributions from affiliates of the Existing Stockholders
through June 30, 1997. From July 1, 1997 through July 14, 1998, the deficiency
has been funded through interest bearing loans from affiliates of the Existing
Stockholders. Thereafter, the Company expects cash flow deficiencies to be
funded with the proceeds of the Offering, the proceeds of the Notes and future
financings as described above. In addition, the Notes provide that the proceeds
of an equity offering such as the Offering may be used to repay subordinated
indebtedness to affiliates of the Existing Stockholders. The amounts due to
affiliates of the Existing Stockholders, including interest accrued on those
amounts, under this funding arrangement was $174.9 million and $75.5 million as
of December 31, 1998 and 1997, respectively.
On July 21, 1998, the Company issued $400.0 million principal amount in
Notes. Interest on the Notes is payable semiannually on January 15 and July 15.
The net proceeds from the sale of the Notes were immediately invested in short
term investments.
The Company estimates that net proceeds from the sale of 18,000,000 shares
of Class A Common Stock in the Offering are approximately $166.0 million,
approximately $191.2 million if the U.S. underwriters exercise their
over-allotment option, assuming an initial public offering price of $10 per
share, the midpoint of the range set forth on the cover page of this prospectus,
after deducting underwriting discounts and estimated expenses of the Offering.
The Company intends to use the net proceeds of the Offering primarily to
repay outstanding subordinated indebtedness to affiliates of the Existing
Stockholders, which was $174.9 million at December 31, 1998 and $178.3 million
at March 31, 1999. Any remaining proceeds will be used for general corporate and
working capital purposes, which may include acquisitions and joint ventures.
Pending these uses, the net proceeds of the Offering will be invested in short
term, money market instruments. While the primary use of such remaining
proceeds, together with the proceeds from the sale of the Notes, will be to fund
ongoing business operations of the Company's subsidiaries which own and operate
its networks, the Company intends to continue to evaluate potential acquisitions
and joint ventures. The Company has no definitive agreement with respect to any
material acquisition or joint venture, although from time to time it may discuss
and assess opportunities with other companies, including affiliates of the
Existing Stockholders, on an ongoing basis.
The Company expects that its future cash requirements will principally be
for working capital, capital expenditures and to fund its operating losses. The
Company expects that the net proceeds of the Offering after the repayment of
subordinated loans to affiliates of the Existing Stockholders, together with the
net proceeds of $387.5 million received from the sale of the Notes and
internally generated funds, will provide sufficient funds for the Company to
meet the Company's expected capital and liquidity needs to expand its business
as currently planned, pay interest on the Notes and to fund its currently
expected losses through the middle of 2000. After
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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 or equity financing by the Company or its
subsidiaries or other financing arrangements.
Capital Expenditures. The facilities-based telecommunications service
business is a capital intensive business. The Company's operations have required
and will continue to require substantial capital investment for:
the purchase and installation of switches, electronics, fiber and other
technologies in existing networks and in additional networks to be
constructed in new service areas; and
the acquisition and expansion of networks currently owned and operated by
other companies.
The Company's expected capital expenditures for general corporate and
working capital purposes include:
expenditures with respect to the Company's management information system
and corporate service support infrastructure and
operating and administrative expenses with respect to new networks and
debt service.
The Company plans to make substantial capital investments in connection
with the deployment of switches in all of its existing networks, and plans to
construct and develop new networks. Expansion of the Company's networks will
include the geographic expansion of the Company's existing operations and will
consider the development of new markets. In addition, the Company may acquire
existing networks in the future.
During the year ended December 31, 1998, capital expenditures were $126.0
million, a decrease of $1.3 million from the year ended December 31, 1997. 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 1,055 route miles of fiber. During the year ended December 31, 1997,
capital expenditures were $127.3 million, a decrease of $17.5 million from
$144.8 million in 1996. The decrease was principally due to a slower rate of
expansion into new markets in 1997. Based on historic capital requirements for
network construction in relation to sales volumes and network expansion plans,
the Company anticipates it will commit approximately $395.0 million over the
next two years to fund its capital expenditures. See 'Certain Relationships and
Related Transactions -- Certain Operating Agreements.'
YEAR 2000
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of time-sensitive information by its computerized
information systems. Year 2000 issues may arise if computer programs have been
written using two digits (rather than four) to define the applicable year. In
such case, programs that have time-sensitive logic may recognize a date using
'00' as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. The Company utilizes a number of computer
programs across its entire operation. Year 2000 issues could impact the
Company's information systems as well as computer hardware and equipment that is
part of its telephony network such as switches, termination devices and SONET
rings that may contain embedded software or 'firmware.'
The Company's exposure to potential Year 2000 problems exists in two
general areas: technological operations in the sole control of the Company, and
technological operations dependent in some way on one or more third parties. The
majority of the Company's exposure to potential Year 2000 problems is in the
latter area where the situation is much less within the Company's ability to
predict or control. The Company's business is heavily dependent on 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
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towards solutions to Year 2000 problems, such as suppliers of software systems
for billing, ordering and other key business operations. See 'Risk Factors -- We
expect to depend on third party vendors for information systems.'
The Company has developed a Year 2000 action plan to address identification
and assessment of potential Year 2000 issues, remediation, testing and
implementation of any corrected software or firmware. The Company has completed
the first phase of such action plan which involved making the Company's internal
organizations aware of Year 2000 issues and assigning responsibility internally
for the Year 2000 readiness program. The Company has also completed the
assessment phase of its plan which involves an inventory and review of software
and equipment used in the Company's operations in order to determine the Year
2000 readiness of that software and equipment and the identification of
remediation measures that could be taken on a timely basis to alter, validate or
replace time-sensitive and date-sensitive software and equipment.
In the course of the assessment process the Company determined that all of
the equipment comprising its telephony networks depends on software or firmware
that is already represented by its vendor to be Year 2000 ready. The Company
conducted its own validation testing of that equipment, including its switches,
to verify the vendor's representations. On the basis of the test results, the
Company believes that such equipment will continue to accurately recognize and
process date information on and after January 1, 2000. The Company has developed
test and verification plans for the remainder of its equipment, applications and
systems.
The Company has already begun implementing certain remedial measures and
intends to complete its remediation efforts with respect to technological
operations within its sole control prior to any anticipated material impact on
its computerized information systems. The Company's early Year 2000 planning
took into account the Company's plans to replace, in the normal course of
business in 1999, many of the computer programs used by key business operations
and its financial systems. The specifications for these new systems are all Year
2000 compliant but would require validation testing by the Company to verify the
Year 2000 readiness of those systems. The Company anticipates that
implementation of some back office systems for ordering, workflow management,
service design and trouble management may be delayed in implementation so that
it may not be possible to test these systems before the fourth quarter of 1999.
The Company's Year 2000 action plan currently includes a moratorium on the
installation of new hardware or software systems during the last 60 to 90 days
of 1999 in order to avoid the possible creation of new Year 2000 issues during
that period and to allow the Company's information technologies personnel to
focus on contingency planning. Therefore, the implementation of these new
systems may not occur until the first quarter of 2000. As a result, the Company
is in the process of testing and remediating the back office systems that would
have been replaced by the new systems and plans to complete validation testing
of the remediated systems during the third quarter of 1999.
Costs of addressing potential Year 2000 problems have not been material to
date and, based on preliminary information gathered to date from the Company,
its customers and vendors, are not currently expected to have a material adverse
impact on the Company's financial position, results of operations or cash flows
in future periods.
Total 1998 costs incurred with respect to Year 2000 issues were
approximately $115,000. Based on the Company's current Year 2000 action plan,
the Company expects that 1999 costs will be approximately $2.0 million. The
majority of the estimated 1999 costs represent the costs of personnel who will
conduct verification testing of equipment and software, costs of out-sourcing
the testing of some existing software systems, test equipment and costs for
replacement of certain personal computers. These costs do not include the cost
of replacing systems, the replacement of which is not being accelerated due to
Year 2000 issues, or the costs of software maintenance contracts that the
Company would have entered into in the normal course of business. In some cases,
Year 2000 compliant upgrades to third party software systems licensed to the
Company are being supplied under these maintenance agreements. However, the
Company's Year 2000 costs could exceed these estimates if third party equipment
or software do not perform as represented, additional unanticipated Year 2000
issues arise or planned remediation efforts are unsuccessful.
The Company is in the process of developing specific contingency plans in
the event that unanticipated problems arise from Year 2000 issues, including
plans for extra staffing and surveillance of operations at year end,
prioritization of systems for restoral and manual work-arounds for automated
processes. As part of this process, the Company is examining its existing
emergency procedures to determine how those procedures could meet the demand of
failures resulting from Year 2000-related problems. The Company also plans to
conduct
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tests of its contingency plans by simulating interruptions in a test laboratory
which reproduces the Company's switch and transport environments.
Management believes that it has established a sound program to resolve
significant Year 2000 issues within its sole control in a timely manner and that
the Company has made satisfactory progress in addressing issues dependent on
third parties. However, the Company's Year 2000 program is not yet complete. The
Company's failure to correctly identify and remediate all Year 2000 issues
within its control or the failure of suppliers or other third parties with which
the Company interconnects to address their Year 2000 issues could pose various
risks to the Company. Those risks may include the possibility of interruptions
to the Company's basic services and difficulties in passing traffic to or
receiving traffic from other carriers, detecting and resolving trouble in the
networks, provisioning new service to customers, billing customers and other
carriers and collecting revenues. These impacts as well as disruptions
experienced by other parties could result in material adverse consequences to
the Company, including loss of revenue and substantial unanticipated costs, the
amounts of which cannot reasonably be estimated at this time.
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on the Company.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest income and expense are sensitive to changes in the
general level of interest rates. In this regard, changes in interest rates can
affect the interest earned on the Company's cash equivalents and marketable
securities as well as interest paid on its borrowings. To mitigate the impact of
fluctuations in interest rates, the Company generally enters into fixed rate
investing and borrowing arrangements.
The following table provides information at December 31, 1998 about the
Company's financial instruments that are sensitive to changes in interest rates.
For investment securities and debt obligations, the table presents principal
cash flows and related weighted-average interest rates expected by the maturity
dates. The Company also has financial instruments included in the liabilities
portion of its balance sheet. These liabilities are comprised of the Notes,
which are fixed rate debt at 9 3/4% and mature in 2008, and the subordinated
loans payable to affiliates of the Existing Stockholders, which are variable
rate debt based on the Chase Manhattan prime rate, which was 7 3/4% at December
31, 1998. The weighted-average variable rate on the Company's long term debt is
based on the Chase Manhattan Bank's prime rate. The carrying amounts for the
following financial instruments approximate fair market value at December 31,
1998, except for the Notes for which the fair market value is estimated to be
$422 million based on market prices.
<TABLE>
<CAPTION>
1999 2000 TOTAL
-------- ------- --------
(THOUSANDS, UNLESS OTHERWISE NOTED)
---------------------------------
<S> <C> <C> <C>
Assets:
Marketable securities:
Shares of money market mutual funds...................................... $ 3,338 -- $ 3,338
Average interest rate.................................................. 4.62% --
Certificates of deposit with banks....................................... $ 62,014 -- $ 62,014
Average interest rate.................................................. 5.65% --
Corporate debt securities................................................ $262,479 $19,750 $282,229
Average interest rate.................................................. 5.59% 5.69%
Foreign government debt securities....................................... $ 5,008 -- $ 5,008
Average interest rate.................................................. 5.99% --
</TABLE>
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BUSINESS
OVERVIEW
The Company is a leading fiber facilities-based competitive local exchange
carrier in selected metropolitan areas across the United States, offering a wide
range of business telephony services, primarily to medium- and large-sized
business customers and other carriers. The Company's customers are principally
telecommunications-intensive business end-users, long distance carriers,
internet service providers, wireless communications companies and governmental
entities. Such customers are offered a wide range of integrated
telecommunications services, including dedicated transmission, local switched,
long distance, data and video transmission services and certain Internet
services. The Company has deployed switches in 16 of its 19 service areas as of
December 31, 1998, and management expects that a growing portion of the
Company's revenues will be derived from providing switched services. In
addition, the Company benefits from its strategic relationship with Time Warner
Cable both through network facilities access and cost-sharing. As a result, the
Company's networks have been constructed primarily through licensing the use of
fiber capacity from Time Warner Cable. As of December 31, 1998, the Company
operated networks in 19 metropolitan areas that spanned 6,968 route miles,
contained 272,390 fiber glass miles and offered service to 4,321 buildings.
Combined revenues for the Company, which have historically been primarily
derived from private line services, grew by 120.0% for the year ended December
31, 1998 as compared to 1997.
The business of the Company was commenced in 1993 by Time Warner Cable,
originally to provide certain telephony services together with cable television.
In January 1997, the Company put in place a new management team that is
implementing a business strategy focused exclusively on serving business
customers, rapidly providing switched services in all the Company's service
areas and expanding the range of business telephony services offered by the
Company.
The Company believes that the 1996 Act and certain state regulatory
initiatives provide increased opportunities in the telecommunications
marketplace by opening all local service areas to competition and requiring
incumbent local exchange carriers to provide increased direct interconnection.
According to the FCC, in 1997 the total revenues for the telecommunications
industry amounted to approximately $230.0 billion, of which approximately $130.0
billion was local service and approximately $100.0 billion was long distance. To
capitalize on these significant opportunities, the Company has accelerated its
deployment of high capacity digital switches in its service areas and is
aggressively marketing switched services to medium- and large-sized businesses.
BUSINESS STRATEGY
The Company's primary objective is to be a leading competitive local
exchange carrier in its existing and future service areas offering medium- and
large-sized businesses superior telecommunications services through advanced
networks. The key elements of the Company's business strategy include the
following:
Leverage Existing Fiber Optic Networks. The Company has designed and built
its networks to serve geographic locations where management believes there are
large numbers of potential customers. As of December 31, 1998, the Company
operated networks that spanned over 6,968 route miles and contained over 272,390
fiber glass miles. The Company's highly concentrated networks have yet to be
fully exploited and provide the capacity to serve a substantially larger base of
customers.
Management believes that the Company's extensive fiber network capacity
allows it to:
increase orders substantially from new and existing customers while
incurring significantly lower capital expenditures and operating expenses
than non-fiber facilities based carriers;
emphasize its fiber facilities-based services rather than resales of
network capacity of other providers; and
provide better customer service because the Company can exert greater
control over its services than its competitors that depend on off-net
facilities.
Expand Switched Services. The Company provided a broad range of switched
services in 16 of its 19 service areas as of December 31, 1998, and plans to
provide switched services in Albany and Greensboro by the end of the third
quarter of 1999, and in Binghamton in 2000. For the year ended December 31,
1998, combined
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revenues from switched service grew by 248.1% as compared to the same period in
1997. Because the demand for switched services is greater than for dedicated
transport services and the Company has been rapidly installing switches in its
markets, management expects the Company to derive a growing portion of its
revenues from switched services. The Company utilizes high capacity digital
5-ESS switches manufactured by Lucent.
Expand Data Services Capacity. Data services are becoming increasingly
important to the Company's target customers. In particular, the Company believes
that the demand for high speed, high quality local area network and wide area
network connectivity, virtual private networks, website hosting, electronic
commerce, intranet and internet access and transport services is growing
rapidly. During the second quarter of 1999, the Company will have deployed a
fully managed, fiber-based nationwide infrastructure to ensure that its
long-haul data products provide the capacity and high quality level of service
increasingly demanded by its customers.
Target Medium- and Large-Sized Business Customers. The Company operates
networks in metropolitan areas that have high concentrations of medium- and
large-sized businesses. Such businesses tend to be telecommunications-intensive
and are more likely to seek the greater reliability provided by an advanced
network such as the Company's. Thus, management believes that significant
economies of scale may be achieved by focusing and intensifying its sales and
marketing efforts on such businesses as they are potentially high volume users
of the Company's services. To drive revenue growth in these markets, the Company
is aggressively expanding its direct sales force to focus on such business
customers.
Interconnect Service Areas. The Company groups the 19 service areas in
which the Company currently operates into six geographic clusters across the
United States. See ' -- Telecommunications Networks and Facilities --
Telecommunications Networks.' The Company plans to interconnect each service
area within a cluster with its own broadband, fiber optic facilities or with
facilities licensed from Time Warner Cable and/or third parties. This is
expected to increase its revenue potential by addressing customers' regional
long distance voice, data and video requirements. The Company began
interconnecting its service areas in 1998.
Utilize Strategic Relationships with Time Warner Cable. The Company has
benefited from and continues to leverage its relationships with Time Warner
Cable, the largest multiple system cable operator in the U.S., by licensing and
sharing the cost of digital fiber optic facilities. This licensing arrangement
allows the Company to benefit from Time Warner Cable's access to rights-of-way,
easements, poles, ducts and conduits. See 'Certain Relationships and Related
Transactions -- Certain Operating Agreements.' By leveraging its existing
relationship with Time Warner Cable, the Company believes that it can increase
revenues, benefit from existing regulatory approvals and licenses, derive
economies of scale in network costs and extend its existing networks in a rapid,
efficient and cost-effective manner. Furthermore, management believes that the
strong awareness and positive recognition of the 'Time Warner' brand name
significantly contributes to its marketing programs and sales efforts by
distinguishing it from its competitors.
Enter New Geographic Areas. The Company's strategy is to target
metropolitan areas possessing demographic, economic and telecommunications
demand profiles that it believes provide it with the potential to generate an
attractive economic return. Currently, the Company operates networks in a total
of 19 metropolitan areas and has announced plans to enter Dallas, Texas and
Jersey City, New Jersey by the third quarter of 1999, which will bring the total
to 21. Management plans to have networks in operation or under construction in
one additional service area by the end of 1999. See 'Certain Relationships and
Related Transactions -- Certain Operating Agreements.'
Continue Disciplined Expenditure Program. The Company increases operational
efficiencies by pursuing a disciplined approach to capital expenditures. This
capital expenditure program requires that prior to making any expenditure on a
project, the project must be expected to meet stringent financial criteria such
as minimum recurring revenue, cash flow margins and rate of return. In addition,
to control capital expenditures and share the risks of developing costly new
networks, management is considering establishing strategic alliances with other
telecommunications providers in the form of joint ventures and possible
co-branding marketing programs.
On May 4, 1999 the Company announced that it signed an agreement to acquire
the remaining 50% interest in MetroComm that it does not currently own. In
connection with the transaction, the Company will issue 2,190,308 shares of
Class A Common Stock to the former partners of MetroComm, representing
approximately 2% of the combined Class A Common Stock and Class B Common Stock
of the Company. The closing of the acquisition is subject to receipt of
antitrust clearance and completion of the Offering, as well as other closing
conditions.
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MARKET OPPORTUNITY
The Company believes that the 1996 Act and certain state regulatory
initiatives provide increased opportunities in the telecommunications
marketplace by opening all local markets to competition and requiring incumbent
local exchange carriers to provide increased direct interconnection. According
to the FCC, in 1997 the total revenues for the telecommunications industry
amounted to approximately $230.0 billion, of which approximately $130.0 billion
was local service and approximately $100.0 billion was long distance. To
capitalize on these significant opportunities, the Company accelerated its
deployment of high capacity digital switches in its markets and is aggressively
marketing switched services to its customers.
A number of important trends are reshaping the U.S. communications
industry, creating substantial opportunities for competitive local exchange
carriers beyond capturing market share from incumbent local exchange carriers in
local exchange services. These trends include:
increasing customer demand for high speed, broadband services, such as
internet access and transport and personal computer- and internet
protocol-based applications,
the emergence of electronic commerce as a new paradigm for business
transactions and
continued consolidation among service providers to broaden their service
offerings and technical capabilities.
By leveraging customer relationships and bundling service offerings,
competitive local exchange carriers have begun to exploit a variety of
opportunities, including high speed internet access and transport, digital
subscriber lines, local area network and wide area network connectivity, managed
network services, virtual private networks, remote access, and electronic
commerce services. The Company believes that new entrants have an excellent
opportunity to establish themselves as leading providers of such value-added
services.
High-speed connectivity has become important to business due to the
dramatic increase in internet usage and the proliferation of personal computer-
and internet protocol-based applications. According to International Data
Corporation, an independent telecommunications and technology research company,
the number of internet users worldwide reached approximately 69 million in 1997
and is forecasted to grow to approximately 320 million by 2002. The popularity
of the internet with consumers has also driven the rapid growth in exploiting
the internet as a commercial medium, as businesses establish websites, corporate
intranets and extranets and implement electronic commerce applications to expand
their customer reach and improve their communications efficiency. International
Data Corporation estimates that the value of goods and services sold worldwide
through the internet will increase from $12 billion in 1997 to over $400 billion
in 2002. The Company believes that these applications are becoming increasingly
important to businesses of all sizes, making the availability of broadband
capacity, network quality, a value-added services portfolio and technical
capability an important competitive distinction among service providers.
SERVICES
The Company provides its customers with a wide range of telecommunications
services, including dedicated transmission, local switched, long distance, data
and video transmission services and high-speed dedicated internet access
services. The Company's dedicated services, which include private line and
special access services, use high-capacity digital circuits to carry voice, data
and video transmissions from point-to-point in multiple configurations. Switched
voice services offered by the Company use high-capacity digital switches to
route voice transmissions anywhere on the public switched telephone network. In
offering its dedicated transmission and switched services, the Company also
provides private network management and systems integration services for
businesses that require combinations of various dedicated and switched
telecommunications services. Data services provided by the Company allow
customers to create their own internal computer networks and access external
computer networks and the internet. The Company can provide its customers,
including companies in the media industry, with advanced video transport
services such as point-to-point, broadcast-quality video to major television
networks as well as to advertising agencies and other customers. Internet
services provided by the Company include dedicated internet access, website
hosting, transport and electronic commerce services for business customers and
local internet service providers.
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DEDICATED TRANSPORT SERVICES
The Company currently provides a complete range of dedicated transport
services with transmission speeds from 2.4 kilobits per second to 2.488 gigabits
per second to its long distance carriers and end-user customers. All products
and services can be used for voice, data, image and video transmission.
The Company offers the following dedicated transport links:
POP-TO-POP SPECIAL ACCESS. Telecommunications lines linking the points of
presence (POPs) of one long distance carrier or the points of presence of
different long distance carriers in a market, allowing the points of
presence to exchange transmissions for transport to their final
destinations.
END-USER/INTEREXCHANGE CARRIER SPECIAL ACCESS. Telecommunications lines
between an end-user, such as a large business, and the local points of
presence of its selected long distance carrier.
PRIVATE LINE. Telecommunications lines connecting various locations of a
customer's operations, suitable for transmitting voice and data traffic
internally.
TRANSPORT ARRANGEMENT SERVICE. Provides dedicated transport between local
exchange carrier central offices and customer designated points of
presence of a long distance carrier for transport of local exchange
carrier provided switched access or local exchange carrier provided
special access. This point-to-point service is available at DS1 or DS3
interfaces at both ends. DS1 and DS3 interfaces are standard North
American telecommunications industry digital signal formats that are
distinguishable by the number of binary digits transmitted per second, or
bit rate. DS1 has a bit rate of 1.544 megabits per second and DS3 has a
bit rate of 44.736 megabits per second.
The Company provides the following services that use high-capacity digital
circuits to carry voice, data and video transmissions from point to point in
flexible configurations involving different standardized transmission speeds and
circuit capacities:
broadcast video TV-1, which is the dedicated transport of broadcast
quality video signals;
STS-1, which is the full duplex, synchronous optical transmission of
digital data on synchronous optical network, or SONET, standards, which
eliminates the need to maintain and pay for multiple dedicated lines; and
private network transport service, which is a private, dedicated premium
quality service over fully redundant, diverse routed, SONET rings with
bandwidth that is dedicated and always available.
The transmission speeds and circuit capacities used for these services
include DS0, DS1, DS3 and SONET OC-N. DS0 is a standard North American
telecommunications industry digital signal format that has a bit rate of 64
kilobits per second.
SWITCHED SERVICES
The Company's switched services provide business customers with local
calling capabilities and connections to their long distance carriers. The
Company owns, houses, manages and maintains the switch used to provide the
services. The Company's switched services include the following:
BUSINESS ACCESS LINE SERVICE. This service provides voice and data
customers quality analog voice grade telephone lines for use at any time.
Business access line service provides customers with flexibility in
network configurations because lines can be added, deleted and moved as
needed.
TIME WARNER ACCESS TRUNKS. Time Warner access trunks provide communication
lines between two switching systems. These trunks are utilized by private
branch exchange, or PBX, customers which are customers that own and
operate a switch on their own premises. PBX customers use these trunks to
provide access to the local, regional and long distance telephone
networks. PBX customers may use either the Company's telephone numbers or
their incumbent local exchange carrier assigned telephone numbers.
Customer access to the Company's local exchange services is accomplished
by a DS1 digital connection or DS0 analog trunks between the customer's
PBX port and the Company's switching centers.
TIME WARNER LOCAL TOLL SERVICE. This service provides customers with a
competitive alternative to incumbent local exchange carrier service for
intraLATA toll calls. LATA refers to a geographic area
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identified by the FCC that was originally designated by a unique area
code. The Company's local toll service is a customized, high-quality local
calling plan available to business access line and Time Warner access
trunk customers. The Company works with customers to devise cost-saving
programs based on actual usage and calling patterns.
LOCAL TELEPHONE SERVICE. Local telephone service is basic local exchange
service which can be tailored to a customer's particular calling
requirements. Local telephone service includes operator and directory
assistance services, as well as an optional intraLATA toll plan.
SWITCHED ACCESS SERVICE. The connection between a long distance carrier's
POP and an end user's premises that is provided through the switching
facilities of a local exchange carrier are referred to as switched access
services. These services provide long distance carriers with a switched
connection to their customers for the origination and termination of long
distance telephone calls.
OTHER SERVICES. Other services offered by the Company include telephone
numbers, listings, customized calling features, voice messaging, hunting,
blocking services and two-way, simultaneous voice and data transmission in
digital formats over the same transmission line, which is an international
standard referred to as integrated services digital network or ISDN.
DATA TRANSMISSION SERVICES
The Company offers its customers a broad array of data transmission
services that enable customers to create their own internal computer networks
and access external computer networks and the internet. In 1996, the Company
introduced its native speed local area network inter-networking data service
which is used to connect workstations and personal computer users on one or more
local area networks. Native speed services avoid the bottleneck problems that
are frequently encountered with customary DS1 connections by providing the
customer with a circuit that matches the transmission speeds of its local area
network. The Company's local area network service provides dedicated circuits,
guaranteed transmission capacity and guaranteed bandwidth for virtually all
local area network applications. Users can share files and databases as if they
were all working on the same computer, or within the same local area network.
As companies and communications become more sophisticated, there is an
increased need for customer access to superior traffic management of sensitive
data, video and voice transmission within a single metropolitan area, or between
various company operations. The Company's switched data services offer
sophisticated switching technology and provide high standards in reliability and
flexibility while enabling users to reduce the costs associated with
interconnecting architecturally diverse information systems. The Company's data
service offerings support evolving high-speed applications, such as multimedia,
desktop video conferencing and medical imaging. The Company offers native speed
connections to both end-users as well as interexchange data carriers. The
Company's services allow users to interconnect both high speed and low speed
local area network environments and to benefit from flexible billing, as well as
detailed usage reports.
VIDEO TRANSMISSION SERVICES
The Company provides broadcast quality digital and analog video link
services to its video services customers, including media industry customers,
such as television networks, and advertising agencies. The Company's video
services include offering broadcast quality, digital channel transmissions that
can be provided on a point-to-point or point-to-multipoint basis.
INTERNET SERVICES
Late in 1998, the Company contracted with Internet Connect, Inc., a
regional internet service provider, to deploy a national fiber-based internet
protocol network connecting the Company's hub cities. By the end of the second
quarter of 1999, the network is expected to be operational in the 19 markets
that the Company currently serves. In April 1999, the Company acquired Internet
Connect, Inc. which became a wholly-owned subsidiary of the Company. Through
this subsidiary, the Company will manage its data network and new internet
products, including its Digital Subscriber Line or DSL, services. As part of the
consideration, the former owners of Internet Connect, Inc. received, in
connection with the Reconstitution, approximately 307,550 shares of Class A
Common Stock of the Company which will be released from escrow over a three year
period.
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LONG DISTANCE SERVICES
The Company began to offer basic long distance services in 1998 and intends
to offer additional services, such as toll free, calling card and international
gateways to Europe and the Pacific, targeting medium- and small-size business
customers. Generally, large businesses tend to obtain their long distance needs
directly from the major long distance carriers. The Company believes medium- and
small-size businesses are more likely to obtain their long distance services
from competitive local exchange carriers rather than the major long distance
carriers. As a result, management believes that such medium- and small-sized
end-users represent a potential customer base for developing a market for the
Company's long distance services. The Company purchases long distance capacity
under agreements with major long distance carriers that provide the Company
capacity at competitive rates for resale and all support and billing services.
The Company has negotiated a non-exclusive resale agreement with a long distance
carrier and may negotiate additional resale agreements with other long distance
carriers. Management believes that the offering of long distance services will
contribute to revenue growth with profitable margins and will also add strategic
sales and marketing value as a bundled product.
TELECOMMUNICATIONS NETWORKS AND FACILITIES
Overview. The Company uses the latest technologies and network
architectures to develop a highly reliable infrastructure for delivering
high-speed, quality digital transmissions of voice, data and video
telecommunications. The Company's basic transmission platform consists primarily
of optical fiber equipped with high capacity SONET equipment deployed in fully
redundant, self-healing rings. These SONET rings give the Company the capability
of routing customer traffic in both directions around the ring, thereby
eliminating loss of service in the event of a cable cut. The Company's networks
are designed for remote automated provisioning, which allows the Company to meet
customers' real time service needs. The Company extends SONET rings or point to
point links from rings to each customer's premises over its own fiber optic
cable and unbundled facilities obtained from incumbent local exchange carriers.
The Company also installs diverse building entry points where a customer's
security needs require such redundancy. The Company then places necessary
customer-dedicated or shared electronic equipment at a location near or in the
customer's premises to terminate the link.
The Company serves its customers from one or more central offices or hubs
strategically positioned throughout its networks. The central offices house the
transmission and switching equipment needed to interconnect customers with each
other, the long distance carriers and other local exchange networks. Redundant
electronics, with automatic switching to the backup equipment in the event of
failure, protects against signal deterioration or outages. The Company
continuously monitors system components from its network operations center and
proactively focuses on avoiding problems rather than merely reacting upon
failure.
The Company adds switched, dedicated and data services to its basic fiber
optic transmission platform by installing sophisticated digital electronics at
its central offices and nodes and at customer locations. The Company's advanced
Lucent 5-ESS digital telephone switches are connected to multiple incumbent
local exchange carriers and long distance carrier switches to provide the
Company's customers access to telephones in the local market as well as the
public switched telephone network. Similarly, in certain markets, the Company
provides asynchronous transfer mode, or ATM, switched and local area network
multiplexers at its customers' premises and in its central offices to provide
high speed local area network interconnection services.
The Company's strategy for adding customers is designed to maximize the
speed and impact of its marketing efforts while maintaining attractive rates of
return on capital invested to connect customers directly to its networks. To
initially serve a new customer, the Company may use various transitional links,
such as reselling a portion of an incumbent local exchange carrier's network.
Once the new customer's communications volume and product needs are identified,
the Company may build its own fiber optic connection between the customer's
premises and the Company's network to accommodate: (1) the customer's needs; and
(2) the Company's efforts to maximize return on network investment.
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Telecommunications Networks. The following chart sets forth information
regarding each of the Company's telecommunications networks as of December 31,
1998:
<TABLE>
<CAPTION>
Network Switch Commercial
Commercially Commercially Fiber Route Buildings MSA Business
Metropolitan Area Available Available(1) Miles(2) On-Net Lines(3)
- ------------------------------------ ------------- ------------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
NEW YORK REGION
Albany, New York.................... Jul. 95 Sep. 99(4) 42 16 302,130
Binghamton, New York................ Jan. 95 TBD 81 27 78,868
Manhattan, New York................. Feb. 96 Feb. 96 157 53 2,473,048
Rochester, New York................. Dec. 94 Feb. 95 366 91 368,522
Jersey City, New Jersey............. July 99(4) July 99(4) na na 203,312
SOUTHWEST REGION
Austin, Texas....................... Sep. 94 Apr. 97 284 89 374,200
Dallas, Texas....................... Sept. 99(4) Sept. 99(4) na na 1,095,916
Houston, Texas...................... Jan. 96 Sep. 97 471 153 1,262,601
San Antonio, Texas.................. May 93(5) Nov. 97 524 151 431,989
SOUTHEAST REGION
Charlotte, N. Carolina.............. Sep. 94 Dec. 97 634 192 494,477
Greensboro, N. Carolina............. Jan. 96 Sep. 99(4) 142 20 317,637
Memphis, Tennessee.................. May 95 May 97 503 112 267,339
Raleigh, N. Carolina................ Oct. 94 Sep. 97 523 131 277,378
MIDWEST REGION
Cincinnati, Ohio.................... Jul. 95 Nov. 97 299 86 524,937
Columbus, Ohio(6)................... Mar. 91(5) Jul. 97 371 105 433,323
Indianapolis, Indiana............... Sep. 87(5) Dec. 97 281 137 452,874
Milwaukee, Wisconsin................ Feb. 96 Sep. 97 422 96 524,155
SOUTH REGION
Tampa, Florida...................... Dec. 97 Jan. 98 423 10 978,203
Orlando, Florida.................... Jul. 95 Jul. 97 912 152 833,765
WESTERN REGION
Honolulu, Hawaii.................... Jun. 94 Jan. 98 296 195 223,224
San Diego, California............... Jun. 95 Jul. 97 237 103 1,125,674
----------- ---------- ------------
Total............................... 6,968 1,919 13,043,572
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
- ------------
(1) Date of switch commercially available is the first date on which switched
services were provided to a customer of the Company.
(2) Licensed and owned fiber optic route miles.
(3) Metropolitan statistical areas business lines data are from Statistics of
Communications Common Carrier 1997 Business Data.
(4) Estimated.
(5) The networks in Columbus, Ohio, San Antonio, Texas and Indianapolis, Indiana
were built by certain predecessor companies prior to the commencement of the
Company's business.
(6) The Columbus market is operated by MetroComm, a partnership which is
50%-owned by the Company. However, the switch is owned by the Company. The
Company has an agreement to acquire the 50% interest in MetroComm that it
does not currently own. See ' -- Business Strategy.'
Information Systems Infrastructure. The Company uses advanced technology in
its information systems infrastructure. The Company also uses an integrated,
nationwide client server platform and coherent relational databases to increase
employee productivity, link itself electronically to some of its customers and
develop real time data and information. The architecture also enables the
Company to rapidly re-engineer its processes and procedures to lower its costs
and to respond rapidly to changing industry conditions. The Company's
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information systems deliver data at the network, regional or corporate level,
and also by customer and vendor. The Company's information systems assist in the
delivery of superior customer service and real time support of network
operations. The systems, which were partially developed by an outside vendor but
are operated internally, utilize open system standards and architecture. As a
result, the Company is positioned to either purchase from third parties or
develop in-house supplementary information support systems as its needs arise.
The Company has contracted with an outside vendor to install certain new back
office systems to enhance the Company's capabilities and accommodate the planned
scale of its business. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000.'
Network Monitoring and Management. The Company provides a single point of
contact for all of its customers and consolidates all of its systems support,
expertise and technical training at its network operations center in Greenwood
Village, Colorado. With over 400 technicians, customer service representatives
and administrative support staff dedicated to providing superior customer
service, the Company is able to quickly correct, and often anticipate, any
problems that may arise in its networks. The Company provides 24 hour-a-day, 7
days-a-week surveillance and monitoring of networks to achieve the Company's
99.98% network reliability and performance. Network analysts monitor real-time
alarm, status and performance information for network circuits, which allows
them to react swiftly to repair network failures.
Network Development and Application Laboratory. The Company's network
development and application laboratory is a comprehensive telecommunications
technology, applications and services development laboratory, equipped with
advanced systems and equipment, including those used by the Company in the
operation of its local digital networks.
The center is designed to provide a self-contained testing and integration
environment, fully compatible with the Company's digital networks, for the
purposes of:
verifying the technical and operational integrity of new equipment prior
to installation in the networks;
developing new services and applications;
providing a realistic training environment for technicians, engineers and
others; and
providing a network simulation environment to assist in fault isolation
and recovery.
Technologies currently under evaluation in the lab include dense wave
division multiplexing, or DWDM, optical bandwidth management and internet
protocol telephony, and related data applications.
Billing Systems. The Company contracts with outside vendors for customer
billing. The Company has licensed a system for switched services billing that it
operates on its own equipment and has a service bureau arrangement with another
vendor for dedicated transport service and interconnection billing. See 'Risk
Factors -- We expect to depend on third party vendors for information systems'
and 'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000.'
Agreements with Time Warner Cable. The Company has entered into several
agreements with Time Warner Cable for the license of fiber optic networks and
certain facilities, administrative and operating services, residential telephony
support services. See 'Risk Factors -- We may need to obtain additional fiber
optic capacity beyond what Time Warner Cable provides us,' 'Risk Factors -- Our
business may be limited if the capacity license with Time Warner Cable expires
or is terminated' and 'Certain Relationships and Related Transactions -- Certain
Operating Agreements.'
NETWORK DESIGN AND CONSTRUCTION
In order to leverage its relationship with Time Warner Cable, the Company
has constructed its existing networks in selected metropolitan areas served by
Time Warner Cable's fiber optic infrastructure. This has allowed the Company to
develop, in a cost-efficient way, an extensive network in each of its service
areas. As of December 31, 1998, the Company's networks spanned 6,968 route
miles, contained 272,390 fiber glass miles and offered service to 4,321
buildings with 2,953,454 voice grade equivalent circuits and 78,036 access lines
in service.
The Company anticipates that it will construct new networks in certain
cities, using its relationship with Time Warner Cable or other fiber providers,
or by developing the networks in house, whichever is most effective and
economical. Before deciding to construct or acquire a network in a particular
city, the Company's corporate
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development staff reviews the demographic, economic, competitive and
telecommunications demand characteristics of the city, including its location,
the concentration of potential business, government and institutional end-user
customers, the economic prospects for the area, available data regarding long
distance carrier and end-user special access and switched access transport
demand and actual and potential competitive access provider/competitive local
exchange carrier competitors. Market demand is estimated on the basis of market
research performed by Company personnel and others, utilizing a variety of data
including estimates of the number of interstate access and intrastate private
lines in the city based primarily on FCC reports and commercial databases. This
process has enabled the Company to reduce its start-up costs and expedite lead
times.
If a particular city targeted for development is found to have sufficiently
attractive demographic, economic, competitive and telecommunications demand
characteristics, the Company's network planning and design personnel design a
network targeted to provide access to the major long distance carrier, points of
presence and the incumbent local exchange carrier's principal central office(s)
in the city. Consistent with the Company's disciplined capital expenditure
program, distribution rings are designed to cover strategic or highly
concentrated business parks and downtown metropolitan areas, and build-out to
100% of the identified end-users is generally not considered to be
cost-effective since a portion of the end-users are located in low density
areas.
Based on the data obtained through the foregoing process, in connection
with either the construction or an acquisition of a network, the Company
develops detailed financial estimates based on the anticipated demand for the
Company's current services. If the financial estimates meet or exceed the
Company's minimum rate of return thresholds using a discounted cash flow
analysis, the Company's corporate planning personnel prepare a detailed business
and financial plan for the proposed network.
Prior to commencing construction, the Company's local staff, working
together with Time Warner Cable, where applicable, obtains any needed city
franchises, permits, or other municipal requirements to initiate construction
and operate the network. In some cities, a construction permit is all that is
required. In other cities, a right-of-way agreement or franchise may also be
required. Such agreements and franchises are generally for a term of limited
duration. In addition, the 1996 Act requires that local governmental authorities
treat all telecommunications carriers in a competitively neutral,
non-discriminatory manner. The Company's current right-of-way agreements and
franchises expire in years ranging from 1999 to 2015. City franchises often
require payment of franchise fees which in some cases can be directly passed
through on customers' invoices. The Company's local staff also finalizes
arrangements for other needed rights-of-way. Rights-of-way are typically
licensed from Time Warner Cable under multi-year agreements with renewal options
and are generally non-exclusive. See 'Certain Relationships and Related
Transactions -- Certain Operating Agreements.' The Company leases underground
conduit and pole space and other rights-of-way from entities such as local
exchange carriers and other utilities, railroads, long distance providers, state
highway authorities, local governments and transit authorities. The 1996 Act
requires most utilities, including most local exchange carriers and electric
companies, to afford competitive access providers/competitive local exchange
carriers access to their poles, conduits and rights-of-way at reasonable rates
on non-discriminatory terms and conditions.
The Company's networks are constructed to cost-effectively access areas of
significant commercial end-user telecommunications traffic, as well as the
points of presence of most long distance carriers and cellular companies and the
principal local exchange carrier central offices in a city. The Company
establishes general requirements for network design, and internally engineers
the contemplated network and the required deployment. Construction and
installation services are provided by independent contractors, including Time
Warner Cable, selected through a competitive bidding process. Company personnel
provide project management services, including contract negotiation and
supervision of the construction, testing and certification of all facilities.
The construction period for a new network varies depending upon the number of
route miles to be installed, the initial number of buildings targeted for
connection to the network, the general deployment of the network and other field
conditions. Networks that the Company has installed to date generally have
become operational within six to nine months after the beginning of
construction.
EQUIPMENT SUPPLY
The Company acquires Lucent 5-ESS digital switches pursuant to an exclusive
vendor agreement, which provides for discounted pricing. The Lucent agreement
expires in June of 2002 and is renewable for up to four additional years upon
the parties' mutual agreement. The Lucent agreement provides that if the Company
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purchases digital switches from a vendor other than Lucent during the term of
the agreement, Lucent, among other things, may discontinue the agreed upon
discounted pricing on all future orders, renegotiate higher prices for digital
switches and may not be liable for failures to meet certain delivery and
installation schedules on future orders.
CUSTOMERS AND SALES AND MARKETING
The Company's customers are principally telecommunications-intensive medium
and large-sized businesses, internet service providers, wireless communications
companies and various governmental entities. Historically, the Company's
customers were primarily long distance carriers. While the Company's long
distance carrier business has grown by approximately 67.0% in 1998 over 1997, it
has declined as a proportion of total revenues by 24.0%, to approximately 26.0%
of the Company's total revenues. Of this long distance carrier revenue,
approximately 60% is influenced by the end-user customer rather than the long
distance carrier since an end-user may switch long distance carriers while
retaining the Company as its local exchange carrier.
The Company's two largest customers for the year ended December 31, 1998,
AT&T and MCI-Worldcom, represented 13.4% and 10.3%, respectively, of the
Company's total revenues. However, a substantial portion of that revenue results
from traffic that is directed to the Company by customers that have selected
those long distance carriers (approximately 27.3% of the 1998 AT&T revenue and
34.0% of the 1998 MCI-Worldcom revenue). The Company's primary contracts with
AT&T and MCI-Worldcom are summarized below. The Company does not believe that
the termination of either of the contracts would have a material adverse effect
on its business.
The agreement between the Company and AT&T specifies the terms under which
AT&T will purchase certain switched and dedicated services in selected service
areas of the Company. The agreement (but not the individual services purchased
under such agreement) has a 13 year term ending in September 2008, but may be
terminated, in whole or in part, under specified circumstances prior to that
time. Interexchange company affiliates of AT&T and AT&T Wireless Services, Inc.
are also eligible to purchase services under the agreement.
The Master Capacity Agreement between the Company and a subsidiary of
MCI-Worldcom ('MCImetro') provides for MCImetro and its affiliates to purchase
dedicated services from the Company. Most of these services connect MCImetro end
users to MCImetro's points of presence, but may also provide transport between a
MCImetro point of presence and a local exchange carrier central office or
another interexchange carrier. The Master Capacity Agreement is effective until
September 12, 1999. The Company is currently in negotiations with MCImetro for
renewal of the Master Capacity Agreement. The Master Capacity Agreement also
permits the Company to co-locate its equipment in MCImetro locations approved by
MCImetro for purposes of performing the Company's obligations under the Master
Capacity Agreement.
No other customer, including customers who direct their business through
long distance carriers, accounted for 10% or more of revenues. For the year
ended December 31, 1998, the Company's top 10 customers accounted for 37.8% of
the Company's total revenues.
The Company provides incentives for its sales force to negotiate service
contracts that have a minimum term of 1 year, and provides enhanced commissions
for executing agreements with terms of 3 years or greater. Currently, more than
50% of service agreements have a duration of 3 years or greater. See 'Risk
Factors -- Several customers account for a significant amount of our revenues.'
The Company's marketing emphasizes its:
reliable, facilities-based networks;
flexibly priced, bundled products and services;
responsive customer service orientation; and
integrated operations, customer support and network monitoring and
management systems.
The Company's centrally managed customer support operations are designed to
facilitate the processing of orders for changes and upgrades in customer
services. To reduce the inherent risk in bringing new and untested
telecommunications products and services to a dynamically changing market, the
Company introduces its products and services once market demand develops and
offers them in diversified, competitively-priced
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bundles, thereby increasing usage among its existing customers and attracting
new customers. The services offered by the Company are typically priced at a
discount to the prices of the incumbent local exchange carriers.
With a direct sales force in each of its service areas along with regional
and national sales support, the Company targets medium- and large-sized
telecommunications-intensive businesses in the areas served by its networks.
Compensation for the Company's sales representatives is based primarily on
commissions that are tied to sales generated. The Company's customers include
financial services firms, health care, media, telecommunications services and
high tech companies and various governmental institutions. In addition, the
Company markets its services through sales agents, landlords, advertisements,
trade journals, media relations, direct mail and participation in trade
conferences.
The Company also targets long distance carriers, internet service
providers, large, strategic business accounts and wireless telephone companies
through its national sales organization. The Company also has master services
agreements (which generally set forth technical standards, ordering processes,
pricing methodologies and service grade requirements, but do not guarantee any
specified level of business for the Company) with Sprint Corporation, and
Qwest-LCI, Inc. By providing long distance carriers with a local connection to
their customers, the Company enables them to avoid complete dependence on the
incumbent local exchange carriers for access to customers and to obtain a high
quality and reliable local connection. The Company provides a variety of
transport services and arrangements that allow long distance carriers to connect
their own switches in both local areas, or intra-city, and in wide areas, or
inter-city. Additionally, long distance carriers may purchase the Company's
transport services that allow them to connect their switch to an incumbent local
exchange carrier switch and to end-user locations directly. The Company's
advanced networks allow it to offer high volume business customers and long
distance carriers uniformity of services, pricing, quality standards and
customer service.
CUSTOMER SERVICE
With over 400 expert technicians, customer service representatives and
administrative support staff, the Company provides its customers with continuous
support and superior service. To serve its customers, account representatives
are assigned to the Company's customers to act as effective liaisons with the
Company. Technicians and other support personnel are available in each of the
Company's service areas to react to any network failures or problems. In
addition, the network operations center provides 24 hour-a-day, 7 days-a-week
surveillance and monitoring of networks to maintain the Company's network
reliability and performance. See ' -- Telecommunications Networks and
Facilities -- Network Monitoring and Management.'
COMPETITION
The Company believes that the principal competitive factors affecting its
business are, and will continue to be
(a) pricing,
(b) the availability of proven support systems for the Company's back
office systems, including provisioning and billing,
(c) competition for skilled, experienced personnel, and
(d) regulatory decisions and policies that promote competition.
The Company believes that it competes favorably with other companies in the
industry or is impacted favorably with respect to each of these factors. The
technologies and systems which provide back office support for the competitive
local exchange carrier industry are nascent and may not keep pace with the
growth of order volume, integration with other systems, and production of
required information for systems managers. The best personnel in all areas of
the Company's operations are in demand by the numerous participants in the
highly specialized competitive local exchange carrier industry. While the
Company's employee base is very stable, it is anticipated that others in the
industry will continue to demand high quality personnel and will thus drive
pressure to maintain extremely competitive compensation and benefits packages in
addition to an attractive work environment. Regulatory environments at both the
state and Federal level differ widely and have considerable influence on the
Company's market and economic opportunities and resulting investment decisions.
The
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Company believes it must continue monitoring regulatory developments and remain
active in its participation in regulatory issues.
Services substantially similar to those offered by the Company are also
offered by the incumbent local exchange carriers, which include Ameritech
Corporation, Bell Atlantic Corporation, BellSouth Corporation, SBC and GTE
Corporation. The Company believes that many incumbent local exchange carriers
may have competitive advantages over the Company. Incumbent local exchange
carriers generally benefit from their long-standing relationships with customers
and greater technical and financial resources. The incumbent local exchange
carriers have the potential to subsidize services of the type offered by the
Company from service revenues in unrelated businesses and currently benefit from
recent regulations that relax price restrictions and decrease regulatory
oversight of incumbent local exchange carriers. In addition, in most of the
metropolitan areas in which the Company currently operates, at least one, and
sometimes several, other competitive access providers or competitive local
exchange carriers offer substantially similar services at substantially similar
prices to those of the Company.
The Company also faces competition from new entrants in the local services
business who may also be better established and have greater financial
resources. Other competitive local exchange carriers, competitive access
providers, cable television companies, electric utilities, long distance
carriers, microwave carriers, wireless telephone system operators and private
networks built by large end users currently do, and may in the future, offer
services similar to those offered by the Company.
In addition, the current trend of business combinations and alliances in
the telecommunications industry, including mergers between subsidiaries of
regional Bell operating companies, between Bell operating companies and other
incumbent local exchange carriers, and between major long distance carriers and
competitive local exchange carriers, may create significant new competitors for
the Company. For example, Bell Atlantic has acquired the local exchange carriers
owned by NYNEX and SBC, corporate parent of Southwestern Bell Telephone Company,
has acquired Southern New England Telephone and Pacific Telesis. In addition,
SBC and Ameritech have agreed to merge, as have Bell Atlantic and GTE
Corporation. The latter two mergers have not yet been consummated pending
regulatory approval. On July 23, 1998, AT&T announced that it had completed its
acquisition of TCG, a competitor of the Company. On March 8, 1999, AT&T
completed its acquisition of TCI, a major cable operator, following FCC approval
of the transfer of TCI's licenses to AT&T. AT&T and Time Warner have also
announced their intention to form a joint venture to offer any distance
telephone service to residential and small business customers over Time Warner's
cable facilities.
The Company believes that the 1996 Act will provide increased business
opportunities by opening all local markets to competition. The 1996 Act:
requires all local exchange providers to offer their services for resale;
requires incumbent local exchange carriers to provide increased direct
interconnection;
requires incumbent local exchange carriers to offer network elements on an
unbundled basis; and
requires incumbent local exchange carriers to offer the services they
provide to end-users to other carriers at wholesale rates.
However, under the 1996 Act, the FCC and some state regulatory authorities
may provide incumbent local exchange carriers with increased flexibility to
reprice their services as competition develops and as incumbent local exchange
carriers allow competitors to interconnect to their networks. In addition, some
new entrants in the local market may price certain services to particular
customers or for particular routes below the prices charged by the Company for
services to those customers or for those routes, just as the Company may itself
underprice those new entrants for other services, customers or routes. If the
incumbent local exchange carriers and other competitors lower their rates and
can sustain significantly lower prices over time, this may adversely affect
revenues of the Company if it is required by market pressure to price at or
below the incumbent local exchange carriers' prices. If regulatory decisions
permit the incumbent local exchange carriers to charge competitive access
providers/competitive local exchange carriers substantial fees for
interconnection to the incumbent local exchange carriers' networks or afford
incumbent local exchange carriers other regulatory relief, such decisions could
also have a material adverse effect on the Company.
However, the Company believes that the negative effects of the 1996 Act may
be more than offset by
the increased revenues available as a result of being able to address the
entire local exchange market,
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mutual reciprocal compensation with the incumbent local exchange carriers
that results in the Company terminating its local exchange traffic on the
incumbent local exchange carrier's network at little or no net cost to the
Company,
obtaining access to off-network customers through more reasonably priced
expanded interconnection with incumbent local exchange carrier networks,
and
a shift by long distance carriers to purchase access services from
competitive access providers/competitive local exchange carriers instead
of incumbent local exchange carriers.
There can be no assurance, however, that these anticipated results will
offset completely the effects of increased competition as a result of the 1996
Act.
Historically, the Company has been able to build new networks and expand
existing networks in a timely and economical manner through strategic
arrangements such as leasing fiber optic cable from Time Warner Cable, which
already possesses rights-of-way and has facilities in place. The Company intends
to use its experience and presence in the telecommunications industry to fully
exploit its available capacity, further develop and expand its existing
telecommunications infrastructure and offer a diversified range of products and
services in competitively priced bundles.
GOVERNMENT REGULATION
Historically, interstate and foreign communication services were subject to
the regulatory jurisdiction of the FCC, and intrastate and local
telecommunications services were subject to regulation by state public service
commissions. With the enactment of the 1996 Act, competition in all
telecommunications market segments, including interstate and intrastate, local
and long distance, became matters of national policy. As described below, the
respective roles of Federal and state regulators to establish rules and pricing
requirements to implement that policy remain the subject of litigation.
Nonetheless, the Company believes that the national policy fostered by the 1996
Act should contribute to an increase in the market opportunities for the
Company. Because these developments require numerous actions to be implemented
by individual Federal and state regulatory commissions, and are subject to
particular legal, political and economic conditions, it is not possible to
predict the pace at which regulatory liberalization will occur.
Telecommunications Act of 1996. In early 1996, President Clinton signed the
1996 Act, the most comprehensive reform of the nation's telecommunications laws
since the Communications Act. The 1996 Act prohibits state and local governments
from enforcing any law, rule or legal requirement that prohibits or has the
effect of prohibiting any entity from providing any interstate or intrastate
telecommunications service. This provision of the 1996 Act should enable the
Company to provide a full range of local telecommunications services in any
state. States retain jurisdiction under the 1996 Act to adopt competitively
neutral regulations necessary to preserve universal service, protect public
safety and welfare, ensure the continued quality of telecommunications services
and safeguard the rights of consumers. States are also responsible for mediating
and arbitrating competitive local exchange carrier-incumbent local exchange
carrier interconnection arrangements if voluntary agreements are not reached.
Therefore, the degree of state regulation of local telecommunications services
may be substantial.
The 1996 Act imposes a number of access and interconnection requirements on
all local exchange carriers, including competitive local exchange carriers, with
additional requirements imposed on incumbent local exchange carriers. The 1996
Act requires competitive local exchange carriers and incumbent local exchange
carriers to attempt to resolve interconnection issues through negotiations for
at least 135 days. During these negotiations, the parties may submit disputes to
state regulators for mediation and, after the negotiation period has expired,
the parties may submit outstanding disputes to state regulators for arbitration.
As of December 1, 1998, the Company has executed 36 definitive interconnection
agreements with incumbent local exchange carriers, covering 18 of its markets.
The Company has executed interconnection agreements with the incumbent local
exchange carriers in each of its markets in which it offers switched services
and has negotiated, or is negotiating, secondary interconnection arrangements
with carriers whose territories are adjacent to the Company's for intrastate
intraLATA toll traffic and extended area services.
Under the 1996 Act, the FCC was required to establish rules and regulations
to implement the local competition provisions of the 1996 Act within six months
of enactment. In August 1996, the FCC issued two reports and orders. In the
First Report and Order, the FCC promulgated rules to govern interconnection,
resale,
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unbundled network elements, and the pricing of those facilities and services, as
well as the negotiation and arbitration procedures to be utilized by states to
implement those requirements. In the Second Report and Order, the FCC adopted
rules to govern the dialing parity requirements of the 1996 Act.
In July 1997, the Eighth Circuit Court of Appeals issued a decision in
which it affirmed certain portions of the FCC's rules and vacated others. It
vacated the FCC rules governing the pricing of interconnection, resale, and
unbundled network elements on the basis that the FCC lacks jurisdiction to
establish pricing rules for intrastate service. It also vacated rules allowing
requesting carriers to select from among various provisions of individual
interconnection agreements between incumbent local exchange carriers and other
carriers, and rules permitting the combining of network elements. In a
subsequent decision, the court vacated the FCC's dialing parity rules with
respect to intraLATA service. In October 1997, the Eighth Circuit Court of
Appeals issued an order on rehearing in which it vacated one additional FCC
rule. The vacated rule prohibited incumbent local exchange carriers from
separating network elements that they currently combine, except upon request.
Although the FCC's rules governing the pricing of interconnection, unbundled
network elements and resale have been vacated by the Eighth Circuit Court of
Appeals, interconnection and arbitration proceedings at the state level have
continued with the states implementing their own pricing standards.
Several entities, including the United States government, submitted
petitions for certiorari asking the U.S. Supreme Court to review the orders of
the Eighth Circuit Court of Appeals. Those petitions asked the Supreme Court to
review the Court of Appeals' ruling that the FCC lacks jurisdiction to establish
pricing rules for intrastate services and facilities as well as to establish
dialing parity requirements for intrastate (including most intraLATA) service.
In addition, the petitions asked the Supreme Court to review the Court of
Appeals' decision to vacate the so-called 'pick and choose' rule established by
the FCC. That rule required local exchange carriers to make available to
requesting carriers (including the Company) any provision from any
interconnection, unbundled network element or resale agreement between an
incumbent local exchange carrier and any requesting carrier approved by a state
commission. Finally, several of the petitions (including that of the U.S.
government) also asked the Supreme Court to review the October 1996 rehearing
order vacating the FCC rule which required incumbent local exchange carriers to
make available combined packages of network elements. In January 1998, the
Supreme Court granted those petitions for certiorari and agreed to review the
Eighth Circuit decisions.
On January 25, 1999, the Supreme Court issued its opinion in the case
involving review of the Eighth Circuit Court of Appeals decision. The Court held
that the FCC has authority under the Communications Act to establish rules,
including pricing rules, to implement the local competition provisions of the
1996 Act, even with respect to intrastate services. The Supreme Court did not
address the merits of the pricing rules which the FCC promulgated in 1996. In
addition, the Supreme Court affirmed several of the other rules which had been
promulgated by the FCC but which had been found unlawful by the Eighth Circuit
Court of Appeals. These included a rule allowing requesting carriers to select
provisions from among different interconnection agreements approved by state
commissions (the so-called 'pick-and-choose' rule) and a rule allowing
requesting carriers to obtain from incumbent local exchange carriers assembled
combinations of unbundled network elements. However, the Court vacated a FCC
rule identifying specific network elements which incumbent local exchange
carriers were required to make available on the basis that the FCC had failed to
consider (1) whether such network elements were necessary and (2) whether the
failure to make network elements available would impair the ability of
requesting carriers to provide the services they seek to offer. The FCC has
since initiated a proceeding to comply with the Supreme Court opinion regarding
the availability of network elements. Whether incumbent local exchange carriers
will be required to make available to requesting telecommunications carriers
combined platforms of network elements will depend on how the FCC implements the
'necessary' and 'impair' standards governing network elements availability in
light of the Supreme Court opinion. The Company believes that the availability
of combined platforms of network elements at prices based on the FCC's Total
Element Long Run Incremental Cost standard could create economic opportunities
for new competitors to enter local markets through acquisition of incumbent
local exchange carrier network element platforms rather than by investing in
their own network facilities as the Company does.
The 1996 Act provides a detailed list of items that are subject to these
interconnection negotiations, as well as a detailed set of duties for all
affected carriers.
All local exchange carriers, including competitive local exchange carriers
like the Company, have a duty to
not unreasonably limit the resale of their services,
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provide number portability if technically feasible,
provide dialing parity to competing providers,
provide access to poles, ducts, conduits and rights-of-ways
establish reciprocal compensation arrangements for the transport and
termination of telecommunications.
Under the 1996 Act and rules established by the FCC in 1996 (and modified
on reconsideration in 1997), local exchange carriers, including the Company, are
required to make available number portability. Number portability refers to the
ability of users of telecommunications services to retain, at the same location,
existing telecommunications numbers without impairment of quality, reliability,
or convenience when switching from one telecommunications carrier to another.
Under the schedule for number portability implementation established by the FCC,
local exchange carriers are required to implement number portability in the 100
largest MSAs over a five-phase period that began on October 1, 1997 and
concluded on December 31, 1998. After that, in areas outside the 100 largest
MSAs, local exchange carriers are required to make available number portability
within six months of receipt of a specific request from another
telecommunications carrier.
The 1996 Act and the FCC's rules also require local exchange carriers to
implement dialing parity. Dialing parity refers to the ability of a person that
is not an affiliate of a local exchange carrier to be able to provide
telecommunications services in such a manner that customers have the ability to
route automatically without the use of any access code, their telecommunications
to the telecommunications service provider of the customer's designation from
among two or more telecommunications service providers (including such local
exchange carrier). Under rules promulgated by the FCC in 1996, all local
exchange carriers, including the Company, are required to provide intraLATA and
interLATA dialing parity not later than February 8, 1999. However, if a local
exchange carrier also provides interLATA service as the Company does, that local
exchange carrier was required to provide dialing parity by August 8, 1997. Local
exchange carriers unable to comply with that August 8, 1997 deadline were
required to have notified the FCC by May 8, 1997. As a result of the Eighth
Circuit Court of Appeals' vacating of the FCC's intraLATA dialing parity rules,
the February 8, 1999 dialing parity date was to apply to intraLATA dialing
parity only. However, in March 1999, following the Supreme Court's January 1999
opinion reinstating the FCC's intraLATA dialing parity rules, the FCC issued an
order establishing a schedule for implementation of intraLATA dialing parity.
Local exchange carriers whose dialing parity plans have been approved by state
commissions were required to implement dialing parity no later than May 7, 1999.
The Company does not restrict the resale of its services, engages in
reciprocal compensation arrangements, provides dialing parity, and provides full
number portability, satisfying four of the five requirements. The Company
generally licenses poles, ducts and conduits, and therefore owns few such
rights-of-way subject to the requirement to make them available to other
carriers.
In addition to those general duties of all local exchange carriers,
incumbent local exchange carriers have additional duties to
interconnect at any technically feasible point and provide service equal
in quality to that provided to their customers or the incumbent local
exchange carrier itself,
provide unbundled access to network elements at any technically feasible
point,
offer retail services at wholesale prices for the use of competitors,
provide reasonable public notice of changes in the network or the
information necessary to use the network, and
provide for physical collocation.
The 1996 Act further imposes various pricing guidelines for the provision
of certain of these services. Both the incumbent local exchange carriers and the
requesting carriers have a statutory duty to negotiate in good faith regarding
these arrangements. The regional Bell operating companies, in particular, must
successfully achieve agreements, leading to the development of facilities-based
competition for business and residential users, in order to enter the long
distance markets within their regions. The Company has successfully concluded
agreements governing interconnection arrangements in all of the states in which
it holds competitive local exchange carrier authority. Several of these
agreements are expiring in 1999 and the Company anticipates that the incumbent
local exchange carriers will want to renegotiate the terms and conditions,
including reciprocal compensation. The Company cannot predict the outcome of the
negotiations, especially in light of the Supreme Court's recent decision
regarding the interconnection rules, and the FCC's recent determination that
local traffic which terminates at Internet service providers' premises is mostly
jurisdictionally interstate.
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The 1996 Act establishes procedures under which Bell operating companies
may apply to the FCC for authority to provide interLATA service from states
within their operating regions. A Bell operating company seeking in-region
interLATA authority must demonstrate that it is subject to competition from a
competitor in the state with whom it has entered into an interconnection
agreement and which is providing service to business and residential customers
within the state exclusively or predominantly over its own facilities.
Alternatively, the Bell operating company may seek in-region interLATA authority
if no provider has requested access and interconnection, and the Bell operating
company has in place a state commission-approved statement of generally
available terms and conditions for access and interconnection which is available
to competitors. Further, access and interconnection agreements must comply with
each point of a 14 point competitive checklist. To date, five applications have
been filed by Bell operating companies with the FCC for authority pursuant to
Section 271 of the Communications Act to provide interLATA long distance service
in states within their operating territories. All five of those applications
have been denied by the FCC. An application by SBC for FCC authority to provide
long distance service in Oklahoma was denied in June 1997. SBC's appeal of that
decision was denied by the U.S. Court of Appeals for the District of Columbia
Circuit in March 1998. In August 1997, the FCC also denied an application by
Ameritech to provide long distance service in Michigan. BellSouth applications
for FCC approval to provide long distance service in South Carolina and
Louisiana also were denied by the FCC in December 1997 and February 1998,
respectively. In July 1998, BellSouth again applied to the FCC to provide long
distance service in Louisiana. That application was denied by the FCC in October
1998. In addition to those FCC applications, SBC Corporation brought a lawsuit
in the U.S. District Court for the Northern District of Texas in which it
challenged on constitutional grounds the Bell operating company long distance
entry provisions of the Communications Act. In December 1997, the District Court
ruled in favor of SBC finding those provisions to be unconstitutional. Shortly
thereafter, the District Court stayed its decision pending review by the U.S.
Court of Appeals for the Fifth Circuit. On September 4, 1998, the U.S. Court of
Appeals for the Fifth Circuit reversed that decision of the District Court
concluding that the provisions of Section 271 governing the Bell operating
companies interLATA service entry is not an unconstitutional bill of attainder.
Several parties, including SBC, have filed petitions for certiorari with the
U.S. Supreme Court asking that it review the decision of the Fifth Circuit. On
January 19, 1999, the Supreme Court declined to review that decision. The
Company anticipates that eventually the Bell operating companies will be found
to comply with the requirements of the Communications Act governing in-region
long distance entry and their applications for authority to provide interLATA
service will be approved and they will be permitted to offer interLATA services
within their operating territories.
The Company, like other competitive local exchange carriers, receives
reciprocal compensation from incumbent local exchange carriers for local calls
which it terminates at the premises of Internet service providers. Incumbent
local exchange carriers have attempted to persuade state commissions and the FCC
that such traffic is interstate traffic rather than local traffic and that such
traffic should not be subject to reciprocal compensation. To date, every state
commission which has considered the issue has concluded that local traffic
terminated at Internet service provider locations is local traffic and is
subject to reciprocal compensation under state-approved interconnection
agreements. However, on February 26, 1999, the FCC released a declaratory ruling
in which it held that local traffic that terminates at Internet service
providers is largely interstate traffic. The FCC did not determine whether or
not such traffic may be subject to reciprocal compensation on a prospective
basis, but commenced a FCC rulemaking on that subject. Pending completion of
that rulemaking, determinations of whether reciprocal compensation should be
paid on traffic terminated at internet service provider locations will be made
by state commissions and under the terms of approved agreements. It is expected
that incumbent local exchange carriers will attempt to persuade the FCC and
state commissions that local traffic delivered to Internet service providers
should not be subject to reciprocal compensation. Exclusion of such traffic from
reciprocal compensation requirements could reduce the revenues received by the
Company for terminating traffic originated by incumbent local exchange carriers.
If the Bell operating companies become authorized to provide in-region
interLATA service, they will be able to offer customers a full range of local
and long distance services. Bell operating company entry into the interLATA
services markets may reduce the market shares held by major long distance
carriers, which are among the Company's largest customers. However, the Company
believes that the entry of Bell operating companies into the interLATA market
will encourage long distance carriers to increase their use of exchange access
services offered by the Company and by other competitive local exchange carriers
rather than the exchange access services of the Bell operating companies. When
Bell operating companies provide long
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distance services outside their local telephone service areas, they will be
potential customers of the Company's services as well as services of other
competitive local exchange carriers and competitive access providers.
Federal Regulation. The 1996 Act obligates the FCC to establish mechanisms
for ensuring that consumers, including low income consumers and those located in
rural, insular and high cost areas, have access to telecommunications and
information services at rates reasonably comparable to those charged for similar
services in urban areas. The 1996 Act also requires the FCC to establish funding
mechanisms to make available access to telecommunications services, including
advanced services, to schools, libraries and rural health care centers. These
requirements are generally referred to as the 'universal service requirements'
of the 1996 Act. In May 1997, the FCC adopted rules to implement the universal
service requirements. Under those rules, all telecommunications carriers,
including the Company, are required to contribute to support universal service.
If the Company offers to provide the services that are supported by Federal
universal service funding mechanisms to all customers within certain geographic
areas designated by the applicable state commissions, it may be deemed to be an
'Eligible Carrier' and therefore entitled to subsidy funds under the program
established by the FCC. Certain aspects of universal service, including the
formulas to be used to quantify local service costs remain under study by the
FCC. In addition, several parties appealed the FCC's May 1997 universal service
order. Those appeals were consolidated in the U.S. Court of Appeals for the
Fifth Circuit and are pending.
On December 23, 1998, the FCC established rules to govern the manner in
which telecommmunications carriers effectuate and verify selection by consumers
of preferred providers of local exchange and interexchange services. The Company
will be subject to those rules and will be required to comply with the specific
verification requirements established by the FCC. Violation of those rules could
subject the Company to sanctions imposed by the FCC.
Following a June 1997 decision of the FCC, the Company has been permitted
to provide its interstate access services without having tariffs on file with
the FCC. Following that decision, the Company withdrew its interstate access
services tariff and now provides such services pursuant to contracts entered
into with customers. This will improve the Company's ability to rapidly change
its access service pricing in response to competition and will reduce the
Company's regulatory compliance costs. The Company is still required to file
with the FCC tariffs for its other interstate telecommunications services,
including long distance service.
The FCC's action does not, however, impact the Company's state public
utility commission tariff requirements. Whether or not the Company is subject to
a tariff filing requirement, the Company must offer its interstate services on a
nondiscriminatory basis, at just and reasonable rates, and it is subject to the
complaint provisions of the Communications Act. For its current offering of
interstate services as a nondominant carrier, the Company is not subject to rate
of return or price cap regulation by the FCC and may install and operate digital
facilities for the transmission of interstate communications without prior FCC
authorization. Pursuant to the 1996 Act, the Company is subject to additional
Federal regulatory obligations when it provides local exchange service in a
market, such as the access and interconnection requirements that are imposed
on all local exchange carriers. See ' -- Government Regulation --
Telecommunications Act of 1996.'
The Communications Assistance for Law Enforcement Act, enacted in 1994,
requires telecommunications carriers, including the Company, to make their
equipment and facilities capable of assisting authorized law enforcement
agencies to conduct electronic surveillance. By September 8, 1998, subject
carriers were required to notify the Attorney General of systems which do not
have the capacity to meet surveillance requirements specified by the Attorney
General. By October 25, 1998, telecommunications carriers, including the
Company, were required to meet the surveillance standards set by the Attorney
General. The FCC has extended the date for compliance with these requirements
until June 30, 2000.
State Regulation. The Company has acquired all state government authority
needed to conduct its business as currently contemplated. Most state public
service commissions require carriers that wish to provide local and other
jurisdictionally intrastate common carrier services to be authorized to provide
such services. The Company's operating subsidiaries and affiliates are
authorized as common carriers in ten states. These certifications cover the
provision of switched services including local basic exchange service, point to
point private line, competitive access services, and in five states long
distance services.
Local Government Authorizations. The Company may be required to obtain from
municipal authorities street opening and construction permits and other rights
and other rights-of-way to install and expand its networks in certain cities. In
some cities, the Company's affiliates or subcontractors may already possess the
requisite authorizations to construct or expand the Company's networks. Any
increase in the difficulty or cost of
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obtaining these authorizations and permits could adversely affect the Company,
particularly where it must compete with companies that already have the
necessary permits.
In some of the metropolitan areas where the Company provides network
services, the Company pays license or franchise fees based on a percent of gross
revenues. There can be no assurance that municipalities that do not currently
impose fees will not seek to impose fees in the future, nor is there any
assurance that, following the expiration of existing franchises, fees will
remain at their current levels. Under the 1996 Act, municipalities are required
to impose such fees on a competitively neutral and nondiscriminatory basis.
However, municipalities that currently favor the incumbent local exchange
carriers may or may not conform their practices in a timely manner or without
legal challenges by the Company or another competitive access provider or
competitive local exchange carrier. Moreover, there can be no assurance that
incumbent local exchange carriers with whom the Company competes will not be
excluded from such local franchise fee requirements by previously-enacted
legislation allowing them to utilize rights-of-way throughout their states
without being required to pay franchise fees to local governments.
If any of the Company's existing franchise or license agreements for a
particular metropolitan area were terminated prior to its expiration date and
the Company were forced to remove its fiber optic cables from the streets or
abandon its network in place, even with compensation, such termination could
have a material adverse effect on the Company's operation in that metropolitan
area and could have a material adverse effect on the Company.
The Company is party to various regulatory and administrative proceedings,
however, subject to the discussion above, the Company does not believe that any
such proceedings will have a material adverse effect on its business.
COMPANY NAME
The use of the 'Time Warner' name by the Company is subject to a license
agreement with Time Warner. See 'Risk Factors -- We may lose the right to use
the `Time Warner' name' and 'Certain Relationships and Related Transactions --
Certain Operating Agreements.'
EMPLOYEES
As of December 31, 1998, the Company employed 898 full-time employees. The
Company believes that its relations with its employees are good. By succession,
the New York City operating entity is a party to a collective bargaining
agreement. In connection with the construction and maintenance of its networks
and the conduct of its other business operations, the Company uses third party
contractors, some of whose employees may be represented by unions or collective
bargaining agreements. The Company believes that its success will depend in part
on its ability to attract and retain highly qualified employees and maintain
good working relations with its current employees.
PROPERTIES
The Company leases network hub sites and other facility locations and sales
and administrative offices, substantially all of which are leased from Time
Warner Cable, in each of the cities in which it operates networks. During 1996,
1997 and 1998, rental expense for the Company's facilities and offices totaled
approximately $3.9 million, $4.7 million and $4.8 million, respectively. The
Company owns no material real estate. Management believes that its properties,
taken as a whole, are in good operating condition and are suitable and adequate
for the Company's business operations. The Company currently leases
approximately 130,000 square feet of space in Greenwood Village, Colorado, where
its corporate headquarters are located.
LEGAL PROCEEDINGS
The Company is a party to various claims and legal and regulatory
proceedings arising in the ordinary course of business. The Company does not
believe that such claims or proceedings, individually or in the aggregate, will
have a material adverse effect on the Company's business, financial condition or
results of operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information (as of April 1999) with
respect to the persons who are members of the board of directors, executive
officers or key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ----------------------------------------------------------------------
<S> <C> <C>
Larissa L. Herda.................... 40 President and Chief Executive Officer and Director
Paul B. Jones....................... 52 Senior Vice President, General Counsel and Regulatory Policy
A. Graham Powers.................... 52 Senior Vice President, Chief Information Officer
David J. Rayner..................... 42 Senior Vice President and Chief Financial Officer
John T. Blount...................... 40 Senior Vice President, Sales
Raymond H. Whinery.................. 44 Senior Vice President, Engineering, Technologies and Operations
Julie A. Rich....................... 45 Senior Vice President, Human Resources and Business Administration
Mark A. Peters...................... 38 Vice President, Treasurer
Jill Stuart......................... 44 Vice President, Accounting and Finance and Chief Accounting Officer
Richard J. Bressler................. 41 Director
Glenn A. Britt...................... 50 Director
Richard J. Davies................... 51 Director
Douglas Holmes...................... 38 Director
Stephen A. McPhie................... 45 Director
Robert J. Miron..................... 61 Director
Audley M. Webster, Jr............... 46 Director
</TABLE>
Ms. Herda has served as President and Chief Executive Officer of the
Company since June 22, 1998. From March 1997 to June 21, 1998, Ms. Herda served
as Senior Vice President, Sales of the Company. From 1989 to 1997, Ms. Herda was
employed by MFS Telecom Inc., a competitive local exchange carrier, most
recently as Southeast Regional Vice President and General Manager. Ms. Herda has
served as a director of the Company since June 22, 1998.
Mr. Jones has served as Senior Vice President, General Counsel and
Regulatory Policy of the Company since August 1998. Prior to August 1998, Mr.
Jones served as Senior Vice President, Legal and Regulatory Policy of the
Company from October 1993. From 1992 to 1993, Mr. Jones served as Senior Vice
President, Corporate Development of Time Warner Cable Ventures. Mr. Jones was
Senior Vice President and General Counsel of Warner Cable from 1987 to 1992 and
Vice President, Strategy and Development of CBS Publishing Group from 1985 to
1986. From 1977 to 1979, Mr. Jones was the Assistant General Counsel for the
FCC.
Mr. Powers has served as Senior Vice President, Chief Information Officer
since April 1999. Prior to April 1999, Mr. Powers served as Senior Vice
President, Engineering and Technology of the Company since June 1996. From
August 1993 to May 1996, Mr. Powers served as Senior Vice President, Operations
Development and Business Implementation. Prior to joining the Company, Mr.
Powers was the President of Telecommunications Strategy Inc., a technology
consulting service, from May 1992 to July 1993 and previously held various
management positions at American Television and Communications Corporation, a
subsidiary of Time Warner Inc.
Mr. Rayner has served as Senior Vice President and Chief Financial Officer
of the Company since June, 1998. From February 1997 to May 1998, Mr. Rayner
served as Vice President, Finance. From May 1994 to February 1997, Mr. Rayner
served as Controller. From 1982 to 1994, Mr. Rayner held various financial and
operational management positions in Time Warner Cable.
Mr. Blount has served as Senior Vice President, Sales of the Company since
June 24, 1998. Prior to that, Mr. Blount served as the Company's Regional Vice
President for the Midwest and Southwest regions from January 1997 and
Milwaukee's Vice President and General Manager from January 1996 to January
1997, having served as its General Manager from February 1995. Prior to joining
the Company, Mr. Blount held various sales positions at US WEST, Inc., the
predecessor of MediaOne, starting in 1988, including Director of Sales for US
WEST !nterprise in Minneapolis from May 1994 to February 1995 and Sales and
Service Manager for South Dakota from January 1992 to May 1994.
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Mr. Whinery has served as Senior Vice President, Engineering, Technologies
and Operations since April 1999. Prior to that, Mr. Whinery served as Senior
Vice President, Technical Operations of the Company since January 1997. From May
1994 to January 1997, Mr. Whinery served as the Senior Director of Engineering
and Planning. Prior to May 1994, Mr. Whinery was employed by U S WEST, Inc., the
predecessor of MediaOne, from 1978 and served as General Manager for Idaho,
Montana, North Dakota and South Dakota from 1992 to 1994.
Ms. Rich has served as Senior Vice President, Human Resources and Business
Administration since April 1999. Prior to April 1999, Ms. Rich served as Vice
President, Human Resources and Business Administration of the Company since
March 1998. From June 1996 to February 1998, she owned an independent human
resources consulting practice. From 1984 to 1996 she was a founder of XEL
Communications, Inc., a telecommunications manufacturer, and held positions of
Director and Vice President of Human Resources.
Mr. Peters has served as Vice President, Treasurer of the Company since
July 15, 1998. From March 1996 to July 1998, Mr. Peters participated in
entrepreneurial start-up ventures. From January 1990 to February 1996, Mr.
Peters was an executive officer with Nextel Communications, Inc. and predecessor
OneComm where he most recently held the position of Vice President of Finance
and Treasurer.
Ms. Stuart has served as Vice President, Accounting and Finance and Chief
Accounting Officer since July 1998. Prior to that, she served as Director,
Finance and Business Planning from September 1994 to July 1998.
Mr. Bressler has served as a director of the Company since February 1998,
as a director of TWT Inc. since July 1998 and as Executive Vice President and
Chief Financial Officer of Time Warner Inc. since January 1998. Prior to that,
he served as Time Warner Inc.'s Senior Vice President and Chief Financial
Officer from March 1995; as Senior Vice President, Finance from January 1995;
and as a Vice President prior to that. Mr. Bressler is also a member of the
Board of Representatives of TWE.
Mr. Britt has served as a director of the Company since July 1998, as Vice
President of the Company since July 1998, as Chief Executive Officer and
President of Time Warner Cable Ventures, a division of Time Warner Cable, for
more than the past five years and as President of Time Warner Cable since
January 1999.
Mr. Davies has served as a director of the Company since October 1998, and
as Senior Vice President, Corporate Development, of Time Warner Cable since
September 1998. Prior to that, he served as Senior Vice President of TW Ventures
from June 1996 and as Chief Financial Officer of the Company from March 1993 to
June 1996.
Mr. Holmes has served as a director of the Company since April 1999, and as
Executive Vice President -- Strategy and Business Development for MediaOne since
May 1998. From January 1997 to May 1998, Mr. Holmes served as Executive Vice
President -- Finance, Strategy and Business Development for MediaOne's domestic
cable business. Prior to that, he served as the chief financial officer for U S
WEST Media Group and held a variety of strategy and marketing positions with U S
WEST, Inc. since 1990.
Mr. McPhie has served as a director of the Company since July 1998, and as
Executive Vice President of MediaOne International, a division of MediaOne,
since August 1998. From January 1997 to June 1998, Mr. McPhie served as
President and Chief Executive Officer of the Company. Prior to that, Mr. McPhie
was Vice President of Business Development at U S WEST, Inc., the predecessor of
MediaOne, from November 1995. From 1993 to 1995, Mr. McPhie served as Senior
Vice President of MFS Network Technologies, a competitive local exchange
carrier.
Mr. Miron has served as a director of the Company since July 1998, and as
President of Advance/Newhouse Communications since April 1995, having served as
President of Newhouse Broadcasting Corporation from October 1986.
Mr. Webster has served as a director of the Company since July 1998, and as
Vice President -- Shared Corporate Resources of MediaOne since December 1997.
Prior to December 1997, he was Vice President -- Corporate Strategy of MediaOne
from December 1996. Prior to that, Mr. Webster served as Executive Director of U
S WEST, Inc. since February 1993.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company or of any of the holders of
Class B Common Stock or their affiliates will receive no compensation for their
services as directors. It is currently anticipated that each director who is not
affiliated with the Company or of any of the holders of Class B Common Stock
will be entitled to
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receive an annual retainer of $25,000 (to be paid 50% in cash and 50% in Class A
Common Stock) and an additional $1,000 plus reasonable expenses for attending
each meeting of the board of directors of the Company. A director is also
entitled to be paid $1,000 annually for each committee of the board of directors
for which that director serves as chairman.
BOARD COMPOSITION
Directors are elected annually. The stockholders agreement among the
Existing Stockholders provides that the board of directors of the Company will
consist of up to 10 directors and that at each annual meeting of the Company's
stockholders at which directors are elected, the holders of the Class B Common
Stock (all of which is currently held by the Existing Stockholders) will vote
their shares in favor of the following nominees: (1) up to seven nominees
selected by the holders of Class B Common Stock, (2) the chief executive officer
of the Company and (3) two nominees who are neither employed by nor affiliated
with the Company or any holder of Class B Common Stock and who are selected by a
committee comprised of the members of the board of directors, other than the
chief executive officer and the independent directors. The independent directors
are expected to be nominated within 90 days of the Offering. See 'Certain
Relationships and Related Transactions -- Stockholders Agreement.' The holders
of the Class A Common Stock will not have the right, as a class, under the
Company's restated certificate of incorporation or the stockholders agreement to
nominate any individuals for election to the board of directors.
COMMITTEES OF BOARD OF DIRECTORS
The board of directors will have two committees: an audit committee and a
compensation committee.
The audit committee will be comprised of a majority of independent
directors. The audit committee reviews and recommends to the board of directors,
as it deems necessary, the internal accounting and financial controls for the
Company and the accounting principles and auditing practices and procedures to
be employed in preparation and review of financial statements of the Company.
The audit committee makes recommendations to the board of directors concerning
the engagement of independent public accountants and the scope of the audit to
be undertaken by such accountants. Ernst & Young LLP presently serves as the
independent auditors of the Company.
The compensation committee will be comprised solely of independent
directors. The compensation committee reviews and, as it deems appropriate,
recommends to the board of directors policies, practices and procedures relating
to the compensation of the officers and other managerial employees and the
establishment and administration of employee benefit plans. The compensation
committee will exercise all authority under the 1998 Option Plan of the Company
(unless the board of directors appoints any other committee to exercise such
authority), and advises and consults with the officers of the Company as may be
requested regarding managerial personnel policies. The compensation committee
will have such additional powers and be granted additional authority as may be
conferred upon it from time to time by the board of directors.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning total compensation
paid to the Company's chief executive officer and each of its four remaining
most highly compensated current executive officers, which are collectively
referred to as the 'named executive officers', for services rendered to the
Company during 1998 in their capacities as executive officers.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- ----------------------------------------
AWARDS
---------------------------
TIME WARNER CLASS A
COMMON STOCK COMMON STOCK PAYOUTS
UNDERLYING UNDERLYING ----------
OPTIONS OPTIONS LTIP ALL OTHER
NAME & PRINCIPAL POSITION SALARY(1) BONUS AWARDED(2) AWARDED(3) PAYOUTS(4) COMPENSATION(5)
- --------------------------------------- ------------ -------- ------------ ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Larissa L. Herda(6) ................... $300,000 $169,381 7,600 375,000 $ -- $ 3,116
President and Chief Executive Officer
Paul B. Jones ......................... $259,000 $171,748 16,700 166,000 $ 134,400 $ --
General Counsel and
Regulatory Policy
A. Graham Powers ...................... $175,497 $118,448 7,600 100,000 $ 60,480 $ 4,800
Senior Vice President,
Engineering & Technology
David J. Rayner ....................... $171,000 $ 94,792 7,600 125,000 $ -- $ 4,610
Senior Vice President and Chief
Financial Officer
John T. Blount ........................ $170,500 $ 65,963 -- 100,000 $ -- $49,581
Senior Vice President, Sales
Stephen A. McPhie(6) .................. $234,000 -- -- -- $ -- $ --
Former President and Chief Executive
Officer
</TABLE>
- ------------
(1) The information provided under the heading 'Salary' is the annual salary of
the named executive officers as of December 31, 1998 pursuant to their
employment agreements with the Company (except for Mr. McPhie for whom the
information provided represents his annual salary received prior to June 22,
1998. See note 6). Actual salaries received by Ms. Herda and Messrs Jones,
Powers, Rayner, Blount and McPhie were $242,129, $259,242, $175,479,
$153,654, $145,625 and $140,400, respectively. See 'Employment Agreements.'
In accordance with rules of the SEC, amounts of personal benefits totaling
less than 10% of the total annual salary and bonus reported in the Table
have been omitted. Compensation of the Company's executive officers for 1998
was determined by the Existing Stockholders and approved by the Management
Committee of TWT LLC, as reflected in the employment agreements.
(2) All of these options are exercisable for the common stock of Time Warner
Inc. and have been adjusted to reflect a two-for-one stock split of Time
Warner common stock that took place on December 15, 1998. None of these
options was awarded with tandem stock appreciation rights. Mr. McPhie holds
12,450 restricted shares of common stock of MediaOne awarded in February
1997 by U S WEST, Inc. all of which are vested. No dividends were paid on
these restricted shares of MediaOne common stock. The value of these
restricted shares based on the closing price of MediaOne common stock on the
New York Stock Exchange Composite Listing on December 31, 1998 was $585,150.
None of the other named executive officers was awarded restricted stock of
MediaOne, Time Warner Inc. or the Company during 1998 or holds any such
shares.
(3) These options were originally awarded by TWT LLC with respect to equity
interests therein and were assumed by the Company in connection with the
Reconstitution and are exercisable for Class A Common Stock. See ' -- Stock
Option Plan.'
(4) These payouts were made in 1999 to participants in the Time Warner Cable
Long-Term Cash-Flow Incentive Plan for the 1995 to 1998 four-year cycle.
(5) The amounts shown in this column include the following:
(a) Pursuant to the TWC Savings Plan, a defined contribution plan
available generally to employees of the Company, each executive named above,
if eligible, may defer a portion of his or her annual compensation and the
Company contributes an additional two-thirds of that contribution so
deferred by the executive up to $4,800. These Company contributions were
invested under the savings plan. The amount contributed for 1998 on behalf
of Mr. Blount was $4,800 and for each other named executive officer is
disclosed under the heading 'All Other Compensation.'
(footnotes continued on next page)
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(footnotes continued from previous page)
(b) The Company maintains a program of life and disability insurance
generally available to all salaried employees on the same basis. For 1998,
prior to the reorganization that occurred on July 14, 1998, group term life
insurance was reduced to $50,000 for Mr. Jones, who was given an annual cash
payment equal to the cost of replacing coverage amounting to three times
base salary and annual bonus less $50,000.
(c) Mr. Blount received $44,781 in commissions during 1998 in his
capacity as Regional Vice President.
The amounts of this column exclude amounts of approximately $65,157 and
$30,182 paid to Mr. Blount and Mr. Jones, respectively, for certain
relocation expenses.
(6) Ms. Herda became President and Chief Executive Officer of the Company on
June 22, 1998 upon the resignation of Mr. McPhie who, effective August 1,
1998, became an Executive Vice President of MediaOne International, a
division of MediaOne. Prior to June 22, 1998, Ms. Herda served as the Senior
Vice President, Sales. Information for Mr. McPhie covers only the period
during which he was employed by the Company.
STOCK OPTION PLAN
GENERAL
In connection with the Reconstitution, New Time Warner Telecom assumed the
obligations under the TWT LLC 1998 Option Plan, amended such plan and renamed it
the Time Warner Telecom Inc. 1998 Stock Option Plan which is referred to as the
'1998 Option Plan'. The 1998 Option Plan provides for the granting of stock
options to purchase shares of Class A Common Stock to directors and current or
prospective employees of, and consultants or other individuals providing
services to, the Company and its subsidiaries. The Company believes that the
stock options to be granted under the 1998 Option Plan are an important part of
the compensation of the Company's key employees.
STOCK SUBJECT TO THE PLAN
The 1998 Option Plan provides for the granting of options to purchase a
maximum of 9,027,000 shares (approximately 33.0% of the Class A Common Stock
expected to be outstanding) of the Company's Class A Common Stock. The shares of
Class A Common Stock issued under the 1998 Option Plan may be either authorized
and unissued shares or issued shares held in treasury, or both. The Company will
reserve the number of shares necessary to satisfy the maximum number of shares
that may be issued under the 1998 Option Plan. The Class A Common Stock
underlying any option that expires, terminates or is canceled for any reason
without being exercised will again become available for awards under the 1998
Option Plan. Cash payments received by the Company upon the exercise of options
will be used for general corporate purposes. Awards under the 1998 Option Plan
may be made to (a) directors and employees of the Company, (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. As of
December 31, 1998, there were 898 employees and 8 directors eligible to
participate in the 1998 Option Plan.
ADMINISTRATION AND ELIGIBILITY
The board of directors of the Company intends to delegate authority to
administer the 1998 Option Plan to its compensation committee. Members of the
compensation committee will be 'non-employee directors' within the meaning of
SEC Rule 16b-3 and 'outside directors' within the meaning of Section 162(m) of
the Internal Revenue Code of 1986, as amended.
Awards may be made to employees and directors whether or not they
participate or are entitled to participate in any other option, restricted stock
or other compensation plan of the Company. The maximum number of shares that may
be awarded to any one person during one calendar year is 4,513,500. The exercise
of options granted to a prospective employee will be conditioned upon such
person becoming an employee of the Company or one of its subsidiaries.
Except as expressly provided by the 1998 Option Plan, the board of
directors, or to the extent delegated to the compensation committee, the
compensation committee will have the plenary authority in its discretion, to
61
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<PAGE>
grant awards under the 1998 Option Plan and to determine the terms and
conditions, which need not be identical, of such awards, including without
limitation,
(a) the employees and directors to whom, and the time or times at which,
awards will be granted,
(b) the number of awards to be granted,
(c) whether an option will be an incentive stock option, within the meaning
of Section 422A of the Code or a nonqualified stock option,
(d) the exercise price of any such award,
(e) when an option can be exercised and whether in whole or in
installments, and
(f) the form, terms and provisions of any agreement in which awards of
options are made.
However, under the terms of the 1998 Option Plan, the board of directors of
the Company may not delegate to the compensation committee the power to appoint
members to the compensation committee or amend, modify or terminate the 1998
Option Plan.
OPTIONS
Purchase Price. Subject to the limitations set forth below, the purchase
price of the shares of Class A Common Stock covered by each option will be
determined by the board of directors, or to the extent delegated to the
compensation committee, the compensation committee on the date of grant. The
purchase price of the shares of Class A Common Stock covered by each option will
not be less than the fair market value of the Class A Common Stock on the date
of grant of such option. In addition, an incentive stock option may not be
granted to any person who owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company unless the purchase
price is at least 110% of the fair market value of the Class A Common Stock at
the time the incentive stock option is granted and the incentive stock option is
not exercisable after the expiration of five years from the date it is granted.
Term and Exercise. The duration of each option will be for a period of up
to ten years as the board of directors, or to the extent delegated to the
compensation committee, the compensation committee determines at the time of
grant. Each option may be exercised in whole or in part at any time or only
after a period of time or in installments, as determined by the board of
directors or compensation committee at the time of grant, or by the board of
directors' or compensation committee's subsequent acceleration. Under the terms
of the 1998 Option Plan, options become immediately exercisable in full if the
optionee's employment terminates by reason of death or total disability.
The board of directors, or to the extent delegated to the compensation
committee, the compensation committee will establish option exercise procedures.
Payments may be made in cash or, unless otherwise determined by the board of
directors or compensation committee, in shares of Class A Common Stock already
owned by the optionee for at least six months or partly in cash and partly in
such Common Stock.
Options may be exercised after termination of employment only to the extent
provided in the agreement under which the option award was made; provided,
however, that (1) if employment terminates by reason of death or total
disability, options will remain exercisable for a period of at least one year
after such termination, but not later than the scheduled expiration of such
options, and (2) if employment terminates for cause, then all such options will
terminate immediately.
Transferability. To the extent permitted by the agreement under which the
option award was made, options will be transferable by gift to members of a
holder's immediate family. Options will also be transferable to a designated
beneficiary or by will or the laws of descent and distribution upon the death of
the holder.
ACCELERATION OF OPTIONS
Unless otherwise provided in the agreement under which the option award was
made, each award will vest upon the occurrence of any of the following
change-of-control transactions:
(1) the board of directors (or stockholders if required) approves:
(a) a consolidation or merger in which the Company is not the
surviving corporation or pursuant to which the Class A Common
Stock would be converted into cash, securities or other property,
excluding any merger in which the stockholders 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,
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(b) the sale, lease, exchange or other transfer of all or
substantially all of the assets of the Company, or
(c) the adoption of any plan for the liquidation or dissolution of the
Company;
(2) (a) the Existing Stockholders as a group cease to have the ability to
elect a majority of the members of the board of directors, other
than the chief executive officer and independent directors;
provided that independent directors shall be included in
calculating whether the foregoing majority requirement is satisfied
if the directors nominated by the Existing Stockholders do not
constitute a majority of the committee that selects the board of
directors' nominees for independent directors, and
(b) a 'person' or 'group' within the meaning of Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended, other
than the Existing Stockholders, has become the ultimate 'beneficial
owner' as defined in Rule 13d-3 under the Exchange Act of more than
35% of the total voting power of the Company's securities, on a
fully diluted basis, and such ownership represents a greater
percentage of the total voting power of the Company's securities, on
a fully diluted basis, than is held by the Existing Stockholders as
a group on such date.
Under Section 4999 of the Internal Revenue Code, an optionee may be
required to pay an excise tax on certain cash or stock received in connection
with any such change-of-control transaction, and, under Section 280G of the
Internal Revenue Code, the Company may not be entitled to a deduction for
Federal income tax purposes for certain of such cash or stock paid to an
optionee. However, the 1998 Option Plan provides that agreements under which
options are awarded may contain provisions relating to the applicability of
the penalty provisions of Section 4999 of the Internal Revenue Code to any
such cash or stock received by an optionee.
ADDITIONAL PROVISIONS
Change in Capitalization. In the event of stock split, stock dividend,
recapitalization, merger, consolidation or other similar transaction which
affects the character or amount of the outstanding shares of Class A Common
Stock, the board of directors, or to the extent delegated to the compensation
committee, the compensation committee will equitably adjust the purchase price
of each award and the number of shares subject to each award, and the number of
shares for which awards may be granted under the 1998 Option Plan will be
appropriately adjusted.
Other. The obligations of the Company with respect to awards granted under
the 1998 Option Plan are subject to all applicable laws. Unless otherwise
provided by the board of directors, or to the extent delegated to the
compensation committee, the compensation committee, the payment of withholding
taxes due in respect of an award under the 1998 Option Plan may be made with
shares of Class A Common Stock.
AMENDMENT AND TERMINATION
No awards may be granted under the 1998 Option Plan on or after July 14,
2008. The board of directors may terminate, modify or amend the 1998 Option Plan
at any time, provided that the board of directors must comply with all
applicable laws, applicable stock exchange listing requirements and applicable
requirements for the 1998 Option Plan to qualify as 'performance based' under
Section 162(m) of the Internal Revenue Code. Termination or amendment of the
1998 Option Plan or any outstanding award may not adversely affect the rights of
any holder without his or her consent.
AWARDS UNDER THE 1998 OPTION PLAN
In connection with the Reconstitution, New Time Warner Telecom assumed
options awarded by TWT LLC that were exercisable for units of Class A limited
liability company interests in TWT LLC. These options were adjusted in the
Reconstitution such that an option with respect to one TWT LLC unit at an
exercise price of $12 per unit became exercisable for one share of Class A
Common Stock at an exercise price of $12 per share, subject to adjustment based
on the size of the Offering. As a result of the Reconstitution, each of Ms.
Herda and Messrs. Jones, Powers, Rayner and Blount holds nonqualified stock
options with respect to 375,000, 166,000, 100,000, 125,000 and 100,000 shares of
Class A Common stock, respectively, and there are options with respect to an
additional 5,320,667 shares held by other employees, all with an exercise price
of $12 per share, subject to adjustment based on the size of the Offering and
the initial offering price. These options become exercisable in installments of
one-quarter on the first anniversary of the date of grant and one-sixteenth at
the end of each calendar quarter thereafter, subject to acceleration upon the
occurrence of certain events, and will expire ten years from the date of grant.
In March 1999 the Company granted options covering 41,667 shares of Class A
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Common Stock to its former president and chief executive officer in settlement
of certain incentive compensation issues. These options have an exercise price
of $12 per share and vest over a three-year period and expire in 2008.
Depending upon the final initial public offering price, the Company may in
connection with the Offering grant additional options to employees having an
exercise price equal to the initial public offering price.
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS
The following summary generally describes the principal Federal (and not
state and local) income tax consequences of awards granted under the 1998 Option
Plan. It is general in nature and is not intended to cover all tax consequences
that may apply to a particular officer or to the Company. The provisions of the
Internal Revenue Code and the regulations thereunder relating to these matters
are complicated and their impact in any one case may depend upon the particular
circumstances.
If an option is granted in accordance with the terms of the 1998 Option
Plan, no income will be recognized by the recipient thereof at the time the
option is granted.
On exercise of a nonqualified stock option, the amount by which the fair
market value of the shares of Class A Common Stock on the date of exercise
exceeds the purchase price of such shares will generally be taxable to the
optionee as ordinary income, and will be deductible for tax purposes by the
Company in the year in which the optionee recognized the ordinary income. The
disposition of shares acquired upon exercise of a nonqualified stock option will
ordinarily result in long-term or short-term capital gain or loss, depending on
the applicable holding period, in an amount equal to the difference between the
amount realized on such disposition and the sum of the purchase price and the
amount of ordinary income recognized in connection with the exercise of the
nonqualified stock option.
On exercise of an incentive stock option, an optionee will generally not
recognize any income and the Company will generally not be entitled to a
deduction for tax purposes. However, the difference between the exercise price
and the fair market value of the shares received on the date of exercise will be
treated as a positive adjustment in determining alternative minimum taxable
income, which may subject the optionee to the alternative minimum tax. The
disposition of shares acquired upon exercise of an incentive stock option will
ordinarily result in long-term or short-term capital gain or loss (depending on
the applicable holding period). However, if the optionee disposes of shares
acquired upon exercise of an incentive stock option within two years after the
date of grant or within one year after the date of exercise (a 'disqualifying
disposition'), the optionee will generally recognize ordinary income, and the
Company will generally be entitled to a deduction for tax purposes in the amount
of the excess of the fair market value of the shares of Class A Common Stock on
the date the incentive stock option is so exercised over the purchase price or,
in certain circumstances, the gain on sale, if less. Any excess of the amount
realized by the optionee on the disqualifying disposition over the fair market
value of the shares on the date of exercise of the incentive stock option will
ordinarily constitute capital gain.
If an option is exercised through the use of Class A Common Stock
previously owned by the optionee, such exercise generally will not be considered
a taxable disposition of the previously owned shares and no gain or loss will be
recognized with respect to such shares upon such exercise. However, if the
previously owned shares were acquired on the exercise of an incentive stock
option or other tax-qualified stock option and the holding period requirement
for those shares was not satisfied at the time they were used to exercise an
option intended to qualify as an incentive stock option, such use would
constitute a disqualifying disposition of such previously owned shares resulting
in the recognition of ordinary income, but, under proposed Treasury Regulations,
not any additional capital gain, in the amount described above. If an otherwise
qualifying incentive stock option becomes first exercisable in any one year for
shares having a value in excess of $100,000 on the date it is granted, the
portion of the option in respect of such excess shares will be treated as a
nonqualified stock option.
EMPLOYMENT AGREEMENTS
The Company is a party to employment agreements with the each of the
current named executive officers of the Company. These agreements have been
incorporated by reference as exhibits to the registration statement of which
this prospectus forms a part.
Among other things, the agreements with the Company's named executive
officers provide for:
a three-year term of employment in a specified executive post, commencing
on July 14, 1998;
an annual salary;
an annual bonus in the discretion of the Company, generally targeted at
50% of the named executive officer's salary; and
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a participation in any present or future pension, profit-sharing, employee
equity ownership, vacation, insurance, hospitalization, medical, health,
disability and other employee benefit or welfare plan, program or policy,
to the extent that employees at the officer's executive level are general
eligible under the provisions of the plan, program or policy.
The minimum annual salaries under these agreements are $300,000 for Ms.
Herda; $259,000 for Mr. Jones; $175,497 for Mr. Powers; $171,000 for Mr. Rayner
and $170,500 for Mr. Blount.
Generally, such agreements include a narrow definition of the 'cause' for
which an executive's employment may be terminated and in that event, the
executive will only receive earned and unpaid base salary accrued through such
date of termination.
These agreements typically provide that in the event of the Company's
material breach or termination of the executive's employment during the term of
employment without cause, the executive will be entitled to elect either
to receive a lump-sum payment equal to the present value of the base
salary and annual bonus otherwise payable during the remaining portion of
the executive's term of employment, provided that such amount shall not be
less than the sum of such salary and bonus prorated for an 18-month period
or
to remain an employee of the Company for up to 18 months and, without
performing any services, receive the base salary and annual bonus
otherwise payable, with a lump-sum payment, if necessary for any remaining
payment, at the end of such 18 months.
Executives are not generally required to mitigate damages after such a
termination, other than as necessary to prevent the Company from losing any tax
deductions to which it otherwise would have been entitled for any payments
deemed to be 'contingent on a change' under the Internal Revenue Code.
If an executive becomes disabled during the term of his or her employment
agreement, the executive typically will receive 75% of the executive's then
current salary and his or her applicable target annual bonus amount prorated for
an 18-month period. Any such payments will be reduced by amounts received from
Worker's Compensation, Social Security and disability insurance policies
maintained by the Company.
If an executive dies during the term of an employment agreement, generally
the executive's beneficiaries will receive the executive's earned and unpaid
salary to the date thirty days after the date of death and a pro rata portion of
the executive's bonus for the year of his death.
STOCK OPTIONS AWARDED BY THE COMPANY DURING 1998
The following table sets forth certain information with respect to employee
options to purchase shares of Class A Common Stock assumed by the Company in
connection with the Reconstitution awarded during 1998 with respect to the named
executive officers. All such options were nonqualified stock options and no
stock appreciation rights, alone or in tandem with stock options, were awarded
during 1998. These are the only options with respect to Class A Common Stock
held by such persons.
STOCK OPTION GRANTS DURING 1998 BY THE COMPANY
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)
---------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES PRICE EXPIRATION
NAME GRANTED IN 1998 ($ /SHARE) DATE
- ------------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Larissa L.
Herda........... 375,000 6.1% $12 8/5/08
Paul B. Jones..... 166,000 2.7% $12 8/5/08
A. Graham
Powers.......... 100,000 1.6% $12 8/5/08
David J. Rayner... 125,000 2.0% $12 8/5/08
John T. Blount.... 100,000 1.6% $12 8/5/08
Stephen A.
McPhie.......... -- -- -- --
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
OF
STOCK PRICE APPRECIATION
FOR OPTION TERM
-------------------------
NAME 5% ($) 10% ($)
- ------------------ --------- -------------
<S> <C> <C>
Larissa L.
Herda........... $2,830,026 $ 7,171,841
Paul B. Jones..... $1,252,758 $ 3,174,735
A. Graham
Powers.......... $ 754,674 $ 1,912,491
David J. Rayner... $ 943,342 $ 2,390,614
John T. Blount.... $ 754,674 $ 1,912,491
Stephen A.
McPhie.......... -- --
</TABLE>
(table continued on next page)
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(table continued from previous page)
<TABLE>
<CAPTION>
TOTAL GRANTS (1)
----------------------------------------------
EXERCISE OR BASE NUMBER OF SECURITIES
PRICE ($/SHARE) UNDERLYING OPTIONS GRANTED
---------------- --------------------------
<S> <C> <C>
All executive officers as a group (7 persons)........................ $ 12 1,040,000
Non-executive director group (7 persons)............................. -- --
All other employees (891 persons).................................... $ 12 4,770,750
</TABLE>
(1) These options were awarded pursuant to the option plan of TWT LLC and were
assumed by the Company and the terms are governed by such plan and the
recipient's option agreement. See ' -- Stock Option Plan -- General.'
As required by SEC rules, the dollar amounts in the last two columns under
'Individual Grants' represent the hypothetical gain or 'option spread' that
would exist for the options based on assumed 5% and 10% annual compounded rates
of Class A Common Stock appreciation over the full ten-year option term,
resulting in 63% and 159% appreciation, respectively. These assumed rates of
appreciation applied to the exercise price would result in a Class A Common
Stock price on August 5, 2008 of $19.55 and $31.12, respectively. These
prescribed rates are not intended to forecast possible future appreciation, if
any, of the Class A Common Stock.
STOCK OPTIONS AWARDED BY THE EXISTING STOCKHOLDERS DURING 1998
The following table sets forth certain information with respect to employee
options to purchase shares of Time Warner common stock awarded by Time Warner
during 1998 to the named executive officers. All such Time Warner options were
nonqualified options and no stock appreciation rights, alone or in tandem with
stock options, were awarded during 1998. No options to purchase MediaOne common
stock were awarded to the named executive officers during 1998.
STOCK OPTION GRANTS DURING 1998 BY THE EXISTING STOCKHOLDERS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)
---------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM
OPTIONS IN 1998 PRICE EXPIRATION ------------------------------
NAME GRANTED (2) ($ /SHARE) DATE 5% ($) 10% ($)
- ------------------ ---------- ---------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Larissa L.
Herda........... 7,600 .04% $ 36.03 3/17/08 $ 172,512 $ 435,387
Paul B. Jones..... 16,700 .09% $ 36.03 3/17/08 $ 379,072 $ 956,705
A. Graham
Powers.......... 7,600 .04% $ 36.03 3/17/08 $ 172,512 $ 435,387
David J. Rayner... 7,600 .04% $ 36.03 3/17/08 $ 172,512 $ 435,387
John T. Blount.... -- -- -- -- -- --
Stephen A.
McPhie.......... -- -- -- -- -- --
</TABLE>
- ------------
(1) These Time Warner options were awarded pursuant to stock option plans of
Time Warner and the terms are governed by such plans and the recipient's
option agreement, and, pursuant to these terms, have been adjusted to
reflect the Time Warner stock split that took place on December 15, 1998.
The option exercise price is the fair market value of the Time Warner common
stock on the date of grant. The Time Warner options shown in the table
become exercisable in installments of one-third on the first three
anniversaries of the date of grant. Payment of the exercise price of a Time
Warner option may be made in cash or, in whole or in part, in full shares of
Time Warner common stock already owned by the holder of the Time Warner
option. The payment of withholding taxes due upon exercise of a Time Warner
option may generally be made with shares of Time Warner common stock.
(2) Represents a percentage of all options granted to employees of Time Warner
during 1998.
As required by SEC rules, the dollar amounts in the last two columns
represent the hypothetical gain or 'option spread' that would exist for the
options based on assumed 5% and 10% annual compounded rates of Time Warner
common stock price appreciation over the full ten-year option term, resulting in
63% and 159% appreciation, respectively. These assumed rates of appreciation
applied to the price on the date of the awards would result in a Time Warner
common stock price on March 17, 2008 of $58.69 and $93.45, respectively.
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These prescribed rates are not intended to forecast possible future
appreciation, if any, of the Time Warner common stock.
OPTION EXERCISES AND VALUES IN 1998
None of the options exercisable for Class A Common Stock held by the named
executive officers and listed under the heading 'Stock Options Awarded by the
Company During 1998' have been exercised, are exercisable or are 'in-the-money.'
The following table sets forth as to each of the named executive officers
information with respect to option exercises during 1998 and the status of their
options on December 31, 1998:
the number of shares of Time Warner common stock, or MediaOne common stock
in the case of Messrs. Blount and McPhie, underlying options exercised
during 1998;
the aggregate dollar value realized upon exercise of such options;
the total number of shares of Time Warner common stock, or MediaOne common
stock in the case of Messrs. Blount and McPhie, underlying exercisable and
nonexercisable stock options held on December 31, 1998; and
the aggregate dollar value of in-the-money exercisable and nonexercisable
stock options on December 31, 1998.
None of the named executive officers has been awarded stock appreciation
rights alone or in tandem with stock options. This information has been adjusted
to reflect the Time Warner stock split that took place on December 15, 1998.
AGGREGATE OPTION EXERCISES DURING 1998 AND
OPTION VALUES ON DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDERLYING DOLLAR VALUE OF
NUMBER OF UNEXERCISED UNEXERCISED
SHARES DOLLAR OPTIONS IN-THE-MONEY OPTIONS
UNDERLYING VALUE ON DECEMBER 31, 1998 ON DECEMBER 31, 1998*
OPTIONS REALIZED ON ---------------------------- ----------------------------
NAME EXERCISED EXERCISE EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
- -------------------------------------- ---------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Larissa L. Herda...................... -- -- 3,334 14,266 $ 134,302 $ 466,370
Paul B. Jones......................... 4,000 $ 110,280 85,078 33,398 $ 3,656,870 $1,109,996
A. Graham Powers...................... -- -- 29,402 15,198 $ 1,222,919 $ 505,103
David J. Rayner....................... 1,600 $ 44,054 668 8,932 $ 26,909 $ 251,503
John T. Blount........................ -- -- 521 -- $ 17,245 $ 0
Stephen A. McPhie(1).................. -- -- 30,916 7,838 $ 886,526 $ 219,289
</TABLE>
- ------------
* Based on a closing price of $62.0625 per share of Time Warner common stock,
and $47.00 per share of MediaOne common stock with respect to stock options
held by Messrs. Blount and McPhie, on December 31, 1998 as reported on the
New York Stock Exchange Composite Listing.
(1) These options to purchase MediaOne common stock become exercisable in
installments of one-third on the first three anniversaries of the date of
grant and include a reload feature that gives the holder the right to
receive a further option, at the then current market price, for a number of
shares equal to the number of shares of stock surrendered in payment of the
exercise price of the original option.
The option exercise price of all options held by the named executive
officers is the fair market value of the stock on the date of grant. All of the
options held by the named executive officers become immediately exercisable in
full upon the occurrence of certain events, including the death or total
disability of the option holder, certain change-of-control transactions and, in
most cases, the Company's breach of the holder's employment agreement. The Time
Warner options held by the named executive officers generally remain exercisable
for three years after their employment is terminated without cause, for one year
after death or total disability, for five years after retirement and for three
months after termination for any other reason, except that such stock options
awarded before 1996 are exercisable for three months after a termination without
cause and
67
<PAGE>
<PAGE>
after retirement and those awarded after July 1997 are exercisable for three
years after death or disability. All Time Warner options terminate immediately
if the holder's employment is terminated for cause. The terms of the options
shown in the chart are ten years.
PENSION COVERAGE
Although the Company does not currently expect to have its own pension
plan, Messrs. Jones, Powers and Rayner will, upon retirement, be entitled to
receive benefits under the Time Warner Cable pension plan based on service to
the Company and/or Time Warner Cable on or prior to December 31, 1998. Set forth
below is a brief description of the Time Warner Cable pension plan.
A participant accrues benefits under the Time Warner Cable pension plan on
the basis of 1 1/4% of the average annual compensation, which is defined as the
highest average annual compensation for five consecutive full years of
employment in the last ten years, which includes regular salary, overtime and
shift differential payments, and non-deferred bonuses paid according to a
regular program, up to the average Social Security Wage Base plus 1 2/3% in
excess of the average Social Security Wage Base for each year of service up to
35 years and 1/2% for each year of service over 35 years. In addition, there is
a supplemental benefit of $60 per year times years of service up to thirty
years. Compensation for purposes of calculating average annual compensation
under the Time Warner Cable pension plan is limited to $200,000 per year for
1989 through 1993 and $150,000 per year for 1994 and thereafter, each subject to
adjustments provided in the Internal Revenue Code. Eligible employees become
vested in all benefits under the Time Warner Cable pension plan on the earlier
of five years of service or certain other events.
Federal law limits both the amount of compensation that is eligible for the
calculation of benefits and the amount of benefits derived from employer
contributions that may be paid to participants under the Time Warner Cable
pension plan. However, as permitted by the Employee Retirement Income Security
Act of 1974, as amended, Time Warner Cable has adopted the Time Warner Cable
excess benefit pension plan, which provides for payments by Time Warner Cable of
certain amounts which employees of Time Warner Cable would have received under
the Time Warner Cable pension plan if eligible compensation were limited to
$250,000 in 1994, increased 5% per year after 1994, to a maximum of $350,000,
and there were no payment restrictions.
The following table shows the estimated annual pension payable upon
retirement to employees in specified remuneration and years-of-service
classifications. The amount of the estimated annual pension is based upon a
pension formula which applies to all participants in both the Time Warner Cable
pension plan and the excess benefit pension plan. The estimated amounts are
based on the assumption that payments under the Time Warner Cable pension plan
will commence upon normal retirement, which is generally age 65, that the Time
Warner Cable pension plan will continue in force in its present form and that no
joint and survivor annuity will be payable, which would on an actuarial basis
reduce benefits to the employee but provide benefits to a surviving beneficiary.
Amounts calculated under the pension formula which exceed ERISA limits will be
paid under the excess benefit pension Plan from Time Warner Cable's assets and
are included in the amounts shown in the following table.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL PENSION FOR YEARS OF CREDITED SERVICE
HIGHEST CONSECUTIVE -----------------------------------------------------------------
FIVE YEAR AVERAGE COMPENSATION 10 15 20 25 30 35
- -------------------------------------------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000.................................... $ 7,036 $10,555 $14,073 $ 17,591 $ 21,109 $ 24,627
$100,000.................................... 15,370 23,055 30,740 38,425 46,110 53,795
$150,000.................................... 23,703 35,555 47,407 59,268 71,110 82,962
$200,000.................................... 32,037 48,055 64,074 80,092 96,111 112,129
$250,000.................................... 40,370 60,556 80,741 100,926 121,111 141,296
$300,000.................................... 48,704 73,056 97,408 121,760 146,112 170,464
$350,000.................................... 57,037 85,556 114,075 142,593 171,112 199,631
</TABLE>
The estimated annual benefits payable under the Time Warner Cable pension
plan and the excess benefit pension plan, as of December 31, 1998, would be
based on average compensation of $261,321 for Mr. Jones, $189,395 for Mr. Powers
and $123,226 for Mr. Rayner with 11.0, 12.0 and 15.5 years of credited service,
respectively.
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<PAGE>
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT
In connection with the Reconstitution, the Existing Stockholders entered
into a stockholders agreement. The following summary description of the
stockholders agreement does not purport to be complete and is qualified in its
entirety by reference to the text of such agreement, the form of which is filed
as an exhibit to the registration statement of which this prospectus forms a
part. Additionally, there can be no assurance that the Existing Stockholders
will not cause the stockholders agreement to be amended, modified or terminated
or cause the Company to waive any provision of such agreement.
The stockholders agreement provides that at each annual meeting of the
Company's stockholders at which directors are elected, the holders of the Class
B Common Stock will vote their shares in favor of the following nominees:
(1) up to seven nominees selected by the holders of Class B Common Stock as
described in the next paragraph,
(2) the chief executive officer and
(3) two nominees who are neither employed by nor affiliated with the
Company or any holder of Class B Common Stock and who are selected by a
committee comprised of all the members of the Board of Directors, other
than the chief executive officer and the independent directors;
provided that if the Existing Stockholders do not have the right to nominate a
total of at least three Class B nominees, such nominating committee shall
consist of a total of three directors and shall include such Class B nominees
plus such other director or directors as shall be determined by a majority of
the board of directors. Solely as a result of the agreement of each Existing
Stockholder to vote in favor of the other Existing Stockholders' director
nominees under the stockholders agreement, the Existing Stockholders may be
deemed to share beneficial ownership of the shares beneficially owned by each of
them.
Under the stockholders agreement, the Class B Nominees will be selected as
follows: initially three Class B nominees will be designated by Time Warner,
three by MediaOne and one by Newhouse. Under the stockholders agreement, the
ability of the Existing Stockholders to designate any Class B nominees depends
on the identity of the particular stockholder and the percentage of shares of
Common Stock owned by it. Generally, each Existing Stockholder must own at least
9.44% of the Common Stock to appoint one director. In the case of Time Warner,
so long as it owns at least 18.88% of the Common Stock it will be entitled to
nominate three directors. In the event that Time Warner owns less than 18.88% of
the Common Stock, which event is referred to in this prospectus as a 'Time
Warner step event', the number of directors which Time Warner may nominate will
decrease proportionally with its ownership of the Common Stock until it owns
less than 9.44%, at which point it will not be entitled to nominate any
directors. In the case of MediaOne, so long as a Time Warner step event has not
occurred and it owns at least 9.44% of the Common Stock, MediaOne will be
entitled to nominate three directors. If a Time Warner step event has occurred,
the number of directors that MediaOne is entitled to nominate will decrease
proportionally with its ownership of the Common Stock (in accordance with the
same percentage thresholds as apply to Time Warner) until it owns less than
9.44%, at which point it will not be entitled to nominate any directors. If a
Time Warner step event has not occurred but MediaOne owns less than 9.44% of the
Common Stock, it will not be entitled to nominate any directors. In the case of
Newhouse, so long as it owns at least 9.44% of the Common Stock, Newhouse will
be entitled to nominate one director. The foregoing percentages shall be
adjusted, from time to time, in the event that the Company issues additional
shares of Common Stock or takes actions in respect of Common Stock, such as
stock splits or recapitalizations, to reflect the percentages that would have
been in effect had such action been taken as of the effective date of the
Reconstitution and prior to the computation of such percentages.
The stockholders agreement prohibits any transfer of Class B Common Stock
held by the Existing Stockholders, unless expressly permitted under the terms
thereof. In addition, voting agreements relating to the Class B Common Stock
with any third party are prohibited.
If a selling Class B stockholder proposes to sell all of its shares of
Class B Common Stock pursuant to a bona fide offer from an unaffiliated third
party, such stockholder shall give a refusal notice to all other holders of
Class B Common Stock. The notice must contain the identity of the offeror and an
offer to sell such stock to the holders of Class B Common Stock upon the terms
and subject to the conditions set forth in the offer from the
69
<PAGE>
<PAGE>
third party. The non-selling holders of Class B Common Stock will have the right
of first refusal to purchase pro rata all, but not less than all, of such Class
B Common Stock. If the non-selling holders do not exercise that right for all
the shares, the selling Class B Stockholder shall be free, for a period of 90
days thereafter, to sell such shares of Class B Common Stock, as shares of
Class B Common Stock, to the third party offeror on terms and conditions that
are no less favorable to the selling Class B Common stockholder than those
contained in the refusal notice. If a holder sells all, but not less than all,
of its Class B Common Stock as shares of Class B Common Stock, such holder may
transfer its right to nominate Class B nominees for election to the board of
directors. In addition, if Time Warner proposes to sell all, but not less than
all, of its Class B Common Stock together with shares of its Class A Common
Stock that represent an aggregate of more than one-third of the outstanding
shares of Common Stock, then other holders of Class B Common Stock will have
certain 'tag-along' rights that provide them with the right to sell their shares
of Class A Common Stock and Class B Common Stock on a pro rata basis along with,
and on the same terms and conditions as, Time Warner. However, these 'tag-along'
rights apply to all Class B Common Stock prior to applying to any Class A Common
Stock held by such holders. In connection with such sale, Time Warner and any
other stockholder transferring all of its shares of Class B Common Stock shall
have the right to transfer all of its right, if any, to nominate Class B
nominees for election to the board of directors. In addition, Time Warner and
the other selling stockholders will not be required to convert their shares of
Class B Common Stock to Class A Common Stock prior to such sale.
Except for transfers to affiliates and any other transfer described above,
immediately prior to any direct transfer of Class B Common Stock or certain
indirect transfers of Class B Common Stock, the Class B Common Stock must be
converted to Class A Common Stock. Except for transfers described above, a
stockholder may not transfer its right to nominate Class B nominees. A holder of
Class B Common Stock will not be required to convert its shares into Class A
Common Stock, and such holder's right to nominate Class B nominees will not
terminate, if such holder is acquired by a third party or such holder
distributes to its stockholders a company holding its shares of Class B Common
Stock, as well as other assets.
The Existing Stockholders will have demand registration rights with respect
to shares of Class A Common Stock, including Class A Common Stock issuable or
issued upon the conversion of shares of Class B Common Stock, on the following
terms:
no demand may be made during the first 180 days after the closing date of
the Offering,
the Company shall not be obligated to effect a demand within 180 days from
the effective date of the previous demand registration,
the Company will not be required to effect a demand registration unless
the aggregate number of shares of Class A Common Stock to be registered
is, at any given time, at least 1% of the Class A Common Stock then
outstanding and
the demand registration may be postponed for up to two months if the
Company believes that such registration would have a material adverse
effect on any proposal or plan to engage in any financing, acquisition of
assets or any merger, consolidation, tender offer or other significant
transaction.
In addition, each Existing Stockholder may cause the Company to include its
shares in certain other registered offerings under the Securities Act, subject
to certain conditions. Each Existing Stockholder will pay all underwriting
discounts and commissions and any transfer taxes attributable to the sale of its
shares. The Company will pay all expenses relating to its obligations to file
and maintain the effectiveness of a registration statement, the legal fees of
one counsel to represent the Existing Stockholders and the fees and expenses of
its auditors.
CERTAIN OPERATING AGREEMENTS
Capacity License Agreements. Each of the Company's local operations is
party to a capacity license agreement, which are collectively referred to as the
'capacity license,' with the local cable television operation of Time Warner
Cable, providing the Company with a 30 year exclusive right to utilize all of
the capacity of specified fiber-optic cable owned and maintained by the
respective Time Warner Cable operation. For the Company's existing networks, the
capacity license has been fully paid and does not require additional license
fees (although certain maintenance fees and fees for splicing and similar
services are payable periodically). The Company may request that the Time Warner
Cable construct and provide additional fiber-optic cable capacity to
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meet the Company's future needs. Time Warner Cable is not obligated to provide
such fiber capacity to the Company; however, the capacity license provides for
the sharing of construction costs between the Company and Time Warner Cable to
the extent that such costs are incurred to build additional fiber-optic capacity
which is licensed to the Company. See 'Risk Factors -- We may need to obtain
additional fiber optic capacity beyond what Time Warner Cable provides us.' and
'Risk Factors -- Our business may be limited if the capacity license with Time
Warner Cable expires or is terminated.' If Time Warner Cable provides such
additional capacity, the Company will pay an allocable share of the cost of
construction of the fiber upon which capacity is to be provided, plus a
permitting fee. Such payments are due one-half upon commencement of construction
and the remainder upon initial acceptance of the capacity by the Company. The
Company is responsible for all taxes and franchise or similar fees arising out
of its utilization of the capacity, and a portion of other out-of-pocket
expenses incurred by Time Warner Cable with regard to the cable upon which such
capacity is made available. The Company is permitted to use the capacity for
telecommunications services and any other lawful purpose, except for the
provision of residential services and content services. Violations of the
limitations on business activities of the Company contained in the restated
certificate of incorporation or the capacity license may, subject to the cure
period provided in the capacity license, result in a termination of the capacity
license. The capacity license does not restrict the Company from licensing fiber
optic capacity from parties other than Time Warner Cable. The capacity license
expires in 2028. Although Time Warner Cable has agreed to negotiate renewal or
alternative provisions in good faith at that time, the parties may not agree on
the terms of any renewal or alternative provisions or the terms of any renewal
or alternative provisions agreed upon by the parties may not be favorable to the
Company. If the capacity license is not renewed in 2028, the Company will have
no residual interest in the capacity under the capacity license and may need to
build, lease or otherwise obtain transmission capacity in order to service its
customers in the service areas covered by the capacity license; the terms of
such arrangements could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has the
right to terminate a capacity license in whole or in part at any time upon 180
days' notice and payment of any outstanding fees regarding the terminated
capacity. Time Warner Cable has the right to terminate a capacity license upon
180 days' notice in the event of, among other things, certain governmental
proceedings or third party challenges to Time Warner Cable's franchises or the
capacity license. The capacity license includes substantial limitations on
liability in the event of service interruptions. See 'Risk Factors -- Our
business may be limited if the capacity license with Time Warner Cable expires
or is terminated.'
Facility Lease Agreements. The Company leases or subleases physical space
located at Time Warner Cable's facilities for various purposes under facility
lease agreements. In the event that at least a majority of the ownership of any
Time Warner Cable system is not owned by one or more affiliates of the Existing
Stockholders or of
Time Warner's owning less than 30% of the Common Stock,
Time Warner having the right to nominate less than 3 nominees to the board
of directors of the Company,
the Company's non-compliance with the restrictions in the restated
certificate of incorporation regarding residential services and content
services and
the transfer by an Existing Stockholder of its Class B Common Stock
together with its rights to designate nominees to the board of directors
under the stockholders agreement, the Company will be required, at its own
expense, to segregate and partition in a reasonable, secure manner its
leased or subleased space.
The lease rates for properties owned by Time Warner Cable and leased to the
Company are based upon comparable rents in the local market, taking into account
other factors such as the term of the lease, type of space, square footage,
location and leasehold improvements funded to date by Time Warner Cable.
Generally, the term of such leases are for 15 years, with two five year options
to renew. With respect to properties leased by Time Warner Cable, the Company is
charged a pro rata portion of the rent and fees payable under the primary lease.
The duration of the Company's subleases are coextensive with Time Warner Cable's
primary lease.
Services Agreement. Time Warner Cable provides certain administrative and
operating services, tax, management information systems, and legal support
services, to the Company pursuant to an administrative services agreement. The
costs for such services are determined by Time Warner Cable based upon the
Company's historical and projected usage, depending on the amount and type of
administrative services to be provided.
71
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Residential Support Agreements. Under residential support agreements, the
Company will provide certain support and interconnection services to Time Warner
Cable for its residential telephony business. Generally, all rates for such
residential support services offered to Time Warner Cable may be adjusted
annually by the Company, but may not be less favorable than the wholesale rates
charged to the Company's other customers.
Time Warner License Agreement. The use of the 'Time Warner' name by the
Company is subject to a license agreement with Time Warner. The Company will no
longer have the right to use of the 'Time Warner' in the following
circumstances:
the license agreement expires after an initial term of four years or any
permitted renewal,
Time Warner no longer owns at least 30% of the Common Stock,
Time Warner no longer has the right to nominate at least 3 nominees to the
board of directors of the Company,
the Company violates covenants regarding residential services and content
services, or
an Existing Stockholder transfers its Class B Common Stock and its rights
to designate nominees to the board of directors to a third party.
Under those circumstances, the Company may change its name to 'TW Telecom
Inc.' The Company believes that the terms and conditions, taken as a whole, of
the transactions described under the headings 'Capacity License Agreements,'
'Facility Lease Agreements,' 'Services Agreement,' 'Residential Support
Agreements' and the 'Time Warner License Agreement' were no less favorable to
the Company than could have been obtained from unaffiliated parties.
72
<PAGE>
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PRINCIPAL STOCKHOLDERS
Prior to the reorganization of the Company that occurred on July 14, 1998,
the Existing Stockholders and their affiliates beneficially owned all of the
assets and liabilities of the Company's business. In connection with the
reorganization, such assets were contributed to the Company by affiliates of the
Existing Stockholders and the Existing Stockholders received all the limited
liability company interests in TWT LLC. These interests were exchanged in
connection with the Reconstitution for all the outstanding Class B Common Stock
of New Time Warner Telecom.
The following table sets forth certain information regarding the beneficial
ownership of the equity securities of the Company:
(1) immediately following the Reconstitution but immediately prior to the
Offering and
(2) immediately following the Offering by:
(a) each of the directors and the named executive officers;
(b) all directors and executive officers as a group; and
(c) each owner of more than 5% of any class of equity securities of
the Company.
Unless otherwise noted, the address for each executive officer of the
Company is c/o the Company, 5700 S. Quebec Street, Greenwood Village, CO 80111.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK (1) CLASS B COMMON STOCK (1) TOTAL COMMON STOCK
----------------------------------- ---------------------------------- ------------------------------------
PERCENT OF CLASS PERCENT OF CLASS PERCENT OF EQUITY
-------------------------- ---------------------- ------------------------
PRIOR TO FOLLOWING PRIOR TO FOLLOWING PRIOR TO FOLLOWING
NO. OF THE THE NO. OF THE THE NO. OF THE THE
SHARES OFFERING (2) OFFERING (2) SHARES OFFERING OFFERING SHARES OFFERING OFFERING
------- ------------ ------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TW (3)(4)...... -- --% --% 50,358,750 61.98% 61.98% 50,358,750 61.98% 50.74%
MediaOne
(4)(5)....... -- -- -- 15,315,625 18.85 18.85 15,315,625 18.85 15.43
Newhouse
(4)(6)....... -- -- -- 15,575,625 19.17 19.17 15,575,625 19.17 15.69
All Directors
and
executive
officers as
a group (16
persons)
(7)(8)..... * * * -- -- -- * * *
<CAPTION>
% OF
VOTING POWER
FOLLOWING THE
OFFERING
-------------
<S> <C>
TW (3)(4)...... 60.64%
MediaOne
(4)(5)....... 18.44
Newhouse
(4)(6)....... 18.75
All Directors
and
executive
officers as
a group (16
persons)
(7)(8)..... *
</TABLE>
- ------------
* Represents less than one percent.
(1) The Company has two classes of outstanding Common Stock, the Class A Common
Stock and the Class B Common Stock. Beneficial ownership of the Common Stock
has been determined in accordance with the rules of the SEC. See
'Description of Capital Stock.'
(2) Excludes 81,250,000 shares of Class B Common Stock which are convertible
into an equal number of shares of Class A Common Stock. The shares of Class
B Common Stock held by Time Warner, MediaOne and Newhouse represented on a
converted basis 61.98%, 18.85% and 19.17%, respectively, of the Class A
Common Stock prior to the Offering and 50.74%, 15.43% and 15.69%,
respectively, following the Offering.
(3) Owned by Time Warner Companies, Inc., American Television and Communications
Corporation, Warner Communications Inc., TW/TAE, Inc., FibrCOM Holdings,
L.P. and Paragon Communications, each a direct or indirect wholly owned
subsidiary of Time Warner Inc. The business address of Time Warner is 75
Rockefeller Plaza, New York, NY 10019.
(4) Solely as a result of the agreement of the Existing Stockholders to vote in
favor of the others' director nominees under the stockholders agreement, the
Existing Stockholders may be deemed to share beneficial ownership of the
shares beneficially owned by each of them. See 'Certain Relationships and
Related Transactions -- Stockholders Agreement.'
(5) Owned by MediaOne of Colorado, Inc., a Colorado corporation and wholly owned
subsidiary of MediaOne Group, Inc., a Delaware corporation. The business
address of MediaOne is 188 Inverness Drive West, Englewood, CO 80112.
(6) The business address of Newhouse is 5015 Campuswood Drive, East Syracuse, NY
13057.
(7) None of the directors or executive officers of the Company beneficially owns
any shares of Class A Common Stock or Class B Common Stock.
(8) As of December 31, 1998 all directors and executive officers held an
aggregate of 60,204 shares of Time Warner common stock, including 23,744
shares held by trusts under Time Warner-sponsored benefit plans. In
addition, such persons held options which, on December 31, 1998 were
exercisable within 60 days to purchase 1,357,960 shares of Time Warner
common stock.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
THE NOTES
On July 21, 1998, the Company completed the public offering of $400.0
million aggregate principal amount of the Notes. The Notes were issued pursuant
to the indenture. For the purposes of this section only, the term 'obligor':
when used in relation to any period prior to the Reconstitution, refers
collectively to TWT LLC and TWT Inc., as co-oligors of the Notes, and does
not include any other consolidated or unconsolidated subsidiary of TWT LLC
and
when used in relation to any period after the Reconstitution, refers to
New Time Warner Telecom, as successor obligor to the Notes.
The Notes are unsecured unsubordinated obligations of the obligor, ranking
equally in right of payment with all existing and future unsubordinated
indebtedness of the obligor and senior in right of payment to all subordinated
indebtedness of the obligor. Interest on the Notes will accrue at the rate of
9 3/4% per annum from July 21, 1998 or from the most recent interest payment
date to which interest has been paid or provided for, payable semiannually on
January 15 and July 15. The Notes will be subject to redemption at the option of
the obligor, in whole or in part, at any time on or after July 15, 2003,
initially at 104.875% of their principal amount and declining to 100% of their
principal amount at maturity on or after July 15, 2006 plus accrued and unpaid
interest to the applicable redemption date. In addition, at any time prior to
July 15, 2001, in the event of an offering of the Common Stock of the Company
for cash, the obligor may, at its option, within 90 days of an offering, use the
net proceeds of the offering to redeem up to 35% of the aggregate principal
amount at maturity of the Notes at a redemption price of 109.75% of the
principal amount on the redemption date; provided that at least 65% of the
aggregate principal amount at maturity of the Notes originally issued remain
outstanding immediately after each redemption. The Company does not intend to
use any portion of the proceeds of the Offering to redeem the Notes. Upon the
occurrence of a change of control under the indenture, the obligor must
commence, within 30 days of the later of the occurrence of such change of
control and the end of the change of control period required under the
indenture, an offer to purchase the Notes then outstanding at a purchase price
of 101% of their principal amount; provided that the obligor shall not be
required to commence an offer to purchase if, at any time within 30 days of the
later of the occurrence of the change of control and the end of the change of
control period, the Notes shall be rated investment grade under the indenture.
The indenture limits, and in some circumstances prohibits, the ability of
the Company to:
incur additional debt;
pay dividends;
make investments or other restricted payments;
engage in transactions with stockholders and affiliates;
create liens;
sell assets;
issue or sell capital stock of subsidiaries; and
engage in mergers and consolidations.
The indenture also provides for the repayment of subordinated debt,
including the subordinated indebtedness to affiliates of the Existing
Stockholders, prior to maturity with the net proceeds of any offering of common
stock or equivalent interests of the Company, including the Offering.
INTERCOMPANY SUBORDINATED DEBT
As of December 31, 1998, the Company had outstanding approximately $174.9
million of subordinated indebtedness to affiliates of the Existing Stockholders,
all of which is subordinated in right of payment to the Notes. This subordinated
indebtedness is payable in kind, bears interest at an annual rate equal to The
Chase Manhattan Bank's prime lending rate as in effect from time to time and
matures on August 15, 2008, one month after the maturity of the Notes. The Chase
Manhattan Bank's prime lending rate was 8.5% throughout the periods from July 1,
1997 through September 29, 1998, was 8.25% for the period from September 30,
1998
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through October 15, 1998, was 8.0% for the period from October 15, 1998 through
November 17, 1998 and is presently 7.75%. The subordinated indebtedness may be
declared immediately due and payable only if the maturity of the Notes is
similarly accelerated. If any event of default under the subordinated
indebtedness, or event that with notice or the passage of time would be an event
of default, shall have occurred and be continuing or would occur upon any
payment of the subordinated indebtedness, with respect to any senior debt (as
defined in the terms of the subordinated indebtedness), the Company shall not
make any payment with respect to amounts owing under the subordinated
indebtedness. Furthermore, upon any distribution of assets of, or payments by,
the Company of any kind or character to creditors upon any dissolution or
winding-up or total or partial liquidation or reorganization of the Company, all
amounts due or to become due upon all senior debt, including, without
limitation, interest accruing after the filing of a petition under any
bankruptcy law at the rate provided for in the documents governing the senior
debt, whether or not allowable as a claim under such bankruptcy law, shall first
be paid in full in cash, or duly provided for, before any payment or
distribution is made on account of any amount owing under the subordinated
indebtedness and before the Company shall, directly or indirectly, prepay,
repay, redeem, purchase, exchange or acquire the subordinated indebtedness. Upon
any such dissolution, winding-up, liquidation or reorganization, any payment or
distribution of assets of, or payments by, the Company of any kind or character
in respect of such subordinated indebtedness to which an affiliate of an
Existing Stockholder would be entitled except for the provisions of the
subordinated indebtedness, shall be paid pro rata by the Company or by any
receiver, trustee in bankruptcy, liquidating trustee, agent or other person
making such payment or distribution, or by an affiliate of an Existing
Stockholder if received by it, directly to the holders of senior debt for
application to the payment of senior debt remaining unpaid until all such senior
debt has been paid in full in cash after giving effect to any concurrent
payment, distribution or provision therefor to or for the holders of the senior
debt. The indenture for the Notes provides that the subordinated indebtedness
may be repaid prior to maturity with the net proceeds of any offering of common
stock or equivalent interests of the Company, including the Offering. The
Company intends to use the net proceeds of the Offering primarily to repay the
subordinated indebtedness to affiliates of the Existing Stockholders.
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DESCRIPTION OF CAPITAL STOCK
The Company's restated certificate of incorporation provides for authorized
capital stock of 459.8 million shares, including 277.3 million shares of Class A
Common Stock, $.01 par value per share, 162.5 million shares of Class B Common
Stock, $.01 par value per share, and 20 million shares of preferred stock, $.01
par value per share. Upon completion of the Offering, no preferred stock will be
outstanding and the Existing Stockholders will own of record all of the
outstanding shares of Class B Common Stock. See 'Principal Stockholders.'
The following summary description relating to the capital stock of the
Company does not purport to be complete. The rights of the holders of the
Company's capital stock will be set forth in the Company's restated certificate
of incorporation, as well as the stockholders agreement, the forms of both of
which are filed as exhibits to the registration statement of which this
prospectus forms a part. The summary set forth below is qualified by reference
to such exhibits and to the applicable provisions of the Delaware General
Corporation Law.
COMMON STOCK
The relative rights of the Class A Common Stock and Class B Common Stock
are substantially identical in all respects, except for voting rights and
conversion rights.
Voting Rights. Each share of Class A Common Stock entitles the holder to
one vote and each share of Class B Common Stock entitles the holder to 10 votes
on each matter to be voted upon by the holders of the Common Stock. The holders
of the shares of Class A Common Stock and Class B Common Stock vote as one class
on all matters to be voted on by stockholders, including, without limitation,
the election of directors and any proposed amendment to the restated certificate
of incorporation of the Company that would increase the authorized number of
shares of Common Stock or any class thereof or any other class or series of
stock or decrease the number of authorized shares of any class or series of
stock (but not below the number then outstanding), except as required by the
Delaware General Corporation Law and except that,
(1) without a unanimous vote of the holders of the Class B Common Stock,
voting as a separate class,
(A) the restated certificate of incorporation may not be amended,
altered or repealed and
(B) the Company may not merge or consolidate with, or sell all or
substantially all of its assets to, any person,
in each case until such time as the outstanding shares of Class B
Common Stock represent less than 50% of the voting power of the
outstanding Common Stock and
(C) the Company cannot issue additional shares of Class B Common Stock
or other capital stock having more than one vote per share and
(2) without a majority vote of the holders of the Class A Common Stock,
certain provisions of the restated certificate of incorporation
relating to the termination of, and vote required to waive, the
limitations on business purposes described in the next sentence may not
be amended, altered or repealed.
Under the restated certificate of incorporation, the Company may not
directly or indirectly, through a subsidiary or affiliate of the Company,
(a) engage in the business of providing, offering, packaging, marketing,
promoting or branding (alone or jointly with or as an agent for other
parties) any wireline telecommunications services or other services,
including data services, to residences (collectively, 'residential
services') or
(b) engage in the business of producing, packaging, distributing,
marketing, hosting, offering, promoting, branding or otherwise
providing entertainment, information or any other content services,
whether fixed or interactive, or any services incidental thereto, but
excluding acting solely as a carrier of video, audio or data of
unaffiliated third parties by providing transport services, so long as
the Company has no other direct or indirect pecuniary interest in the
transmitted information or content (collectively, 'content services'),
in each case until the earlier of (1) the date that is five years after the date
of the filing of the restated certificate of incorporation and (2) the date on
which the holders of Class B Common Stock no longer represent at least 50% of
the voting power of the outstanding Common Stock of the Company.
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Neither the holders of Class A Common Stock nor the holders of Class B
Common Stock have cumulative voting rights. For a discussion of the effects of
the disproportionate voting rights of the Class A Common Stock and Class B
Common Stock, see 'Risk Factors -- After the Offering, the Existing Stockholders
will continue to control the Company.'
Dividends. Each share of Common Stock is entitled to receive dividends from
funds legally available therefor if, as and when declared by the board of
directors of the Company. Class A Common Stock and Class B Common Stock share
equally, on a share-for-share basis, in any dividends declared by the board of
directors. If at any time a distribution of the Class A Common Stock or Class B
Common Stock is to be paid in shares of Class A Common Stock, Class B Common
Stock or any other securities of the Company or any other person, such dividends
may be declared and paid only as follows:
(1) a share distribution consisting of Class A Common Stock to holders of
Class A Common Stock and Class B Common Stock, on an equal per share
basis; or to holders of Class A Common Stock only, but in such event
there shall also be a simultaneous share distribution to holders of
Class B Common Stock consisting of shares of Class B Common Stock on an
equal per share basis;
(2) a share distribution consisting of Class B Common Stock to holders of
Class B Common Stock and Class A Common Stock, on an equal per share
basis; or to holders of Class B Common Stock only, but in such event
there shall also be a simultaneous share distribution to holders of
Class A Common Stock consisting of shares of Class A Common Stock on an
equal per share basis; and
(3) a share distribution of shares of any class of securities of the
Company or any other person other than the Common Stock, either on the
basis of a distribution of identical securities, on an equal per share
basis to the holders of Class A Common Stock and Class B Common Stock,
or on the basis of a distribution of one class of securities to the
holders of Class A Common Stock and another class of securities to
holders of Class B Common Stock, provided that the securities so
distributed do not differ in any respect other than relative voting
rights and related differences in designations, conversion and share
distribution provisions, with the holders of Class B Common Stock
receiving the class having the higher relative voting rights, provided
that if the securities so distributed constitute capital stock of a
subsidiary of the Company, such rights shall not differ to a greater
extent than the corresponding differences in voting rights,
designations, conversion and distribution provisions between Class A
Common Stock and Class B Common Stock.
If the Company shall in any manner subdivide or combine the outstanding
shares of Class A Common Stock or Class B Common Stock, the outstanding shares
of the other class of Common Stock shall be proportionally subdivided or
combined in the same manner and on the same basis as the outstanding shares of
Class A Common Stock or Class B Common Stock, as the case may be, that have been
subdivided or combined.
Conversion. Under the restated certificate of incorporation, each share of
Class B Common Stock is convertible at any time and from time to time at the
option of the holder thereof into one share of Class A Common Stock. The Class A
Common Stock has no conversion rights.
Equivalent Consideration in Certain Transactions. In the event of any
merger, consolidation, acquisition of all or substantially all the assets of the
Company or other reorganization to which the Company is a party, in which any
consideration is to be received by the holders of Class A Common Stock and
Class B Common Stock, those holders must receive the Equivalent Consideration
(as defined below) on a per share basis. Under the restated certificate of
incorporation of the Company, 'Equivalent Consideration' is defined as
consideration of substantially equivalent economic value as determined by the
board of directors of the Company at the time of execution of the definitive
agreement relating to the applicable merger, consolidation, acquisition or
reorganization, provided, that (i) the holders of Class A Common Stock can
receive consideration of a different form from the consideration to be received
by the holders of Class B Common Stock and (ii) if the holders of Class A Common
Stock and Class B Common Stock are to receive securities of any other person,
such securities (and, if applicable, the securities into which the received
securities are convertible, or for which they are exchangeable, or which they
evidence the right to purchase) can differ with respect to their relative voting
rights and related differences in conversion and share distribution provisions,
with the holders of shares of Class B Common Stock receiving the class or series
having the higher relative voting rights, and the differences permitted by this
clause (ii) are not taken into account in the determination of equivalent
economic value.
Other. Stockholders of the Company have no preemptive or other rights to
subscribe for additional shares. All holders of Common Stock, regardless of
class, are entitled to share equally on a share-for-share basis in any
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assets available for distribution to stockholders on liquidation, dissolution or
winding up of the Company. All outstanding shares are, and all shares offered by
this prospectus will be, when sold, validly issued, fully paid and
nonassessable. The Company may not subdivide or combine shares of Common Stock
without at the same time proportionally subdividing or combining shares of the
other classes.
PREFERRED STOCK
The Company's board of directors is authorized to provide for the issuance
of preferred stock in one or more series and to fix the designation,
preferences, powers and relative, participating, optional and other rights,
qualifications, limitations and restrictions thereof, including the dividend
rate, conversion rights, voting rights, redemption price and liquidation
preference and to fix the number of shares to be included in any such series.
Any preferred stock so issued may rank senior to the Common Stock with respect
to the payment of dividends or amounts upon liquidation, dissolution or winding
up, or both. In addition, any such shares of preferred stock may have class or
series voting rights.
CORPORATE OPPORTUNITIES
The restated certificate of incorporation provides that the Existing
Stockholders are not restricted from engaging directly or indirectly in the same
or similar business activities or lines of business as the Company. In the event
that any of the Existing Stockholders acquires knowledge of a potential
transaction or matter that may be a corporate opportunity for any of the
Existing Stockholders and the Company, such corporate opportunity shall be
allocated to the Existing Stockholder if offered to any person who is an
officer, employee or director of the Existing Stockholder and/or the Company,
unless such opportunity is expressly offered to such person primarily in his or
her capacity as an officer, employee or director of the Company. Other than
under these circumstances, the Existing Stockholders shall have no duty to
communicate or present such corporate opportunity to the Company.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The restated certificate of incorporation of the Company expressly states
that the Company has elected not to be governed by Section 203 of the Delaware
General Corporation Law which prohibits a publicly held Delaware corporation
from engaging in a 'business combination', as defined in clause (c)(3) of that
section, with an 'interested stockholder', as defined in clause (c)(5) of that
section, for a period of three years after the date of the transaction in which
the stockholder became an interested stockholder.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The restated certificate of incorporation limits the liability of directors
to the fullest extent permitted by the Delaware General Corporation Law. In
addition, the restated certificate of incorporation provides that the Company
shall indemnify directors and officers of the Company to the fullest extent
permitted by that law. The Company anticipates entering into separate
indemnification agreements with its current directors and executive officers
prior to the completion of the Offering which will have the effect of providing
such persons indemnification protection in the event the restated certificate of
incorporation is subsequently amended.
NASDAQ TRADING
The Class A Common Stock is expected to be approved for quotation on the
Nasdaq National Market of the Nasdaq Stock Market under the symbol 'TWTC.'
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Norwest Bank,
Minnesota N.A.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF COMMON STOCK
GENERAL
The following is a general discussion of U.S. Federal income and estate tax
consequences of the ownership and disposition of common stock that may be
relevant to you if you are a 'non-U.S. holder'. For purposes of this summary, a
non-U.S. holder is a beneficial owner of common stock that is, for U.S. Federal
income tax purposes, (1) a nonresident alien individual, (2) a foreign
corporation, (3) a nonresident alien fiduciary of a foreign estate or trust or
(4) a foreign partnership one or more of the members of which is, for U.S.
Federal income tax purposes, a nonresident alien individual, a foreign
corporation or a nonresident alien fiduciary of a foreign estate or trust.
This discussion does not address all aspects of U.S. Federal income and
estate taxation that may be relevant to you in light of your particular
circumstances, and does not address any foreign, state or local tax
consequences. Furthermore, this discussion is based on provisions of the
Internal Revenue Code, Treasury regulations and administrative and judicial
interpretations as of the date hereof. All of these are subject to change,
possibly with retroactive effect, or different interpretations. If you are
considering buying common stock you should consult your own tax advisor about
current and possible future tax consequences of holding and disposing of common
stock in your particular situation.
DISTRIBUTIONS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See 'Risk Factors -- The indenture for the Notes contains
restrictive covenants that may limit our flexibility.' However, if distributions
are paid on the shares of Common Stock, these distributions generally will
constitute dividends for U.S. Federal income tax purposes to the extent paid
from our current or accumulated earnings and profits, as determined under U.S.
Federal income tax principles. Dividends paid to a non-U.S. holder that are not
effectively connected with a U.S. trade or business of the non-U.S. holder will
be subject to United States withholding tax at a 30% rate or, if a tax treaty
applies, a lower rate specified by the treaty. To receive a reduced treaty rate,
a non-U.S. holder must furnish to us or our paying agent a duly completed Form
1001 or Form W-8BEN (or substitute form) certifying to its qualification for
such rate.
Currently, withholding is generally imposed on the gross amount of a
distribution, regardless of whether we have sufficient earnings and profits to
cause the distribution to be a dividend for U.S. Federal income tax purposes.
However, withholding on distributions made after December 31, 2000 may be on
less than the gross amount of the distribution if the distribution exceeds a
reasonable estimate of our accumulated and current earnings and profits.
Dividends that are effectively connected with the conduct of a trade or
business within the U.S. and, if a tax treaty applies, are attributable to a
U.S. permanent establishment of the non-U.S. holder, are exempt from U.S.
Federal withholding tax, provided that the non-U.S. holder furnishes to us or
our paying agent a duly completed Form 4224 or Form W-8ECI (or substitute form)
certifying the exemption. However, dividends exempt from U.S. withholding
because they are effectively connected or they are attributable to a U.S.
permanent establishment are subject to U.S. Federal income tax on a net income
basis at the regular graduated U.S. Federal income tax rates. Any such
effectively connected dividends received by a foreign corporation may, under
certain circumstances, be subject to an additional 'branch profits tax' at a 30%
rate or a lower rate specified by an applicable income tax treaty.
Under current U.S. Treasury regulations, dividends paid before January 1,
2001 to an address outside the United States are presumed to be paid to a
resident of the country of address for purposes of the withholding discussed
above and for purposes of determining the applicability of a tax treaty rate.
However, U.S. Treasury regulations applicable to dividends paid after December
31, 2000 eliminate this presumption, subject to certain transition rules.
For dividends paid after December 31, 2000, a non-U.S. holder generally
will be subject to U.S. backup withholding tax at a 31% rate under the backup
withholding rules described below, rather than at a 30% rate or a reduced rate
under an income tax treaty, as described above, unless the non-U.S. holder
complies with certain Internal Revenue Service certification procedures or, in
the case of payments made outside the U.S. with respect
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to an offshore account, certain IRS documentary evidence procedures. Further, to
claim the benefit of a reduced rate of withholding under a tax treaty for
dividends paid after December 31, 2000, a non-U.S. holder must comply with
certain modified IRS certification requirements. Special rules also apply to
dividend payments made after December 31, 2000 to foreign intermediaries, U.S.
or foreign wholly owned entities that are disregarded for U.S. Federal income
tax purposes and entities that are treated as fiscally transparent in the U.S.,
the applicable income tax treaty jurisdiction, or both. You should consult your
own tax advisor concerning the effect, if any, of the rules affecting
post-December 31, 2000 dividends on your possible investment in common stock.
A non-U.S. holder may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund along with the required information with
the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder will generally not be subject to U.S. Federal income tax
with respect to gain recognized on a sale or other disposition of our Common
Stock unless one of the following apply:
If the gain is effectively connected with a trade or business of the
non-U.S. holder in the United States and, if a tax treaty applies, the
gain is attributable to a U.S. permanent establishment maintained by the
non-U.S. holder. The non-U.S. holder will, unless an applicable treaty
provides otherwise, be taxed on its net gain derived from the sale under
regular graduated U.S. Federal income tax rates. If the non-U.S. holder is
a foreign corporation, it may be subject to an additional branch profits
tax equal to 30% of its effectively connected earnings and profits within
the meaning of the Internal Revenue Code for the taxable year, as adjusted
for certain items, unless it qualifies for a lower rate under an
applicable income tax treaty and duly demonstrates such qualification.
If a non-U.S. holder who is an individual and holds our Common Stock as a
capital asset is present in the United States for 183 or more days in the
taxable year of the disposition and certain other conditions are met, the
non-U.S. holder will be subject to a flat 30% tax on the gain derived from
the sale, which may be offset by certain U.S. capital losses.
If we are or have been a 'U.S. real property holding corporation' for U.S.
Federal income tax purposes at any time during the shorter of the
five-year period ending on the date of the disposition or the period
during which the non-U.S. holder held the Common Stock. We believe that we
never have been and are not currently a U.S. real property holding
corporation for U.S. Federal income tax purposes. Although we consider it
unlikely based on our current business plans and operations, we may or may
not become a U.S. real property holding corporation in the future. Even if
we were to become a U.S. real property holding corporation, any gain
recognized by a non-U.S. holder still would not be subject to U.S. tax if
the shares were considered to be 'regularly traded on an established
securities market' and the non-U.S. holder did not own, actually or
constructively, at any time during the shorter of the periods described
above, more than five percent of a class of Common Stock.
FEDERAL ESTATE TAX
Common Stock held by an individual non-U.S. holder at the time of death
will be included in such holder's gross estate for U.S. Federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under U.S. Treasury regulations, we must report annually to the IRS and to
each non-U.S. holder the amount of dividends paid to such holder and the tax
withheld with respect to such dividends. These information reporting
requirements apply even if withholding was not required because the dividends
were effectively connected dividends or withholding was reduced or eliminated by
an applicable income tax treaty. Pursuant to an applicable tax treaty, that
information may also be made available to the tax authorities in the country in
which the non-U.S. holder resides.
United States Federal backup withholding generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain required information. Backup withholding generally will not apply to
dividends paid before January 1, 2001 to non-U.S. holders. See the discussion
under
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'Distributions' above for rules regarding reporting requirements to avoid backup
withholding on dividends paid after December 31, 2000.
As a general matter, information reporting and backup withholding will not
apply to a payment by or through a foreign office of a foreign broker of the
proceeds of a sale of Common Stock effected outside the U.S. However,
information reporting requirements, but not backup withholding, will apply to a
payment by or through a foreign office of a broker of the proceeds of a sale of
Common Stock effected outside the U.S. if that broker:
is a U.S. person,
is a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the U.S.,
is a 'controlled foreign corporation' as defined in the Internal Revenue
Code, or
is a foreign partnership with certain U.S. connections (for payments made
after December 31, 2000).
Information reporting requirements will not apply in the above cases if the
broker has documentary evidence in its records that the holder is a non-U.S.
holder and certain conditions are met or the holder otherwise establishes an
exemption.
Payment by or through a U.S. office of a broker of the proceeds of a sale
of Common Stock is subject to both backup withholding and information reporting
unless the holder certifies to the payor in the manner required as to its
non-U.S. status under penalties of perjury or otherwise establishes an
exemption.
Amounts withheld under the backup withholding rules do not constitute a
separate U.S. Federal income tax. Rather, any amounts withheld under the backup
withholding rules will be refunded or allowed as a credit against the holder's
U.S. Federal income tax liability, if any, provided the required information or
appropriate claim for refund is filed with the IRS.
THE FOREGOING DISCUSSION IS A SUMMARY OF CERTAIN U.S. FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF COMMON
STOCK BY NON-U.S. HOLDERS. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR WITH
RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF OWNERSHIP AND DISPOSITION
OF COMMON STOCK, INCLUDING THE EFFECT OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 18,000,000 shares of Class A
Common Stock outstanding and 81,250,000 shares of Class B Common Stock
outstanding, all of which are convertible into Class A Common Stock on a share
for share basis. This number excludes 307,550 shares of Class A Common Stock
that were issued in connection with the Reconstitution to the former owners of
Internet Connect, Inc. and 2,190,308 shares of Class A Common Stock issuable
upon the closing of the Company's acquisition of the 50% interest in MetroComm
that the Company does not currently own, if such acquisition is consummated. See
'Business -- Services -- Internet Services and 'Business -- Business Strategy.'
The Company has reserved for issuance 9,027,000 shares, subject to adjustment
based on the size of the Offering, of Class A Common Stock upon the exercise of
stock options. Options to purchase 6,186,667 shares were outstanding as a result
of New Time Warner Telecom's assumption of TWT LLC's outstanding options in
connection with the Reconstitution.
Each of the Company, its directors and executive officers and the Existing
Stockholders has agreed that, subject to certain exceptions, without the prior
written consent of Morgan Stanley & Co. Incorporated and Lehman Brothers Inc.,
it will not, during the period ending 180 days after the date of this
prospectus, offer, pledge, sell, contract to sell or otherwise transfer, lend or
dispose of, directly or indirectly, any shares of Class A Common Stock or any
securities convertible into or exercisable or exchangeable for shares of Class A
Common Stock. See 'Underwriters.' After that, other holders of the Class B
Common Stock may or may not decide, based upon then prevailing market and other
conditions, to convert their Class B Common Stock to Class A Common Stock and to
dispose of all or a portion of such stock pursuant to the provisions of Rule 144
under the Securities Act or pursuant to the demand registration rights contained
in the stockholders agreement among the Existing Stockholders. See 'Certain
Relationships and Related Transactions -- Stockholders Agreement.'
Prior to the Offering, there has been no established market for the Class A
Common Stock, and no predictions can be made about the effect, if any, that
market sales of shares of Class A Common Stock or the availability of such
shares for sale would have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of Class A Common Stock in the public
market, or the perception that such sales could occur, may have an adverse
impact on the market price for the shares of Class A Common Stock offered hereby
or on the ability of the Company to raise capital through a public offering of
its equity securities. See 'Risk Factors -- Future sales of shares of Class A
Common Stock could depress the price of the Class A Common Stock.'
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UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the U.S. underwriters named below,
for whom Morgan Stanley & Co. Incorporated, Lehman Brothers Inc. and Bear,
Stearns & Co. Inc. are acting as U.S. representatives, and the international
underwriters named below, for whom Morgan Stanley & Co. International Limited,
Lehman Brothers International (Europe) and Bear, Stearns International Limited
are acting as international representatives have severally agreed to purchase,
and the Company has agreed to sell to them, severally, the respective number of
shares of Class A Common Stock set forth opposite the names of such underwriters
below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ----------------------------------------------------------------------------------- ----------------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.............................................
Lehman Brothers Inc...........................................................
Bear, Stearns & Co. Inc.......................................................
----------------
Subtotal................................................................. 14,400,000
----------------
International Underwriters:
Morgan Stanley & Co. International Limited....................................
Lehman Brothers International (Europe)........................................
Bear, Stearns International Limited...........................................
----------------
Subtotal................................................................. 3,600,000
----------------
Total.................................................................. 18,000,000
----------------
----------------
</TABLE>
The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively referred
to as the 'underwriters' and the 'representatives,' respectively. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of Class A Common Stock offered are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all the
shares of Class A Common Stock offered in the Offering other than those covered
by the U.S. underwriters' over-allotment option described below, if any such
shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. underwriter has represented and agreed that, with certain exceptions:
it is not purchasing any shares for the account of anyone other than a
United States or Canadian person and
it has not offered or sold, and will not offer or sell, directly or
indirectly, any Shares or distribute any prospectus relating to the shares
outside the United States or Canada or to anyone other than a United
States or Canadian person.
Pursuant to the Agreement between U.S. and International Underwriters, each
international underwriter has represented and agreed that, with certain
exceptions:
it is not purchasing any shares for the account of any United States or
Canadian person and
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it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the shares
in the United States or Canada or to any United States or Canadian person.
With respect to any underwriter that is a U.S. underwriter and an
international underwriter, the foregoing representations and agreements (1) made
by it in its capacity as a U.S. underwriter apply only to it in its capacity as
a U.S. underwriter and (2) made by it in its capacity as an international
underwriter apply only to it in its capacity as an international underwriter.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement between U.S. and
International Underwriters. As used herein, 'United States or Canadian person'
means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof other than a branch located outside the United States and Canada of any
United States or Canadian person, and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian person. All
shares of Class A Common Stock to be purchased by the underwriters under the
underwriting agreement are referred to herein as the 'shares.'
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. underwriters and international underwriters
of any number of shares as may be mutually agreed. The per share price of any
shares sold shall be the public offering price set forth on the cover page of
this prospectus, in United States dollars, less an amount not greater than the
per share amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares, directly or indirectly, in any province or
territory of Canada or to, for the benefit of, any resident of any province or
territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
underwriter has further agreed to send to any dealer who purchases from it any
of the shares a notice stating in substance that, by purchasing such shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
international underwriter has represented and agreed that
it has not offered or sold and, prior to the date six months after the
closing date for the sale of the shares to the international underwriters,
will not offer or sell, any shares to persons in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments, either as principal or agent, for
the purposes of their businesses or otherwise in circumstances which have
not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations
1995;
it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the shares in, from or otherwise involving the United Kingdom;
and
it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the offering
of the Shares to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996 or is a person to whom such document may otherwise lawfully be
issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
international underwriter has further represented that is has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
international underwriter has further
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agreed to send to any dealer who purchases from it any of the shares a notice
stating in substance that, by purchasing such shares, such dealer represents and
agrees that it has not offered or sold, and will not offer or sell, any of such
shares, directly or indirectly, in Japan or to or for the account of any
resident thereof except for offers or sales to Japanese international
underwriters or dealers and except pursuant to any exemption from the
registration requirements of the Securities and Exchange Law and otherwise in
compliance with applicable provisions of Japanese law, and that such dealer will
send to any other dealer to whom it sells any of such shares a notice containing
substantially the same statement as is contained in this sentence.
The underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public offering
price. The underwriters may allow, and such dealers may reallow, a concession
not in excess of $ a share to other underwriters or to certain dealers. After
the initial offering of the shares of Class A Common Stock, the offering price
and other selling terms may from time to time be varied by the representatives.
Pursuant to the underwriting agreement, the Company has granted to the U.S.
underwriters an option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate of 2.7 million additional shares of
Class A Common Stock at the public offering price set forth on the cover page of
this prospectus, less underwriting discounts and commissions. The U.S.
underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of Class A Common Stock offered hereby. To the extent such option is
exercised, each U.S. underwriter will become obligated, subject to conditions,
to purchase approximately the same percentage of such additional shares of
Class A Common Stock as the number set forth next to such U.S. underwriter's
name in the preceding table bears to the total number of shares of Class A
Common Stock set forth next to the names of all U.S. underwriters in the
preceding table. If the U.S. underwriters' option is exercised in full, the
total price to the public would be $ , the total underwriters'
discounts and commissions would be $ and total proceeds to the Company
would be $ .
The Class A Common Stock is expected to be approved for quotation, subject
to official notice of issuance, on the Nasdaq National Market under the symbol
'TWTC.'
Each of the Company and the directors, executive officers and certain other
stockholders of the Company has agreed that, without the prior written consent
of each of Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. on behalf
of the underwriters, it will not during the period ending 180 days after the
date of this prospectus:
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of Class A Common Stock or any securities
convertible into or exercisable or exchangeable for Class A Common Stock;
provided that such shares or securities are either now owned by such party
or are hereafter acquired prior to or in connection with the Offering or
enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
shares of Class A Common Stock,
in each case whether any such transaction described above is to be settled by
delivery of Class A Common Stock or such other securities, in cash or otherwise.
These restrictions do not apply to (a) the shares of Class A Common Stock to be
sold in the Offering or (b) the issuance by the Company of (1) shares of Class A
Common Stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date of this prospectus of which the underwriters
have been advised in writing and (2) grants from time to time of stock options
and other incentive compensation pursuant to the 1998 Option Plan, provided that
such options or awards do not vest during the period of 180 days ending after
the date of this prospectus.
The underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A Common Stock offered by them.
In order to facilitate the Offering of the Class A Common Stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A Common Stock. Specifically, the underwriters may
over-allot in connection with the Offering, creating a short position in the
Class A Common Stock for their own account. In addition, to cover
over-allotments or to stabilize the price of the Class A Common Stock, the
underwriters may bid for, and purchase, shares of Class A Common Stock in the
open market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a
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<PAGE>
dealer for distributing the Class A Common Stock in the Offering, if the
syndicate repurchases previously distributed Class A Common Stock in
transactions to cover syndicate short positions, in stabilization transactions
or otherwise. Any of these activities may stabilize or maintain the market price
of the Class A Common Stock above independent market levels. The underwriters
are not required to engage in these activities, and may end any of these
activities at any time.
At the request of the Company, the underwriters have reserved up to 900,000
shares of Class A Common Stock for sale at the initial public offering price to
the Company's employees, officers and directors and to other individuals having
relationships with the Company. The Company will pay all fees and disbursements
of counsel incurred by the underwriters in connection with offering the shares
to such persons. The number of shares available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered hereby.
Reserved shares purchased by such individuals will, except as restricted by
applicable securities laws, be available for resale following the Offering.
The Company and the underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
The Company has agreed to pay the printing, legal, accounting and other
expenses relating to the Offering, which it estimates to be $1.85 million.
From time to time, Morgan Stanley & Co. Incorporated and Lehman Brothers
Inc. provide certain financial advisory services to the Company and the Existing
Stockholders for which they have received customary fees and commissions.
Prior to the Offering, there has been no public market for the shares of
Class A Common Stock of the Company. Consequently, the initial public offering
price for the Class A Common Stock will be determined by negotiation between the
Company and the U.S. and international representatives of the underwriters.
Among the factors to be considered in determining the initial public offering
price will be the Company's record of operations, the Company's current
financial condition and future prospects, the experience of its management, the
economics of its industry in general, the general condition of the equity
securities market and the market prices of similar securities of companies
considered comparable to the Company and other factors deemed relevant. A
regular trading market for the shares of Class A Common Stock may not develop
after the Offering or, if developed, a public trading market may not be
sustained. The prices at which the Class A Common Stock will sell in the public
market after the Offering may not be lower than the price at which it is issued
by the underwriters in the Offering.
LEGAL MATTERS
The legality of the Class A Common Stock offered in the Offering and
certain other legal matters will be passed upon for the Company by Cravath,
Swaine & Moore, New York, New York and for the underwriters by Shearman &
Sterling, New York, New York.
EXPERTS
The combined financial statements of Time Warner Telecom Inc. and its
subsidiaries as of December 31, 1998 and 1997 and for each of the three years in
the period ended December 31, 1998 included in this prospectus and registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the Class A Common Stock being offered in the
Offering. The term 'registration statement' means the original registration
statement and any and all amendments thereto, including the schedules and
exhibits to the original registration statement or any amendment. This
prospectus does not contain all of the information set forth in the registration
statement. We refer you to the registration statement for any information in the
registration statement that is not included in this prospectus. In addition,
each statement made in this prospectus concerning a document filed as an exhibit
to the registration statement is qualified in its entirety by reference to that
exhibit for a complete statement of its provisions.
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<PAGE>
We are currently subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and file periodic reports, and
other information relating to our business, financial statements and other
matters. Our SEC filings are available to the public over the internet at the
SEC's web site at http://www.sec.gov. You may also read and copy any document we
file at the SEC's public reference room located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the regional offices of the SEC located at
7 World Trade Center, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms and their copy charges.
We intend to distribute to all holders of the shares of Class A Common
Stock offered in the Offering annual reports containing audited consolidated
financial statements together with a report by our independent certified public
accountants.
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<PAGE>
GLOSSARY
Access Charges. The fees paid by long distance carriers for the local
connections between the long distance carriers' networks and the long distance
carriers' customers.
ATM (asynchronous transfer mode). A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits of
a standard fifty-three bit-long packet or cell. ATM-based packet transport was
specifically developed to allow switching and transmission of mixed voice, date
and video at varying rates. The ATM format can be used by many different
information systems, including LANs.
Bell Operating Company. A telephone operating subsidiary of an RBOC; an
incumbent local exchange carrier.
Broadcast Video TV-1. This Company service provides dedicated transport of
broadcast quality video signals.
Competitive Access Provider. A company that provides dedicated
telecommunications services (private line, local transport and special access)
as an alternative to the incumbent local exchange carrier.
Central Offices. A telecommunications center where switches and other
telecommunications facilities are housed. CAPs may connect with incumbent local
exchange carrier networks either at this location or through a remote location.
Collocation. The ability of a telecommunications carrier to interconnect
its network to the incumbent local exchange carrier's network by extending its
facilities to the incumbent local exchange carrier's central office. Physical
collocation occurs when the interconnecting carrier places its network equipment
within the incumbent local exchange carrier's central offices. Virtual
collocation is an alternative to physical collocation under which the incumbent
local exchange carrier permits a carrier to interconnect its network to the
ILEC's network in a manner which is technically, operationally and economically
comparable to physical collocation, even though the interconnecting carrier's
network connection equipment is not physically located within the central
offices.
Competitive Local Exchange Carrier. A company that provides local exchange
services, including Dedicated service, in competition with the incumbent local
exchange carrier.
Dedicated. Telecommunications lines dedicated to, or reserved for use by, a
particular customer along predetermined routes (in contrast to links which are
temporarily established).
Dedicated Transmission. The sending of electronic signals carrying
information over a direct transport facility.
Digital. A means of storing, processing and transmitting information by
using distinct electronic or optical pulses that represent the binary digits 0
and 1. Digital transmission and switching technologies use a sequence of these
pulses to represent information as opposed to the continuously variable analog
signal. The precise digital numbers preclude distortion (such as graininess or
snow in the case of video transmission, or static or other background distortion
in the case of audio transmission).
Direct Transport (aka Dedicated Transport). A non-switched point-to-point
telecommunications facility leased from a telecommunications provider by an end
user and used exclusively by that end user.
Diverse Routing. A telecommunications network configuration in which
signals are transmitted simultaneously along two different paths so that if one
path is cut or impaired, traffic can continue in the other direction without
interrupting service. The Company's networks generally provide diverse routing.
DS0, DS1, DS3. Standard North American telecommunications industry digital
signal formats, which are distinguishable by bit rate (the number of binary
digits (0 and 1) transmitted per second). DS0 service has a bit rate of 64
kilobits per second. DS1 service has a bit rate of 1.544 megabits per second and
DS3 service as a bit rate of 44.736 megabits per second. A DS0 can transmit a
single uncompressed voice conversation.
FCC. Federal Communications Commission.
Fiber Glass Miles. The number of route miles of fiber optic cable installed
(excluding pending installations) along a telecommunications path multiplied by
the number of fibers in the cable. See the definition of 'route mile' below.
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Fiber Optics. Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information. Fiber optic cable
is the medium of choice for the telecommunications and cable industries. Fiber
is immune to electrical interference and environmental factors that effect
copper wiring and satellite transmission.
Incumbent Local Exchange Carriers. The local phone companies, either a Bell
Operating Company or an independent (such as GTE) which provides local exchange
services.
Internet. The name used to describe the global open network of computers
that permits a person with access to the Internet to exchange information with
any other computer connected to the network.
Integrated Services Digital Network. ISDN is an internationally agreed
standard which, through special equipment, allows two-way, simultaneous voice
and data transmission in digital formats over the same transmission line. ISDN
permits video conferencing over a single line, for example, and also supports a
multitude of value-added switched service applications such as Incoming Calling
Line Identification. ISDN's combined voice and data networking capabilities
reduce costs for end users and result in more efficient use of available
facilities. ISDN combines standards for highly flexible customer to network
signaling with both voice and data within a common facility.
Interexchange Carrier. A long distance carrier.
Kilobits. One thousand bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in 'thousands of bits
per second.'
Local Area Networks. The interconnection of computers for the purpose of
sharing files, programs and peripheral devices such as printers and high-speed
modems. LANs may include dedicated computers or file servers that provide a
centralized source of shared files and programs. LANs are generally confined to
a single customer's premises and may be extended or interconnected to other
locations through the use of bridges and routers.
LATAS (Local Access and Transport Area). The geographical areas within
which a local telephone company may offer telecommunications services, as
defined in the divestiture order known as the Modified Final Judgment ('MFP')
unless and until refined by the FCC pursuant to the 1996 Act.
Local Exchange. A geographic area defined by the appropriate state
regulatory authority in which telephone calls generally are transmitted without
toll charges to the calling or called party.
Local Exchange Service/Local Exchange Telephone Service. Basic local
telephone service, including the provision of telephone numbers, dial tone and
calling within the local exchange area.
Long Distance Carriers (Interexchange Carriers). Long distance carriers
providing services between LATAs, on an interstate or intrastate basis. A long
distance carrier may be facilities-based or offer service by reselling the
services of a facilities-based carrier.
Local Transport Services. Dedicated lines between the incumbent local
exchange carrier's central offices and long distance carrier POPs used to carry
switched traffic.
Mbps (Megabit). One million bits of information. The information carrying
capacity (i.e., bandwidth) of a circuit may be measured in 'millions of bits per
second.'
PBX (Private Branch Exchange). A customer owned and operated switch on
customer premises, typically used by large businesses with multiple telephone
lines.
PBX Trunk. A transmission facility which connects a PBX to the Company's or
ILEC's central office switching center.
POPs (Points of Presence). Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
telephone calls to, a network switching center of the same long distance
carrier.
Private Line. A private, dedicated telecommunications link between
different customer locations (excluding long distance carrier POPs).
Private Network Transport Service. This service is a private, dedicated
high capacity premium quality service over fully redundant, diverse routed,
SONET rings with band width that is dedicated and always available.
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Public Switched Network. The switched network available to all users
generally on a shared basis (i.e., not dedicated to a particular user). The
local exchange telephone service networks operated by incumbent local exchange
carriers are the largest and often the only public switched networks in a given
locality.
Regional Bell Operating Company. The holding company which owns a Bell
operating company.
Reciprocal Compensation. An arrangement in which two local exchange
carriers agree to terminate traffic originating on each other's networks in
exchange for a negotiated level of compensation.
Route Mile. The number of miles along which fiber optic cables are
installed.
SONET (Synchronous Optical Network). A set of standards for optical
communications transmission systems that define the optical rates and formats,
signal characteristics, performance, management and maintenance information to
be embedded within the signals and the multiplexing techniques to be employed in
optical communications transmission systems. SONET facilitates the
interoperability of dissimilar vendors equipment. SONET benefits business
customers by minimizing the equipment necessary for various telecommunications
applications and supports networking diagnostic and maintenance features.
Special Access Services. The lease of private, dedicated telecommunications
lines or circuits on an incumbent local exchange carrier's or a competitive
access provider's network which run to or from the long distance carrier's POPs.
Special access services do not require the use of switches. Examples of special
access services are telecommunications circuits running between POPs of a single
long distance carrier, from one long distance carrier's POP to another long
distance carrier's POP or from an end user to its long distance carrier's POP.
STS-1. This dedicated transmission service is carried over high capacity
channels for full duplex, synchronous optical transmission of digital data on
SONET standards. This service eliminates the need to maintain and pay for
multiple dedicated lines.
Switch. A mechanical or electronic device that opens or closes circuits or
selects the paths or circuits to be used for the transmission of information.
Switching is a process of linking different circuits to create a temporary
transmission path between users. Within this document, switches generally refer
to voice grade telecommunications switches unless specifically stated otherwise.
Switched Access Services. The connection between a long distance carrier's
POP and an end user's premises through the switching facilities of a local
exchange carrier.
Switched Services. Telecommunications services that support the connection
of one calling party with another calling party via use of a telephone switch
(i.e., an electronic device that opens or closes circuits, completes or breaks
an electrical path, or selects paths or circuits).
Toll Services. Otherwise known as EAS or intra LATA toll services are those
calls that are beyond the free local calling area but originate and terminate
within the same LATA; such calls are usually priced on a measured basis.
Voice Grade Equivalent ('VGE') Circuit. One DS0. One voice grade equivalent
circuit is equal to 64 kilobits of bandwidth.
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TIME WARNER TELECOM INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements:
Report of Independent Auditors........................................................................ F-2
Combined Balance Sheets at December 31, 1998 and 1997................................................. F-3
Combined Statement of Operations for the years ended December 31, 1998, 1997
and 1996............................................................................................ F-4
Combined Statement of Cash Flows for the years ended December 31, 1998, 1997
and 1996............................................................................................ F-5
Combined Statement of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.................................................................... F-6
Notes to Combined Financial Statements................................................................ F-7
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of TIME WARNER TELECOM INC.
We have audited the accompanying combined balance sheets of Time Warner
Telecom Inc. (the 'Company') as of December 31, 1998 and 1997, and the related
combined statements of operations, cash flows and stockholders' equity for each
of the three years in the period ended December 31, 1998. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Company
at December 31, 1998 and 1997, and the combined results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 5, 1999
except for Notes 1, 2 and 3 as to
which the date is May 10, 1999
F-2
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents...................................................... $ 105,140 $ --
Marketable securities.......................................................... 231,107 --
Receivables, less allowances of $2,692 and $776................................ 26,690 8,882
Prepaid expenses............................................................... 2,176 1,192
------------ ------------
Total current assets...................................................... 365,113 10,074
Investments in unconsolidated affiliates............................................ 5,707 4,376
Property, plant and equipment....................................................... 612,119 484,206
Less: accumulated depreciation...................................................... (117,961) (69,048)
------------ ------------
494,158 415,158
Long-term marketable securities..................................................... 19,750 --
Intangible assets, net.............................................................. 19,616 8,469
------------ ------------
Total assets.............................................................. $ 904,344 $ 438,077
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................................... $ 38,888 $ 32,908
Accrued interest............................................................... 17,333 --
Payable to TW Cable............................................................ 16,801 --
Deferred revenue............................................................... 10,524 938
Accrued payroll and benefits................................................... 8,821 6,333
Accrued taxes and fees......................................................... 7,481 5,871
Other current liabilities...................................................... 21,905 16,162
------------ ------------
Total current liabilities................................................. 121,753 62,212
Long term debt...................................................................... 400,000 --
Subordinated loans payable to the Parent Companies (including $3,399 and $1,544 of
accrued interest, respectively)................................................... 174,940 75,475
Stockholders' equity
Preferred stock, $0.01 par value, 20,000,000 shares authorized, no shares
outstanding................................................................... -- --
Class A common stock, $0.01 par value, 277,300,000 shares authorized, no shares
outstanding................................................................... -- --
Class B common stock, $0.01 par value, 162,500,000 shares authorized,
81,250,000 shares outstanding................................................. 813 813
Additional paid in capital..................................................... 255,654 554,994
Accumulated deficit............................................................ (48,816) (255,417)
------------ ------------
Total stockholders' equity................................................ 207,651 300,390
------------ ------------
Total liabilities and stockholders' equity................................ $ 904,344 $ 438,077
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-3
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<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues:
Dedicated transport services............................................ $ 84,024 $ 44,529 $ 20,362
Switched services....................................................... 37,848 10,872 3,555
-------- -------- --------
Total revenues..................................................... 121,872 55,401 23,917
-------- -------- --------
Costs and expenses:
Operating(a)............................................................ 67,153 40,349 25,715
Selling, general and administrative(a).................................. 77,401 54,640 60,366
Depreciation and amortization(a)........................................ 50,717 38,466 22,353
-------- -------- --------
Total costs and expenses........................................... 195,271 133,455 108,434
-------- -------- --------
Operating loss............................................................... (73,399) (78,054) (84,517)
Gain on disposition of investments........................................... -- 11,018 --
Equity in income (losses) of unconsolidated affiliates....................... 127 (2,082) (1,547)
Interest income.............................................................. 9,731 -- --
Interest expense(a).......................................................... (29,198) (1,538) (52)
-------- -------- --------
Net loss..................................................................... $(92,739) $(70,656) $(86,116)
-------- -------- --------
-------- -------- --------
Basic and diluted loss per common share...................................... $ (1.14) $ (0.87) $ (1.06)
-------- -------- --------
-------- -------- --------
Average common shares........................................................ 81,250 81,250 81,250
-------- -------- --------
-------- -------- --------
(a) Includes expenses resulting from transactions with affiliates (Note 7):
Operating............................................................. $ 2,041 $ 1,731 $ 1,303
-------- -------- --------
-------- -------- --------
Selling, general and administrative................................... $ 5,063 $ 6,810 $ 6,106
-------- -------- --------
-------- -------- --------
Depreciation and amortization......................................... $ 9,010 $ 7,064 $ 4,961
-------- -------- --------
-------- -------- --------
Interest expense...................................................... $ 11,582 $ 1,544 $ --
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes.
F-4
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
OPERATIONS
Net loss................................................................... $ (92,739) $ (70,656) $ (86,116)
Adjustments for noncash and nonoperating items:
Gain on disposition of investments.................................... -- (11,018) --
Depreciation and amortization......................................... 50,717 38,466 22,353
Equity in (income) losses of unconsolidated affiliates................ (127) 2,082 1,547
Changes in operating assets and liabilities:
Receivables........................................................... (17,808) (4,019) (2,553)
Accounts payable...................................................... 5,980 7,264 1,333
Accrued interest...................................................... 20,732 1,544 --
Payable to TW Cable................................................... 16,801 -- --
Accrued payroll and benefits.......................................... 2,488 4,093 919
Other current liabilities............................................. 16,939 5,473 8,172
Other balance sheet changes........................................... (3,326) (2,648) 2,071
--------- --------- ---------
Cash used in operations.................................................... (343) (29,419) (52,274)
--------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures....................................................... (126,023) (127,315) (144,815)
Investments and acquisitions............................................... (1,204) (334) (4,375)
Proceeds from sale of investments.......................................... -- 7,028 --
Purchases of marketable securities......................................... (286,356) -- --
Proceeds from maturities of marketable securities.......................... 35,500 -- --
--------- --------- ---------
Cash used in investing activities.......................................... (378,083) (120,621) (149,190)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from loans from the Parent Companies.............................. 96,066 73,931 --
Capital contributions from the Parent Companies............................ -- 127,550 222,584
Distributions to the Parent Companies...................................... -- (51,441) (21,120)
Net proceeds from debt offering............................................ 387,500 -- --
--------- --------- ---------
Cash provided by financing activities...................................... 483,566 150,040 201,464
--------- --------- ---------
INCREASE IN CASH AND EQUIVALENTS........................................... 105,140 -- --
CASH AND EQUIVALENTS AT BEGINNING OF YEAR.................................. -- -- --
--------- --------- ---------
CASH AND EQUIVALENTS AT END OF YEAR........................................ $ 105,140 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-5
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS B
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------- ------ ---------- ----------- --------------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995....................... 81,250 $813 $ 277,421 $ (98,645) $179,589
Net loss for 1996.................................. -- -- -- (86,116) (86,116)
Net capital contributions from the Parent
Companies........................................ -- -- 201,464 -- 201,464
------- ------ ---------- ----------- --------------
BALANCE AT DECEMBER 31, 1996....................... 81,250 813 478,885 (184,761) 294,937
Net loss for 1997.................................. -- -- -- (70,656) (70,656)
Net capital contributions from the Parent
Companies........................................ -- -- 76,109 -- 76,109
------- ------ ---------- ----------- --------------
BALANCE AT DECEMBER 31, 1997....................... 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
------- ------ ---------- ----------- --------------
------- ------ ---------- ----------- --------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Time Warner Telecom Inc. (the 'Company') is a facilities-based competitive
local telecommunications services provider in selected metropolitan markets
across the United States, offering a wide range of business telephony services,
primarily to medium- and large-sized business customers. The business of the
Company was commenced in 1993 by Time Warner Cable ('TW Cable'), a division of
Time Warner Entertainment Company, L.P. ('TWE'), and reflects the combined
commercial telecommunication operations under the ownership or management
control of TW Cable. These operations consist of the commercial
telecommunication operations of Time Warner Inc. and certain of its subsidiaries
(collectively, 'Time Warner') and the Time Warner Entertainment-Advance/Newhouse
Partnership ('TWE-A/N') that were acquired or formed in 1995, as well as the
pre-existing commercial telecommunication operations of TWE (collectively, TWE,
TWE-A/N and Time Warner are referred to herein as the 'Parent Companies').
In July 1998, the Company completed a reorganization (the 'Reorganization')
under which the Parent Companies contributed all of the assets and liabilities
of the Company into Time Warner Telecom LLC ('TWT LLC') and in connection
therewith, Time Warner, MediaOne of Colorado, Inc. ('MediaOne') and
Advance/Newhouse Partnership ('A/N') and together with Time Warner and MediaOne,
the ('Existing Stockholders') received all of the limited liability company
interests in TWT LLC. The Reorganization has been reflected as of July 1, 1998
for accounting purposes. On May 10, 1999, TWT LLC was reconstituted as a
corporation through the merger of TWT LLC with and into the Company (the
'Reconstitution'). In connection with the Reconstitution, the Company's
capitalization was authorized to include two classes of common stock, Class A
Common Stock and Class B Common Stock and the Existing Stockholders exchanged
their respective limited liability company interests for all of the outstanding
shares of Class B Common Stock. Following the Reconstitution, Time Warner,
MediaOne and A/N held all of the Company's Class B Common Stock. Accordingly,
the accompanying combined financial statements have been adjusted to
retroactively reflect the authorization of the shares of Class A Common Stock
and the authorization and issuance of shares of Class B Common Stock for all
periods.
To date, the majority of the Company's revenues have been derived from the
provision of 'private line' or 'direct access' telecommunications services.
Because the Company has deployed switches in 16 of its 19 markets, management
expects that a growing portion of the Company's revenues will be derived from
providing switched services. The Company's customers are principally
telecommunications-intensive business end-users, long distance carriers and
internet service providers, wireless communications companies and governmental
entities. Such customers are offered a wide range of integrated
telecommunications products and services, including dedicated transmission,
local switched, data and video transmission services and Internet services. In
addition, the Company benefits from its strategic relationship with TW Cable
both through access rights and cost-sharing. As a result, the Company's networks
have been constructed primarily through the use of fiber capacity licensed from
TW Cable.
BASIS OF PRESENTATION
The combined financial statements of the Company reflect the 'carved out'
historical financial position, results of operations, cash flows and changes in
stockholders' equity of the commercial telecommunications operations of the
Parent Companies as if they had been operating as a separate company. Although
these financial statements are presented as if the Company had operated as a
corporation, the Company operated as a partnership for tax purposes and
continued to operate in a partnership structure through December 31, 1998. The
combined statement of operations has been adjusted to retroactively reflect an
allocation of certain expenses pursuant to the final terms of the related
agreements, primarily relating to office rent, overhead charges for various
administrative functions performed by TW Cable and certain facility maintenance
and pole rental costs. These allocations were required to reflect all costs of
doing business and have been based on various methods (Note 7), which management
believes results in reasonable allocations of such costs.
F-7
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
RECENT PRONOUNCEMENTS
Effective December 31, l998, the Company adopted FASB Statement No. 131,
'Disclosures About Segments of an Enterprise and Related Information' ('FAS
131'). FAS 131 requires disclosure of financial and descriptive information
about an entity's reportable operating segments under the 'Management Approach'
as defined in the statement.
The Company operates in 19 locations and the Company's management makes
decisions on resource allocation and assesses performance based on total
revenues, EBITDA, and capital spending of these operating locations. Each of the
locations offer the same products and services, have similar customers and
networks, are regulated by the same type of authorities, and are managed
directly by the Company's executives, allowing the 19 sites to be aggregated
under the guidelines of FAS 131 resulting in one reportable line of business.
BASIS OF COMBINATION AND CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS
The combined financial statements include 100% of the assets, liabilities,
revenues, expenses, income, loss and cash flows of the Company and all entities
in which the Company has a controlling voting interest ('subsidiaries'), as if
the Company and its subsidiaries were a single entity. Significant intercompany
accounts and transactions between the combined entities have been eliminated.
Significant accounts and transactions with the Parent Companies are disclosed as
related party transactions.
Investments in entities in which the Company has significant influence, but
less than a controlling voting interest, are accounted for using the equity
method. At December 31, 1998 and 1997, the Company's investments in
unconsolidated affiliates consisted solely of a 50% investment in Metrocomm AXS,
L.P., a joint venture providing commercial telecommunications services in the
central Ohio area. Under the equity method, only the Company's investment in and
amounts due to and from the equity investee are included in the combined balance
sheet, and only the Company's share of the investee's earnings is included in
the combined operating results. In addition, only the Company's share of the
cash distributions and cash paid to the investee are included in the combined
cash flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
REVENUES
Revenues for dedicated transport services are generally billed in advance
on a fixed rate basis and recognized over the period the services are provided.
Revenues for switched services and long distance are generally billed on a
transactional basis determined by customer usage with some fixed rate elements.
The transactional elements of switched services are billed in arrears and
estimates are used to recognize revenue in the period earned. The fixed rate
elements are billed in advance and recognized over the period provided.
Reciprocal compensation revenue is an element of switched service revenue, which
represents compensation from local exchange carriers for local exchange traffic
terminated on the Company's facilities originated by other local exchange
carriers. Reciprocal compensation is based on contracts between the Company and
the local exchange carriers. The Company has chosen to defer revenue recognition
on a portion of cash payments associated with reciprocal compensation agreements
that are under dispute. The Company pays reciprocal compensation expense to the
other local exchange carriers for local exchange traffic it terminates on the
local exchange carriers' facilities. These costs are recognized as operating
expenses.
SIGNIFICANT CUSTOMERS
The Company has substantial business relationships with a few large
customers, including the major long distance carriers. For the year ended
December 31, 1998, the Company's top 10 customers accounted for 37.8%
F-8
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of the Company's consolidated revenues. Two of these customers, AT&T and
MCI-Worldcom, each accounted for more than 10% of the Company's total revenues
in 1998, 1997 and 1996. However, a substantial portion of that revenue results
from traffic that is directed to the Company by customers of the Company that
have selected those long distance carriers. Revenues included sales to AT&T and
MCI-Worldcom (including sales directed to the Company by customers of the
Company) of approximately $28.9 million, $14.7 million and $5.2 million in 1998,
1997 and 1996, respectively.
CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
The Company did not historically maintain any cash or marketable securities
since all funding of the Company's operating, investing and financing activities
were provided by the Parent Companies or by subordinated loans payable to the
Parent Companies (Note 5). This funding consisted of non-interest bearing
capital contributions through June 30, 1997 and subordinated loans during the
period from July 1, 1997 through July 14, 1998. The non-interest bearing capital
contributions have been included in paid-in capital. The subordinated loans,
including accrued interest, have been reflected as long-term liabilities in the
accompanying balance sheets.
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.
RECEIVABLES
The Company does not require collateral for telecommunication services
provided to customers. However, the Company performs ongoing credit evaluations
of its customers' financial conditions and has provided an allowance for
doubtful accounts based on the expected collectability of all accounts
receivable. The provision for doubtful accounts was $2.0 million, $931,000 and
$207,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Additions to property,
plant and equipment generally include material, labor, and overhead. The Company
licenses the right to use the majority of its fiber optic cable from TW Cable
divisions, in which they are co-located. The cost of these rights is capitalized
and reflects an allocable share of TW Cable's costs, which generally reflects
the incremental costs incurred by TW Cable to construct the fiber for the
Company. Such amounts do not always reflect TW Cable's total cost of
constructing the distribution plant in cases where TW Cable is also constructing
cable plants at the same time. In these instances, TW Cable's total cost of
construction is allocated between cable plant and the Company. The Company is
then charged for its incremental share of the construction costs related to its
share of the fiber. Depreciation is provided on the straight-line method over
estimated useful lives as follows:
F-9
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Buildings and improvements............................................. 5-20 years
Communications networks................................................ 5-15 years
Vehicles and other equipment........................................... 3-10 years
Fiber optic use rights................................................. 15 years
</TABLE>
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(THOUSANDS)
<S> <C> <C>
Buildings and improvements.......................................... $ 14,453 $ 12,846
Communications networks............................................. 380,150 290,618
Vehicles and other equipment........................................ 58,224 46,086
Fiber optic use rights.............................................. 159,292 134,656
--------- ---------
612,119 484,206
Less accumulated depreciation....................................... (117,961) (69,048)
--------- ---------
Total..................................................... $ 494,158 $ 415,158
--------- ---------
--------- ---------
</TABLE>
INTANGIBLE ASSETS
Intangible assets primarily consist of goodwill, deferred right of way
costs and covenants not to compete, which are amortized over periods up to 20
years using the straight-line method. Amortization expense amounted to $2.3
million, $2.0 million and $271,000 for the years ended December 31, 1998, 1997
and 1996, respectively. Accumulated amortization of intangible assets at
December 31, 1998 and 1997, amounted to $2.2 million and $1.5 million,
respectively.
INCOME TAXES
Had the Company been operating as a corporation on a stand-alone basis,
income tax benefits would not have been provided in the accompanying combined
statement of operations because such benefits would have been fully offset by
corresponding increases in the valuation allowance due to the uncertainty of
realizing the benefit for tax losses on a separate return basis. On a historical
basis, the operating results of the Company have primarily been included in the
consolidated U.S. Federal, state and local income tax returns of Time Warner or
subsidiaries of Time Warner. Time Warner has not, and will not, compensate the
Company for the utilization of the Company's losses.
LOSS PER SHARE
In February 1997, the FASB issued Statement No. 128, 'Earnings per Share'
('FAS 128'), effective for periods ending after December 15, 1997. The new rules
establish simplified standards for computing and presenting earnings per share.
The Company's adoption of FAS 128 did not have a material effect on its
financial statements.
Basic loss per common share is based upon the net loss applicable to common
shares and the weighted average of common shares outstanding during the period.
Diluted loss per common share adjusts for the effect of stock options only in
the periods presented in which such effect would have been dilutive. As all of
the Company's stock options are antidilutive and none of the stock options have
nominal exercise prices, basic and diluted earnings per share are the same for
all periods presented herein.
In connection with the Reconstitution of the Company that occurred in May
1999, the Company was authorized to issue two new classes of common stock, Class
A Common Stock and Class B Common Stock. Accordingly, the accompanying combined
financial statements have been adjusted to retroactively reflect the
authorization of the shares of Class A Common Stock and the authorization and
issuance of shares of Class B Common Stock for all periods.
F-10
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for the Company's
financial instruments approximate fair market value, except for the Company's
9 3/4% Senior Notes due 2008 ('Senior Notes'). The fair market value for these
instruments was determined based on quoted market prices. At December 31, 1998,
the fair market value for the $400 million of Senior Notes was determined to be
$422 million, based on the quoted market price.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform with the 1998 presentation.
2. STOCKHOLDERS' EQUITY
Prior to the Reorganization in July 1998, all the assets and liabilities of
the Company were beneficially owned by Time Warner and MediaOne, which, through
certain subsidiaries, are partners in TWE. The assets and liabilities of the
Company were also beneficially owned by A/N through TWE-A/N. Time Warner and
certain of its subsidiaries, MediaOne and certain of its subsidiaries and A/N
are collectively referred to herein as the 'Existing Stockholders'.
In July 1998, the Company completed the Reorganization under which the
Parent Companies contributed all of the assets and liabilities of the Company to
TWT LLC and in connection therewith, the Existing Stockholders received all of
the limited liability company interests in TWT LLC. In May 1999, TWT LLC was
reconstituted as a corporation through the Reconstitution. In connection with
the Reconstitution, the Company's capitalization was authorized to include two
classes of common stock, Class A Common Stock and Class B Common Stock and the
Existing Stockholders exchanged their respective limited liability company
interests for all of the outstanding shares of the Class B Common Stock.
Following the Reconstitution, Time Warner, MediaOne and A/N held all of the
Company's Class B Common Stock. Accordingly, the accompanying combined financial
statements have been adjusted to retroactively reflect the authorization of the
shares of Class A Common Stock and the authorization and issuance of shares of
Class B Common Stock for all periods.
Shares of Class A Common Stock and Class B Common Stock are identical in
all respects, except that holders of Class A Common Stock are entitled to one
vote per share and holders of Class B Common Stock are entitled to 10 votes per
share on all matters submitted to a vote of stockholders and except that certain
matters require the approval of 100% of the outstanding Class B Common Stock,
voting separately as a class, and certain other matters require the approval of
a majority of the outstanding Class A Common Stock, voting separately as a
class.
The Company also is authorized to issue shares of Preferred Stock. The
Company's board of directors has the authority to establish the voting powers,
the preferences and special rights for the Preferred Stock. No such voting
powers, preferences or special rights have been established as of December 31,
1998 and no shares of Preferred Stock have been issued at December 31, 1998.
3. STOCK OPTION PLANS
TIME WARNER TELECOM INC. 1998 STOCK OPTION PLAN
In connection with the Reorganization, the Management Committee approved an
option plan that provides for granting options to purchase 9,027,000 shares of
the Company's Class A Common Stock. Such options have been granted to employees
of the Company at estimated fair value at the date of the grant, and
accordingly, no compensation cost has been recognized by the Company relating to
such stock option plan. Generally, the options become exercisable over a
four-year vesting period and expire ten years from the date of the grant. The
Company has reserved the number of shares necessary to satisfy the maximum
number of shares that may be issued under the option plan.
F-11
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of applying FASB Statement No. 123, 'Accounting for
Stock-Based Compensation' ('FAS 123'), the fair value of each option grant by
Time Warner Telecom Inc. is estimated on the date of the grant using the minimum
value option-pricing model. With regard to grants of Time Warner Telecom Inc.
stock options to the Company's employees in 1998, weighted average assumptions
consisted of: dividend yield of 0%; risk-free interest rate of 6.5%; and an
expected life of 5 years. The weighted average fair value of a Time Warner
Telecom Inc. stock option granted to the Company's employees was $12 per share
for the year ended December 31, 1998.
A summary of stock option activity with respect to the Time Warner Telecom
Inc. 1998 Stock Option Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1997............................................. -- $ --
Granted............................................................. 6,115,250 12.00
Exercised........................................................... -- --
Cancelled (a)....................................................... (304,500) $12.00
---------
Balance at December 31, 1998............................................. 5,810,750 $12.00
---------
---------
</TABLE>
- ------------
(a) Includes all options cancelled and forfeited during the year.
There were no exercisable options held by employees at December 31, 1998.
Outstanding options held by employees at December 31, 1998 have a weighted
average exercise price of $12 per share and a weighted average remaining
contractual life of 9.6 years. All options were granted at the same exercise
price during 1998.
TIME WARNER AND MEDIAONE STOCK OPTION PLANS
Time Warner and MediaOne also have stock option plans under which certain
employees of the Company have been granted options to purchase Time Warner or
MediaOne common stock. Such options have been granted to employees of the
Company at fair market value at the date of the grant, and accordingly, no
compensation cost has been recognized by Time Warner and MediaOne, nor charged
to the Company, related to such stock option plans. Generally, the options
become exercisable over a three-year vesting period and expire ten years from
the date of the grant. All options have been retroactively restated for stock
splits.
For purposes of applying FAS 123, the fair value of each option grant by
Time Warner and MediaOne is estimated on the date of the grant using the
Black-Scholes option-pricing model. With regard to grants of Time Warner stock
options to the Company's employees in 1998, 1997 and 1996, weighted average
assumptions consisted of: dividend yields of .5% in 1998 and 1.0% in each of
1997 and 1996; expected volatility of 21.5%, 21.9% and 21.7%, respectively;
risk-free interest rates of 5.5%, 6.6% and 6.1%, respectively; and expected
lives of 5 years in all three periods. The weighted average fair value of Time
Warner stock granted to the Company's employees was $10.50, $6.48 and $6.09 for
the years ended December 31, 1998, 1997 and 1996, respectively. In 1997,
MediaOne granted options to a director and former executive of the Company. The
weighted averaged fair value of a MediaOne stock option was $7.43, based on the
following weighted average assumptions: no dividend yield; expected volatility
of 30%; risk-free interest rate of 6.8%; and an expected life of 5 years.
F-12
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity in the Time Warner and MediaOne stock
option plans, with respect to employees of the Company, is as follows:
<TABLE>
<CAPTION>
TIME WARNER MEDIAONE
----------------------------- -----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995................ 264,350 $18.56 -- $ --
Granted................................ 113,500 21.32 -- --
Exercised.............................. (1,268) 17.69 -- --
Cancelled (a).......................... (13,932) 20.32 -- --
--------- ---------
Balance at December 31, 1996................ 362,650 $19.35 -- $ --
Granted................................ 27,700 21.78 5,566 $18.26
Exercised.............................. (3,500) 18.88 -- --
Transferred (b)........................ (98,100) 22.36 -- --
Cancelled (a).......................... (19,500) 20.49 -- --
--------- ---------
Balance at December 31, 1997................ 269,250 $18.43 5,566 $18.26
Granted................................ 54,900 34.87 -- --
Exercised.............................. (59,164) 19.72 -- --
Cancelled (a).......................... (500) 18.78 -- --
--------- ---------
Balance at December 31, 1998................ 264,486 $21.55 5,566 $18.26
--------- ---------
--------- ---------
</TABLE>
- ------------
(a) Includes all options cancelled and forfeited during the year.
(b) Transfers represent individuals who were employed by the Company; but
transferred to another Time Warner affiliate.
The number of exercisable Time Warner and MediaOne options held by
employees of the Company is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Time Warner stock options............................................... 166,730 121,433 70,408
MediaOne stock options.................................................. 1,855 -- --
</TABLE>
PRO FORMA NET LOSS
In accordance with Accounting Principles Board Opinion No. 25, 'Accounting
for Stock Issued to Employees' and related interpretations, no compensation cost
has been recognized by the Company for any of the three stock option plans
detailed above. Had compensation cost for Time Warner Telecom Inc.'s, Time
Warner's, and Media One's stock option plans been determined based on the fair
value at the grant dates for all awards made subsequent to 1994 consistent with
the method set forth under FASB Statement No. 123, 'Accounting for Stock-Based
Compensations' ('FAS 123'), the Company's allocable share of compensation cost
would have increased its net loss to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss:
As reported................................................... $(92,739) $(70,656) $(86,116)
-------- -------- --------
-------- -------- --------
Pro forma..................................................... $(95,382) $(71,012) $(86,500)
-------- -------- --------
-------- -------- --------
Net loss per common share
As reported................................................... $ (1.14) $ (0.87) $ (1.06)
-------- -------- --------
-------- -------- --------
Pro forma..................................................... $ (1.17) $ (0.87) $ (1.06)
-------- -------- --------
-------- -------- --------
</TABLE>
F-13
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Black-Scholes and minimum value method option valuation models were
developed for use in estimating the fair value of options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions such as expected stock price
volatility. Because the Company's employee stock options and those issued by
Time Warner and MediaOne have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
4. LONG TERM DEBT
On July 21, 1998, the Company issued $400 million of Senior Notes. The
Senior Notes are unsecured, unsubordinated obligations of the Company and Time
Warner Telecom Inc., a wholly owned subsidiary of the Company, which are jointly
and severally liable, fully and unconditionally, with respect to the Senior
Notes. Interest on the Senior Notes is payable semiannually on January 15 and
July 15, beginning January 15, 1999. The net proceeds of approximately $387.5
million are expected to be used to expand and develop existing and new networks
and for general corporate and working capital purposes through the second
quarter of 2000. The proceeds of the Senior Notes were immediately invested in
cash equivalents and marketable securities. Interest expense relating to the
Senior Notes totaled approximately $17.9 million for the twelve months ended
December 31, 1998.
5. SUBORDINATED LOANS PAYABLE TO THE PARENT COMPANIES
Effective July 1, 1997 through July 14, 1998, all of the Company's
financing requirements were funded with subordinated loans from the Parent
Companies. These loans from the Parent Companies are subordinated in right of
payment to the Senior Notes, except for 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 bear interest (payable in kind) at The
Chase Manhattan Bank's prime rate which was 7.75% at December 31, 1998.
Effective with the Reorganization, the maturity of these loans was extended
until 2008. Interest expense relating to these loans totaled approximately $11.6
million in 1998 and $1.5 million in 1997.
6. MARKETABLE SECURITIES
At December 31, 1998, the Company's marketable securities portfolio
consisted of shares of money market mutual funds, corporate debt securities,
certificates of deposit with banks, and foreign government debt securities. At
December 31, 1998, all of the Company's marketable securities were categorized
as 'held-to-maturity' and carried at amortized cost.
Marketable securities at December 31, 1998, were as follows:
<TABLE>
<CAPTION>
AMORTIZED
COST
-----------
(THOUSANDS)
<S> <C>
Cash Equivalents:
Shares of money market mutual funds............................... $ 3,338
Certificates of deposit with banks................................ 5,000
Corporate debt securities......................................... 93,394
-----------
101,732
Current Marketable Securities:
Certificates of deposit with banks................................ 57,014
Corporate debt securities......................................... 169,085
Foreign government debt securities................................ 5,008
-----------
231,107
Long-Term Marketable Securities:
Corporate debt securities......................................... 19,750
-----------
Total Marketable Securities.................................. $ 352,589
-----------
-----------
</TABLE>
F-14
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair value of the marketable securities is not materially
different from the amortized cost. The Company does not have any marketable
securities with a maturity of greater than two years.
7. RELATED PARTY TRANSACTIONS
In the normal course of conducting its businesses, the Company has various
transactions with the Parent Companies, generally on terms resulting from
negotiation between the affected units that, in management's view, results in
reasonable allocations.
The Company's operations, which in certain cases are co-located with TW
Cable divisions, are allocated a charge for various overhead expenses for
services provided by TW Cable. These allocations are based on direct labor,
total expenses, or headcount relative to each division. The Company is also
allocated rent based on the square footage of space occupied by the Company at
TW Cable facilities. The aggregate of these charges totaled approximately $2.1
million, $4.4 million and $4.3 million for the years ended December 31, 1998,
1997 and 1996, respectively.
The Company participates in the Time Warner Cable Pension Plan (the
'Pension Plan'), a noncontributory defined benefit pension plan which covers
approximately 75% of all employees. The remaining 25% of employees are
participating in a pension plan under the administration of MediaOne, their
previous employer. The Company also participates in the Time Warner Cable
Employees Savings Plan (the 'Savings Plan'), a defined contribution plan. Both
the Pension Plan and Savings Plan are administered by a committee appointed by
the Board of Representatives of TWE and cover substantially all employees.
Benefits under the Pension Plan are determined based on formulas which
reflect employees' years of service and compensation levels during their
employment period. Total pension cost was $1.9 million, $1.7 million and $1.2
million for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company's contributions to the Savings Plan can represent up to 6.67%
of the employees' compensation during the plan year. TWE's Board of
Representatives has the right in any year to set the maximum amount of the
Company's annual contribution. Defined contribution plan expense was $1.0
million, $710,000 and $606,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
As of January 1, 1999, the Company does not participate in the Time Warner
Cable Pension Plan, the MediaOne Pension Plan or the Time Warner Cable Employee
Savings Plan, because the company has 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 $23.8 million, $32.5 million, and $41.3
million in the years ended December 31, 1998, 1997 and 1996, 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
$9.0 million, $7.1 million and $5.0 million for the years ended December 31,
1998, 1997 and 1996, respectively, has been classified as a component of
depreciation and amortization in the accompanying combined statement of
operations. In addition, under this licensing arrangement, the Company
reimburses TW Cable for facility maintenance and pole rental costs, which costs
amounted to $2.0 million, $1.7 million and $1.3 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
Effective July 1, 1997 through July 14, 1998, all of the Company's
financing requirements were funded with loans from the Parent Companies.
Interest expense relating to these loans totaled approximately $11.6 million in
1998 and $1.5 million in 1997 (see Note 5).
F-15
<PAGE>
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
There are no current income taxes payable based on the Company's operating
losses.
The pro forma deferred tax assets and liabilities calculated on a
separate-company basis consistent with the liability method prescribed by FASB
Statement No. 109, 'Accounting for Income Taxes' are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................................ $ 1,082 $ 312
Tax losses utilized by Time Warner............................. 179,192 134,365
--------- ---------
Total gross deferred tax assets................................ 180,274 134,677
Less: valuation allowance...................................... (139,829) (102,679)
--------- ---------
Net deferred tax assets........................................ 40,445 31,998
--------- ---------
Deferred tax liabilities:
Depreciation and amortization.................................. (38,570) (30,583)
Investments.................................................... (1,875) (1,415)
--------- ---------
Total gross deferred tax liabilities........................... (40,445) (31,998)
--------- ---------
Net deferred tax assets........................................ $ -- $ --
--------- ---------
--------- ---------
</TABLE>
In 1998, 1997 and 1996, the net income tax benefits of approximately $44.8
million, $28.4 million and $34.6 million, respectively, have been fully offset
by corresponding increases in the valuation allowance due to the uncertainty of
realizing the benefit for tax losses on a separate return basis.
On a pro forma basis, had the Company been operating on a stand alone
basis, the Company would have generated net operating loss carryforwards for tax
purposes of approximately $333 million during the three years ended December 31,
1998. However, at December 31, 1998, the Company, which operated as a
partnership for tax purposes during the periods presented herein, has no net
operating loss carryforwards for tax purposes because such losses were primarily
allocated to and utilized by Time Warner and its affiliates. The Company has
not, and will not, be compensated for such losses. Consequently, without the tax
benefit for losses utilized by Time Warner, the Company would have a net
deferred tax liability of approximately $39.4 million at December 31, 1998.
9. COMMITMENTS AND CONTINGENCIES
The Company has non-cancelable operating leases for office space and
switching facilities expiring over various terms. Certain of these leases
contain renewal clauses. Rental expense for all operating leases totaled $7.0
million, $5.4 million and $4.2 million for the years ended December 31, 1998,
1997 and 1996, respectively.
The minimum rental commitments under non-cancelable operating leases are:
1999 -- $6.3 million; 2000 -- $6.1 million; 2001 -- $5.8 million; 2002 -- $5.9
million; 2003 -- $5.7 million and after 2003 -- $30.6 million.
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.
F-16
<PAGE>
<PAGE>
[Logo]
<PAGE>
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED MAY 11, 1999
18,000,000 SHARES
[LOGO]
TIME WARNER TELECOM INC.
CLASS A COMMON STOCK
------------------------
TIME WARNER TELECOM INC. IS OFFERING 18,000,000 SHARES OF ITS CLASS A COMMON
STOCK. INITIALLY, THE INTERNATIONAL UNDERWRITERS ARE OFFERING 3,600,000 SHARES
OF OUR CLASS A COMMON STOCK OUTSIDE THE UNITED STATES AND CANADA, AND THE
U.S. UNDERWRITERS ARE OFFERING 14,400,000 SHARES OF OUR CLASS A
COMMON STOCK IN THE UNITED STATES AND CANADA. THIS IS OUR INITIAL
PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR
SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE
WILL BE BETWEEN $9 AND $11 PER SHARE.
IMMEDIATELY AFTER THE OFFERING, THE FOUNDING STOCKHOLDERS OF TIME WARNER TELECOM
INC. WILL OWN 100% OF THE CLASS B COMMON STOCK, WHICH WILL REPRESENT 97.8% OF
THE COMBINED VOTING POWER OF BOTH CLASSES OF OUTSTANDING COMMON STOCK.
------------------------------------
WE EXPECT THE CLASS A COMMON STOCK TO BE APPROVED FOR QUOTATION ON THE NASDAQ
NATIONAL MARKET OF THE NASDAQ STOCK MARKET UNDER THE SYMBOL 'TWTC.'
------------------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS.
SEE 'RISK FACTORS' BEGINNING ON PAGE 14.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
--------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total................................... $ $ $
</TABLE>
------------------------
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Time Warner Telecom Inc. has granted the U.S. Underwriters the right to purchase
up to an additional 2,700,000 shares of Class A Common Stock to cover
over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares
of Class A Common Stock to purchasers on , 1999.
------------------------
JOINT BOOK - RUNNING MANAGERS
MORGAN STANLEY DEAN WITTER LEHMAN BROTHERS
BEAR, STEARNS INTERNATIONAL LIMITED
, 1999
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the expenses of issuance and distribution of the shares
of Class A Common Stock registered hereunder on Form S-1, other than
underwriting discounts and commissions. All amounts except the Registration Fee
are estimated.
<TABLE>
<S> <C>
Registration Fee.......................................................................... $ 63,301
Nasdaq National Market Listing Fee........................................................ 95,000
NASD Filing Fee........................................................................... 21,200
Printing and Engraving Fees............................................................... 500,000
Blue Sky Fees and Expenses................................................................ 12,000
Legal Fees and Expenses................................................................... 950,000
Accounting Fees and Expenses.............................................................. 200,000
Registrar and Transfer Agent's Fees....................................................... 2,000
Miscellaneous............................................................................. 6,499
----------
Total................................................................................ $1,850,000
----------
----------
</TABLE>
All of the above expenses have been or will be paid by Time Warner Telecom
Inc.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Restated Certificate of Incorporation (the 'Restated
Certificate of Incorporation') of Time Warner Telecom Inc. (the 'Company')
provides that to the fullest extent permitted under the General Corporation Law
of the State of Delaware (the 'DGCL'), a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director.
Section 102(b)(7) of the DGCL, provides that a corporation may eliminate or
limit the personal liability of a director (or certain persons who, pursuant to
the provisions of the certificate of incorporation, exercise or perform duties
conferred or imposed upon directors by the DGCL) to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provisions shall not eliminate or limit the liability of a
director:
for any breach of the director's duty of loyalty to the corporation or its
stockholders,
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
under Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions)
or
for any transaction from which the director derived an improper personal
benefit.
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement in
connection with specified actions, suits or proceedings, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation -- a 'derivative action'), if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceedings, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in the case of derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) actually
and reasonably incurred in connection with the defense or settlement of such
action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, by-laws,
disinterested director vote, stockholder vote, agreement or otherwise. Article
VIII of the TWT Charter provides that TWT shall indemnify its officers,
directors, employees and agents to the full extent permitted by Delaware law.
II-1
<PAGE>
<PAGE>
The By-laws of Time Warner Inc. ('TWI') require indemnification to the
fullest extent permitted under Delaware law of any person who is or was a
director or officer of TWI who is or was involved or threatened to be made so
involved in any action, suit or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that such person is or
was serving at the request of TWI as a director, officer or employee of any
other enterprise. Mr. Bressler would be covered by this provision. The
Directors' and Officers' Liability and Reimbursement Insurance Policy of TWI is
designed to reimburse TWI for any payments made by it pursuant to the foregoing
indemnification. The policy has coverage of $50,000,000.
The Agreement of Limited Partnership of TWE provides that TWE shall
indemnify, defend and hold harmless each officer of TWE from any personal
liability he or she may incur by reason of his or her action on behalf of TWE to
the fullest extent permitted as if TWE were a Delaware corporation. Messrs.
Bressler, Britt, Davies and Rossetti would be covered by this provision.
The By-laws of MediaOne Group, Inc. ('MediaOne') require indemnification to
the fullest extent permitted under Delaware law of any person who is or was a
director, officer or employee of MediaOne, or was otherwise designated as an
indemnified representative (as defined in the MediaOne By-laws) by MediaOne,
against any liability (as defined in the MediaOne By-laws) incurred by such
person in connection with any proceeding (as defined in the MediaOne By-laws) in
which such person is involved by reason of their past, present or future
services for, or at the request of, MediaOne as a director, officer, employee,
agent, fiduciary or trustee of any other entity or enterprise. Messrs. McPhie,
Williams and Webster are covered by this provision.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, except as set forth in the next four
sentences, the Company has not sold any securities without registration under
the Securities Act. Immediately prior to the date of this Registration
Statement, the Company issued 81,250,000 shares of its Class B Common Stock to
the Existing Stockholders, in a private placement under Section 4(2) of the
Securities Act. In April 1999, the Company issued 307,550 shares of Class A
Common Stock in connection with the Company's acquisition of Internet Connect,
Inc. in a private placement under Section 4(2) of the Securities Act. In March
1999, the Company issued options to acquire 41,667 shares of Class A Common
Stock to its former president and CEO, Steven McPhie, in a private placement
under Section 4(2) of the Securities Act. If the Company's proposed acquisition
of the remaining 50% of MetroComm that the Company does not currently own is
consummated, the Company will issue 2,190,308 shares of Class A Common Stock to
the former partners of MetroComm in a private placement under Section 4(2) of
the Securities Act.
II-2
<PAGE>
<PAGE>
ITEM 16. EXHIBITS
(a) Exhibits:
TIME WARNER TELECOM INC.
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- -----------------------------------------------------------------------------------------------------------
<S> <C>
1.1 -- Form of Underwriting Agreement***
2.1 -- Reorganization Agreement among Time Warner Companies, Inc., MediaOne Group, Inc., Advance/Newhouse
Partnership, Time Warner Entertainment Company, L.P., and Time Warner Entertainment -- Advance Newhouse
Partnership (filed as Exhibit 2.1 to TWT LLC's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998)**
2.2 -- Merger Agreement among the Company, TWT LLC and TWT Inc.
3.1 -- Restated Certificate of Incorporation of the Company***
3.2 -- Restated By-laws of the Company***
4.1 -- Stockholders Agreement, among the Company, Time Warner Companies, Inc., American Television and
Communications Corporation, Warner Communications Inc., TW/TAE Inc., FibrCOM Holdings, L.P., Paragon
Communications, MediaOne Group, Inc., Multimedia Communications, Inc. and Advance/Newhouse Partnership***
4.2 -- Indenture, between TWT LLC, TWT Inc. and The Chase Manhattan Bank, as Trustee (filed as Exhibit 4.1 to
TWT LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)**
5 -- Opinion of Cravath, Swaine & Moore
10.1 -- Lease, between Quebec Court Joint Venture No. 2, Landlord, and Intelligent Advanced Systems, Inc.,
Tenant, dated June 3, 1994 (filed as Exhibit 10.1 to TWT LLC's Registration Statement on Form S-1
(Registration No. 333-53553))**
10.2 -- Agreement for Assignment of Lease, dated September 12, 1997, between Ingram Micro Inc. and Time Warner
Communications Holdings Inc. (filed as Exhibit 10.2 to TWT LLC's Registration Statement on Form S-1
(Registration No. 333-53553))**
10.3 -- First Amendment to Lease, dated October 15, 1997, by Carramerica Realty, L.P. and Time Warner
Communications Holdings Inc. (filed as Exhibit 10.3 to TWT LLC's Registration Statement on Form S-1
(Registration No. 333-53553))**
10.4 -- Time Warner Telecom Inc. 1998 Stock Option Plan***
10.5 -- Employment Agreement between the Company and Larissa L. Herda (filed as Exhibit 10.6 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**
10.6 -- Employment Agreement between the Company and Paul B. Jones (filed as Exhibit 10.5 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**
10.7 -- Employment Agreement between the Company and A. Graham Powers (filed as Exhibit 10.7 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**
10.8 -- Employment Agreement between the Company and David J. Rayner (filed as Exhibit 10.8 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**
10.9 -- Employment Agreement between the Company and John T. Blount (filed as Exhibit 10.10 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**
10.10 -- Capacity License Agreement (filed as Exhibit 10.3 to TWT LLC's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998)**
10.11 -- Trade Name License Agreement (filed as Exhibit 10.4 to TWT LLC's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998)**
10.12 -- Master Capacity Agreement between MCImetro Access Transmission Services, Inc. and Time Warner
Communications, dated September 9, 1994, as amended on September 9, 1994 and August 28, 1997'D'***
10.13 -- Agreement between AT&T Communications, Inc. and Time Warner Communications, dated as of September 15,
1995, as amended on June 1, 1997'D'***
</TABLE>
II-3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- -----------------------------------------------------------------------------------------------------------
<S> <C>
21 -- Subsidiaries of the Company***
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
23.2 -- Consent of Cravath, Swaine & Moore (included in Exhibit 5)
24.1 -- Power of Attorney of the Company's Officers and Directors***
24.2 -- Power of Attorney of the Company's Officers and Directors***
</TABLE>
- ------------
* To be filed by amendment.
** Incorporated by reference.
*** Previously filed as part of this Registration Statement.
'D' 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.
(b) Financial Statement Schedule
The following financial statement schedule is included in Part II of this
Registration Statement and should be read in conjunction with the combined
financial statements and notes thereto included elsewhere herein.
<TABLE>
<S> <C>
Report of Independent Auditors.................................................................... S-1
Schedule II -- Valuation and Qualifying Accounts.................................................. S-2
</TABLE>
All other schedules are omitted, either because they are not applicable or
because the required information is shown in the financial statements or the
notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described under Item 14 above or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of their
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The Company hereby undertakes that:
1. For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as a part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed part of this Registration
Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at such time shall be
deemed to be the initial bona fide offering thereof.
3. It will provide the underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.
II-4
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Time Warner Telecom Inc. has duly caused Amendment No. 7 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on May 11, 1999.
TIME WARNER TELECOM INC.
By /s/ David J. Rayner
....................................
DAVID J. RAYNER
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------------- ------------------------------------ --------------------
<S> <C> <C>
(i) Principal Executive Officer
* President and Chief Executive May 11, 1999
.................................................... Officer and Director
LARISSA L. HERDA
(ii) Principal Financial Officer
/s/ David J. Rayner Senior Vice President and May 11, 1999
.................................................... Chief Financial Officer
DAVID J. RAYNER
(iii) Principal Accounting Officer
* Vice President, Accounting May 11, 1999
.................................................... and Finance and
JILL STUART Chief Accounting
Officer
(iv) Directors
* Director May 11, 1999
....................................................
RICHARD J. BRESSLER
* Director May 11, 1999
....................................................
LARISSA L. HERDA
* Director May 11, 1999
....................................................
ROBERT J. MIRON
* Director May 11, 1999
....................................................
DOUGLAS HOLMES
* By: /s/ David J. Rayner
....................................................
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Time Warner Telecom Inc.
We have audited the combined financial statements of Time Warner Telecom
Inc. (the 'Company') as of December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998 and have issued our report thereon
dated February 5, 1999, except for Notes 1, 2 and 3, as to which the date is
May 10, 1999. Our audits also included the financial statement schedule listed
in Item 16(b) of this Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic combined financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 5, 1999
S-1
<PAGE>
<PAGE>
TIME WARNER TELECOM LLC
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS/
BALANCE AT CHARGES TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
(THOUSANDS)
<S> <C> <C> <C> <C>
For the Year ended December 31, 1998:
Allowance for doubtful accounts receivable................. $776 $2,020 $ (104) $2,692
For the Year ended December 31, 1997:
Allowance for doubtful accounts receivable................. $193 $1,213 $ (630) $ 776
For the Year ended December 31, 1996:
Allowance for doubtful accounts receivable................. $ 21 $ 271 $ (99) $ 193
</TABLE>
S-2
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- ---------------------------------------------------------------------------------------------------- -----
<S> <C> <C>
1.1 -- Form of Underwriting Agreement***.................................................................
2.1 -- Reorganization Agreement among Time Warner Companies, Inc., MediaOne Group, Inc.,
Advance/Newhouse Partnership, Time Warner Entertainment Company, L.P., and Time Warner
Entertainment -- Advance Newhouse Partnership (filed as Exhibit 2.1 to TWT LLC's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998)**...............................................
2.2 -- Merger Agreement among the Company, TWT LLC and TWT Inc...........................................
3.1 -- Restated Certificate of Incorporation of the Company***...........................................
3.2 -- Restated By-laws of the Company***................................................................
4.1 -- Stockholders Agreement, among the Company, Time Warner Companies, Inc., American Television and
Communications Corporation, Warner Communications Inc., TW/TAE Inc., FibrCOM Holdings, L.P.,
Paragon Communications, MediaOne Group, Inc., Multimedia Communications, Inc. and Advance/Newhouse
Partnership***....................................................................................
4.2 -- Indenture, between TWT LLC, TWT Inc. and The Chase Manhattan Bank, as Trustee (filed as Exhibit
4.1 to TWT LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)**.............
5 -- Opinion of Cravath, Swaine & Moore................................................................
10.1 -- Lease, between Quebec Court Joint Venture No. 2, Landlord, and Intelligent Advanced Systems,
Inc., Tenant, dated June 3, 1994 (filed as Exhibit 10.1 to TWT LLC's Registration Statement on
Form S-1 (Registration No. 333-53553))**..........................................................
10.2 -- Agreement for Assignment of Lease, dated September 12, 1997, between Ingram Micro Inc. and Time
Warner Communications Holdings Inc. (filed as Exhibit 10.3 to TWT LLC's Registration Statement on
Form S-1 (Registration No. 333-53553))**..........................................................
10.3 -- First Amendment to Lease, dated October 15, 1997, by Carramerica Realty, L.P. and Time Warner
Communications Holdings Inc. (filed as Exhibit 10.3 to TWT LLC's Registration Statement on Form
S-1 (Registration Statement No. 333-53553))**.....................................................
10.4 -- Time Warner Telecom Inc. 1998 Stock Option Plan***................................................
10.5 -- Employment Agreement between the Company and Larissa L. Herda (filed as Exhibit 10.6 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**................................
10.6 -- Employment Agreement between the Company and Paul B. Jones (filed as Exhibit 10.5 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**................................
10.7 -- Employment Agreement between the Company and A. Graham Powers (filed as Exhibit 10.7 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**................................
10.8 -- Employment Agreement between the Company and David J. Rayner (filed as Exhibit 10.8 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**................................
10.9 -- Employment Agreement between the Company and John T. Blount (filed as Exhibit 10.10 to TWT LLC's
Registration Statement on Form S-1 (Registration No. 333-53553))**................................
10.10 -- Capacity License Agreement (filed as Exhibit 10.3 to TWT LLC's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998)**................................................................
10.11 -- Trade Name License Agreement (filed as Exhibit 10.4 to TWT LLC's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998)**............................................................
10.12 -- Master Capacity Agreement between MCImetro Access Transmission Services, Inc. and Time Warner
Communications, dated September 9, 1994, as amended on September 9, 1999 and August 28,
1997'D'***........................................................................................
10.13 -- Agreement between AT&T Communications, Inc. and Time Warner Communications, dated as of
September 15, 1995, as amended on June 1, 1997'D'***..............................................
21 -- Subsidiaries of the Company***....................................................................
23.1 -- Consent of Ernst & Young LLP, Independent Auditors...............................................
23.2 -- Consent of Cravath, Swaine & Moore (included in Exhibit 5).......................................
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- ---------------------------------------------------------------------------------------------------- -----
<S> <C> <C>
24.1 -- Power of Attorney of the Company's Officers and Directors***.....................................
24.2 -- Power of Attorney of the Company's Officers and Directors***.....................................
</TABLE>
- ------------
* To be filed by amendment.
** Incorporated by reference.
*** Previously filed as part of this Registration Statement.
'D' 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.
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as .................................. 'D'
<PAGE>
<PAGE>
Exhibit 2.2
AGREEMENT AND PLAN OF MERGER, dated as of
May 10, 1999 (this "Agreement"), between TW
Telecom Merger Corp., a Delaware corporation ("TW
Telecom"), Time Warner Telecom LLC , a Delaware
limited liability company ("TWT LLC") and Time
Warner Telecom Inc., a Delaware corporation
("TWT Inc.").
W I T N E S S E T H :
WHEREAS TW Telecom desires to acquire the properties and other assets
and to assume all of the liabilities and obligations pursuant to a merger of
each of TWT LLC and TWT Inc. with and into TW Telecom;
WHEREAS Section 18-209 of the Delaware Limited Liability Company Act,
6 Del. C. 'SS' 18-101, et seq. (the "Delaware Act") and Section 264 of the
General Corporation Law of the State of Delaware, 8 Del C. 'SS' 101, et seq.
(the "GCL") authorize the merger of a Delaware limited liability company with
and into a Delaware corporation and Section 251 of the GCL authorizes the merger
of a Delaware corporation with and into another Delaware corporation;
WHEREAS TW Telecom, TWT LLC and TWT Inc. now desire to merge (the
"Merger"), following which TW Telecom shall be the surviving entity;
WHEREAS Time Warner Companies, Inc., a Delaware corporation ("TWX"),
American Television and Communications Corporation, a Delaware corporation
("ATC"), Warner Communications Inc., a Delaware corporation ("WCI"), TW/TAE,
Inc., a Delaware corporation ("TW/TAE"), FibrCOM Holdings, L.P., a Delaware
limited partnership that is owned by TW/Kblcom Inc., a Delaware corporation
("TW/KBLCOM"), Paragon Communications, a Colorado general partnership ("Paragon"
and, together with TWX, ATC, WCI, TWI/TAE and TW/KBLCOM, the "TW Stockholders"),
Media One Group, Inc., a Colorado corporation ("MediaOne"), and Advance/Newhouse
Partnership, a New York general partnership ("A/N"), as the "distributee
members" under the Amended and Restated Limited Liability Company Agreement of
TWT LLC (the "Members") have approved this Agreement and the consummation of the
Merger
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2
and have executed counterparts to this Agreement as evidence of that approval;
WHEREAS TW Telecom's Certificate of Incorporation and By-laws permit,
and resolutions adopted by TW Telecom's Board of Directors authorize, this
Agreement and the consummation of the Merger; and
WHEREAS TWT Inc.'s Certificate of Incorporation and By-laws permit and
resolutions adopted by TWT Inc.'s Board of Directors authorize, this Agreement
and the consummation of the Merger.
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
The Merger
SECTION 1.01. The Merger. (a) After satisfaction or, to the extent
permitted hereunder, waiver of all conditions to the Merger, as TW Telecom, the
Members and TWT Inc. shall determine, TW Telecom, which shall be the surviving
entity, shall merge with each of TWT LLC and TWT Inc. and shall file a
certificate of merger substantially in the form of Exhibit 1 hereto (the
"Certificate of Merger") with the Secretary of State of the State of Delaware
and make all other filings or recordings required by Delaware law in connection
with the Merger. The Merger shall become effective at such time as is specified
in the Certificate of Merger (the "Effective Time").
(b) At the Effective Time, each of TWT LLC and TWT Inc. shall be
merged with and into TW Telecom, whereupon the separate existence of each of TWT
LLC and TWT Inc. shall cease, and TW Telecom shall be the surviving entity of
the Merger (the "Surviving Corporation") in accordance with Section 18-209 of
the Delaware Act and Sections 251, 259 and 264 of the GCL.
SECTION 1.02. Exchange of Interests. At the Effective Time:
(a) each Class B limited liability company interest in TWT LLC
outstanding immediately prior to the Effective Time, representing a 1%
participation percentage in the Company, shall be exchanged for 815,575.5
shares of Class B Common Stock of TW Telecom provided that TW Telecom shall
not be required to issue fractional shares;
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<PAGE>
3
(b) each Class A limited liability company interest in TWT LLC
outstanding immediately prior to the Effective Time representing a 1%
participation percentage in the Company, shall be exchanged for 815,575.5
shares of Class A Common Stock of TW Telecom provided that TW Telecom shall
not be required to issue fractional shares;
(c) each option exercisable for one Unit (as defined in the TWT LLC
1998 Option Plan) outstanding immediately prior to the Effective Date shall
be exchanged for one option exercisable for one share of Class A Common
Stock of TW Telecom;
(d) each share of common stock of TW Telecom that is owned by TWT LLC
shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and no consideration shall be delivered
in exchange therefor; and
(e) each share of capital stock of TWT Inc. that is owned by TWT LLC
or any subsidiary of TWT LLC shall automatically be canceled and retired
and shall cease to exist, and no consideration shall be delivered in
exchange therefor.
ARTICLE II
The Surviving Corporation
SECTION 2.01. Certificate of Incorporation and By-laws. The
Certificate of Incorporation and By-laws of TW Telecom in effect at the
Effective Time shall be the Certificate of Incorporation and By-laws attached
hereto as Exhibits A and B, respectively unless and until amended in accordance
with its terms and applicable law. In accordance with the Amended and Restated
Certificate of Incorporation, the name of the Surviving Corporation shall be
Time Warner Telecom Inc.
SECTION 2.02. Directors and Officers. From and after the Effective
Time, until successors are duly elected or appointed and qualified in accordance
with the applicable law, (i) the Representatives of the Management Committee of
TWT LLC shall become the directors of TW Telecom and
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<PAGE>
4
(ii) the officers of TWT LLC shall become the officers of TW Telecom.
ARTICLE III
Transfer and Conveyance of Assets
and Assumption of Liabilities
SECTION 3.01. Transfer, Conveyance and Assumption. At the Effective
Time, TW Telecom shall continue in existence as the Surviving Corporation, and
without further transfer, succeed to and possess all of the rights, privileges
and powers of each of TWT LLC and TWT Inc., and all of the assets and property
of whatever kind and character of each of TWT LLC and TWT Inc. shall vest in TW
Telecom without further act or deed; thereafter, TW Telecom, as the Surviving
Corporation, shall be liable for all of the liabilities and obligations of each
of TWT LLC and TWT Inc., and any claim or judgment against either TWT LLC or TWT
Inc. may be enforced against TW Telecom, as the Surviving Corporation, in
accordance with Section 18-209 of the Delaware Act and Section 259 of the GCL.
SECTION 3.02. Further Assurances. If at any time TW Telecom shall
consider or be advised that any further assignment, conveyance or assurance is
necessary or advisable to vest, perfect or confirm of record in the Surviving
Corporation the title to any property or right of either TWT LLC or TWT Inc., or
otherwise to carry out the provisions hereof, the proper representatives of each
of TWT LLC and TWT Inc. as of the Effective Time shall execute and deliver any
and all proper deeds, assignments and assurances and do all things necessary or
proper to vest, perfect or convey title to such property or right in the
Surviving Corporation and otherwise to carry out the provisions hereof.
<PAGE>
<PAGE>
5
ARTICLE IV
Termination
SECTION 4.01. Termination. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether before
or after approval of this agreement by the members and stockholders of the
constituent entities:
(a) by mutual written consent of the Members, on behalf of TWT LLC,
the Board of Directors of TWT Inc., and the Board of Directors of TW
Telecom;
(b) by either the Members, on behalf of TWT LLC, the Board of
Directors of TWT Inc., or the Board of Directors of TW Telecom, if there
shall be any law or regulation that makes consummation of the Merger
illegal or otherwise prohibited, or if any judgment, injunction, order or
decree enjoining TW Telecom, TWT LLC or TWT Inc. from consummating the
Merger is entered and such judgment, injunction, order or decree shall
become final and nonappealable.
SECTION 4.02. Effect of Termination. If this Agreement is terminated
pursuant to Section 4.01, this Agreement shall become void and of no effect with
no liability on the part of any party hereto.
ARTICLE V
Miscellaneous
SECTION 5.01. Amendments; No Waivers. (a) Any provision of this
Agreement may, subject to applicable law, be amended or waived prior to the
Effective Time if, and only if, such amendment or waiver is in writing and
signed by the Members, on behalf of TWT LLC, by TWT Inc. and by TW Telecom.
(b) No failure or delay by any party hereto in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be
<PAGE>
<PAGE>
6
cumulative and not exclusive of any rights or remedies provided by law.
SECTION 5.02. Integration. All prior or contemporaneous agreements,
contracts, promises, representations and statements, if any, between TW Telecom,
TWT LLC and TWT Inc., or their representatives, are merged into this agreement,
and this Agreement shall constitute the entire understanding between TW
Telecom, TWT LLC and TWT Inc. with respect to the subject matter hereof.
SECTION 5.03. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other parties hereto.
SECTION 5.04. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Delaware, without
giving effect to principles of conflicts of law.
SECTION 5.05. Counterparts; Effectiveness. This Agreement may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received the counterpart hereof signed by the other party hereto.
<PAGE>
<PAGE>
7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized representatives as of the day
and year first above written.
TIME WARNER TELECOM LLC,
by
FIBRCOM HOLDINGS, L.P.,
by FIBRCOM INCORPORATED,
General Partner
by __________________________
Name:
Title:
TIME WARNER COMPANIES, INC.
by __________________________
Name:
Title:
AMERICAN TELEVISION AND
COMMUNICATIONS CORPORATION,
by __________________________
Name:
Title:
WARNER COMMUNICATIONS INC.,
by __________________________
Name:
Title:
<PAGE>
<PAGE>
8
TW/TAE, INC.,
by __________________________
Name:
Title:
PARAGON COMMUNICATIONS,
by KBL COMMUNICATIONS, INC.,
Managing General Partner
by __________________________
Name:
Title:
MEDIAONE GROUP, INC.,
by __________________________
Name:
Title:
ADVANCE/NEWHOUSE PARTNERSHIP,
by ADVANCE COMMUNICATION
CORP., General Partner,
by __________________________
Name:
Title:
TIME WARNER TELECOM INC.
by __________________________
Name:
Title:
TW TELECOM MERGER CORP.
by __________________________
Name:
Title:
<PAGE>
<PAGE>
[LETTERHEAD OF CRAVATH, SWAINE & MOORE]
May 11, 1999
Time Warner Telecom Inc.
Dear Ladies and Gentlemen:
We have acted as counsel for Time Warner Telecom Inc., a Delaware
corporation (the "Company") in connection with the Registration Statement on
Form S-1 (the "Registration Statement") filed by the Company with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the registration of 18,000,000
shares (plus an additional 2,700,000 shares if the U.S. and International
Underwriters choose to exercise their over-allotment option) (the "Shares") of
Class A common stock, par value $.01 per share, of the Company.
In that connection, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of such documents,
corporate records and other instruments as we have deemed necessary or
appropriate for the purposes of our opinion, including (a) the Restated
Certificate of Incorporation of the Company; (b) the By-laws of the Company; and
(c) certain resolutions adopted by the Board of Directors of the Company.
Based on the foregoing and subject to the qualifications set
forth herein, we are of opinion that:
1. The Company is a corporation validly existing and in
good standing under the laws of the State of Delaware; and
2. The Shares have been duly and validly authorized and
when issued and delivered by the Company and paid for by the U.S.
and International Underwriters in accordance with the terms of
the
<PAGE>
<PAGE>
2
Underwriting Agreements referred to in the Registration
Statement, will be validly issued, fully paid and nonassessable.
The opinion set forth in paragraph 2 is qualified to the extent
we have assumed the due execution and delivery of the Underwriting Agreement.
We are aware that we are referred to under the heading "Legal
Matters" in the prospectus forming a part of the Registration Statement, and we
hereby consent to such use of our name therein and the filing of this opinion as
Exhibit 5 to the Registration Statement. In giving this consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act or the Rules and Regulations of
the Commission promulgated thereunder.
Very truly yours,
/s/ Cravath, Swaine & Moore
Time Warner Telecom Inc.
5700 South Quebec Street
Greenwood Village, CO 80111
<PAGE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions 'Experts' and
'Selected Combined Financial and Other Operating Data' and to the use of our
reports dated February 5, 1999 (except Notes 1, 2 and 3 as to which the date is
May 10, 1999), in Amendment No. 7 to the Registration Statement (Form S-1) and
related Prospectus of Time Warner Telecom Inc. for the registration of shares of
its Class A Common Stock.
/S/ ERNST & YOUNG LLP
Denver, Colorado
May 10, 1999
<PAGE>
