<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-30218
TIME WARNER TELECOM INC.
------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1500624
------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10475 Park Meadows Drive
Littleton, Colorado 80124
----------------------------- ------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (303) 566-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of Time Warner Telecom Inc.'s common stock as
of July 31, 2000 was:
Time Warner Telecom Inc. Class A common stock -- 33,239,219 shares
Time Warner Telecom Inc. Class B common stock -- 72,226,500 shares
<PAGE>
TIME WARNER TELECOM INC.
INDEX TO FORM 10-Q
------------------
Page
----
Part I. Financial Information
---------------------
Item 1. Financial Statements:
---------------------
Consolidated and Condensed Balance Sheets at June 30,
2000 and December 31, 1999 1
Consolidated Statements of Operations for the three
and six months ended June 30, 2000 and 1999 2
Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 3
Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 2000 4
Notes to Consolidated and Condensed Financial
Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
-----------------
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
<PAGE>
TIME WARNER TELECOM INC.
CONSOLIDATED AND CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------- -------------------
<S> <C> <C>
(unaudited)
(amounts in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 105,157 90,586
Marketable debt securities..................................................... 68,467 173,985
Receivables, less allowances of $15,906 and $7,857 ............................ 66,213 52,652
Prepaid expenses............................................................... 3,780 2,938
------------------- -------------------
Total current assets...................................................... 243,617 320,161
------------------- -------------------
Property, plant and equipment....................................................... 1,012,331 868,770
Less accumulated depreciation.................................................. (234,688) (191,664)
------------------- -------------------
777,643 677,106
Intangible and other assets, net of accumulated amortization (notes 1 and 2)........ 80,358 45,745
------------------- -------------------
Total assets.............................................................. $ 1,101,618 1,043,012
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 59,277 64,678
Deferred revenue............................................................... 36,106 37,913
Other current liabilities...................................................... 105,021 86,752
------------------- -------------------
Total current liabilities................................................ 200,404 189,343
------------------- -------------------
Long-term debt and capital lease obligations (note 3)............................... 403,419 403,627
Deferred income taxes............................................................... 38,262 27,126
Stockholders' equity (note 1):
Preferred stock, $0.01 par value, 20,000,000 shares authorized, no
shares issued and outstanding.............................................. - -
Class A common stock, $0.01 par value, 227,300,000 shares authorized
33,180,344 and 23,543,422 shares issued and outstanding in 2000
and 1999, respectively....................................................... 332 235
Class B common stock, $0.01 par value, 162,500,000 shares authorized,
72,226,500 and 81,214,285 shares issued and outstanding in 2000
and 1999, respectively....................................................... 722 812
Additional paid-in capital..................................................... 574,177 559,950
Accumulated other comprehensive income, net of taxes (note 1).................. 15,476 -
Accumulated deficit............................................................ (131,174) (138,081)
------------------- -------------------
Total stockholders' equity................................................ 459,533 422,916
------------------- -------------------
Total liabilities and stockholders' equity................................ $ 1,101,618 1,043,012
=================== ===================
</TABLE>
See accompanying notes.
1
<PAGE>
TIME WARNER TELECOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------- -------------- ------------
<S> <C> <C> <C> <C>
(amounts in thousands, except per share amounts)
Revenue:
Dedicated transport services.......................... $ 60,692 35,397 112,630 65,061
Switched services..................................... 71,081 22,984 119,281 40,909
------------ ------------- -------------- ------------
Total revenue.................................... 131,773 58,381 231,911 105,970
------------ ------------- -------------- ------------
Costs and expenses (a):
Operating............................................. 43,558 27,466 82,547 51,461
Selling, general and administrative................... 40,497 26,268 78,188 50,404
Depreciation and amortization......................... 22,935 15,987 44,799 30,981
------------ ------------- -------------- ------------
Total costs and expenses......................... 106,990 69,721 205,534 132,846
------------ ------------- -------------- ------------
Operating income (loss)..................................... 24,783 (11,340) 26,377 (26,876)
Interest expense (a)........................................ (10,887) (11,645) (20,614) (25,156)
Interest income............................................. 3,276 4,771 6,796 8,988
Equity in income of unconsolidated affiliate (note 2)....... - 97 - 285
------------ ------------- -------------- ------------
Income (loss) before income taxes........................... 17,172 (18,117) 12,559 (42,759)
Income tax expense.......................................... 7,405 35,062 5,652 35,062
------------ ------------- -------------- ------------
Net income (loss)........................................... $ 9,767 (53,179) 6,907 (77,821)
------------ ------------- -------------- ------------
Earnings (loss) per share:
Basic $ 0.09 (0.57) 0.07 (0.89)
------------ ------------- -------------- ------------
Diluted $ 0.09 (0.57) 0.06 (0.89)
------------ ------------- -------------- ------------
Weighted average shares outstanding:
Basic 105,277 92,885 105,126 87,099
------------ ------------- -------------- ------------
Diluted 108,334 92,885 108,363 87,099
------------ ------------- -------------- ------------
(a) Includes expenses resulting from transactions with affilitates (note 4):
Operating...................................... $ 77 507 465 1,015
------------ ------------- -------------- ------------
Selling, general and administrative............ $ 398 474 701 947
------------ ------------- -------------- ------------
Depreciation and amortization.................. $ 3,191 2,621 6,363 5,216
------------ ------------- -------------- ------------
Interest expense............................... - 1,689 - 5,078
------------ ------------- -------------- ------------
</TABLE>
See accompanying notes.
2
<PAGE>
TIME WARNER TELECOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
(amounts in thousands)
Cash flows from operating activities:
Net income (loss)......................................................................... $ 6,907 (77,821)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization.......................................................... 44,799 30,981
Amortization of deferred debt issue costs.............................................. 625 625
Equity in income of unconsolidated affiliate........................................... - (285)
Deferred income tax expense............................................................ 5,652 35,062
Changes in operating assets and liabilities, net of the effect of acquisitions:
Receivables and prepaid expenses.................................................... (14,403) (7,636)
Accounts payable, deferred revenue and other current liabilities.................... 11,061 6,347
-------------- --------------
Net cash provided by (used in) operating activities.............................. 54,641 (12,727)
-------------- --------------
Cash flows from investing activities:
Capital expenditures...................................................................... (143,561) (89,290)
Cash paid for acquisitions, net of cash acquired.......................................... - (2,567)
Purchases of marketable securities........................................................ (83,998) (45,153)
Proceeds from maturities of marketable securities......................................... 189,516 152,686
Other investing activities................................................................ (6,063) -
-------------- --------------
Net cash provided by (used in) investing activities............................... (44,106) 15,676
-------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock upon exercise of stock options................. 7,227 -
Net proceeds from issuance of common stock in connection with the employee
stock purchase plan.................................................................. 2,087 -
Payment of capital lease obligations...................................................... (208) (1,537)
Deferred debt issue costs................................................................. (5,070) -
Net proceeds from initial public offering................................................. - 270,182
Repayment of loans to Former Parent Companies............................................. - (180,018)
Repayment of acquired debt................................................................ - (15,567)
-------------- --------------
Net cash provided by financing activities......................................... 4,036 73,060
-------------- --------------
Increase in cash and cash equivalents............................................. 14,571 76,009
-------------- --------------
Cash and cash equivalents at beginning of period.................................. 90,586 105,140
-------------- --------------
Cash and cash equivalents at end of period........................................ $ 105,157 181,149
============== ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 19,988 24,052
============== ==============
Tax benefit related to exercise of non-qualified stock options..................... $ 4,914 -
============== ==============
Cash paid for income taxes......................................................... $ 207 168
============== ==============
</TABLE>
See accompanying notes.
3
<PAGE>
TIME WARNER TELECOM INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Accumulated
----------------------------------- other
Class A Class B Additional comprehensive Total
----------------- ---------------- paid-in income, Accumulated stockholders'
Shares Amount Shares Amount capital net of taxes deficit equity
--------- ------- -------- ------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(amounts in thousands)
Balance at January 1, 2000.............. 23,543 $ 235 81,214 $ 812 559,950 - (138,081) 422,916
Shares issued for cash in connection
with the exercise of stock
options........................... 596 6 - - 12,141 - - 12,147
Shares issued for cash in connection
with the employee stock purchase
plan.............................. 54 1 - - 2,086 - - 2,087
Conversion of shares by related party
(note 1).......................... 8,987 90 (8,987) (90) - - - -
Change in unrealized holding gain for
available-for-sale security, net
of taxes............................ - - - - - 15,476 - 15,476
Net income........................... - - - - - - 6,907 6,907
--------- ------- -------- ------- --------- ------------- ------------ -------------
Balance at June 30, 2000................ 33,180 $ 332 72,227 $ 722 574,177 15,476 (131,174) 459,533
========= ======= ======== ======= ========= ============= ============ =============
</TABLE>
See accompanying notes.
4
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
June 30, 2000
(unaudited)
1. Organization and Summary of Significant Accounting Policies
Description of Business and Capital Structure
Time Warner Telecom Inc. (the "Company"), a Delaware corporation, is a
leading fiber facilities-based integrated communications provider in
selected metropolitan markets across the United States, offering local
businesses "last-mile" broadband connections for data, high-speed Internet
access, local voice and long distance services.
Time Warner Cable, as defined below, began the Company's business in
1993 by providing telephony services through cable systems owned by Time
Warner Entertainment Company, L.P. ("TWE"), Time Warner Entertainment-
Advance/Newhouse Partnership ("TWE-A/N") and Time Warner Inc. ("Time
Warner"), collectively referred to as the ''Former Parent Companies.''
"Time Warner Cable" refers to the cable systems owned by TWE, TWE-A/N and
Time Warner.
TWE and TWE-A/N are owned as follows:
(1) TWE is a partnership of subsidiaries of Time Warner and AT&T Corp.
("AT&T"), as successor by merger to Media One Group, Inc.
("MediaOne"); and
(2) TWE-A/N is a partnership of TWE, Time Warner and Advance/Newhouse
Partnership ("Advance").
On July 14, 1998, Time Warner Telecom LLC ("TWT LLC") succeeded to the
ownership of the Company's business. At that time, Time Warner, MediaOne
and Advance (collectively referred to as the "Class B Stockholders") formed
TWT LLC to acquire the assets and liabilities of the Company's business
from the Former Parent Companies and to conduct the offering on July 21,
1998 of $400 million principal amount 9 3/4% Senior Notes due July 2008
(the "Senior Notes"). In the transaction, referred to as the
"Reorganization," the Class B Stockholders (either directly or through
subsidiaries) became the owners of all the limited liability company
interests in TWT LLC. The Reorganization has been reflected as of July 1,
1998 for accounting purposes.
On May 10, 1999, in preparation for the Company's initial public
offering, TWT LLC was reconstituted as a Delaware corporation (the
"Reconstitution") under the name Time Warner Telecom Inc. by merging into a
newly formed Delaware corporation. The Company accounted for the
Reorganization and the Reconstitution at each of the Class B Stockholders'
historical cost basis and, except as noted below, the Reorganization and
Reconstitution had no effect on the Company's total stockholders' equity,
which has been presented on a consistent basis. In connection with the
Reconstitution, the Company's capitalization was authorized to include two
classes of common stock, Class A common stock and Class B common stock. As
part of the merger, the outstanding Class A limited liability company
interests were converted into Class A common stock and the Class B
Stockholders exchanged their Class B limited liability company interests in
TWT LLC for Class B common stock of the newly formed corporation, Time
Warner Telecom Inc. Prior to the Reconstitution, the only outstanding Class
A interests were those held by the former shareholders of Internet Connect,
Inc., which the Company acquired in April 1999 (see note 2). Following the
Reconstitution, the Class B Stockholders held all of the Company's Class B
common stock. Accordingly, the accompanying financial statements have been
adjusted to retroactively reflect the authorization and issuance of the
shares of Class A common stock and Class B common stock for all periods
presented.
On May 14, 1999, in conjunction with the Reconstitution, the Company
completed an initial public offering of 20,700,000 shares of Class A common
stock at a price of $14 per share (the
5
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
"IPO"). The IPO generated $270.2 million in proceeds for the Company, net
of underwriting discounts and expenses. The net proceeds were used
primarily to repay indebtedness to the Former Parent Companies (see note
4). The proceeds of the IPO remaining after repayment of that indebtedness
were used to repay assumed debt from acquisitions and to fund capital
expenditures.
As a result of the IPO, the Company has two classes of common stock
outstanding, Class A common stock and Class B common stock. Holders of
Class A common stock have one vote per share and holders of Class B common
stock have ten votes per share. Each share of Class B common stock is
convertible, at the option of the holder, into one share of Class A common
stock. Holders of Class A common stock and Class B common stock generally
vote together as a single class. However, some matters require the
approval of 100% of the holders of the Class B common stock voting
separately as a class, and some matters require the approval of a majority
of the holders of the Class A common stock, voting separately as a class.
Upon completion of the IPO, the Class B Stockholders owned all of the
81,250,000 shares of outstanding Class B common stock. Subsequent to the
IPO, 9,023,500 shares of Class B common stock have been converted into
Class A common stock. As of June 30, 2000, the Class B Stockholders had
approximately 95.6% of the combined voting power of the outstanding common
stock.
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 and
no shares of Preferred Stock have been issued as of June 30, 2000.
MediaOne completed an underwritten offering on May 1, 2000 of
9,000,000 shares of Class A common stock of the Company, 8,987,785 of which
were converted from shares of Class B common stock. As a result of this
transaction, MediaOne was no longer entitled to appoint three members of
the Company's Board of Directors and the three directors designated by
MediaOne have resigned. After the transaction, MediaOne held 6,289,842
shares of Class B common stock, representing 6.0% of the Company's total
outstanding common stock and 8.3% of the total voting power, and the Class
B Stockholders as a group had approximately 95.6% of the combined voting
power of the outstanding common stock as of May 2, 2000. The Company did
not receive any proceeds nor did its total shares outstanding change as a
result of this transaction.
On June 15, 2000, MediaOne merged with AT&T. As a result of the
merger, the Class B common stock previously beneficially owned by a
MediaOne subsidiary is beneficially owned by AT&T, since that subsidiary
has become a wholly-owned subsidiary of AT&T. However, the transaction
does not affect the rights of that subsidiary as a Class B Stockholder.
On January 10, 2000, Time Warner announced an agreement to merge with
America Online, Inc. ("AOL") in a stock-for-stock transaction that would
create a new company called AOL Time Warner Inc. As a result of the
merger, both AOL and Time Warner will become wholly owned subsidiaries of
AOL Time Warner. If the merger is completed, the Class B common stock
beneficially owned by Time Warner will be beneficially owned by AOL Time
Warner and its subsidiaries. However, the transaction will not affect the
rights of Time Warner subsidiaries as Class B Stockholders. The merger was
approved by the Time Warner stockholders, but is also subject to customary
closing conditions, including regulatory clearance. There is no assurance
that the clearance will be obtained or that the merger will be consummated.
Basis of Presentation
Until July 14, 1998, the historical financial statements of the
Company reflected the "carved out" historical financial position, results
of operations, cash flows and changes in stockholders' equity of the
commercial telecommunications operations of the Former Parent Companies, as
if they had been operating as a separate company. Although these financial
statements are presented as if the Company had operated as a corporation,
the Company operated as a partnership for tax purposes
6
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
and continued to operate in a partnership structure through May 10, 1999.
The consolidated statements of operations have been adjusted to
retroactively reflect an allocation of certain expenses pursuant to the
final terms of agreements related to the Reorganization, primarily relating
to office rent, overhead charges for various administrative functions
performed by Time Warner Cable and certain facility maintenance and pole
rental costs. These allocations were required to reflect all costs of doing
business and have been based on various methods which management believes
result in reasonable allocation of these costs.
The accompanying interim consolidated and condensed financial
statements are unaudited, but in the opinion of management, reflect all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of operations for
any interim period are not necessarily indicative of results for the full
year. The accompanying financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto for
the year ended December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and all entities in which the Company has a controlling voting
interest ("subsidiaries"). Significant intercompany accounts and
transactions have been eliminated. Significant accounts and transactions
with Time Warner Cable are disclosed as related party transactions.
Investments
Marketable equity securities held by the Company are classified as
available-for-sale. Accordingly, these securities are included in other
assets at fair value. Unrealized holding gains and losses on securities
classified as available-for-sale are carried net of taxes as a component of
accumulated other comprehensive income in stockholders' equity. Other
investments which ownership interest is less than 20% and are not
considered marketable securities are generally carried at the lower of cost
or net realizable value. Realized gains and losses are determined on a
specific identification basis.
At June 30, 2000, the fair value of the Company's available-for-sale
security was $28.9 million. The unrealized holding gain on this marketable
equity security is reported as accumulated other comprehensive income, net
of taxes, in the accompanying consolidated financial statements. As of June
30, 2000, the unrealized holding gain on this security was $15.5 million,
net of taxes. There were no sales of marketable securities for the six
months ended June 30, 2000 and 1999, respectively.
Investments in entities in which the Company has significant
influence, but less than a controlling voting interest, are accounted for
using the equity method. During the first quarter of 1999, the Company's
investment in unconsolidated affiliate consisted solely of a 50% investment
in MetroComm AxS, L.P. ("MetroComm L.P."), a joint venture providing
commercial telecommunications services in the central Ohio area. Under the
equity method, only the Company's investment in and amounts due to and from
the equity investee were included in the consolidated balance sheets, and
only the Company's share of the investee's income (losses) was included in
the consolidated statements of operations. During the second quarter of
1999, the remaining 50% of MetroComm L.P. was acquired (see note 2) and,
accordingly, is accounted for on a consolidated basis as of May 31, 1999.
7
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
Revenue
The Company's revenue has been derived primarily from business
telephony services, including dedicated transport, local switched, long
distance, data and high-speed Internet access services. The Company's
customers are principally telecommunications-intensive business end-users,
long distance carriers, Internet service providers ("ISPs"), wireless
communications companies and governmental entities.
Revenue for dedicated transport services is generally billed in
advance on a fixed rate basis and recognized over the period the services
are provided. Revenue for switched services, data and Internet 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 services
revenue, which represents compensation from local exchange carriers
("LECs") for local exchange traffic terminated on the Company's facilities
originated by other LECs. Reciprocal compensation is based on contracts
between the Company and LECs. The Company recognizes reciprocal
compensation revenue as it is earned, except in such cases where the
revenue is under dispute. Under several of its contracts, the LECs have
disputed the payment of reciprocal compensation for traffic terminating to
ISP customers contending that such traffic was not local. As a result, the
Company initiated the dispute resolution process under the applicable
contracts to collect these amounts and filed complaints with various public
utility commissions ("PUCs") contending that the ISP traffic is local.
Various of these state PUCs have ruled in favor of the Company, but all of
these favorable decisions have subsequently been appealed by the LECs.
While the Company believes that these disputes will ultimately be resolved
in its favor, the Company only recognizes revenue on a portion of the cash
received and defers recognition of a portion of this revenue pending
outcome of the dispute. In addition, the payment of reciprocal compensation
under certain of the Company's interconnection agreements is, by the terms
of those agreements, subject to adjustment or repayment depending on
prospective federal or state generic rulings with respect to reciprocal
compensation for ISP traffic. Switched services revenue for the three and
six months ended June 30, 2000 includes the recognition of $23.4 million
and $27.3 million, respectively, of non-recurring reciprocal compensation.
A significant portion of the non-recurring reciprocal compensation revenue
recognized during the second quarter of 2000 was a result of the resolution
of certain cases involving reciprocal compensation disputes. As of June 30,
2000, the Company had deferred recognition of $28.3 million in reciprocal
compensation revenue for payments received associated with pending disputes
and agreements that are subject to future reciprocal compensation
adjustments. The Company pays reciprocal compensation expense to the other
LECs for local exchange traffic it terminates on the LEC's facilities.
These costs are recognized as incurred and are reported as a component of
operating expenses in the accompanying consolidated statements of
operations.
Significant Customers
The Company has substantial business relationships with a few large
customers, including the major long distance carriers. For the six months
ended June 30, 2000 and 1999, the Company's top 10 customers accounted for
46% and 43%, respectively, of the Company's consolidated revenue. AT&T
accounted for more than 10% of the Company's total revenue, or $14.3
million, during the six months ended June 30, 1999, but accounted for less
than 10% of the Company's total revenue during the six months ended June
30, 2000. However, a substantial portion of this revenue results from
traffic that is directed to the Company by the Company's customers who have
selected AT&T as their long distance provider.
8
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
Segment Reporting
The Company operates in 22 service areas and the Company's management
makes decisions on resource allocation and assesses performance based on
total revenue, EBITDA and capital spending of these operating locations.
Each of the service areas offers the same products and services, has
similar customers and networks, is regulated by the same type of
authorities, and is managed directly by the Company's executives, allowing
the 22 service areas to be aggregated, resulting in one reportable line of
business.
Earnings (Loss) Per Common Share and Potential Common Share
Basic earnings (loss) per share for all periods presented herein was
computed by dividing the net income (loss) by the weighted average shares
outstanding for the period.
The diluted loss per common share for the three and six months ended
June 30, 1999 was computed by dividing the net loss attributable to common
shares by the weighted average outstanding common shares for the period.
Potential common shares were not included in the computation of weighted
average shares outstanding because their inclusion would be anti-dilutive.
The diluted earnings per share for the three and six months ended June
30, 2000 was computed by dividing the net income by the weighted average
number of common shares and dilutive potential common shares outstanding
during the period.
Set forth below is a reconciliation of the basic and diluted earnings
(loss) per share for each period:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(amounts in thousands, except per share amounts)
Net income (loss) for basic and
diluted earnings (loss) per share $ 9,767 (53,179) 6,907 (77,821)
============== ============== ============== ==============
Weighted-average number of
shares - basic 105,277 92,885 105,126 87,099
Dilutive effect of stock options 3,057 - 3,237 -
-------------- -------------- -------------- --------------
Weighted-average number of
shares - diluted 108,334 92,885 108,363 87,099
============== ============== ============== ==============
Earnings (loss) per share:
Basic $ 0.09 (0.57) 0.07 (0.89)
============== ============== ============== ==============
Diluted $ 0.09 (0.57) 0.06 (0.89)
============== ============== ============== ==============
</TABLE>
2. Acquisitions
During the second quarter of 1999, the Company acquired all of the
outstanding common stock of Internet Connect, Inc., an Internet service
provider, for consideration consisting of $3.8 million of Class A limited
liability interests in TWT LLC, the Company's predecessor, approximately
$3.5 million in net cash and the assumption of $1.9 million in liabilities.
At the time of the IPO, these Class A limited liability interests were
converted into 307,550 shares of Class A common stock of the
9
<PAGE>
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
Company. The Class A common stock of the Company into which the limited
liability interests were converted are being held in escrow to be released
to the former Internet Connect, Inc. shareholders over a period of three
years, beginning in April 2000. Through the acquisition of this subsidiary,
the Company plans to manage current and future data networks and provide
new Internet products. The transaction was accounted for under the purchase
method of accounting and generated $6.9 million in goodwill, which is being
amortized on a straight-line basis over a ten-year period. Amortization
expense aggregated $115,000 and $346,000 for the six months ended June 30,
2000 and 1999, respectively.
During the second quarter of 1999, the Company acquired all of the
outstanding common stock of MetroComm, Inc. ("MetroComm") through the
issuance of 2,190,308 shares of Class A common stock of the Company valued
at $24.1 million, and the assumption of $20.1 million in liabilities.
Through the acquisition of MetroComm, the Company acquired the 50% interest
of MetroComm L.P. not already owned by the Company. After the acquisition,
the Company's Columbus, Ohio assets were transferred to MetroComm L.P. and
all operations in Columbus, Ohio are now reported under the new entity.
The transaction was accounted for under the purchase method of accounting
and generated $18.8 million in goodwill, which is being amortized on a
straight-line basis over a ten-year period. Amortization expense
aggregated $940,000 and $158,000 for the six months ended June 30, 2000 and
1999, respectively.
Since both acquisitions are accounted for as purchases, the results of
operations of Inc.Net and MetroComm are consolidated with the Company's
results of operations from their respective acquisition dates.
3. Long-Term Debt
The Senior Notes are unsecured, unsubordinated obligations of the
Company. Interest on the Senior Notes is payable semi-annually on January
15 and July 15, and began on January 15, 1999. Interest expense, including
amortization of debt discount, relating to the Senior Notes totaled
approximately $20.1 million for both the six months ended June 30, 2000 and
1999. At June 30, 2000, the fair market value for the $400 million of
Senior Notes was $391 million, based on market prices.
The Senior Notes are governed by an Indenture that contains certain
restrictive covenants. These restrictions affect, and in many respects
significantly limit or prohibit, among other things, the ability of the
Company to incur indebtedness, make prepayments of certain indebtedness,
pay dividends, make investments, engage in transactions with shareholders
and affiliates, issue capital stock of subsidiaries, create liens, sell
assets and engage in mergers and consolidations.
On April 10, 2000, the Company executed a $475 million Senior Secured
Revolving Credit Facility (the "Revolver"). The Revolver has a final
maturity of December 31, 2007, with annual reductions in the principal
amount available under the Revolver commencing on December 31, 2004, and
borrowings will be at the Eurodollar rate plus a margin of up to 2.0%,
depending on financial metrics. The Company is required to pay commitment
fees on a quarterly basis ranging from 0.875% to 0.500% per annum on the
undrawn available commitment. Commitment fee expense was $935,000 for the
three months ended June 30, 2000 and has been classified as a component of
interest expense in the accompanying consolidated statements of operations.
It is anticipated that the Revolver will primarily be used for the build-
out of the Company's network and working capital needs. At June 30, 2000,
the undrawn available commitment under the Revolver was $475 million.
The obligations under the Revolver are secured by the Company's
interests in all of its subsidiaries and substantially all of the assets of
the Company's subsidiaries, except for certain assets with respect to which
the grant of a security interest is prohibited by governing agreements.
The Revolver requires the Company to prepay any amounts that have been
borrowed with the proceeds received from a number of specified events or
transactions. In addition, obligations under the Revolver are subject to
various covenants that limit the Company's ability to: (i) borrow and
incur
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TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
liens on its property; (ii) pay dividends or make other distributions; and
(iii) make capital expenditures. The Revolver also contains financial
covenants, including a consolidated leverage ratio, a consolidated interest
coverage ratio and a consolidated debt service coverage ratio. In addition,
the Revolver contains customary events of default, including cross default
provisions. Under the cross default provisions, the Company is deemed to be
in default under the Revolver if the Company has defaulted under any of the
other material outstanding obligations, such as the Senior Notes.
4. Related Party Transactions
In the normal course of business, the Company engages in various
transactions with the Former Parent Companies, generally on negotiated
terms among the affected units that, in management's opinion, result in
reasonable allocations.
The Company benefits from its strategic relationship with Time Warner
Cable both through access to local right-of-way and construction cost-
sharing. The Company's networks have been constructed primarily through
the use of fiber capacity licensed from Time Warner Cable. Under this
licensing arrangement, the Company paid Time Warner Cable $1.2 million and
$6.7 million for the six months ended June 30, 2000 and 1999, respectively.
These costs have been capitalized by the Company. The amortization expense
of these costs and fiber previously capitalized in the amount of $6.4
million and $5.2 million for the six months ended June 30, 2000 and 1999,
respectively, has been classified as a component of depreciation and
amortization expense in the accompanying consolidated statements of
operations. In addition, under this licensing arrangement, the Company
reimburses Time Warner Cable for facility maintenance and pole rental
costs, which aggregated $465,000 and $1.0 million for the six months ended
June 30, 2000 and 1999, respectively.
The Company's operations, which in certain cases are co-located with
Time Warner Cable's divisions, are allocated a charge for various overhead
expenses for services provided by these divisions. Prior to the
Reorganization, the allocations were based on direct labor, total expenses
or headcount relative to each operating unit. The Company is also
allocated rent based on the square footage of space occupied by the Company
at Time Warner Cable's facilities. After the Reorganization, these costs
are based on contracts with Time Warner Cable. The charges aggregated
$701,000 and $947,000 for the six months ended June 30, 2000 and 1999,
respectively.
During the period from July 1, 1997 through July 14, 1998, all of the
Company's financing requirements were funded with subordinated loans from
the Former Parent Companies. These loans remained outstanding, accruing
interest, through May 14, 1999. The loans from the Former Parent Companies
were subordinated in right of payment to the Senior Notes, except for a
provision allowing repayment prior to maturity with the net proceeds of any
offering of common stock or equivalent interest of the Company. These
loans bore interest (payable in kind) at The Chase Manhattan Bank's prime
rate, which was 7.75% from January 1, 1999 through the payoff of the loan
in May 1999. Interest expense relating to these loans totaled
approximately $5.1 million for the six months ended June 30, 1999. On May
14, 1999, approximately $180 million of the proceeds from the IPO were used
to repay the subordinated loans payable to the Former Parent Companies in
full, including accrued interest.
5. Commitments and Contingencies
Pending legal proceedings are substantially limited to litigation
incidental to the business of the Company. In the opinion of management,
the ultimate resolution of these matters will not have a material adverse
effect on the Company's financial statements.
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TIME WARNER TELECOM INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautions Concerning Forward Looking Statements
The following discussion and analysis provides information concerning the
results of operations and financial condition of Time Warner Telecom Inc. (the
"Company") and should be read in conjunction with the accompanying financial
statements and notes thereto. Additionally, the following discussion and
analysis should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations and the consolidated financial
statements included in Part II of Time Warner Telecom Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1999.
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. Certain information
included in this report contains ''forward-looking statements'' within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements anticipating future growth in revenue, EBITDA and cash flow. Words
such as ''anticipate,'' ''estimate,'' ''expects,'' ''projects,'' ''intends,''
''plans,'' ''believes,'' ''target'' and words and terms of similar substance
used in connection with any discussion of future operating or financial
performance identify such forward-looking statements. Those forward-looking
statements are management's present expectation of future events. As with any
projection or forecast, they are inherently susceptible to changes in
circumstances, and the Company is under no obligation to (and expressly
disclaims any such obligation to) update or alter its forward-looking statements
despite such changes. Important factors that could cause actual results to
differ materially from these expectations are set forth under "Risk Factors" in
the Company's Registration Statement on Form S-1 (Registration No. 333-33166)
and under "Additional Risks and Other Uncertainties" in Item 7 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
Overview
The Company is a leading fiber facilities-based integrated communications
provider offering local businesses "last-mile" broadband connections for data,
high-speed Internet access, local voice and long distance services. The Company
serves customers in 22 metropolitan markets in the United States. The markets
include: Austin, Dallas, Houston and San Antonio, Texas; Charlotte,
Fayetteville, Greensboro and Raleigh, North Carolina; Albany, Binghamton, New
York City and Rochester, New York; Northern New Jersey; Cincinnati and Columbus,
Ohio; Memphis, Tennessee; Orlando and Tampa, Florida; Indianapolis, Indiana;
Milwaukee, Wisconsin; San Diego, California and Honolulu, Hawaii. The Company
will begin offering service in Denver, Colorado; Atlanta, Georgia; Chicago,
Illinois; Minneapolis, Minnesota and Columbia, South Carolina in 2001. The
Company plans to activate its networks in the Los Angeles/Orange County,
California and Dayton, Ohio markets later this year.
The Company began its business in 1993 by providing telephony services
through cable systems owned by Time Warner Entertainment Company, L.P. ("TWE"),
Time Warner Entertainment-Advance/Newhouse Partnership ("TWE-A/N") and Time
Warner Inc. ("Time Warner"), collectively referred to as the "Former Parent
Companies." The Company's original business was to provide certain telephony
services together with cable television. In January 1997, the Company put in
place a new management team that implemented a business strategy focused
exclusively on serving business customers, rapidly providing switched services
in the Company's service areas and expanding the range of business telephony
services offered by the Company.
TWE and TWE-A/N are owned as follows:
(1) TWE is a partnership of subsidiaries of Time Warner and AT&T Corp.
("AT&T"), as successor by merger to MediaOne Group, Inc. ("MediaOne");
and
(2) TWE-A/N is a partnership of TWE, Time Warner and Advance/Newhouse
Partnership ("Advance").
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TIME WARNER TELECOM INC.
On July 14, 1998, Time Warner Telecom LLC ("TWT LLC") succeeded to the
ownership of the Company's business. At that time, Time Warner, MediaOne and
Advance (collectively referred to as the "Class B Stockholders") formed TWT LLC
to acquire the assets and liabilities of the Company's business from the Former
Parent Companies and to conduct the offering on July 21, 1998 of $400 million
principal amount 9 3/4% Senior Notes due July 2008 (the "Senior Notes"). In the
transaction, referred to as the "Reorganization," the Class B Stockholders
(either directly or through subsidiaries) became the owners of all the limited
liability company interests in TWT LLC.
On May 10, 1999, in preparation for the Company's initial public offering,
TWT LLC was reconstituted as a Delaware corporation (the "Reconstitution") under
the name Time Warner Telecom Inc. by merging into a newly formed Delaware
corporation. As part of the merger, the outstanding Class A limited company
interests were converted into Class A common stock and the Class B Stockholders
exchanged their Class B limited liability company interests in TWT LLC for Class
B common stock of the newly formed corporation, Time Warner Telecom Inc. Prior
to the Reconstitution, the only outstanding Class A interests were those held by
former shareholders of Internet Connect, Inc. ("Inc.Net"), which the Company
acquired in April 1999. The Company accounted for the Reorganization and the
Reconstitution at each of the Class B Stockholders' historical cost basis and,
except as noted below, the Reorganization and the Reconstitution had no effect
on the Company's total stockholders' equity, which has been presented on a
consistent basis.
The primary change to the Company's operating structure since the
Reconstitution is that the management of the Company became accountable to the
Board of Directors, instead of to the management committee of TWT LLC. In
addition, all future net operating loss carryforwards from the date of the
Reconstitution can be utilized against future earnings of the Company as a
result of the change in the Company's operating and legal structure from a
limited liability company to a corporation. Prior to the Reconstitution, all
net operating losses were allocated to and utilized primarily by the Class B
Stockholders. The Company has not been, and will not be compensated for net
operating losses utilized by the Class B Stockholders. As a result of the
Reconstitution, which occurred during the second quarter of 1999, the Company
recorded a non-recurring charge to earnings for a net deferred tax liability of
approximately $39.4 million.
On May 14, 1999, in conjunction with the Reconstitution, the Company
completed an initial public offering of 20,700,000 shares of Class A common
stock at a price of $14 per share (the "IPO"). The IPO generated approximately
$270.2 million in proceeds for the Company, net of underwriting discounts and
expenses. A portion of the proceeds of the IPO was used to repay $180 million
of loans from the Former Parent Companies that were generated from the financing
requirements of the Company from July 1, 1997 through July 14, 1998, which had
remained outstanding, accruing interest, through May 14, 1999.
As a result of the IPO, the Company has two classes of common stock
outstanding, Class A common stock and Class B common stock. In general, holders
of Class A common stock have one vote per share and holders of Class B common
stock have ten votes per share. Each share of Class B common stock is
convertible, at the option of the holder, into one share of Class A common
stock. Holders of Class A common stock and Class B common stock generally vote
together as a single class. However, some matters require the approval of 100%
of the holders of the Class B common stock voting separately as a class, and
some matters require the approval of a majority of the holders of the Class A
common stock, voting separately as a class. Upon completion of the IPO, the
Class B Stockholders owned all of the 81,250,000 shares of outstanding Class B
common stock. Subsequent to the IPO, 9,023,500 shares of Class B common stock
have been converted into Class A common stock. As of June 30, 2000, the Class B
Stockholders had approximately 95.6% of the combined voting power of the
outstanding common stock.
MediaOne completed an underwritten offering on May 1, 2000 of 9,000,000
shares of Class A common stock of the Company, 8,987,785 of which were converted
from shares of Class B common stock. As a result of this transaction, MediaOne
was no longer entitled to appoint three members of the Company's Board of
Directors and the three directors designated by MediaOne have resigned. After
the transaction, MediaOne held 6,289,842 shares of Class B common stock,
representing 6.0% of the Company's total outstanding common stock and 8.3% of
the total voting power, and the Class B Stockholders as a group had
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TIME WARNER TELECOM INC.
approximately 95.6% of the combined voting power of the outstanding common stock
as of May 2, 2000. The Company did not receive any proceeds nor did its total
shares outstanding change as a result of this transaction.
On June 15, 2000, MediaOne merged with AT&T. As a result of the merger,
the Class B common stock previously beneficially owned by a MediaOne subsidiary
is beneficially owned by AT&T, since that subsidiary has become a wholly-owned
subsidiary of AT&T. However, the transaction does not affect the rights of that
subsidiary as a Class B Stockholder.
On January 10, 2000, Time Warner announced an agreement to merge with
America Online, Inc. ("AOL") in a stock-for-stock transaction that would create
a new company called AOL Time Warner Inc. As a result of the mergers, both AOL
and Time Warner will become wholly owned subsidiaries of AOL Time Warner. If
the merger is completed, the Class B common stock beneficially owned by Time
Warner will be beneficially owned by AOL Time Warner and its subsidiaries.
However, the transaction will not affect the rights of Time Warner subsidiaries
as Class B Stockholders. The merger was approved by the Time Warner
stockholders, but is also subject to customary closing conditions, including
regulatory clearance. There is no assurance that the clearance will be obtained
or that the merger will be consummated.
Acquisitions
During the second quarter of 1999, the Company acquired all of the
outstanding common stock of Internet Connect, Inc., an Internet service
provider, for consideration consisting of $3.8 million of Class A limited
liability interests in TWT LLC, the Company's predecessor, approximately $3.5
million in net cash and the assumption of $1.9 million in liabilities. At the
time of the IPO, these Class A limited liability interests were converted into
307,550 shares of Class A common stock of the Company. The Class A common stock
of the Company into which the limited liability interests were converted are
being held in escrow to be released to the former Internet Connect, Inc.
shareholders over a period of three years, beginning in April 2000. Through the
acquisition of this subsidiary, the Company plans to manage current and future
data networks and provide new Internet products.
During the second quarter of 1999, the Company acquired all of the
outstanding common stock of MetroComm, Inc. ("MetroComm") through the issuance
of 2,190,308 shares of Class A common stock of the Company valued at $24.1
million, and the assumption of $20.1 million in liabilities. Through the
acquisition of MetroComm, the Company acquired the 50% interest of MetroComm
AxS, L.P., a competitive local exchange carrier in Columbus, Ohio, not already
owned by the Company.
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TIME WARNER TELECOM INC.
Results of Operations
The following table sets forth certain consolidated statements of
operations data of the Company, in thousands of dollars and expressed as a
percentage of total revenue, for each of the periods presented. This table
should be read together with the Company's financial statements, including the
notes thereto, appearing elsewhere in this report:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
(amounts in thousands, except per share amounts)
Statements of Operations Data:
Revenue:
Dedicated transport services $ 60,692 46% 35,397 61% 112,630 49% 65,061 61%
Switched services (1) 71,081 54 22,984 39 119,281 51 40,909 39
------------- ------------- ------------- ------------
Total revenue 131,773 100 58,381 100 231,911 100 105,970 100
------------- ------------- ------------- ------------
Costs and expenses (2):
Operating 43,558 33 27,466 47 82,547 36 51,461 49
Selling, general and administrative 40,497 31 26,268 45 78,188 34 50,404 47
Depreciation and amortization 22,935 17 15,987 27 44,799 19 30,981 29
------------- ------------- ------------- ------------
Total costs and expenses 106,990 81 69,721 119 205,534 89 132,846 125
------------- ------------- ------------- ------------
Operating income (loss) 24,783 19 (11,340) (19) 26,377 11 (26,876)(25)
Interest expense (2) (10,887) (8) (11,645) 21 (20,614) (9) (25,156)(24)
Interest income 3,276 2 4,771 9 6,796 3 8,988 9
Equity in income of unconsolidated affiliate -- -- 97 1 -- -- 285 -
------------- ------------- ------------- ------------
Net income (loss) before income taxes 17,172 13 (18,117) (31) 12,559 5 (42,759)(40)
Income tax expense (4) 7,405 6 35,062 60 5,652 2 35,062 33
------------- ------------- ------------- ------------
Net income (loss) $ 9,767 7% (53,179) (91)% 6,907 3% (77,821)(73)%
============= ============= ============= ============
Earnings (loss) per share:
Basic $ 0.09 (0.57) 0.07 (0.89)
Diluted $ 0.09 (0.57) 0.06 (0.89)
Earnings (loss) per share before income taxes (4):
Basic $ 0.16 (0.19) 0.12 (0.49)
Diluted $ 0.16 (0.19) 0.12 (0.49)
Weighted average shares outstanding:
Basic 105,277 92,885 105,126 87,099
Diluted 108,334 92,885 108,363 87,099
EBITDA (1) (3) $ 47,718 37% 4,647 8% 71,176 31% 4,105 4%
Net cash provided by (used in) operating activities 37,802 16,563 54,641 (12,727)
Net cash provided by (used in) investing activities (13,237) 15,261 (44,106) 15,676
Net cash provided by (used in) financing activities (1,422) 73,060 4,036 73,060
</TABLE>
(1) Includes the recognition of $3.9 million and $23.4 million of non-recurring
reciprocal compensation in the first and second quarter of 2000,
respectively.
(2) Includes expenses resulting from transactions with affiliates of $3.7
million and $5.3 million for the three months ended June 30, 2000 and 1999,
respectively, and $7.5 million and $12.3 million for the six months ended
June 30, 2000 and 1999, respectively.
(3) "EBITDA" is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provision for income taxes. Accordingly, EBITDA is not intended to replace
operating income, net income (loss), cash flow and other measures of
financial performance and liquidity reported in accordance with generally
accepted accounting principles. Rather, EBITDA is a measure of operating
performance and liquidity that investors may consider in addition to these
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
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TIME WARNER TELECOM INC.
differences in financial, capitalization, and tax structures, as well as
non-operating one-time charges to earnings. EBITDA is used internally by
the Company's management to assess ongoing operations and is a component of
a covenant of the Senior Notes that limits the Company's ability to incur
certain additional future indebtedness. However, EBITDA as used in this
report may not be comparable to similarly titled measures reported by other
companies due to differences in accounting policies.
(4) A one-time charge to earnings of $39.4 million was recorded in the second
quarter of 1999 to reflect the deferred tax liability associated with the
change from a limited liability company to a corporation. Income tax
expense for the six months ended June 30, 1999 reflects the $39.4 million
charge, net of a $4.3 million income tax benefit.
General
The Company's revenue has been derived primarily from business telephony
services, including dedicated transmission, local switched, long distance, data
and high-speed Internet access services. The Company's customers are principally
telecommunications-intensive business end-users, long distance carriers,
Internet service providers ("ISPs"), wireless communications companies and
governmental entities. The Company is experiencing continued growth in revenue
and the geographic scope of its operations. A significant portion of the
Company's growth in revenue has come from the provision of local switched
services as a result of the 23 Lucent Technologies Inc. high-capacity digital
5ESS switches deployed as of June 30, 2000. Due to the nature and size of the
switched, data and Internet markets, the Company believes that these markets
provide a better opportunity for growth in product offerings and revenue. It is
expected that the growth in switched service offerings, as well as data and
Internet services, will expand the Company's customer base, including customers
that are generally smaller than those who purchase dedicated transport services.
Key to the Company's strategy is leveraging its extensive fiber optic networks
by adding additional products that can be delivered over those networks,
including managed voice and data products, packet-telephone, secure virtual
private networks and gigabit Ethernet. However, there is no assurance that the
Company will bring any or all of these or other products to market successfully
or profitably.
Reciprocal compensation revenue is an element of switched services revenue,
which represents compensation from local exchange carriers (''LECs'') for local
exchange traffic terminated on the Company's facilities originated by other
LECs. Reciprocal compensation is based on contracts between the Company and
LECs. The Company recognizes reciprocal compensation revenue as it is earned,
except in such cases where the revenue is under dispute. Under several of its
contracts, the LECs have disputed the payment of reciprocal compensation for
traffic terminating to ISP customers contending that such traffic was not local.
As a result, the Company initiated the dispute resolution process under the
applicable contracts to collect these amounts and filed complaints with various
public utility commissions (''PUCs'') contending that the ISP traffic is local.
Various of these state PUCs have ruled in favor of the Company, but all of these
favorable decisions have subsequently been appealed by the LECs. While the
Company believes that these disputes will ultimately be resolved in its favor,
the Company only recognizes revenue on a portion of the cash received and defers
recognition of a portion of this revenue pending outcome of the dispute. In
addition, the payment of reciprocal compensation under certain of the Company's
interconnection agreements is, by the terms of those agreements, subject to
adjustment or repayment depending on prospective federal or state generic
rulings with respect to reciprocal compensation for ISP traffic. Switched
services revenue for the three and six months ended June 30, 2000 includes the
recognition of $23.4 million and $27.3 million, respectively, of non-recurring
reciprocal compensation. A significant portion of the non-recurring reciprocal
compensation revenue recognized during the second quarter of 2000 was a result
of certain cases involving reciprocal compensation disputes that were resolved
as described in Part II, Item 1. As of June 30, 2000, the Company had deferred
recognition of $28.3 million in reciprocal compensation revenue for payments
received associated with pending disputes and agreements that are subject to
future reciprocal compensation adjustments. The Company pays reciprocal
compensation expense to the other LECs for local exchange traffic it terminates
on the LEC's facilities. These costs are recognized as incurred.
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TIME WARNER TELECOM INC.
A portion of the Company's revenue is comprised of services that are rate
sensitive. Switched access -- the connection between a long distance carrier's
point of presence and an end-user's premises provided through the switching
facilities of a LEC -- is billed on a per minute of use basis. Historically,
the FCC has regulated the access rates imposed by the ILECs, while the CLEC
access rates have been less regulated. During the second quarter of 2000, the
FCC adopted a proposal that substantially reduces the ILEC per-minute access
charges while allowing for an increase in the flat monthly charge paid by local
residential service subscribers. While the FCC decision does not specifically
apply to the switched access rates charged by CLECs, it places significant
downward market pressure on CLEC access rates. For the six months ended June
30, 2000 and 1999, switched access revenue represented 10% of total revenue,
respectively. Management believes that increased volume in services and markets
served will partially offset the impact of rate reduction. However, the degree
and timing of the reductions in the Company's access revenue cannot be
predicted.
Reciprocal compensation is another component of switched services that is
rate sensitive. Rates are established by interconnection agreements between the
parties based on regulatory and judicial ruling in each of the states. Several
significant agreements expired in 1999 and 2000 and have been renegotiated. In
most of the states, regulatory bodies have established lower traffic termination
rates than the rates provided under the Company's expired agreements; and as a
result, the rates under the new agreements, while reasonable in light of the
regulatory environment, are lower than the rates under the expired agreements.
As discussed below, reciprocal compensation represented 5% and 6% of revenue,
excluding the effects of the recognition of $23.4 million and $27.3 million of
non-recurring reciprocal compensation during the three and six months ended June
30, 2000, respectively. Although the renegotiated interconnection agreements
have resulted in lower prospective rates, management believes that the growth in
Internet and related markets will partially mitigate the impact of the rate
reduction. The outcome of regulatory and judicial rulings on reciprocal
compensation for ISP traffic may also negatively impact the Company's revenue
from reciprocal compensation since the rates under most interconnection
agreements are subject to change based on such rulings. The Company cannot
predict the outcome of these rulings. Accordingly, there is no assurance that
the Company will be able to compensate for the reduction in reciprocal
compensation with increased volume of terminating local traffic.
The Company benefits from its strategic relationship with Time Warner Cable
both through access to local right-of-way and construction cost-sharing. The
Company's networks have been constructed primarily through the use of fiber
capacity licensed from Time Warner Cable. As of June 30, 2000, the Company
operated networks in 22 metropolitan areas that spanned 9,271 route miles,
contained 344,377 fiber miles and offered service to 6,059 buildings.
The Company plans to continue expanding its revenue base by fully utilizing
available network capacity in its existing markets, by adding networks in new
markets and by continuing to develop and selectively tailor new services in
competitively-priced packages to meet the needs of its medium and large-sized
business customers. The Company intends to expand its product offerings on a
continuous basis to achieve a diverse revenue base. As part of that process,
the Company is targeting the expansion of data and Internet products that can be
offered on the Company's existing network.
Operating expenses consist of costs directly related to the operation and
maintenance of the networks and the ordering and provisioning of the Company's
services. This includes the salaries and related expenses of operations and
engineering personnel, as well as costs incurred from the incumbent local
exchange carriers, other competitors and long distance providers for facility
leases and interconnection. These costs have increased over time as the Company
has increased its operations and revenue. The Company expects these costs to
continue to increase as the Company's revenue growth continues, 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. These expenses include costs related to sales and
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TIME WARNER TELECOM INC.
marketing, information technology, billing, regulatory and legal costs. These
costs have increased over time as the Company has increased its operations and
revenue. The Company expects these costs to continue to increase as the
Company's revenue growth continues, but generally at a slower rate than revenue
growth.
In the normal course of business, the Company engages in various
transactions with Time Warner Cable, generally on negotiated terms among the
affected units that, in management's view, result in reasonable allocations. In
connection with the Reorganization, the Company entered into several contracts
with Time Warner Cable with respect to certain of these transactions. The
Company's selling, general and administrative expenses include charges allocated
from Time Warner Cable for office rent and overhead charges for various
administrative functions they perform for the Company. These charges are
required to reflect all costs of doing business and are based on various
methods, which management believes result in reasonable allocations of the 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 facilities from Time Warner Cable through
prepaid right-to-use agreements and reimburses Time Warner Cable for facility
maintenance and pole rental costs. The maintenance and pole rental costs are
included in the Company's operating expenses.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenue. Revenue increased $73.4 million, or 126%, to $131.8 million for
the three months ended June 30, 2000, from $58.4 million for the comparable
period in 1999. Exclusive of the effects of acquisitions and the effects of the
recognition of $23.4 million of non-recurring reciprocal compensation during the
three months ended June 30, 2000, revenue increased $46.5 million, or 82% to
$103.5 million, from $56.9 million for the comparable period in 1999. Revenue
from the provision of dedicated transport services increased $25.3 million, or
71%, to $60.7 million for the three months ended June 30, 2000, from $35.4
million for the comparable period in 1999. Switched service revenue increased
$48.1 million, or 209%, to $71.1 million for the three months ended June 30,
2000, from $23.0 million for the comparable period in 1999. Exclusive of the
effects of acquisitions and the effects of the recognition of $23.4 million of
non-recurring reciprocal compensation in the second quarter of 2000, dedicated
transport service and switched service revenue increased 66% and 105%,
respectively. The increase in revenue from dedicated transport services
primarily reflects a 29% increase in average dedicated transport customers and a
broader array of products and services offered in existing markets. The
increase in switched service revenue reflects a 75% increase in average switched
service customers, increased revenue from switched access services and
reciprocal compensation, and a broader array of products and services offered in
existing markets. Reciprocal compensation represented 5% and 7% of total
revenue for the three months ended June 30, 2000 and 1999, respectively,
excluding the effects of the recognition of $23.4 million of non-recurring
reciprocal compensation in the second quarter of 2000. At June 30, 2000 the
Company offered dedicated transport services in 22 metropolitan areas, 21 of
which also offered switched services. At June 30, 1999, the Company offered
dedicated transport services in 19 consolidated metropolitan areas, 16 of which
also offered switched services.
Operating Expenses. Operating expenses increased $16.1 million, or 59%, to
$43.6 million for the three months ended June 30, 2000, from $27.5 million for
the comparable period in 1999. Exclusive of the effects of acquisitions, these
expenses increased 49%. The increase in operating expenses was primarily
attributable to the Company's expansion of its business, principally switched
services, the ongoing development of existing markets resulting in higher local
exchange carrier charges for circuit leases and interconnection, and higher
headcount for technical personnel. As a percentage of revenue, operating
expenses decreased to 33% for the three months ended June 30, 2000 from 47% for
the comparable period in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $14.2 million, or 54%, to $40.5 million for
the three months ended June 30, 2000, from $26.3 million for the comparable
period in 1999. Exclusive of the effects of acquisitions, these expenses
increased 52%. The increase in selling, general and administrative expenses was
primarily attributable to an increase in employee headcount and higher direct
sales costs associated with the increase in revenue, higher property tax expense
and an increase in the provision for doubtful accounts related to the increase
in revenue. Included in selling, general and administrative expenses for the
first half of 2000 is approximately $0.9 million in costs
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TIME WARNER TELECOM INC.
related to a Form S-1 filing with the Securities and Exchange Commission to
facilitate the sale of shares by a Class B Stockholder. The Company was required
to bear these costs under the terms of the Stockholders' Agreement with the
Class B Stockholders. As a percentage of revenue, selling, general and
administrative expenses decreased to 31% for the three months ended June 30,
2000 from 45% for the comparable period in 1999.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $6.9 million, or 43%, to $22.9 million for the three months
ended June 30, 2000, from $16.0 million for the comparable period in 1999.
Exclusive of the effects of acquisitions, this expense increased 40%. The
increase in depreciation and amortization expense was primarily attributable to
increased capital expenditures and increased goodwill generated from
acquisitions.
EBITDA. EBITDA for the three months ended June 30, 2000 increased $43.1
million to $47.7 million, from $4.6 million in 1999. The increase was $19.7
million, exclusive of the effects of acquisitions and the effects of the
recognition of $23.4 million of non-recurring reciprocal compensation in the
second quarter of 2000. This improvement was primarily the result of economies
of scale as more revenue was generated in existing markets, increased
utilization of networks and facilities and a more skilled and productive
workforce.
Interest Expense. During the period July 1, 1997 through July 14, 1998,
all of the Company's financing requirements were funded with subordinated loans
payable from the Former Parent Companies. These loans remained outstanding,
accruing interest, through May 14, 1999. On July 21, 1998, the Company issued
$400 million in Senior Notes in a public offering. On May 14, 1999, the
subordinated loans of approximately $180 million, including accrued interest,
were repaid in full to the Former Parent Companies from the IPO proceeds.
Interest expense relating to the Senior Notes was $10.1 million for the three
months ended June 30, 2000 and interest expense relating to the Senior Notes and
subordinated loans payable aggregated $11.6 million for the three months ended
June 30, 1999. The decrease of $1.5 million is primarily due to the lower
weighted average debt balance during the three months ended June 30, 2000.
Net Income. Earnings changed $63.0 million to $9.8 million for the three
months ended June 30, 2000, from a net loss of $53.2 million for the comparable
period in 1999. The earnings change is primarily due to the improvement in
EBITDA and a decrease in income tax expense, as discussed in the table above.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenue. Revenue increased $125.9 million, or 119%, to $231.9 million for
the six months ended June 30, 2000, from $106.0 million for the comparable
period in 1999. Exclusive of the effects of acquisitions and the effects of the
recognition of $27.3 million of non-recurring reciprocal compensation during the
six months ended June 30, 2000, revenue increased $90.0 million, or 87% to
$195.5 million, from $104.5 million for the comparable period in 1999. Revenue
from the provision of dedicated transport services increased $47.6 million, or
73%, to $112.6 million for the six months ended June 30, 2000, from $65.1
million for the comparable period in 1999. Switched service revenue increased
$78.4 million, or 192%, to $119.3 million for the six months ended June 30,
2000, from $40.9 million for the comparable period in 1999. Exclusive of the
effects of acquisitions and the effects of the recognition of $27.3 million of
non-recurring reciprocal compensation for the six months ended June 30, 2000,
dedicated transport service and switched service revenue increased 65% and 122%,
respectively. The increase in revenue from dedicated transport services
primarily reflects a 31% increase in average dedicated transport customers and a
broader array of products and services offered in existing markets. The
increase in switched service revenue reflects a 80% increase in average switched
service customers, increased revenue from switched access services and
reciprocal compensation, and a broader array of products and services offered in
existing markets. Reciprocal compensation represented 6% and 7% of total
revenue for the six months ended June 30, 2000 and 1999, respectively, excluding
the effects of the recognition of $27.3 million of non-recurring reciprocal
compensation during the six months ended June 30, 2000. At June 30, 2000 the
Company offered dedicated transport services in 22 metropolitan areas, 21 of
which also offered switched services. At June 30, 1999, the Company offered
dedicated transport services in 19 consolidated metropolitan areas, 16 of which
also offered switched services.
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TIME WARNER TELECOM INC.
Operating Expenses. Operating expenses increased $31.1 million, or 60%, to
$82.5 million for the six months ended June 30, 2000, from $51.5 million for the
comparable period in 1999. Exclusive of the effects of acquisitions, these
expenses increased 50%. The increase in operating expenses was primarily
attributable to the Company's expansion of its business, principally switched
services, the ongoing development of existing markets resulting in higher local
exchange carrier charges for circuit leases and interconnection, and higher
headcount for technical personnel. As a percentage of revenue, operating
expenses decreased to 36% for the six months ended June 30, 2000 from 49% for
the comparable period in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $27.8 million, or 55%, to $78.2 million for
the six months ended June 30, 2000, from $50.4 million for the comparable period
in 1999. Exclusive of the effects of acquisitions, these expenses increased
52%. The increase in selling, general and administrative expenses was primarily
attributable to an increase in employee headcount and higher direct sales costs
associated with the increase in revenue, higher property tax expense and an
increase in the provision for doubtful accounts related to the increase in
revenue. Included in selling, general and administrative expenses is
approximately $0.9 million in costs related to a Form S-1 filing with the
Securities and Exchange Commission to facilitate the sale of shares by a Class B
Stockholder. The Company was required to bear these costs under the terms of
the Stockholders' Agreement with the Class B Stockholders. As a percentage of
revenue, selling, general and administrative expenses decreased to 34% for the
six months ended June 30, 2000 from 47% for the comparable period in 1999.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $13.8 million, or 45%, to $44.8 million for the six months
ended June 30, 2000, from $31.0 million for the comparable period in 1999.
Exclusive of the effects of acquisitions, this expense increased 41%. The
increase in depreciation and amortization expense was primarily attributable to
increased capital expenditures and increased goodwill generated from
acquisitions.
EBITDA. EBITDA for the six months ended June 30, 2000 increased $67.1
million to $71.2 million, from $4.1 million in 1999. The increase was $39.7
million, exclusive of the effects of acquisitions and the effects of the
recognition of $27.3 million of non-recurring reciprocal compensation for the
six months ended June 30, 2000. This improvement was primarily the result of
economies of scale as more revenue was generated in existing markets, increased
utilization of networks and facilities and a more skilled and productive
workforce.
Interest Expense. During the period July 1, 1997 through July 14, 1998,
all of the Company's financing requirements were funded with subordinated loans
payable from the Former Parent Companies. These loans remained outstanding,
accruing interest, through May 14, 1999. On July 21, 1998, the Company issued
$400 million in Senior Notes in a public offering. On May 14, 1999, the
subordinated loans of approximately $180 million, including accrued interest,
were repaid in full to the Former Parent Companies from the IPO proceeds.
Interest expense relating to the Senior Notes was $20.1 million for the six
months ended June 30, 2000 and interest expense relating to the Senior Notes and
subordinated loans payable aggregated $25.2 million for the six months ended
June 30, 1999. The decrease of $5.0 million is primarily due to the lower
weighted average debt balance during the six months ended June 30, 2000.
Net Income. Earnings changed $84.7 million to $6.9 million for the six
months ended June 30, 2000, from a net loss of $77.8 million for the comparable
period in 1999. The earnings change is primarily due to the improvement in
EBITDA and a decrease in income tax expense, as discussed in the table above.
Liquidity and Capital Resources
Operations. The Company's cash provided by operating activities was $54.6
million for the six months ended June 30, 2000, as compared to cash used in
operating activities of $12.7 million for the comparable period in 1999. This
increase in cash provided by operating activities of $67.4 million principally
resulted from an increase in EBITDA of $67.1 million. As the Company continues
its expansion plan to enter into new markets, the expenditures incurred,
together with initial operating expenses, will generally result in
20
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TIME WARNER TELECOM INC.
negative EBITDA and operating losses from a network until an adequate customer
base and revenue stream for the network have been established. Accordingly, the
Company expects that the network constructed in each new market will generally
produce negative EBITDA for at least two and a half years after operations
commence in each market. Although overall the Company expects to continue to
have positive EBITDA for the near future as it develops and expands its
business, there can be no assurance that the Company will sustain sufficient
positive EBITDA to meet its working capital requirements and to service its
indebtedness.
Investing. Cash used in investing activities was $44.1 million for the six
months ended June 30, 2000, as compared to cash provided by investing activities
of $15.7 million for the comparable period in 1999. During both the six months
ended June 30, 2000 and 1999, proceeds from the maturities of marketable
securities were primarily used to fund capital expenditures. During the six
months ended June 30, 2000, capital expenditures were also funded through cash
flows from operating activities.
During the six months ended June 30, 2000, capital expenditures were $143.6
million, an increase of $54.3 million from the comparable period in 1999. 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 399 route miles of fiber since December 31, 1999. Based on historic
capital requirements for network construction in relation to sales volumes and
network expansion plans, the Company anticipates it will commit approximately
$350 million in 2000 to fund its capital expenditures. This target spending
includes requirements for current operating markets and the Company's expansion
plans.
The facilities-based telecommunications business is a capital-intensive
business. The Company's operations have required and will continue to require
substantial capital investment for:
. the purchase and installation of switches, electronics, fiber and other
technologies in existing networks and in additional networks to be
constructed in new service areas;
. the acquisition and expansion of networks currently owned and operated
by other companies; and
. the evolution of the network to support new products, services and
technologies.
The Company's expected capital expenditures for general corporate and
working capital purposes include:
. expenditures with respect to the Company's management information system
and corporate service support infrastructure; and
. operating and administrative expenses with respect to new networks and
debt service.
The Company plans to make substantial capital investments in connection
with plans to construct and develop new networks, as well as for technology
upgrades. Expansion of the Company's networks will include the geographic
expansion of the Company's existing operations, and the Company will consider
the development of new markets. In addition, the Company may acquire existing
networks in the future.
The Company regularly evaluates potential acquisitions and joint ventures
that would extend the Company's geographic markets, expand the Company's
products and services and/or enlarge the capacity of its networks. Some of these
transactions may be considerably larger than the transactions it has completed
in the past. In the event the Company enters into a definitive agreement with
respect to any acquisition or joint venture, it may require additional financing
or it may elect to use a portion of the proceeds from the sale of the Senior
Notes not theretofore expended for other purposes, including but not limited to,
capital expenditures and working capital requirements. If the Company enters
into a definitive agreement with respect to any material transaction, it could
result in the Company increasing its leverage or issuing additional common stock
or both. There can be no assurance, however, that the Company will enter into
any transaction or, if it does, on what terms.
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TIME WARNER TELECOM INC.
While the Company intends to continue to leverage its relationship with
Time Warner Cable in pursuing expansion opportunities, to the extent the Company
seeks to expand into service areas where Time Warner Cable does not conduct
cable operations, the Company may incur significant additional costs in excess
of those historically incurred by the Company when expanding into existing Time
Warner Cable service areas. In addition, Time Warner Cable is not obligated to
construct or provide additional fiber optic capacity in excess of what is
already licensed to the Company under certain operating agreements.
Accordingly, if the Company is unable to lease additional capacity at the same
rates as are currently provided for under certain operating agreements, the
Company may be required to obtain additional capacity on more expensive terms.
The development and expansion of the Company's existing and future
networks and services will require significant capital to fund these capital
expenditures. The Company expects that its future cash requirements will
principally be for funding future growth and capital expenditures. In light of
the expected future cash requirements, the Company, on April 12, 2000, executed
a $475 million Senior Secured Revolving Credit Facility with The Chase Manhattan
Bank, as Administrative Agent, Bank of America, N.A., as Syndication Agent and
ABN Amro Bank N.V., as Documentation Agent (the "Revolver"). The Revolver has a
final maturity of December 31, 2007, with annual reductions in the principal
amount available under the Revolver commencing on December 31, 2004, and
borrowings will be at the Eurodollar rate plus a margin of up to 2.0%, depending
on financial metrics. It is anticipated that the Revolver will primarily be
used for the build-out of the Company's network and working capital needs, and
that the Company may begin drawing on the Revolver during the second half of
2000. The Company expects that the $173.6 million in cash, cash equivalents and
marketable debt securities at June 30, 2000, borrowings under the Revolver along
with internally generated funds, will provide sufficient funds for the Company
to meet its expected capital and liquidity needs to expand its business as
currently planned and pay interest on the Senior Notes. 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 revenue and costs are dependent upon factors that
are not within the Company's control, for example regulatory changes, changes in
technology and increased competition. Due to the uncertainty of these and other
factors, actual revenue and costs may vary from expected amounts, possibly to a
material degree, and these variations are likely to affect the level of the
Company's future capital expenditures and expansion plans. Sources of
additional financing may include public or private debt, equity financing by the
Company or its subsidiaries or other financing arrangements.
Financing. Net cash provided by financing activities for the six months
ended June 30, 2000 was $4.0 million and was primarily due to the net proceeds
from both the issuance of common stock upon exercise of stock options and the
issuance of common stock in connection with the employee stock purchase plan,
partially offset by deferred debt issue costs related to the Revolver.
During the period from July 1, 1997 through July 14, 1998, all of the
Company's financing requirements were funded with subordinated loans from the
Former Parent Companies. These loans remained outstanding, accruing interest,
through May 14, 1999. The loans from the Former Parent Companies were
subordinated in right of payment to the Senior Notes, except for a provision
allowing repayment prior to maturity with the net proceeds of any offering of
common stock or equivalent interest of the Company. The $400 million principal
amount in Senior Notes that the Company issued in July 1998 are unsecured,
unsubordinated obligations of the Company. Interest on the Senior Notes is
payable semiannually on January 15 and July 15, and began on January 15, 1999.
Aggregate annual interest payments on the Senior Notes through 2008 are expected
to be approximately $39 million. The Senior Notes are required to be repaid on
July 15, 2008. On May 14, 1999, approximately $180 million of the proceeds from
the IPO were used to repay the subordinated loans payable to the Former Parent
Companies in full, including accrued interest. The proceeds of the IPO
remaining after repayment of the subordinated loans payable, combined with the
proceeds from the Senior Notes, have been used to continue funding the Company's
continued growth, which includes expansion of the Company's networks, and for
general corporate purposes. The Former Parent Companies are not under any
obligation to make any additional equity investments or loans to the Company.
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TIME WARNER TELECOM INC.
The Senior Notes are governed by an Indenture that contains certain
restrictive covenants. These restrictions affect, and in many respects
significantly limit or prohibit, among other things, the ability of the Company
to incur indebtedness, make prepayments of certain indebtedness, pay dividends,
make investments, engage in transactions with shareholders and affiliates, issue
capital stock of subsidiaries, create liens, sell assets and engage in mergers
and consolidations.
The obligations under the Revolver are secured by the Company's interests
in all of its subsidiaries and substantially all of the assets of the Company's
subsidiaries, except for certain assets with respect to which the grant of a
security interest is prohibited by governing agreements. The Revolver requires
the Company to prepay outstanding loans when its cash flow exceeds certain
levels and with the proceeds received from a number of specified events or
transactions, including certain asset sales and insurance recoveries for assets
not replaced. In addition, obligations under the Revolver are subject to
various covenants that limit the Company's ability to:
. borrow and incur liens on its property;
. pay dividends or make other distributions; and
. make capital expenditures.
The Revolver also contains financial covenants, including a consolidated
leverage ratio, a consolidated interest coverage ratio and a consolidated debt
service coverage ratio. In addition, the Revolver contains customary events of
default, including cross default provisions. Under the cross defaults
provisions, the Company is deemed to be in default under the Revolver if the
Company has defaulted under any of the other material outstanding obligations,
such as the Senior Notes.
23
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TIME WARNER TELECOM INC.
Part II
Other Information
Item 1. Legal Proceedings
Southwestern Bell Telephone Company v. Public Utility Commission of Texas et al.
The Company filed a complaint with the Texas Public Utility Commission
("PUC") in October 1997 as a result of Southwestern Bell Telephone's ("SWBT"')
refusal to pay the Company reciprocal compensation under the Interconnection
Agreement between the parties for calls terminated to the Company's Internet
service provider ("ISP") customers in Texas based on SWBT's contention that such
traffic was not "local". The PUC ruled that calls to ISPs are local and
required SWBT to compensate the Company for those calls under the
Interconnection Agreement. SWBT then sought to enjoin and stay the PUC's order
in Federal District Court for the Western District of Texas and sought a
declaration that calls to ISPs are not local. On April 16, 1998, the District
Court denied all relief sought by SWBT and SWBT appealed that decision. SWBT's
appeal to the Fifth Circuit Court of Appeals is still pending. Following the
PUC's order, SWBT began to make reciprocal compensation payments for ISP traffic
under the Interconnection Agreement.
On March 30, 2000, the Fifth Circuit Court of Appeals affirmed the decision
of the PUC that modem calls within a local calling area to Internet service
providers are "local" calls within the meaning of the Interconnection Agreement
between the parties and therefore subject to reciprocal compensation under that
agreement. The Fifth Circuit denied Southwestern Bell's petition for rehearing.
SWBT has the right to file a petition for certiori seeking review of the
decision by the Supreme Court; however, the Company believes that it is more
likely than not that the Supreme Court will decline to review the case. Unless
the outcome of the case is changed by virtue of Supreme Court review, the
Company will be entitled to retain the amounts received from SWBT between April
1997 and September 1999 in respect of ISP traffic except for the amounts to be
refunded pursuant to the arbitration award described below.
Southwestern Bell v. Time Warner Telecom
On December 17, 1999, SWBT filed a Demand for Commercial Arbitration under
the Interconnection Agreement between the Company and SWBT that expired in
September 1999. SWBT alleged that the Company breached the Agreement by refusing
to amend the Agreement to replace the reciprocal compensation rates stated in
the contract with lower rates established by the PUC in a consolidated
arbitration with AT&T, MCI and MFS Communications ("Mega Arb rates"). The case
was heard by an arbitration panel of the American Arbitration Association on May
31, 2000. On June 30, 2000, the panel ordered the Company to refund to SWBT the
difference between the contract rates and the Mega Arb rates for reciprocal
compensation only for a 16-day period out of the 16-month period for which SWBT
claimed it was entitled to a rate adjustment. The Company estimates this amount
to be less than $2 million. SWBT was ordered to refund to the Company an amount
equal to the same rate differential applied to minutes of use terminated to
SWBT, which the Company estimates to be less than $100,000. The panel's
arbitration award is in final satisfaction of the claims raised in the
arbitration and is not subject to appeal.
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TIME WARNER TELECOM INC.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Time Warner Telecom Inc.
was held on May 31, 2000 (the "2000 Annual Meeting").
(b)(c) The following matters were voted upon at the 2000 Annual
Meeting:
(i) The following persons were elected directors of Time Warner
Telecom Inc. for terms expiring in 2001:
Votes For Votes Withheld
----------- --------------
Larissa Herda 831,500,435 50,248
Glenn A. Britt 831,500,330 50,353
Bruce Claflin 831,501,487 49,196
Richard J. Davies 831,500,965 49,718
Spencer B. Hays 831,502,188 48,495
Lisa Hook 831,499,702 50,981
Robert J. Miron 831,497,415 53,268
(ii) Approval of the Time Warner Telecom Inc. 2000 Stock Purchase
Plan:
Votes For: 831,473,112
Votes Against: 53,505
Abstentions: 24,066
Broker Non-Votes 0
(iii) Ratification of the appointment of Ernst & Young LLP as
independent auditors of Time Warner Telecom Inc. for 2000:
Votes For: 831,520,512
Votes Against: 15,345
Abstentions: 14,826
Broker Non-Votes 0
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as part of this report and the Exhibit Index
is incorporated herein by reference.
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TIME WARNER TELECOM INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
2.1 -- Reorganization Agreement among Time Warner Companies,
Inc., MediaOne Group, Inc., Advance/Newhouse Partnership,
Time Warner Entertainment Company, L.P., and Time Warner
Entertainment-Advance/Newhouse Partnership (filed as
Exhibit 2.1 to Time Warner Telecom ("TWT") LLC's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998. *
2.2 -- Merger Agreement among the Company, TWT LLC and TWT Inc.
(filed as Exhibit 2.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-49439)). *
3.1 -- Restated Certificate of Incorporation of the Company
(filed as Exhibit 2.2 to Company's Registration Statement
on Form S-1 (Registration No. 333-49439)). *
3.2 -- Restated By-Laws of the Company (filed as Exhibit 3.2 to
Company's Registration Statement on Form S-1 (Registration
No. 333-49439)). *
4.1 -- Stockholders' Agreement, among the Company, Time Warner
Companies, Inc., American Television and Communications
Corporation, Warner Communications Inc., TW/TAE Inc.,
FibrCOM Holdings, L.P., Paragon Communications, MediaOne
Group, Inc., Multimedia Communications, Inc. and
Advance/Newhouse Partnership (filed as Exhibit 4.1 to
Company's Registration Statement on Form S-1 (Registration
No. 333-49439)). *
4.2 -- Indenture, between TWT LLC, TWT Inc. and The Chase
Manhattan Bank, as Trustee (filed as Exhibit 4.1 to TWT
LLC's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998). *
10.1 -- Credit Agreement among Time Warner Telecom Inc., Time
Warner Telecom Holdings Inc., the several lenders from
time to time parties hereto, The Chase Manhattan Bank, as
Administrative Agent, Bank of America, N.A., as
Syndication Agent and ABN Amro Bank N.V., as Documentation
Agent (filed as Exhibit 10.1 to Company's Quarter Report
on Form 10-Q for the quarter ended March 31, 2000). *
27 -- Financial Data Schedule
* Incorporated by reference.
26
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIME WARNER TELECOM INC.
Date: August 11, 2000 By: /s/ Jill R. Stuart
------------------------
Jill R. Stuart
Vice President, Accounting and
Finance and Chief Accounting Officer
