<PAGE> 1
Filed pursuant to Rule 424(b)(3)
Registration No. 333-49818
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS NOT COMPLETE
AND MAY BE CHANGED. THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS ARE NOT AN OFFER TO SELL THESE SECURITIES AND WE
ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS SUPPLEMENT (Subject to Completion) Issued January 17, 2001
(To Prospectus dated January 12, 2001)
4,400,000 Shares
[TIME WARNER LOGO BLUE]
[TIME WARNER LOGO GREY]
Time Warner Telecom Inc.
CLASS A COMMON STOCK
------------------------
WE ARE OFFERING 4,400,000 SHARES OF OUR CLASS A COMMON STOCK.
------------------------
OUR CLASS A COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "TWTC." ON JANUARY 12, 2001, THE LAST REPORTED SALE PRICE OF OUR CLASS A
COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $69.
------------------------
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO TIME WARNER
PUBLIC AND COMMISSIONS TELECOM INC.
-------- --------------- -----------------------
<S> <C> <C> <C>
Per share........................................ $ $ $
Total............................................ $ $ $
</TABLE>
------------------------
We have granted the underwriters the right to purchase up to an additional
660,000 shares of Class A common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus
supplement or the accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares of Class A
common stock to purchasers on or about , 2001.
------------------------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
JP MORGAN
BEAR, STEARNS & CO. INC.
, 2001
<PAGE> 2
[ARTWORK]
[TIME WARNER TELECOM
MARKETS MAP]
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
--------------------- ----
<S> <C>
Forward-Looking Statements............ S-2
Prospectus Supplement Summary......... S-3
Risk Factors.......................... S-10
Use of Proceeds....................... S-21
Recent Developments................... S-21
Time Warner Telecom Voting
Structure........................... S-22
Capitalization........................ S-23
Dilution.............................. S-24
Dividend Policy....................... S-25
Price Range of Common Stock........... S-25
Unaudited Pro Forma Condensed Combined
Financial Statements................ S-26
Selected Consolidated, Combined and
Condensed Financial and Other
Operating Data...................... S-34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-36
Business.............................. S-49
Management............................ S-63
Certain Relationships and Related
Transactions........................ S-72
Description of Certain Indebtedness... S-76
Description of Capital Stock.......... S-79
Certain United States Federal Tax
Consequences For Non-U.S. Holders... S-82
Shares Eligible for Future Sale....... S-86
Underwriters.......................... S-87
Legal Matters......................... S-90
Experts............................... S-90
Index to Consolidated and Combined
Financial Statements................ F-1
</TABLE>
<TABLE>
<CAPTION>
PROSPECTUS PAGE
---------- ----
<S> <C>
About This Prospectus................. 1
Where You Can Find More Information... 1
Incorporation Of Information We File
with the SEC........................ 1
Forward-Looking Statements............ 2
The Company........................... 2
Risk Factors.......................... 3
Ratio of Earnings to Fixed Charges and
Earnings to Combined Fixed Charges
and Preferred Stock Dividends....... 14
Use of Proceeds....................... 14
Description of Debt Securities........ 15
Description of Capital Stock.......... 51
Plan of Distribution.................. 54
Validity of Securities................ 55
Experts............................... 55
</TABLE>
------------------------
This document is in two parts. The first part is this prospectus supplement,
which describes the terms of the offering of Class A common stock and also adds
to and updates information contained in the accompanying prospectus and the
documents incorporated by reference into the prospectus. The second part is the
accompanying prospectus, which gives more general information, some of which may
not apply to the Class A common stock. To the extent there is a conflict between
the information contained in this prospectus supplement, on the one hand, and
the information contained in the accompanying prospectus or any document
incorporated by reference, on the other hand, the information in this prospectus
supplement shall control.
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with information that is different from
that contained or incorporated by reference in this prospectus supplement or the
accompanying prospectus. We are offering to sell the Class A common stock only
where offers and sales are permitted. The information contained in or
incorporated by reference in this prospectus supplement and the accompanying
prospectus is accurate only as of the date of this prospectus supplement,
regardless of the time of delivery of this prospectus supplement or of any sale
of the Class A common stock.
S-1
<PAGE> 4
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus contains
forward-looking statements, including statements regarding, among other items,
our business and operating strategy, operations, economic performance and
financial condition. These forward-looking statements are subject to risks,
uncertainties and assumptions, some of which are beyond our control. Actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause such differences include,
but are not limited to, those discussed under "Risk Factors." We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. In light of these
risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this prospectus supplement and the accompanying
prospectus might not occur.
S-2
<PAGE> 5
PROSPECTUS SUPPLEMENT SUMMARY
The following summary contains basic information about this offering. This
summary may not contain all of the information that is important to you. You
should carefully read this entire prospectus supplement, the accompanying
prospectus and the other documents we refer to for a more complete understanding
of this offering. In addition, we incorporate important business and financial
information in this prospectus supplement and the accompanying prospectus by
reference. You may obtain the information incorporated by reference in this
prospectus without charge by following the instructions in the "Where You Can
Find More Information" section of the accompanying prospectus.
For simplicity, we use the terms "we" and "Time Warner Telecom" throughout this
prospectus supplement to refer to the business that is owned and conducted by
the corporation that became Time Warner Telecom Inc. shortly prior to the
initial public offering of the Class A common stock, to the business that was
owned and conducted by its predecessors prior to that time and, unless otherwise
indicated, not to the business related to the assets we acquired from GST
Telecommunications, Inc. on January 10, 2001.
Unless otherwise indicated, all information in this prospectus supplement
assumes that the underwriters do not exercise their over-allotment option.
TIME WARNER TELECOM INC.
Time Warner Telecom is a leading fiber facilities-based integrated
communications provider offering local business "last mile" broadband
connections for data, high-speed internet access, local voice and long distance
services. We offer a wide range of business telephony services, primarily to
medium- and large-sized telecommunications-intensive business end-users, long
distance carriers, internet service providers, wireless communications companies
and governmental entities. These business telephony services include dedicated
transmission, local switched, long distance, data and video transmission
services and high-speed dedicated internet access.
As of January 9, 2001, we operated networks in 24 metropolitan markets in the
United States. On January 10, 2001, we substantially expanded our geographic
coverage by acquiring substantially all of the assets of GST Telecommunications,
Inc. out of bankruptcy. As a result of this acquisition, we added 15 markets in
the western United States. We expect to activate networks in five additional
markets by the end of 2001. As of September 30, 2000, our networks covered 9,457
route miles, contained 363,644 fiber miles and offered service to 7,228 on-net
and off-net buildings. The acquisition of the GST assets added to our network
4,210 route miles, 227,674 fiber miles and service to 345 on-net buildings.
Our principal executive offices are located at 10475 Park Meadows Drive,
Littleton, Colorado 80124, and our telephone number is (303) 566-1000.
BUSINESS STRATEGY
The following is a summary of our business strategy:
Leverage Existing Fiber Optic Networks. We own local and regional fiber networks
to serve geographic locations where we believe there are large numbers of
potential customers. These highly concentrated networks have not yet been fully
exploited and provide the capacity to serve a substantially larger base of
customers with a larger array of products.
Enter New Geographic Areas. Our acquisition of substantially all of the GST
assets accelerated our geographic expansion by adding to our network 15 markets
in eight western states. We expect to activate networks in five additional
markets by the end of 2001, increasing our presence to a total of 44 markets. We
will also continuously evaluate other expansion opportunities.
Expand Switched Services. We provide a broad range of switched services in 38 of
our 39 markets, including the markets we recently acquired from GST. In
addition, we are currently integrating into our infrastructure new "softswitch"
technology, which is technology that allows switching of voice calls over an
internet protocol and local area network infrastructure.
S-3
<PAGE> 6
Expand Data Services. We will continue to deliver high-speed transport services
through our fiber optic networks and will also focus on the delivery of next
generation data networking and converged network services.
Target Business Customers. We have historically targeted
telecommunications-intensive medium- and large-sized business customers who
require the high quality networks that we operate. In order to achieve further
economies of scale and network utilization, we are targeting smaller business
customers in buildings we already serve where we can offer a package of network
services that may not otherwise be available to them.
Interconnect Service Areas. We are in the process of interconnecting certain of
our 39 existing markets, including the markets we recently acquired from GST,
within regional clusters with owned or licensed fiber optic facilities. This is
expected to increase our revenue potential and increase margins by addressing
customers' regional long distance voice, data and video requirements.
Utilize Strategic Relationships with Time Warner Cable. We have benefitted from
and continue to leverage our relationships with Time Warner Cable, one of the
largest multiple system cable operators in the U.S., by licensing and sharing
the cost of fiber optic facilities. We have agreements with Time Warner Cable
that allow us access to rights-of-way, easements, poles, ducts and conduits. We
may also benefit from positive awareness of the "Time Warner" name, which we
license from Time Warner Inc.
Continue Disciplined Expenditure Program. We increase operating efficiencies by
pursuing a capital expenditure program that focuses on projects that meet
stringent financial criteria. We evaluate capital expenditures on the basis of
whether or not they meet several minimum requirements, including minimum
recurring revenue, cash flow margin and rate of return.
RECENT DEVELOPMENTS
On January 10, 2001, we completed the acquisition of substantially all of the
assets of GST Telecommunications, Inc. out of bankruptcy for cash consideration
of $627 million, plus the payment of certain liabilities and fees of $42 million
and the assumption of a $21 million obligation to complete certain fiber
networks, for a total purchase price of $690 million.
The acquisition of the GST assets expanded our operations into 15 additional
markets in the western United States, including intercity networks. The GST
acquisition accelerates our geographic expansion and allows us to offer its
products and services in areas formerly served by GST. Our acquisition of the
GST assets did not include certain assets relating to products and services that
do not fit with our core businesses. As required in the asset purchase
agreement, we entered into a services agreement with GST to provide certain
support services with respect to the GST assets that GST is retaining for a
period of up to six months for most services and up to a year for certain
limited services.
We will manage the 15 markets acquired from GST as part of its Western Region.
We expect to complete the initial integration of former GST personnel into our
organization within the next several months. We expect that the integration of
systems and network operations will occur in phases over approximately two
years.
In connection with the acquisition and Time Warner Telecom's capital expenditure
plans, Time Warner Telecom obtained commitments for $1.23 billion of additional
financing to increase the total commitments to $1.7 billion. Time Warner Telecom
Holdings' amended and restated senior secured credit facility provides for an
aggregate of $1 billion in borrowings, comprised of $525 million of senior
secured term loan facilities and a $475 million senior secured revolving credit
facility available to Time Warner Telecom's subsidiaries. Time Warner Telecom
also obtained $700 million in unsecured bridge financing available to Time
Warner Telecom. The acquisition was initially financed with borrowings under the
senior unsecured bridge loan facility.
S-4
<PAGE> 7
THE OFFERING
Class A common stock
offered.................... 4,400,000 shares.
Over-allotment option...... 660,000 shares of Class A common stock.
Common Stock to be
outstanding after the
offering................. 38,103,892 shares of Class A common stock.
72,226,500 shares of Class B common stock
Relative rights of common
stock...................... Our Class A common stock and Class B common stock
are identical in all respects, except that:
(a) holders of Class A common stock are entitled
to one vote per share and holders of Class B
common stock are entitled to 10 votes per
share on all matters submitted to a vote of
stockholders;
(b) certain matters require the approval of a 100%
of the outstanding Class B common stock,
voting separately as a class; and
(c) certain other matters require the approval of
a majority of the outstanding Class A common
stock, voting separately as a class.
Each share of Class B common stock is convertible
into one share of Class A common stock.
Use of Proceeds............ We intend to use the net proceeds from this
offering and associated financings to repay the
$700 million senior unsecured bridge loan facility
which we used to finance the purchase of
substantially all of the assets of GST
Telecommunications, Inc. See "Use of Proceeds."
Nasdaq National Market
symbol..................... "TWTC"
The number of shares of Class A common stock to be outstanding after this
offering is based on the number of shares outstanding as of December 31, 2000,
and excludes:
-- 10.4 million shares underlying options outstanding as of December 31,
2000, at a weighted average exercise price of $34.03 per share;
-- 9,030,000 shares available for future grants under our option plan; and
-- 657,000 shares available for issuance under our employee stock purchase
plan.
RISK FACTORS
You should consider all of the information contained in this prospectus
supplement before making an investment in the Class A common stock. In
particular, you should consider the factors described under "Risk Factors,"
beginning on page S-10.
S-5
<PAGE> 8
SUMMARY CONSOLIDATED AND COMBINED FINANCIAL
AND OTHER OPERATING DATA
The summary statements of operations data for the years ended December 31, 1997,
1998 and 1999 and the selected balance sheet data as of December 31, 1998 and
1999 are derived from the audited consolidated and combined financial statements
of Time Warner Telecom, including the notes, appearing elsewhere in this
prospectus supplement. The summary statements of operations data for the years
ended December 31, 1995 and 1996 and the selected balance sheet data as of
December 31, 1995, 1996 and 1997 have been derived from audited financial
statements of Time Warner Telecom not included in this prospectus supplement.
The summary financial data for the nine months ended September 30, 1999 and 2000
are derived from the unaudited consolidated financial statements of Time Warner
Telecom, including the notes, appearing elsewhere in this prospectus supplement.
The unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which, in the opinion of Time Warner Telecom, is necessary
for a fair presentation of the financial position and results of operations for
these periods. Operating results for the nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 2000. The financial statements of Time Warner
Telecom for all periods prior to the Reorganization that occurred on July 14,
1998 reflect the "carved out" historical financial position, results of
operations, cash flows and changes in stockholders' equity of the commercial
telecommunications operations of predecessors of Time Warner Telecom, as if they
had been operating as a separate company. The summary financial and other
operating data set forth below should be read together with the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Time Warner Telecom's financial statements, including
the notes, appearing elsewhere in this prospectus supplement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Dedicated transport services.............. $ 6,505 $ 20,362 $ 44,529 $ 84,024 $ 152,468 $ 105,727 $ 183,759
Switched services(1)...................... 350 3,555 10,872 37,848 116,285 71,558 169,308
-------- -------- ---------- ---------- ---------- ---------- ----------
Total revenue....................... 6,855 23,917 55,401 121,872 268,753 177,285 353,067
-------- -------- ---------- ---------- ---------- ---------- ----------
Costs and expenses(2):
Operating................................. 15,106 25,715 40,349 67,153 117,567 81,949 130,846
Selling, general and administrative....... 34,222 60,366 54,640 77,401 113,389 80,501 122,663
Depreciation and amortization............. 7,216 22,353 38,466 50,717 68,785 50,272 68,793
-------- -------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses............ 56,544 108,434 133,455 195,271 299,741 212,722 322,302
-------- -------- ---------- ---------- ---------- ---------- ----------
Operating income (loss).................... (49,689) (84,517) (78,054) (73,399) (30,988) (35,437) 30,765
Interest expense, net and other(2)......... (1,416) (1,599) 7,398 (19,340) (28,473) (22,026) (21,641)
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before income taxes...... (51,105) (86,116) (70,656) (92,739) (59,461) (57,463) 9,124
Income tax expense(3)...................... -- -- -- -- 29,804 29,473 4,542
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss).......................... $(51,105) $(86,116) $ (70,656) $ (92,739) $ (89,265) $ (86,936) $ 4,582
======== ======== ========== ========== ========== ========== ==========
Basic and diluted earnings (loss) per
share..................................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.93) $ (0.94) $ 0.04
======== ======== ========== ========== ========== ========== ==========
Earnings (loss) per share before income
taxes:
Basic..................................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.62) $ (0.62) $ 0.09
======== ======== ========== ========== ========== ========== ==========
Diluted................................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.62) $ (0.62) $ 0.08
======== ======== ========== ========== ========== ========== ==========
Weighted average shares outstanding:
Basic..................................... 81,250 81,250 81,250 81,250 95,898 92,957 105,262
Diluted................................... 81,250 81,250 81,250 81,250 95,898 92,957 108,427
</TABLE>
S-6
<PAGE> 9
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
EBITDA(1)(4)............................... $(42,473) $(62,164) $ (39,588) $ (22,682) $ 37,797 $ 14,835 $ 99,558
EBITDA Margin(1)(5)........................ (620)% (260)% (72)% (19)% 14% 8% 28%
Net cash provided by (used in) operating
activities................................ (35,605) (52,274) (29,419) (343) 54,235 (13,194) 71,238
Capital expenditures....................... 141,479 144,815 127,315 126,023 221,224 138,305 213,246
OPERATING DATA(6):
Operating Networks......................... 15 18 19 19 21 20 22
Route miles................................ 3,207 5,010 5,913 6,968 8,872 7,704 9,457
Fiber miles................................ 116,286 198,490 233,488 272,390 332,263 313,549 363,644
DS-0 equivalents........................... 159,000 690,000 1,719,000 3,031,000 5,523,000 4,555,000 9,806,000
Digital telephone switches................. 1 2 14 16 19 20 26
Employees.................................. 508 673 714 919 1,259 1,181 1,697
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ -- $ -- $ -- $ 105,140 $ 90,586 $ 42,394 $ 74,091
Marketable debt securities................. -- -- -- 250,857 173,985 229,793 28,578
Property, plant and equipment, net......... 199,005 323,161 415,158 494,158 677,106 613,137 824,135
Total assets............................... 214,963 341,480 438,077 904,344 1,043,012 976,375 1,104,535
Long-term debt and capital lease
obligations(6)............................ -- -- 75,475 574,940 403,627 403,342 403,311
Total stockholders' equity................. $179,589 $294,937 $ 300,390 $ 207,651 $ 422,916 $ 419,650 $ 470,511
</TABLE>
------------
(1) Includes the recognition of non-recurring $7.6 million and $27.3 million
settlements of reciprocal compensation in the fourth quarter of 1999 and for
the nine months ended September 30, 2000, respectively.
(2) Includes expenses resulting from transactions with affiliates of $6.5
million, $12.4 million, $17.1 million, $27.7 million, $20.0 million, $15.9
million, and $11.4 million for the years ended December 31, 1995, 1996,
1997, 1998 and 1999, and for the nine months ended September 30, 1999 and
2000, respectively. See Time Warner Telecom's financial statements appearing
elsewhere in this prospectus supplement for an explanation of these
expenses.
(3) During 1999, Time Warner Telecom recorded a non-recurring $39.4 million
charge to earnings to record a net deferred tax liability associated with
the Reconstitution. This change occurred immediately prior to Time Warner
Telecom's initial public offering.
(4) "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 such
measures. Management believes that EBITDA is a standard measure of operating
performance and liquidity that is commonly reported and widely used by
analysts, investors and other interested parties in the telecommunications
industry because it eliminates many differences in financial, capitalization
and tax structures, as well as non-cash and non-operating charges to
earnings. EBITDA is used internally by Time Warner Telecom's management to
assess on-going operations and is a component of a covenant of the 9 3/4%
Senior Notes that limits Time Warner Telecom's ability to incur 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.
(5) EBITDA Margin represents EBITDA as a percentage of revenue.
(6) Includes all managed properties including unconsolidated affiliates,
MetroComm AxS, L.P. in Columbus, Ohio and the Albany and Binghamton, New
York networks. Albany and Binghamton were wholly owned at December 31, 1997
and MetroComm AxS, L.P. was wholly owned at December 31, 1999.
S-7
<PAGE> 10
UNAUDITED SUMMARY PRO FORMA CONDENSED COMBINED FINANCIAL DATA
You should read the following unaudited summary pro forma financial data of
Time Warner Telecom in conjunction with the historical financial statements and
other financial information appearing elsewhere in this prospectus supplement,
including "Capitalization," "Unaudited Pro Forma Condensed Combined Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
-------------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
------------------- --------------------
(THOUSANDS, EXCEPT PER SHARE AND OPERATING
DATA AMOUNTS)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue(1)................................................. $ 354,139 $ 440,468
--------- ----------
Costs and expenses:(2)
Operating................................................ 178,179 186,799
Selling, general and administrative...................... 179,577 181,520
Depreciation and amortization............................ 90,163 107,515
--------- ----------
Total costs and expenses......................... 447,919 475,834
--------- ----------
Operating loss............................................. (93,780) (35,366)
Interest expense, net and other(2)......................... (106,372) (75,382)
--------- ----------
Net loss................................................... (200,152) (110,748)
========= ==========
Basic and diluted earnings (loss) per share................ $ (2.00) $ 1.01
========= ==========
Weighted average shares outstanding -- basic and diluted... 100,298 109,662
========= ==========
OTHER OPERATING DATA:
EBITDA(1)(3)............................................... $ (3,617) $ 72,149
EBITDA Margin(1)(4)........................................ (1%) 16%
OPERATING DATA:
Operating Networks......................................... 39
Route miles................................................ 13,667
Fiber miles................................................ 591,318
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
------------------
SEPTEMBER 30, 2000
------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................................... $ 337,520
Marketable debt securities.................................................... 28,578
Property, plant and equipment, net............................................ 1,455,609
Total assets.................................................................. 2,068,827
Long-term debt and capital lease obligations.................................. 1,053,311
Total stockholders' equity.................................................... $ 754,721
</TABLE>
------------
(1) Includes the recognition of non-recurring $7.6 million and $27.3 million
settlements of reciprocal compensation in 1999 and for the nine months ended
September 30, 2000, respectively.
(2) Includes expenses resulting from transactions with affiliates of $20.0
million and $11.4 million for the year ended December 31, 1999 and for the
nine months ended September 30, 2000, respectively. See Time Warner
Telecom's financial statements appearing elsewhere in this prospectus
supplement for an explanation of these expenses.
(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 such
S-8
<PAGE> 11
measures. Management believes that EBITDA is a standard measure of operating
performance and liquidity that is commonly reported and widely used by
analysts, investors and other interested parties in the telecommunications
industry because it eliminates many differences in financial, capitalization
and tax structures, as well as non-cash and non-operating charges to
earnings. EBITDA is used internally by Time Warner Telecom's management to
assess on-going operations and is a component of a covenant of the 9 3/4%
Senior Notes that limits Time Warner Telecom's ability to incur 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) EBITDA Margin represents EBITDA as a percentage of revenue.
S-9
<PAGE> 12
RISK FACTORS
An investment in the Class A common stock is risky. You should carefully
consider the following risks, as well as the other information contained in this
prospectus supplement. If any of the following risks actually occurs, our
business could be harmed. The risks and uncertainties described below are not
the only ones facing us. Additional risks and uncertainties not presently known
to us, or that we currently see as immaterial, may also harm our business.
RISKS RELATING TO US AND OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAY NOT BE A RELIABLE BASIS FOR EVALUATING
OUR PROSPECTS.
Time Warner Cable began our business in 1993. Subsequently, we spun-off to
become an independent company in July 1998. During the last few years, our
business has changed substantially as it has rapidly expanded into switched,
data and Internet services. As a result, prospective purchasers have limited
historical financial information available to evaluate our likely future
performance. When making a decision to invest in the Class A common stock,
prospective purchasers should consider the risks, expenses and difficulties
frequently encountered by companies that are in their development stage.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO EXPERIENCE OPERATING
LOSSES FOR THE FORESEEABLE FUTURE.
We have incurred operating losses for most of our history, net of the
effect of non-recurring reciprocal compensation settlements. For the year ended
December 31, 1999 and the nine months ended September 30, 2000, we had operating
losses of $38.6 million and operating income of $3.5 million, net of the effect
of non-recurring reciprocal settlements of $7.6 million and $27.3 million,
respectively. After giving effect to the acquisition of assets of GST and
associated financings, including this offering, we would have had operating
losses of $101.4 million and $62.7 million for the year ended December 31, 1999
and the nine months ended September 30, 2000, net of the effect of non-recurring
reciprocal compensation settlements of $7.6 million and $27.3 million,
respectively. We expect to continue to incur, and perhaps increase, operating
losses as we build our networks, expand our customer base and as we integrate
the acquired assets of GST. Operating losses will reduce our ability to meet
working capital needs and increase our need for external financing.
The development of our business requires substantial capital expenditures.
As described below, we plan to increase our annual capital expenditures during
2001 to expand our operations. We expect to incur a substantial part of these
expenditures in new markets before we realize any related revenue. We also
expect that capital expenditures and other operating expenditures will result in
negative cash flow and operating losses for our new markets until and unless we
develop an adequate customer base and revenue stream from those markets. We
expect that each network will produce negative cash flow for at least two and a
half years after it begins operations. Moreover, we may never develop an
adequate customer base, sustain profitability, or generate sufficient cash flow.
WE MAY COMPLETE A SIGNIFICANT BUSINESS COMBINATION OR OTHER TRANSACTION
THAT COULD AFFECT OUR LEVERAGE, RESULT IN A CHANGE IN CONTROL OR BOTH.
We continually evaluate potential business combinations, joint ventures and
other transactions that would extend our geographic markets, expand our products
and services and/or enlarge the capacity of our networks. To that end, we have
had exploratory discussions with several other companies in our industry
regarding potentially material transactions. If we enter into a definitive
agreement with respect to any material transaction, it could result in an
increase in our leverage or issuing additional common stock or both, or it could
result in a change of control. There can be no assurance, however, that we will
enter into any transaction or, if we do, on what terms.
A change of control could result in a requirement that we offer to purchase
certain indebtedness and the acceleration of other indebtedness. There can be no
assurance that we will have sufficient funds available to make that repurchase
and repay any accelerated indebtedness.
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THE SENIOR SECURED CREDIT FACILITY AND THE INDENTURE FOR THE 9 3/4% SENIOR
NOTES CONTAIN RESTRICTIVE COVENANTS THAT MAY LIMIT OUR FLEXIBILITY.
The senior secured credit facility and indenture limit, and in some
circumstances prohibit, our ability to:
-- incur additional debt;
-- pay dividends;
-- make investments or other restricted payments;
-- engage in transactions with stockholders and affiliates;
-- create liens;
-- sell assets;
-- issue or sell capital stock of subsidiaries; and
-- engage in mergers and acquisitions.
These covenants may limit our financial and operating flexibility. In
addition, if we do not comply with these covenants, the lenders under the senior
secured credit facility and the holders of the 9 3/4% Senior Notes may
accelerate our debt under the senior secured credit facility and our debt under
the 9 3/4% Senior Notes, respectively.
WE WILL REQUIRE SUBSTANTIAL CAPITAL TO EXPAND OUR OPERATIONS.
The development and expansion of our networks requires substantial capital
investment. If this capital is not available when needed, our business will be
adversely affected. Including the effects of the GST acquisition, we expect our
principal capital requirements for 2001 to be:
-- approximately $550 million to purchase and install switches,
electronics, fiber and other technologies in existing, acquired and
future networks; and
-- approximately $50 million for capital expenditures for our management
information system infrastructure.
We also expect to have substantial capital expenditures in subsequent
periods.
We recently executed agreements with various financial institutions for
$1.23 billion of additional financing, including $525 million of senior secured
term loan facilities, which, together with our $475 million senior secured
credit facility, is available to our subsidiaries, and $700 million unsecured
bridge financing available to us. The GST acquisition was initially financed
with borrowings under the unsecured bridge loan facility. We expect to apply the
net proceeds from this offering and associated financings, together with cash on
hand, to repay the borrowings under the senior unsecured bridge loan facility.
We may be required to seek additional financing if:
-- our business plans and cost estimates prove to be inaccurate;
-- we decide to further accelerate the expansion of our business and
existing networks;
-- we consummate further acquisitions or joint ventures that require
capital; or
-- we are not able to generate sufficient cash flow from operations.
When we seek additional financing, the terms offered may place significant
limits on our financial and operating flexibility, or may not be acceptable to
us. The failure to raise sufficient funds when needed and on reasonable terms
may require us to modify or significantly curtail our business expansion plans.
This could have a material adverse impact on our growth, ability to compete, and
ability to service our existing debt.
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OUR SUBSTANTIAL INDEBTEDNESS, AND SERVICING OUR INDEBTEDNESS, MAY IMPAIR
OUR FINANCIAL AND OPERATING FLEXIBILITY.
We have a substantial amount of debt outstanding and we incurred
substantial additional debt to acquire GST. This substantial indebtedness may
have an adverse impact on us. For example:
-- our ability to obtain additional financing may be limited;
-- a substantial portion of our cash flow will be dedicated to pay
interest and principal on our debt;
-- our ability to satisfy our debt obligations may be diminished
including obligations under the debt securities;
-- we may be more vulnerable to economic downturns; and
-- our ability to withstand competitive pressure may decrease.
As of September 30, 2000, we had approximately $400 million of consolidated
total long-term debt and after giving effect to the acquisition of the assets of
GST and associated financings, including this offering, we would have had
approximately $1.05 billion of consolidated long-term total debt as of that
date.
TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH,
AND OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR
CONTROL.
Our ability to make payments on our indebtedness, including the debt
securities, and to fund planned capital expenditures will depend on our ability
to generate cash in the future.
Our historical financial results have been, and our future financial
results might be, subject to substantial fluctuations. We cannot assure you that
our business will generate sufficient cash flow from operations, that currently
anticipated cost savings and operating improvements will be realized on schedule
or that future borrowings will be available to us in an amount sufficient to
enable us to pay our indebtedness, including the debt securities, or to fund our
other liquidity needs. If we are unable to pay our debts, we will be required to
pursue one or more alternative strategies, such as selling assets, refinancing
or restructuring our indebtedness or selling equity capital. However, we cannot
assure you that any alternative strategies will be feasible at the time due to
market conditions or other factors or prove adequate. Also, certain alternative
strategies will require the consent of our senior secured lenders before we
engage in any such strategy.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE DO NOT SUCCESSFULLY MANAGE OUR
EXPANSION INTO NEW MARKETS AND SERVICES.
We plan to offer new communications services, expand service in our
existing markets, interconnect our existing markets and enter new markets. If we
are not successful in implementing these changes on-time and on-budget, our
results of operations will likely be adversely affected.
Our ability to manage this expansion depends on many factors, including the
ability to:
-- attract new customers and sell new services to existing customers;
-- design, acquire and install transmission and switching facilities;
-- employ new technologies;
-- obtain any required governmental permits and rights-of-way;
-- implement interconnection with local exchange carriers;
-- expand, train and manage our employee base;
-- enhance our financial, operating and information systems to
effectively manage our growth; and
-- accurately predict and manage the cost and timing of our capital
expenditure programs.
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Even if we are successful in completing the infrastructure to support our
expanded business, that business may not be profitable and may not generate
positive cash flow for us.
OUR BUSINESS MAY BE LIMITED IF THE CAPACITY LICENSE WITH TIME WARNER CABLE
EXPIRES OR IS TERMINATED.
If the capacity license with Time Warner Cable is not renewed on expiration
in 2028 or is terminated prior to that time, we may need to build, lease or
otherwise obtain fiber optic capacity. The terms of those arrangements may be
materially less favorable to us than the terms of our existing capacity license.
At expiration of the capacity license, Time Warner Cable is obligated to
negotiate a renewal in good faith, but we may be unable to reach agreement with
Time Warner Cable on acceptable terms. In addition, Time Warner Cable may
terminate the capacity license before expiration upon:
-- a material impairment of Time Warner Cable's ability to provide the
license by law;
-- a material breach of the capacity license by us; or
-- the institution of any proceedings to impose any public utility or
common carrier status or obligations on Time Warner Cable, or any
other proceedings challenging Time Warner Cable's operating authority
as a result of the services provided to us under the capacity
license.
The capacity license prohibits us from offering residential services or
content services with the capacity licensed from Time Warner Cable.
WE MAY LOSE THE RIGHT TO USE THE "TIME WARNER" NAME.
We believe the "Time Warner" brand name is valuable and its loss could have
an adverse effect on us. Under a license agreement with Time Warner, we are
required to discontinue use of the "Time Warner" name in the following
circumstances:
-- the license agreement expires after an initial term ending July 2002
or any permitted renewal;
-- Time Warner no longer owns at least 30% of our common stock;
-- Time Warner no longer has the right to nominate at least three
members of our board of directors;
-- we violate covenants in the capacity license with Time Warner Cable
relating to residential services and content services; or
-- a Class B Stockholder transfers its Class B common stock and its
rights to designate nominees to the board of directors to a third
party.
Under these circumstances, we may change our name to "TW Telecom Inc." or
some other name. Such name change, and the inability to use the "Time Warner"
name, could have an adverse effect on our ability to conduct our business and on
our financial condition and results of operations.
SEVERAL CUSTOMERS ACCOUNT FOR A SIGNIFICANT AMOUNT OF OUR REVENUE.
We have substantial business relationships with a few large customers. For
the nine months ended September 30, 2000, our top ten customers accounted for
approximately 46% of our total revenue. Our largest customer for the nine months
ended September 30, 2000, MCI Worldcom, Inc. and its affiliates, accounted for
more than 10% of our total revenue. However, a portion of that revenue results
from traffic that is directed to us by customers that have selected that long
distance carrier. No other customer, including customers who direct their
business through long distance carriers, accounted for 10% or more of revenue in
2000.
SOME OF OUR CUSTOMER AGREEMENTS MAY NOT CONTINUE.
Some of our customer agreements are subject to termination on short notice
and do not require the customer to maintain its agreements at current levels,
and we cannot assure you that such customers will
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continue to purchase the same services or level of services. We believe that
certain interexchange carriers are pursuing alternatives to their current
practices with regard to obtaining local telecommunications services, including
acquisition or construction of their own facilities. In addition, interexchange
carriers may be able to provide local service by reselling the facilities or
services of an incumbent local exchange carrier, which may be more
cost-effective for an interexchange carrier than using our services or another
competitive access provider or competitive local exchange carrier.
WE ARE DEPENDENT ON TIME WARNER CABLE'S PERMITS, LICENSES AND
RIGHTS-OF-WAY.
We currently license a significant portion of our fiber optic capacity from
Time Warner Cable. Municipalities that regulate Time Warner Cable may or may not
seek to impose additional franchise fees or otherwise charge Time Warner Cable.
We must reimburse Time Warner Cable for any new fees or increases. Time Warner
Cable or Time Warner Telecom may not be able to obtain all necessary permits,
licenses or agreements from governmental authorities or private rights-of-way
providers necessary to effect future license transactions. This would hinder our
ability to expand our existing networks or develop new networks successfully in
locations served by Time Warner Cable.
OUR QUARTERLY OPERATING RESULTS WILL FLUCTUATE.
As a result of the limited revenue and significant expenses associated with
the expansion and development of our networks and services, as well as those
related to the GST acquisition, we anticipate that our operating results could
vary significantly from quarter to quarter. In fact, we expect our recurring
EBITDA margins to decrease in 2001 as compared to 2000 due to the acquisition
and expected commencement of services in five additional markets. Changes in the
usage or payment patterns of significant customers may also cause operating
results to vary.
WE DEPEND ON THIRD PARTY VENDORS FOR INFORMATION SYSTEMS.
We have entered into agreements with vendors that provide for the
development and operation of back office systems, such as ordering, provisioning
and billing systems. The failure of those vendors to perform their services in a
timely and effective manner at acceptable costs could have a material adverse
effect on our growth and our ability to monitor costs, bill customers, provision
customer orders and achieve operating efficiencies.
IF WE DO NOT ADAPT TO RAPID CHANGES IN THE TELECOMMUNICATIONS INDUSTRY, WE
COULD LOSE CUSTOMERS OR MARKET SHARE.
The telecommunications industry will continue to experience rapid changes
in technology. Our future success may depend on our ability to adapt to any
changes in the industry. Our failure to adopt new technology, or our choice of
one technological innovation over another, may have an adverse impact on our
ability to compete or meet customer demands.
WE ARE CONTROLLED BY THE CLASS B STOCKHOLDERS.
AOL Time Warner Inc. (as successor by merger to Time Warner Inc.), AT&T
Corporation (as successor by merger to MediaOne Group, Inc.), Advance Telecom
Holdings Corporation (by transfer from Advance/Newhouse Partnership) and
Newhouse Telecom Holdings Corporation (by transfer from Advance/ Newhouse
Partnership), the Class B Stockholders, hold all the outstanding shares of Class
B common stock. The Class B Stockholders generally have the collective ability
to control all matters requiring stockholder approval, including the nomination
and election of directors. The Class B common stock is not subject to any
mandatory conversion provisions other than pursuant to certain transfer
restrictions. The disproportionate voting rights of the Class B common stock
relative to the Class A common stock may delay or prevent a change in control of
Time Warner Telecom, and may make us a less attractive takeover target.
Our board of directors consists of nine directors. Under the Stockholders
Agreement, Time Warner has the right to designate four nominees for the board of
directors and the Advance/Newhouse stockholder group
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has the right to designate one nominee. Under the Stockholders Agreement, Class
B Stockholders agree to vote in favor of all nominees selected by the Class B
Stockholders. Class B Stockholders will also have the power to elect the other
members of our board of directors.
EACH OF THE CLASS B STOCKHOLDERS HAS VETO RIGHTS OVER CERTAIN ACTIONS.
Under our restated certificate of incorporation, as long as the outstanding
Class B common stock represents at least 50% of the aggregate voting power of
both classes of common stock outstanding, the approval of 100% of the Class B
Stockholders is required:
-- to permit us to provide residential services or content services
prior to May 2004;
-- to amend our restated certificate of incorporation, other than in
connection with certain ministerial actions; or
-- for any direct or indirect disposition by us of capital stock of
subsidiaries or assets that in either case represents substantially
all our assets on a consolidated basis.
The approval of 100% of the Class B Stockholders is also required for the
issuance of any additional shares of Class B common stock or any capital stock
having more than one vote per share.
THE HOLDERS OF CLASS B COMMON STOCK CAN SELL CONTROL OF TIME WARNER TELECOM
AT A TIME WHEN THEY DO NOT HAVE A MAJORITY ECONOMIC INTEREST IN TIME WARNER
TELECOM, AND EXCLUDE THE HOLDERS OF CLASS A COMMON STOCK FROM PARTICIPATING
IN THE SALE.
The Stockholders Agreement provides that, subject to the rights of first
refusal of the other holders of Class B common stock, the Class B Stockholders
may transfer their Class B common stock. If a holder sells all, but not less
than all, of its Class B common stock as shares of Class B common stock, such
holder may transfer its right to nominate Class B nominees for election to the
board of directors. In addition, all of the holders of Class B common stock have
the right to participate in certain sales by Time Warner of its Class B common
stock. Accordingly, majority control of Time Warner Telecom could be transferred
by one or more holders of Class B common stock at a time when such holder or
holders of Class B common stock do not have a majority of the economic interest
in Time Warner Telecom and with no assurance that the holders of Class A common
stock would be given the opportunity to participate in the transaction or, if
they were permitted to participate in the transaction, to receive the same
amount and type of consideration for their stock in Time Warner Telecom as the
holders of Class B common stock.
In addition, we have elected not to be subject to Section 203 of the
Delaware General Corporation Law, which would otherwise provide certain
restrictions on "business combinations" between us and any person acquiring a
significant, 15% or greater, interest in us other than in a transaction approved
by our board of directors and in certain cases by our stockholders.
THE CLASS B STOCKHOLDERS MAY COMPETE WITH US.
The Class B Stockholders are in the cable television business. There is no
restriction on the Class B Stockholders' ability to compete with us. They may,
now or in the future, provide the same or similar services to those that we
provide.
SOME OF OUR BUSINESS ACTIVITIES ARE RESTRICTED.
Our restated certificate of incorporation restricts our business
activities. These restrictions limit our ability to expand our business and
could deprive us of valuable future opportunities. Under the restated
certificate of incorporation, we may not, directly or through a subsidiary or
affiliate:
-- provide residential services; or
-- produce or otherwise provide entertainment, information, or any other
content services, with certain limited exceptions.
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We may engage in these activities with the affirmative vote of all the
holders of the Class B common stock or on the earlier of:
-- five years from the date of our restated certificate of
incorporation, which is May 2004; or
-- the date the Class B common stock represents less than 50% of our
voting power (as of September 30, 2000, Class B common stock
represented approximately 95.6% of our voting power).
We are subject to the same restrictions under the capacity license with
Time Warner Cable, except that those restrictions apply only to our use of the
leased capacity but last until the capacity license expires in 2028 or is
terminated. We believe these restrictions will not materially affect our ability
to operate our business as currently planned.
SOME OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST.
Some of our directors are also directors, officers or employees of the
Class B Stockholders or their affiliates. Although these directors have
fiduciary obligations to Time Warner Telecom under Delaware law, they may face
conflicts of interest. For example, conflicts of interest may arise with respect
to certain business opportunities available to, and certain transactions
involving, Time Warner Telecom. The Class B Stockholders have not adopted any
special voting procedures to deal with such conflicts of interest. The
resolution of these conflicts may be unfavorable to us. Our restated certificate
of incorporation provides for the allocation of corporate opportunities between
us and the Class B Stockholders. See "Description of Capital Stock."
RISKS RELATING TO OUR ACQUISITION OF THE ASSETS OF GST
OUR ACQUISITION OF THE GST ASSETS INCREASES OUR LEVERAGE AND POSES OTHER
RISKS.
Our acquisition of the GST assets increases our geographic presence,
expands our products and services and enlarges the capacity of our networks.
This transaction is considerably larger than the transactions we have completed
in the past.
This transaction involves the following operating risks to us:
-- the difficulty of assimilating the acquired operations and personnel;
-- the potential disruption of our ongoing business;
-- the diversion of resources;
-- the possible inability of management to maintain uniform standards,
controls, procedures and policies;
-- the possible difficulty of managing our growth and information
systems;
-- the risks of entering markets in which we have little or no
experience;
-- the potential impairment of relationships with employees or
customers; and
-- the possibility that the liabilities we assumed to complete
performance under GST contracts may prove to be more burdensome than
anticipated.
WE MAY HAVE DIFFICULTY INTEGRATING THE ACQUIRED ASSETS AND BUSINESSES OF
GST.
We purchased substantially all of the assets of GST with the expectation
that the asset purchase would result in certain benefits, including expansion of
the markets we serve and increasing our operational efficiencies. Achieving the
benefits of the asset purchase will depend upon the successful integration of
the acquired businesses into our existing operations. We cannot assure you that
we will be successful in integrating the acquired GST assets into our current
businesses. The integration risks associated with the acquisition include but
are not limited to:
-- the diversion of our management's attention as integrating the GST
operations and assets will require a substantial amount of our
management's attention;
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-- difficulties associated in assimilating GST's technology, including
billing and customer information systems;
-- any significant loss of key GST personnel could lead to interruptions
in our billing, accounting, information technologies and engineering
capabilities; and
-- the requirement that we provide transition services to GST could tax
our management resources, although we have hired employees not needed
for the core business to carry out those functions.
We cannot assure you that we will be able to successfully overcome the
risks associated with integrating the assets we acquired from GST. There is a
risk that the costs of integration could have a material adverse effect on our
operating results.
RISKS RELATING TO OUR INDUSTRY
WE DEPEND ON INTERCONNECTION WITH INCUMBENT LOCAL EXCHANGE CARRIERS.
Our services may be less attractive if we cannot obtain high quality,
reliable and reasonably priced interconnection from incumbent local exchange
carriers. The Telecommunications Act of 1996 requires incumbent local exchange
carriers to allow us to connect to their networks, thereby connecting to end
users not on our networks, which is commonly referred to as "interconnection"
within our industry. However, negotiating interconnection agreements with the
incumbent local exchange carriers takes considerable time, effort and expense.
The agreements are also subject to state regulation. We may be unable to obtain
interconnection at rates that are both competitive and profitable.
THE LOCAL SERVICES MARKET IS HIGHLY COMPETITIVE, AND MANY OF OUR
COMPETITORS HAVE SIGNIFICANT ADVANTAGES THAT MAY ADVERSELY AFFECT OUR
ABILITY TO COMPETE WITH THEM.
We operate in an increasingly competitive environment and some companies
may have competitive advantages over us. Most incumbent local exchange carriers
offer substantially the same services as we offer. Incumbent local exchange
carriers benefit from:
-- longstanding relationships with their customers;
-- greater financial and technical resources;
-- the ability to subsidize local services from revenue in unrelated
businesses; and
-- recent regulations that relax price restrictions and decrease
regulatory oversight of incumbent local exchange carriers.
We also face competition from new entrants into the local services business
who may also be better established and have greater financial resources. These
advantages may impair our ability to compete in price and service offerings or
require us to sustain prolonged periods of operating losses in order to retain
customers. The current trend of consolidation of telecommunications companies
and strategic alliances within the industry could give rise to significant new
or stronger competitors for us. Some long distance carriers who are our
customers are pursuing alternative ways to obtain local telecommunications
services, including by acquiring local exchange carriers or constructing their
own facilities.
WE EXPECT DECLINING PRICES AND INCREASING COMPETITION.
Many communications services can be provided without incurring significant
incremental expense for an additional unit of service. For example, there is
very low marginal cost for a carrier to transmit a call over its own network. As
a result, once several facilities-based carriers provide communications services
in a market, price competition is likely and can be severe. As a result, we have
experienced price competition, which we expect to continue. Additional
competitors could build facilities in each of our service areas. If additional
competitors build facilities in our service areas, this price competition may
increase significantly.
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COMPETITION IN LOCAL SERVICES HAS ALSO INCREASED AS A RESULT OF CHANGING
GOVERNMENT REGULATIONS.
The Telecommunications Act of 1996 has increased competition in the local
telecommunications business. The Telecommunications Act of 1996:
-- requires incumbent local exchange carriers to interconnect their
networks with those of requesting telecommunications carriers and to
allow requesting carriers to collocate equipment at the premises of
the incumbent local exchange carriers;
-- requires all local exchange providers to offer their services for
resale;
-- allows long distance carriers to resell local services;
-- requires incumbent local exchange carriers to offer to requesting
telecommunications carriers network elements on an unbundled basis;
and
-- requires incumbent local exchange carriers to offer to requesting
telecommunications carriers the services they provide to end-users to
other carriers at wholesale rates.
However, under the Telecommunications Act of 1996, the FCC and some state
regulatory authorities may provide incumbent local exchange carriers with
increased flexibility to reprice their services as competition develops and as
incumbent local exchange carriers allow competitors to interconnect to their
networks. In addition, some new entrants in the local market may price certain
services to particular customers or for particular routes below the prices we
charge for services to those customers or for those routes. If the incumbent
local exchange carriers and other competitors lower their rates and can sustain
significantly lower prices over time, this may adversely affect our revenue if
we are required by market pressure to price at or below the incumbent local
exchange carriers' prices.
Competition may also increase as a result of a recent World Trade
Organization agreement on telecommunications services. As a result of the
agreement, the FCC has made it easier for foreign companies to enter the U.S.
telecommunications market.
WE MAY SUFFER A DECREASE OF REVENUE IF DEMAND FOR OUR SERVICES DECLINES.
Recently, a number of competitive local carriers have filed for bankruptcy
protection, due to high leverage, substantial price competition, technical
difficulties and other problems faced by new market entrants.
A portion of our revenue stream is derived from carriers who purchase
backbone services from us to service their customers. In the event their
anticipated demand declines, we could suffer a corresponding decline in revenue.
WE ARE SUBJECT TO SIGNIFICANT FEDERAL AND STATE REGULATIONS THAT CAN
SIGNIFICANTLY AFFECT PRICING AND PROFITABILITY.
Existing federal and state regulations, or new regulations, could have a
material impact on our prices and revenue. Certain rates that we charge to our
customers must be filed with the FCC and/or state regulators, which provides
price transparency to customers and competitors.
In addition, when we provide local exchange services in a market, the
Telecommunications Act of 1996 and FCC rules require us to:
-- not unreasonably limit the resale of our services;
-- provide telephone number portability if technically feasible;
-- provide dialing parity to competing providers;
-- provide access to poles, ducts and conduits that we own; and
-- establish reciprocal compensation arrangements for the transport and
termination of telecommunications.
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WE MAY RECEIVE LESS REVENUE IF INCUMBENT LOCAL EXCHANGE CARRIERS
SUCCESSFULLY CHALLENGE RECIPROCAL COMPENSATION.
We currently receive compensation from incumbent local exchange carriers
for terminating local calls at the premises of internet service providers. Some
companies have challenged our right and the right of others to receive this
compensation. Determinations by the FCC or by state utility commissions that
such traffic should not be subject to termination compensation could adversely
affect our revenue. The FCC may issue rules or an order that may have the effect
of reducing reciprocal compensation revenue.
WE MAY EXPERIENCE A REDUCTION IN SWITCHED ACCESS REVENUE AS A RESULT OF
REGULATORY RATE REFORM.
The FCC has established a framework for the eventual deregulation of
incumbent local exchange carrier interstate access charges, which will exert a
downward pressure on our interstate access rates. We cannot assure you that we
will be able to compensate for the reduction in switched access revenue from
regulatory rate reform with other revenue sources or increased volume.
WE DEPEND ON GOVERNMENTAL AND OTHER AUTHORIZATIONS.
The development, expansion and maintenance of our networks will depend on,
among other things, our ability to obtain rights-of-way and other required
governmental authorizations and permits. Any increase in the difficulty or cost
of obtaining these authorizations and permits could adversely affect us,
particularly where we must compete with companies that already have the
necessary permits. In order to compete effectively, we must obtain these
authorizations in a timely manner, at reasonable costs and on satisfactory terms
and conditions. In certain of the cities or municipalities where we provide
network services, we pay license or franchise fees. The Telecommunications Act
of 1996 permits municipalities to charge these fees only if they are
competitively neutral and nondiscriminatory, but certain municipalities may not
conform their practices to the requirements of the Telecommunications Act of
1996 in a timely manner or without legal challenge. We also face the risks that
other cities may start imposing fees, fees will be raised or franchises will not
be renewed. Some of our franchise agreements also provide for increases or
renegotiation of fees at certain intervals. Any increases in these fees may have
a negative impact on our financial condition.
RISKS RELATING TO AN INVESTMENT IN THE CLASS A COMMON STOCK
FUTURE SALES OF SHARES OF CLASS A COMMON STOCK COULD DEPRESS THE PRICE OF
THE CLASS A COMMON STOCK.
The market price of the Class A common stock could drop as a result of
significant sales in the market. The perception that such sales could occur may
also affect its trading price. These factors could also make it more difficult
for us to raise funds through future offerings of common stock.
Upon completion of this offering there will be 38,103,892 shares of Class A
common stock outstanding and 72,226,500 shares of Class B common stock
outstanding, all of which are convertible into Class A common stock on a share
for share basis. We have reserved for issuance 9,030,000 shares of Class A
common stock upon the exercise of stock options. Options to purchase 10.4
million shares were outstanding as of December 31, 2000.
We and each of the Class B Stockholders have agreed that, without the prior
written consent of Morgan Stanley & Co. Incorporated, we will not, during the
period ending 90 days after the date of this prospectus supplement: (1) publicly
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer, dispose of or distribute, directly or
indirectly, any shares of Class A common stock or any securities convertible
into the Class A common stock (other than the Class B common stock) or (2) enter
into any public swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the Class A common
stock, whether any such transaction described in clause (1) or (2) above is to
be settled by delivery of Class A common stock or such other securities, in cash
or otherwise. The restrictions described in the foregoing sentence will not
apply to (a) the sale of any shares of Class A common stock to the underwriters
pursuant to the underwriting agreement, (b) transactions relating to shares of
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<PAGE> 22
Class A common stock or other securities acquired in open market transactions
after the completion of this offering, (c) the surrender of unexercised options
or shares upon a "cashless exercise" of options or other incentive compensation
awards or (d) private transactions relating to shares of Class A common stock,
provided that we or such Class B Stockholder shall ensure that any transferee
that receives shares of Class A common stock in a private transaction shall be
subject to the remainder of the 90-day lock-up period set forth in clauses (1)
and (2) above. See "Underwriters." After that, holders of the Class B common
stock may or may not decide, based upon then prevailing market and other
conditions, to convert their Class B common stock to Class A common stock and to
dispose of all or a portion of such stock pursuant to the provisions of Rule 144
under the Securities Act or pursuant to the demand registration rights contained
in the stockholders agreement among the Class B Stockholders. See "Certain
Relationships and Related Transactions--Stockholders Agreement."
THE STOCK PRICE OF THE CLASS A COMMON STOCK MAY BE VOLATILE.
The price of the Class A common stock may be volatile, and may fluctuate
due to factors such as:
-- actual or anticipated fluctuations in quarterly and annual results;
-- announcements of technological innovations;
-- introduction of new services;
-- mergers and strategic alliances in the telecommunications industry;
and
-- changes in government regulation.
In recent years, the market for stock in technology, telecommunications,
and computer companies has been highly volatile. This is particularly true for
companies with relatively small capitalizations, such as us.
WE DO NOT EXPECT TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE.
We are effectively prohibited from paying dividends on our common stock for
the foreseeable future under the terms of the indenture for the 9 3/4% Senior
Notes. Moreover, we plan to retain all earnings for investment in our business,
and do not plan to pay dividends at any time in the foreseeable future. See
"Dividend Policy."
S-20
<PAGE> 23
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of
4,400,000 shares of Class A common stock will be approximately $290 million
($334 million if the underwriters exercise their over-allotment option in full),
after deducting the underwriting discounts and commissions and estimated fees
and expenses payable by us. We intend to use the net proceeds from this offering
and from our concurrent private placement of $400 million of our senior notes
due 2011 to "qualified institutional buyers" pursuant to Rule 144A under the
Securities Act and to non-U.S. persons in compliance with Regulation S under the
Securities Act, together with cash on hand, to repay the $700 million senior
unsecured bridge loan facility which we used to finance the purchase of the
assets of GST. For more information about the senior unsecured bridge loan
facility see "Description of Certain Indebtedness -- Senior Unsecured Bridge
Loan Facility."
RECENT DEVELOPMENTS
On January 10, 2001, Time Warner Telecom completed the acquisition of
substantially all of the assets of GST Telecommunications, Inc. out of
bankruptcy for cash consideration of $627 million, plus the payment of certain
liabilities and fees of $42 million and the assumption of a $21 million
obligation to complete certain fiber networks, for a total purchase price of
$690 million.
The acquisition of the GST assets expanded Time Warner Telecom's operations
into 15 additional markets in the western United States, including intercity
networks. The GST acquisition accelerates Time Warner Telecom's geographic
expansion and allows Time Warner Telecom to offer its products and services in
areas formerly served by GST. Time Warner Telecom's acquisition of the GST
assets did not include certain assets relating to products and services that do
not fit with Time Warner Telecom's core businesses. As required in the asset
purchase agreement, Time Warner Telecom entered into a services agreement with
GST to provide certain support services with respect to the GST assets that GST
is retaining for a period of up to six months for most services and up to a year
for certain limited services.
Time Warner Telecom will manage the 15 markets acquired from GST as part of
its Western Region. Time Warner Telecom expects to complete the initial
integration of former GST personnel into Time Warner Telecom's organization
within the next several months. Time Warner Telecom expects that the integration
of systems and network operations will occur in phases over approximately two
years.
In connection with the acquisition and Time Warner Telecom's capital
expenditure plans, Time Warner Telecom obtained commitments for $1.23 billion of
additional financing to increase its total commitments to $1.7 billion. Time
Warner Telecom Holdings' amended and restated senior secured credit facility
provides for an aggregate of $1 billion in borrowings, comprised of $525 million
of senior secured term loan facilities and a $475 million senior secured
revolving credit facility available to subsidiaries of Time Warner Telecom. Time
Warner Telecom also obtained $700 million in unsecured bridge financing
available to Time Warner Telecom. The acquisition was initially financed with
borrowings under the senior unsecured bridge loan facility.
S-21
<PAGE> 24
TIME WARNER TELECOM VOTING STRUCTURE
The following diagram shows the organizational structure of Time Warner
Telecom immediately following this offering, based on the number of shares
outstanding as of December 31, 2000. The interests of AOL Time Warner, Advance
Telecom Holdings Corporation, Newhouse Telecom Holdings Corporation and AT&T
consist of Class B common stock. The diagram also shows the voting power of Time
Warner Telecom's principal shareholder groups following this offering.
[ORGANIZATIONAL STRUCTURE]
S-22
<PAGE> 25
CAPITALIZATION
The following table sets forth the capitalization of Time Warner Telecom as
of September 30, 2000,
-- on an actual basis as of September 30, 2000, and
-- pro forma as adjusted to give effect to:
- the acquisition of substantially all of the assets of GST for cash
consideration of $627 million, plus the payment of certain liabilities
and fees of $42 million and the assumption of a $21 million obligation
to complete certain fiber networks, for a total purchase price of $690
million;
- borrowings of $250 million under the senior secured credit facility;
- borrowings and subsequent repayment of $700 million under the senior
unsecured bridge loan facility;
- the issuance and sale of $400 million of our high yield senior notes
due 2011 pursuant to Rule 144A of the Securities Act or Regulation S
of the Securities Act and application of $389 million of estimated net
proceeds therefrom; and
- the issuance and sale of 4,400,000 shares of Class A common stock in
this offering and the application of $290 million of estimated net
proceeds therefrom.
This table should be read together with "Selected Combined Financial and
Other Operating Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Time Warner Telecom's financial
statements, including the notes, appearing elsewhere in this prospectus
supplement.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
2000
-----------------------
PRO FORMA
AS
ACTUAL ADJUSTED
--------- -----------
(THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 74,091 $ 337,520
========= ==========
Marketable debt securities.................................. $ 28,578 $ 28,578
========= ==========
Current portion of long-term debt and capital lease
obligations............................................... $ 736 $ 736
========= ==========
Long-term debt and capital lease obligations:
Capital lease obligations................................. $ 3,311 $ 3,311
Senior secured credit facility............................ -- 250,000
Senior unsecured bridge loan facility..................... -- --
9 3/4% Senior Notes due 2008........................... 400,000 400,000
% Senior Notes due 2011................................ -- 400,000
========= ==========
Total long-term debt and capital lease obligations: 403,311 1,053,311
Stockholders equity:
Preferred stock, $0.01 par value, 20,000,000 shares
authorized, no shares outstanding...................... -- --
Class A common stock, $0.01 par value; 277,300,000 shares
authorized, 33,428,172 and 37,828,172 shares issued and
outstanding on an actual and a pro forma as adjusted
basis.................................................. 334 378
Class B common stock, $0.01 par value; 162,500,000 shares
authorized, 72,226,500 shares issued and outstanding... 722 722
Additional paid-in capital................................ 590,924 881,336
Accumulated other comprehensive income, net of taxes...... 12,030 12,030
Accumulated deficit....................................... (133,499) (139,745)
--------- ----------
Total stockholders' equity................................ 470,511 754,721
--------- ----------
Total capitalization.............................. $ 873,822 $1,808,032
========= ==========
</TABLE>
S-23
<PAGE> 26
DILUTION
The pro forma net tangible book value of Time Warner Telecom (total assets
less intangible assets and total liabilities) as of September 30, 2000 was $395
million, or $3.73 per share of Class A common stock and Class B common stock
outstanding. This pro forma calculation assumes that the acquisition of GST was
completed as of September 30, 2000 using debt and before completion of this
offering. Pro forma net tangible book value per share, as adjusted, is
determined by dividing the tangible net worth of Time Warner Telecom by the
aggregate number of shares of Class A common stock and Class B common stock
outstanding, assuming this offering had taken place on September 30, 2000. After
giving effect to the sale of the 4,400,000 shares of Class A common stock
offered in the offering, and the receipt and application of the net proceeds
from the offering, pro forma net tangible book value of Time Warner Telecom as
of September 30, 2000, would have been approximately $695 million, or $6.31 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.58 per share to the existing stockholders of Time Warner Telecom and
an immediate dilution in pro forma net tangible book value of $62.69 per share
to purchasers of Class A common stock in the offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $69.00
Pro forma net tangible book value per share at September 30,
2000...................................................... $3.73
Increase in pro forma net tangible book value per share
attributable to purchasers in the offering................ 2.58
-----
Pro forma net tangible book value per share, as adjusted,
after the offering........................................ 6.31
------
Dilution in pro forma net tangible book value per share to
purchasers of Class A common stock in the offering(1)..... $62.69
======
</TABLE>
------------
(1) Dilution is determined by subtracting pro forma net tangible book value per
share, as adjusted, after the offering from the public offering price per
share.
S-24
<PAGE> 27
DIVIDEND POLICY
Time Warner Telecom has never paid or declared any dividends and does not
anticipate paying any dividends in the foreseeable future. The decision whether
to pay dividends will be made by Time Warner Telecom's board of directors in
light of conditions then existing, including Time Warner Telecom's results of
operations, financial condition and requirements, business conditions, covenants
under loan agreements and other contractual arrangements, and other factors. In
addition, the indenture for the 9 3/4% Senior Notes contains covenants that
effectively prevent Time Warner Telecom from paying dividends on the common
stock for the foreseeable future.
PRICE RANGE OF COMMON STOCK
Time Warner Telecom's Class A common stock has traded on the Nasdaq
National Market under the symbol "TWTC" since May 12, 1999. The following table
sets forth the high and low sales prices per share for the Class A common stock
for the periods indicated as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
PRICE OF CLASS A
COMMON STOCK
-----------------
HIGH LOW
------- -------
<S> <C> <C>
1999
Second Quarter (May 12-June 30)........................... $29.250 $19.938
Third Quarter............................................. 32.875 19.875
Fourth Quarter............................................ 51.625 20.875
2000
First Quarter............................................. $93.000 $39.500
Second Quarter............................................ 80.375 41.000
Third Quarter............................................. 73.750 42.250
Fourth Quarter............................................ 71.750 46.250
2001
First Quarter (through January 12)........................ $72.000 $53.875
</TABLE>
S-25
<PAGE> 28
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On January 10, 2001, Time Warner Telecom acquired substantially all of the
assets of GST out of bankruptcy for cash consideration of $627 million, plus the
payment of certain liabilities and fees of $42 million and the assumption of a
$21 million obligation to complete certain fiber networks, for a total purchase
price of $690 million. GST was a facilities-based integrated communications
provider that offered voice, data and Internet services primarily to business
customers in selected markets in the western United States.
The assets excluded from the acquisition of the GST assets consist of:
-- most of the assets and operations in Hawaii;
-- specific customer contracts and certain businesses that were
determined to be inconsistent with Time Warner Telecom's core
strategy; and
-- other assets and liabilities consisting principally of cash and cash
equivalents, restricted investments, certain accounts receivable,
certain other current assets, certain accounts payable, deferred
revenue, and certain other current liabilities.
In connection with the acquisition of the GST assets and Time Warner
Telecom's capital expenditure plans, Time Warner Telecom obtained commitments
for $1.23 billion of additional financing, including $525 million of senior
secured term loan facilities available to subsidiaries of Time Warner Telecom,
and $700 million in unsecured bridge financing available to Time Warner Telecom.
The acquisition of the GST assets was initially financed with borrowings under
the senior unsecured bridge loan facility. Under the terms of the senior secured
term loan facility, Time Warner Telecom Holdings was required to draw $250
million at closing of the acquisition of the GST assets. The drawn and undrawn
availability under the senior secured term loan facility is available to Time
Warner Telecom Holdings for capital expenditures, working capital and other
general corporate purposes for 24 months from January 10, 2001. The unaudited
pro forma condensed combined financial statements:
-- the acquisition of the GST assets for cash consideration of $627
million, plus the payment of certain liabilities and fees of $42
million and the assumption of a $21 million obligation to complete
certain fiber networks, for a total purchase price of $690 million;
-- borrowings of $250 million under the senior secured credit facility;
-- borrowings and subsequent repayment of $700 million under the senior
unsecured bridge loan facility;
-- the issuance and sale of 4,400,000 shares of our Class A common stock
and the application of $290 million of the estimated net proceeds
therefrom; and
-- the sale of $400 million of high yield notes at an assumed interest
rate of 11% and the application of $389 million of the estimated net
proceeds therefrom.
The selected unaudited pro forma condensed combined financial information
presented below has been derived from the unaudited or audited historical
financial statements of Time Warner Telecom and GST and reflects a preliminary
estimate of certain pro forma adjustments based on information and assumptions
that management of Time Warner Telecom and GST believes are reasonable.
The unaudited pro forma condensed combined balance sheet as of September
30, 2000 gives effect to the acquisition of the GST assets as if it had been
consummated on September 30, 2000. The accompanying unaudited pro forma
condensed combined statements of operations for the year ended December 31, 1999
and the nine months ended September 30, 2000 give effect to the acquisition of
the GST assets as if it had been consummated on January 1, 1999.
The acquisition of the GST assets will be accounted for using the purchase
method of accounting. Accordingly, the purchase price will be initially
allocated to the assets acquired and liabilities assumed, at their estimated
relative fair values, and will be subject to adjustment based upon final
appraisals and other analyses. Time Warner Telecom cannot assure you that the
final purchase price allocations and other purchase
S-26
<PAGE> 29
accounting adjustments will not differ significantly from the estimated amounts
reflected in the unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements may not be
indicative of the results that might have been achieved if the acquisition of
the GST assets had been completed and in effect for the periods indicated or the
results that may be achieved in the period immediately prior to closing or in
the future. The unaudited pro forma condensed combined financial statements
presented below should be read in conjunction with the historical financial
statements and related notes of Time Warner Telecom and GST appearing elsewhere
in this prospectus supplement.
S-27
<PAGE> 30
TIME WARNER TELECOM INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 2000
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GST PRO FORMA
---------------------------------------------- PRO FORMA ADJUSTMENTS
EXCLUSIONS RELATED TO PRO FORMA TWTC AND FOR TWTC
HISTORICAL HISTORICAL THE ASSET PURCHASE GST TO BE GST ACQUISITION AND
TWTC GST AGREEMENT(1) ACQUIRED SUBTOTAL OFFERINGS(3)
---------- ---------- --------------------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 74,091 $ 30,740 $ (30,740)(a) $ -- $ 74,091 $ 950,000(a)
(29,750)(b)
(670,421)(c)
10,000(k)
3,600(g)
Restricted investments........... -- 10,152 (10,152)(a) -- -- --
Marketable debt securities....... 28,578 -- -- -- 28,578 --
Trade and other receivables,
net............................ 81,821 43,881 (13,294)(a) 30,587 112,408 --
Construction contracts
receivable..................... -- 37,625 (7,822)(a) 29,803 29,803 --
Investments...................... -- 910 -- 910 910 --
Prepaid expenses and other
current assets................. 2,247 8,519 (3,574)(a) 4,945 7,192 --
---------- ---------- ----------- --------- ---------- ---------
Total current assets....... 186,737 131,827 (65,582) 66,245 252,982 263,429
---------- ---------- ----------- --------- ---------- ---------
Restricted investments........... -- 3,510 (3,510)(a) -- -- --
Property, plant and equipment.... 1,082,016 1,016,591 (82,087)(a) 934,504 2,016,520 (303,030)(c)
Less accumulated
depreciation................. (257,881) (364,433) 209,829(a) (154,604) (412,485) 154,604(c)
---------- ---------- ----------- --------- ---------- ---------
824,135 652,158 127,742 779,900 1,604,035 (148,426)
Intangible and other assets, net of
accumulated amortization......... 93,663 2,661 36,738(a) 39,399 133,062 29,750(b)
(37,111)(c)
(13,144)(i)
(5,750)(i)
(10,000)(k)
---------- ---------- ----------- --------- ---------- ---------
$1,104,535 $ 790,156 $ 95,388 $ 885,544 $1,990,079 $ 78,748
========== ========== =========== ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................. $ 46,407 $ 1,214 $ (323)(a) $ 891 $ 47,298 $ --
Deferred revenue................. 35,719 12,307 (1,794)(a) 10,513 46,232 --
Other current liabilities........ 127,356 56,443 (14,074)(a) 42,369 169,725 (23,691)(c)
---------- ---------- ----------- --------- ---------- ---------
Total current
liabilities.............. 209,482 69,964 (16,191) 53,773 263,255 (23,691)
---------- ---------- ----------- --------- ---------- ---------
Liabilities subject to
compromise....................... -- 1,322,642 (1,302,452)(a) 20,190 20,190 (20,190)(c)
Long-term debt and capital lease
obligations...................... 403,311 -- -- -- 403,311 950,000(a)
(303,600)(g)
3,600(g)
Deferred income taxes.............. 21,231 -- -- -- 21,231 --
Other long-term liabilities........ -- 25,460 -- 25,460 25,460 (25,460)(c)
Redeemable preference shares....... -- 74,008 (74,008)(a) -- -- --
Stockholders' equity (deficit):
Common stock..................... 1,056 251,575 535,042(a) 786,617 787,673 (786,617)(c)
44(g)
Additional paid-in capital....... 590,924 -- -- -- 590,924 (13,144)(i)
303,556(g)
Accumulated other comprehensive
income, net of taxes........... 12,030 -- -- -- 12,030 --
Accumulated deficit.............. (133,499) (953,493) 952,997(a) (496) (133,995) (5,750)(i)
---------- ---------- ----------- --------- ---------- ---------
Total shareholders' equity
(deficit)................ 470,511 (701,918) 1,488,039 786,121 1,256,632 (501,911)
---------- ---------- ----------- --------- ---------- ---------
$1,104,535 $ 790,156 $ 95,388 $ 885,544 $1,990,079 $ 78,748
========== ========== =========== ========= ========== =========
<CAPTION>
PRO FORMA
TWTC
COMBINED
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 337,520
Restricted investments........... --
Marketable debt securities....... 28,578
Trade and other receivables,
net............................ 112,408
Construction contracts
receivable..................... 29,803
Investments...................... 910
Prepaid expenses and other
current assets................. 7,192
----------
Total current assets....... 516,411
----------
Restricted investments........... --
Property, plant and equipment.... 1,713,490
Less accumulated
depreciation................. (257,881)
----------
1,455,609
Intangible and other assets, net of
accumulated amortization......... 96,807
----------
$2,068,827
==========
LIABILITIES AND STOCKHOLDERS' EQUIT
Current liabilities:
Accounts payable................. $ 47,298
Deferred revenue................. 46,232
Other current liabilities........ 146,034
----------
Total current
liabilities.............. 239,564
----------
Liabilities subject to
compromise....................... --
Long-term debt and capital lease
obligations...................... 1,053,311
Deferred income taxes.............. 21,231
Other long-term liabilities........ --
Redeemable preference shares....... --
Stockholders' equity (deficit):
Common stock..................... 1,100
Additional paid-in capital....... 881,336
Accumulated other comprehensive
income, net of taxes........... 12,030
Accumulated deficit.............. (139,745)
----------
Total shareholders' equity
(deficit)................ 754,721
----------
$2,068,827
==========
</TABLE>
S-28
<PAGE> 31
TIME WARNER TELECOM INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GST
--------------------------------------------------------
EXCLUSIONS
RELATED TO THE GST PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ASSETPURCHASE PRO FORMA GST TO BE TWTC AND
TWTC GST AGREEMENT(1) ADJUSTMENTS(2) ACQUIRED GST SUBTOTAL
---------- ---------- -------------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Telecommunication services........ $268,753 $ 202,686 $(117,300)(a) $ -- $ 85,386 $ 354,139
Construction, facility sales and
other........................... -- 115,147 -- (115,147)(a) -- --
Product........................... -- 4,089 (4,089)(a) -- -- --
-------- --------- --------- --------- --------- ---------
Total revenue............... 268,753 321,922 (121,389) (115,147) 85,386 354,139
Operating costs and expenses:
Operating......................... 117,567 150,835 (90,223)(a) -- 60,612 178,179
Cost of construction revenues..... -- 74,940 -- (74,940)(a) -- --
Cost of product revenues.......... -- 2,484 (2,484)(a) -- -- --
Selling, general and
administrative.................. 113,389 122,974 (56,786)(a) -- 66,188 179,577
Depreciation and amortization..... 68,785 70,973 (22,263)(a) 2,437(b) 51,147 119,932
-------- --------- --------- --------- --------- ---------
Total costs and expenses.... 299,741 422,206 (171,756) (72,503) 177,947 477,688
-------- --------- --------- --------- --------- ---------
Operating income (loss):............ (30,988) (100,284) 50,367 (42,644) (92,561) (123,549)
Interest expense, net of amounts
capitalized....................... (45,264) (115,481) 10,287(a) -- (105,194) (150,458)
Interest income..................... 16,589 9,736 (9,736)(b) -- -- 16,589
Other............................... -- 23,460 4,571(a) -- -- --
(28,031)(c)
Equity in income of unconsolidated
affiliate......................... 202 -- -- -- -- 202
-------- --------- --------- --------- --------- ---------
Income (loss) before income taxes... (59,461) (182,569) 27,458 (42,644) (197,755) (257,216)
Income tax expense (benefit)........ 29,804 -- -- -- -- 29,804
-------- --------- --------- --------- --------- ---------
Net income (loss)................... $(89,265) (182,569) 27,458 (42,644) (197,755) (287,020)
======== ========= ========= ========= ========= =========
Basic and diluted loss per common
share............................. $ (0.93)
========
Average common share outstanding.... 95,898
========
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR TWTC PRO FORMA
ACQUISITION AND TWTC
OFFERINGS(3) COMBINED
--------------- ---------
<S> <C> <C>
Revenue:
Telecommunication services........ $ -- $ 354,139
Construction, facility sales and
other........................... -- --
Product........................... -- --
-------- ---------
Total revenue............... -- 354,139
Operating costs and expenses:
Operating......................... -- 178,179
Cost of construction revenues..... -- --
Cost of product revenues.......... -- --
Selling, general and
administrative.................. -- 179,577
Depreciation and amortization..... (26,896)(d) 90,163
(2,873) (e)
-------- ---------
Total costs and expenses.... (29,769) 447,811
-------- ---------
Operating income (loss):............ 29,769 (93,780)
Interest expense, net of amounts
capitalized....................... 102,381(f) (123,163)
(68,250)(h)
(1,086)(i)
(5,750)(i)
Interest income..................... -- 16,589
Other............................... --
Equity in income of unconsolidated
affiliate......................... -- 202
-------- ---------
Income (loss) before income taxes... 57,064 (200,152)
Income tax expense (benefit)........ (29,804)(i) --
-------- ---------
Net income (loss)................... 86,898 (200,152)
======== =========
Basic and diluted loss per common
share............................. $ (2.00)
=========
Average common share outstanding.... 100,298
=========
</TABLE>
S-29
<PAGE> 32
TIME WARNER TELECOM INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GST
------------------------------------------------------
EXCLUSIONS
RELATED TO
THE ASSET GST PRO FORMA PRO FORMA
HISTORICAL HISTORICAL PURCHASE PRO FORMA GST TO BE TWTC AND
TWTC GST AGREEMENT(1) ADJUSTMENTS(2) ACQUIRED GST SUBTOTAL
---------- ---------- ------------ -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Telecommunications services... $353,067 $ 160,223 $(72,822)(a) $ -- $ 87,401 $ 440,468
Construction, facility sales and other.. -- 24,563 -- 24,563(a) -- --
Product....................... -- 205 205(a) -- -- --
-------- --------- -------- -------- --------- ---------
Total Revenue............... 353,067 184,991 (73,027) (24,563) 87,401 440,468
-------- --------- -------- -------- --------- ---------
Operating costs and expenses:
Operating..................... 130,846 113,806 (57,853)(a) -- 55,953 186,799
Cost of construction
revenues.................... -- 16,581 -- (16,581)(a) -- --
Cost of product revenues...... -- 307 (307)(a) -- -- --
Selling, general and
administrative.............. 122,663 97,380 (38,523)(a) -- 58,857 181,520
Depreciation and
amortization................ 68,793 67,569 (9,407)(a) 4,045(b) 62,207 131,000
Impairment of assets............ -- 260,827 (260,827)(c) -- -- --
-------- --------- -------- -------- --------- ---------
Total costs and expenses.... 322,302 556,470 (366,917) (12,536) 177,017 499,319
-------- --------- -------- -------- --------- ---------
Operating income (loss):........ 30,765 (371,479) 293,890 (12,027) (89,616) (58,851)
Interest expense, net of amounts
capitalized................... (30,657) (52,576) 4,970(a) -- (47,606) (78,263)
Interest income................. 9,016 2,117 (2,117)(b) -- -- 9,016
Other........................... -- 47,745 (2,896)(a) -- -- --
-- -- (44,849)(c) -- -- --
-------- --------- -------- -------- --------- ---------
Income (loss) before
reorganization expenses and
income tax expense
(benefit)..................... 9,124 (374,193) 248,998 (12,027) (137,222) (128,098)
Reorganization expenses......... -- 12,777 (12,777)(d) -- -- --
-------- --------- -------- -------- --------- ---------
Income (loss) before income
taxes......................... 9,124 (386,970) 261,775 (12,027) (137,222) (128,098)
Income tax expense (benefit).... 4,542 -- -- -- -- 4,542
-------- --------- -------- -------- --------- ---------
Net income (loss)............... $ 4,582 $(386,970) $261,775 $(12,027) $(137,222) $(132,640)
======== ========= ======== ======== ========= =========
Basic and diluted earnings
(loss) per common share....... $ 0.04
========
Average shares outstanding:
Basic......................... 105,262
========
Diluted....................... 108,427
========
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR TWTC PRO FORMA
ACQUISITION AND TWTC
OFFERINGS(3) COMBINED
---------------- ---------
<S> <C> <C>
Revenue
Telecommunications services... $ -- $ 440,468
Construction, facility sales a -- --
Product....................... -- --
------- ---------
Total Revenue............... -- 440,468
------- ---------
Operating costs and expenses:
Operating..................... -- 186,799
Cost of construction
revenues.................... -- --
Cost of product revenues...... -- --
Selling, general and
administrative.............. -- 181,520
Depreciation and
amortization................ (20,172)(d) 107,515
(3,313)(e)
Impairment of assets............ -- --
------- ---------
Total costs and expenses.... (23,485) 475,834
------- ---------
Operating income (loss):........ 23,485 (35,366)
Interest expense, net of amounts
capitalized................... 45,867(f) (84,398)
(51,188)(h)
(814)(i)
Interest income................. -- 9,016
Other........................... -- --
-- --
------- ---------
Income (loss) before
reorganization expenses and
income tax expense
(benefit)..................... 17,350 (110,748)
Reorganization expenses......... -- --
------- ---------
Income (loss) before income
taxes......................... 17,350 (110,748)
Income tax expense (benefit).... (4,542)(j) --
------- ---------
Net income (loss)............... $21,892 $(110,748)
======= =========
Basic and diluted earnings
(loss) per common share....... $ (1.01)
=========
Average shares outstanding:
Basic......................... 109,662
=========
Diluted....................... 109,662
=========
</TABLE>
S-30
<PAGE> 33
TIME WARNER TELECOM INC.
NOTES TO THE PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combined balance sheet is
presented as of September 30, 2000. The accompanying unaudited pro forma
condensed combined statements of operations are presented for the year ended
December 31, 1999 and the nine months ended September 30, 2000. The adjustments
contained in the accompanying pro forma condensed combined financial statements
reflect the following:
(1) EXCLUSIONS RELATED TO THE ASSET PURCHASE AGREEMENT
(a) To reflect the exclusion of assets and liabilities of GST that were
not acquired, either because they were excluded from the purchase agreement or
because they were disposed of by GST prior to September 30, 2000.
The assets and liabilities excluded from the purchase agreement
consist of the majority of GST's Hawaiian assets and operations, certain
other businesses and contracts, and other assets and liabilities, as well
as the related revenue and expenses associated with these excluded assets
and liabilities. Other assets and liabilities excluded consist principally
of cash and cash equivalents, restricted investments, certain accounts
receivable, certain other current assets and certain accounts payable,
deferred revenue, and certain other current liabilities. The businesses and
contracts being excluded relate primarily to the operator
services/hospitality business and certain contracts for resold local and
long distance services. Additionally, to reverse the impairment charge by
GST in the third quarter of 2000, which resulted from the consummation of
the purchase agreement.
The dispositions by GST that occurred between January 1, 1999 and
September 30, 2000 have been treated as if they were consummated prior to
January 1, 1999. These divestitures consisted of:
-- a California Internet service provider;
-- a Texas company which provided long distance and ancillary
telecommunications services, and produced software used in the
telecommunications industry; and
-- the assets and liabilities primarily related to GST's Guam
operations.
(b) To eliminate GST's historical interest income as residual cash
balances were not acquired.
(c) To reflect the exclusion of non-recurring items consisting of the
following:
-- For the year ended December 31, 1999:
-- a $28.0 million favorable legal settlement.
-- For the nine months ended September 30, 2000:
-- a $260.8 million impairment of assets; and
-- a $2.5 million favorable legal settlement; and
-- a $42.3 million gain on the sale of an investment
(d) The exclusion of $12.8 million consisting of retention bonuses paid to
employees and fees paid for professional services related to the bankruptcy
reorganization of GST.
S-31
<PAGE> 34
TIME WARNER TELECOM INC.
NOTES TO THE PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) GST PRO FORMA ADJUSTMENTS
(a) To reflect the exclusion of revenue and expenses related to GST
construction and facility sales of conduit and dark fiber previously sold by
GST. The historical GST construction and facility sales activities included:
-- outright sales to third parties, which represented $15.6 million
and $6.6 million in revenue and $12.6 million and $6.5 million in
associated expenses for the year ended December 31, 1999 and the
nine months ended September 30, 2000, respectively; and
-- the consummation of "sales-type" leases, which represented $99.5
and $18.0 million in revenue and $62.3 million and $10.1 million
in associated expenses for the year ended December 31, 1999 and
the nine months ended September 30, 2000, respectively.
This construction and facility sales activity is non-recurring in
nature. Any construction and facility sales following the acquisition will be
recorded when and if such transactions occur.
Historically, GST had treated certain long-term fiber and conduit lease
contracts entered into prior to June 30, 1999 as "sales-type" leases and
recognized the related revenue under the percentage of completion method. In
June 1999, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 43, Real Estate Sales, an Interpretation of FASB Statement
No. 66 ("FIN 43"). FIN 43 is effective for sales of real estate with property
improvements or integral equipment entered into after June 30, 1999. Under FIN
43, conduit and dark fiber are considered integral equipment. Accordingly, for
contracts entered into after June 30, 1999, sales-type lease accounting is no
longer appropriate for dark fiber and conduit leases and therefore, such
transactions will be accounted for as operating leases unless title transfers to
the lessee. Assuming that GST adopted the methodology prescribed by FIN 43 as of
January 1, 1999, GST construction and facility sales would have aggregated $0.7
million and $2.1 million in revenue and $0.5 million and $1.6 million in
depreciation expense for the year ended December 31, 1999 and the nine months
ended September 30, 2000, respectively, and such amounts would have been
included as an adjustment under the Exclusions Related to the Purchase
Agreement. Additionally, a deferred revenue balance would be established, but
would be eliminated in purchase accounting as such balance would represent a
non-monetary liability required to be eliminated as of the acquisition date.
(b) To reflect the effect of the adoption of Time Warner Telecom's
accounting policy for depreciable lives for fixed asset depreciation for the
periods presented.
(3) TIME WARNER TELECOM PRO FORMA ADJUSTMENTS
(a) To reflect the proceeds from borrowings under the senior secured term
loan facility and unsecured bridge loan facility as follows:
-- a $250 million borrowing by subsidiaries of Time Warner
Telecom under the secured term loan facilities; and
-- a $700 million borrowing by Time Warner Telecom under the
unsecured bridge facility.
(b) To reflect the estimated financing costs in connection with closing of
the senior secured credit facility and unsecured bridge loan facility as well as
the costs required to obtain permanent financing. This amount is net of a credit
of a portion of the fees paid to secure the bridge financing. If the full $700
million of the bridge loan facility is not refinanced, such credits will be
reduced proportionally.
S-32
<PAGE> 35
TIME WARNER TELECOM INC.
NOTES TO THE PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(c) To reflect the purchase of a majority of GST's assets under the
purchase agreement for cash consideration of $627 million plus the payment of
certain liabilities and fees of $42 million and the assumption of a $21 million
obligation to complete certain fiber networks, for a total purchase price of
$690 million. The final allocation of purchase price is subject to adjustment
based upon final appraisals and other analyses. As the acquisition will be
accounted for using the purchase method of accounting, the remaining unamortized
balance in intangible assets, which is primarily comprised of goodwill and
deferred loan costs, non-monetary liabilities, and the remaining equity balance
will be eliminated. As the purchase price is anticipated to be lower than the
fair value of the assets acquired, the values otherwise assignable to plant,
property and equipment will be proportionally reduced to determine assigned
values.
(d) To reflect the reduction in depreciation expense as a result of a
proportional reduction in the historical book values of plant, property and
equipment after considering the excess of the historical book values over the
remaining unallocated purchase price of $303 million.
(e) To eliminate the amortization expense arising from historical GST
intangible assets that has been eliminated in purchase accounting.
(f) To eliminate GST's historical interest expense, except for historical
interest expense related to assumed capital lease obligations.
(g) To reflect the net proceeds from refinancing the $700 million borrowed
under the unsecured bridge loan facility in connection with:
-- the issuance and sale of $400 million of high yield senior notes
due 2011 pursuant to a concurrent private placement; and
-- the issuance and sale of 4.4 million shares of our Class A common
stock pursuant to this offering at an assumed price of $69 per
share.
(h) To record interest expense on $250 million in borrowings under the
senior secured term loan facility at a fixed rate of 9.6% and the issuance and
sale of $400 million of high yield senior notes due 2011 at an assumed rate of
11%. For purposes of computing interest expense on the secured term loan
facility, Time Warner Telecom utilized the six month London Interbank Offered
Rate plus the maximum specified margin of 4%. A change of 1% per annum in the
effective annual interest cost on aggregate borrowings of $650 million would
change pro forma interest expense by $6.5 million.
(i) To record amortization of deferred financing costs under the secured
term loan facilities and the unsecured bridge loan facility over an estimated
ten-year period. In connection with the issuance of the unsecured bridge loan
facility, $5.8 million of unamortized deferred financing costs were expensed in
first quarter 2001. In connection with the issuance of the equity securities,
$13.1 million of unamortized deferred financing costs were reclassified to
additional paid-in capital.
(j) The acquisition represents a purchase of assets. Accordingly, Time
Warner Telecom will not be assuming any GST historical tax attributes, including
net operating loss carryforwards. For pro forma presentation purposes, the tax
benefits of GST related to the periods presented have been recognized to the
extent of the tax expense recorded in the Time Warner Telecom historical
financial statements.
(k) To reflect the acquisition deposit paid by Time Warner Telecom upon
consummation of the purchase agreement in September 2000.
S-33
<PAGE> 36
SELECTED CONSOLIDATED, COMBINED AND CONDENSED FINANCIAL AND
OTHER OPERATING DATA
The selected statements of operations data for the years ended December 31,
1997, 1998 and 1999, and the selected balance sheet data as of December 31, 1998
and 1999, are derived from, and are qualified by reference to, the financial
statements of Time Warner Telecom, including the notes, audited by Ernst & Young
LLP, independent auditors, appearing elsewhere in this prospectus supplement.
The selected statements of operations data for the year ended December 31, 1995
and 1996 and the selected balance sheet data as of December 31, 1995, 1996 and
1997 have been derived from audited financial statements of Time Warner Telecom
not included in this prospectus supplement. The summary financial data as of and
for the nine months ended September 30, 1999 and 2000 are derived from the
unaudited consolidated financial statements of Time Warner Telecom, including
the notes, appearing elsewhere in this prospectus supplement. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which, in the opinion of Time Warner Telecom, is necessary for a fair
presentation of the financial position and results of operations for these
periods. Operating results for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 2000. The financial statements of Time Warner Telecom for
all periods prior to the Reorganization of Time Warner Telecom that occurred on
July 14, 1998 reflect the "carved out" historical financial position, results of
operations, cash flows and changes in stockholders' equity of the commercial
telecommunications operations of predecessors of Time Warner Telecom, as if they
had been operating as a separate company. The selected financial and other
operating data set forth below should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Time Warner Telecom's financial statements, including the notes, appearing
elsewhere in this prospectus supplement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Dedicated transport services.... $ 6,505 $ 20,362 $ 44,529 $ 84,024 $ 152,468 $ 105,727 $ 183,759
Switched services(1)............ 350 3,555 10,872 37,848 116,285 71,558 169,308
-------- -------- ---------- ---------- ---------- ---------- ----------
Total revenue............. 6,855 23,917 55,401 121,872 268,753 177,285 353,067
-------- -------- ---------- ---------- ---------- ---------- ----------
Costs and expenses(2):
Operating....................... 15,106 25,715 40,349 67,153 117,567 81,949 130,846
Selling, general and
administrative................ 34,222 60,366 54,640 77,401 113,389 80,501 122,663
Depreciation and amortization... 7,216 22,353 38,466 50,717 68,785 50,272 68,793
-------- -------- ---------- ---------- ---------- ---------- ----------
Total costs and
expenses................ 56,544 108,434 133,455 195,271 299,741 212,722 322,302
-------- -------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)........... (49,689) (84,517) (78,054) (73,399) (30,988) (35,437) 30,765
Interest expense, net and
other(2)........................ (1,416) (1,599) 7,398 (19,340) (28,473) (22,026) (21,641)
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before income
taxes........................... (51,105) (86,116) (70,656) (92,739) (59,461) (57,463) 9,124
Income tax expense(3)............. -- -- -- -- 29,804 29,473 4,542
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................. $(51,105) $(86,116) $ (70,656) $ (92,739) $ (89,265) $ (86,936) $ 4,582
======== ======== ========== ========== ========== ========== ==========
Earnings (loss) per share
Basic........................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.93) $ (0.94) $ 0.04
======== ======== ========== ========== ========== ========== ==========
Diluted......................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.93) $ (0.94) $ 0.04
======== ======== ========== ========== ========== ========== ==========
Earnings (loss) per share before
income taxes
Basic........................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.62) $ (0.62) $ 0.09
======== ======== ========== ========== ========== ========== ==========
Diluted......................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.62) $ (0.62) $ 0.08
======== ======== ========== ========== ========== ========== ==========
Weighted average shares
outstanding
Basic........................... 81,250 81,250 81,250 81,250 95,898 92,957 105,262
Diluted......................... 81,250 81,250 81,250 81,250 95,898 92,957 108,427
</TABLE>
S-34
<PAGE> 37
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
EBITDA(1)(4)...................... $(42,473) $(62,164) $ (39,588) $ (22,682) $ 37,797 $ 14,835 $ 99,558
EBITDA Margin(1)(5)............... (620)% (260)% (72)% (19)% 14% 8% 28%
Net cash provided by (used in)
operating activities............ (35,605) (52,274) (29,419) (343) 54,235 (13,194) 71,238
Capital expenditures.............. 141,479 144,815 127,315 126,023 221,224 138,305 213,246
OPERATING DATA(6):
Operating Networks................ 15 18 19 19 21 20 22
Route miles....................... 3,207 5,010 5,913 6,968 8,872 7,704 9,457
Fiber miles....................... 116,286 198,490 233,488 272,390 332,263 313,549 363,644
DS-0 equivalents.................. 159,000 690,000 1,719,000 3,031,000 5,523,000 4,555,000 9,006,000
Digital telephone switches........ 1 2 14 16 19 20 26
Employees......................... 508 673 714 919 1,259 1,181 1,697
BALANCE SHEET DATA:
Cash and cash equivalents......... $ -- $ -- $ -- $ 105,140 $ 90,586 $ 42,394 $ 74,091
Marketable securities............. -- -- -- 250,857 173,985 229,793 28,578
Property, plant and equipment,
net............................. 199,005 323,161 415,158 494,158 677,106 613,137 824,135
Total assets...................... 214,963 341,480 438,077 904,344 1,043,012 976,375 1,104,535
Long-term debt and capital lease
obligations(6).................. -- -- 75,475 574,940 403,627 403,342 403,311
Total stockholders' equity........ $179,589 $294,937 $ 300,390 $ 207,651 $ 422,916 $ 419,650 $ 470,511
</TABLE>
------------
(1) Includes the recognition of non-recurring $7.6 million and $27.3 million
settlements of reciprocal compensation in the fourth quarter of 1999 and for
the nine months ended September 30, 2000, respectively.
(2) Includes expenses resulting from transactions with affiliates of $6.5
million, $12.4 million, $17.1 million, $27.7 million, $20.0 million, $15.9
million, and $11.4 million for the years ended December 31, 1995, 1996,
1997, 1998 and 1999, and for the nine months ended September 30, 1999 and
2000, respectively. See Time Warner Telecom's financial statements appearing
elsewhere in this prospectus supplement for an explanation of these
expenses.
(3) During 1999, Time Warner Telecom recorded a non-recurring $39.4 million
charge to earnings to record a net deferred tax liability associated with
the Reconstitution. This change occurred immediately prior to Time Warner
Telecom's initial public offering.
(4) "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 such
measures. Management believes that EBITDA is a standard measure of operating
performance and liquidity that is commonly reported and widely used by
analysts, investors and other interested parties in the telecommunications
industry because it eliminates many differences in financial, capitalization
and tax structures, as well as non-cash and non-operating charges to
earnings. EBITDA is used internally by Time Warner Telecom's management to
assess on-going operations and is a component of a covenant of the 9 3/4%
Senior Notes that limits Time Warner Telecom's ability to incur 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.
(5) EBITDA Margin represents EBITDA as a percentage of revenue.
(6) Includes all managed properties including unconsolidated affiliates,
MetroComm AxS, L.P. in Columbus, Ohio and the Albany and Binghamton, New
York networks. Albany and Binghamton were wholly owned at December 31, 1997
and MetroComm AxS, L.P. was wholly owned at December 31, 1999.
S-35
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with Time
Warner Telecom's financial statements, including the notes, appearing elsewhere
in this prospectus supplement. Certain information contained in the discussion
and analysis set forth below and elsewhere in this prospectus supplement,
including information with respect to Time Warner Telecom's plans and strategy
for its business and related financing, includes forward-looking statements that
involve risk and uncertainties. See "Risk Factors" for a discussion of important
factors that could cause actual results to differ materially from the results
described in or implied by the forward-looking statements contained in this
prospectus supplement.
OVERVIEW
Time Warner Telecom 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. As of January 9, 2001, Time Warner Telecom served customers in 24
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, Columbus and Dayton, Ohio; Memphis, Tennessee;
Orlando and Tampa, Florida; Indianapolis, Indiana; Milwaukee, Wisconsin; Los
Angeles/Orange County and San Diego, California and Honolulu, Hawaii. Time
Warner Telecom plans to activate its networks in Chicago, Illinois; Atlanta,
Georgia; Minneapolis, Minnesota; Denver, Colorado; and Columbia, South Carolina
prior to the end of 2001.
Time Warner Cable began our business in 1993. During the last few years,
our business has changed substantially with an exclusive focus on business
customers and a rapid expansion into switched services and geographic areas
beyond the Time Warner Cable footprint.
On July 14, 1998 we were reorganized into a limited liability company and
conducted the offering of the 9 3/4% 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 our initial public offering, TWT LLC
was reconstituted as a Delaware corporation under the name Time Warner Telecom
Inc. We refer to this transaction as the "Reconstitution." The outstanding
limited liability company interests were converted into common stock of the
newly formed corporation, Time Warner Telecom Inc. Time Warner Telecom 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 our total stockholders'
equity, which has been presented on a consistent basis.
As a result of the change in legal structure from a limited liability
company to a corporation, all future net operating loss carry forwards from the
date of the Reconstitution can be utilized against future earnings of Time
Warner Telecom. Prior to the Reconstitution, all net operating losses were
allocated to and utilized primarily by the Class B stockholders. As a result of
the Reconstitution, which occurred during the second quarter of 1999, Time
Warner Telecom 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, we completed an
initial public offering of 20,700,000 shares of Class A common stock at a price
of $14 per share. The IPO generated approximately $270.2 million in proceeds for
us, net of underwriting discounts and expenses. A portion of the proceeds of the
IPO was used to repay $180 million of loans from Time Warner, Advance/Newhouse
Partnership and MediaOne that were generated from the financing requirements of
Time Warner Telecom from July 1, 1997 through July 14, 1998, which had remained
outstanding, accruing interest, through May 14, 1999. The proceeds of the IPO
remaining after repayment of the loans were used to repay assumed debt from
acquisitions and to fund capital expenditures.
S-36
<PAGE> 39
As a result of the IPO, Time Warner Telecom 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 September 30, 2000, the
Class B Stockholders had approximately 95.6% of the combined voting power of the
outstanding common stock.
In connection with the Reconstitution, Time Warner Telecom assumed the
obligations under the former Time Warner Telecom LLC 1998 Option Plan, amended
the plan, and renamed it the Time Warner Telecom 1998 Stock Option Plan. The
plan provides for the granting of stock options to purchase shares of Class A
common stock to directors and current or prospective employees of, and
consultants or other individuals providing services to, Time Warner Telecom and
its subsidiaries. As of December 31, 2000, options for approximately 10.4
million shares were outstanding under both plans.
ACQUISITIONS
During the second quarter of 1999, Time Warner Telecom 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, Time Warner Telecom's predecessor, approximately
$3.5 million in net cash and the assumption of $1.9 million in liabilities. At
the time of the IPO, the Class A limited liability interests were converted into
307,550 shares of Class A common stock of Time Warner Telecom. Through the
acquisition of this subsidiary, Time Warner Telecom manages current and future
data networks and provides new internet products.
During the second quarter of 1999, Time Warner Telecom acquired all of the
outstanding common stock of MetroComm, Inc. through the issuance of 2,190,308
shares of Class A common stock of Time Warner Telecom valued at $24.1 million,
and the assumption of $20.1 million in liabilities. Through the acquisition of
MetroComm, Time Warner Telecom acquired the 50% interest of MetroComm AxS, L.P.,
a competitive local exchange carrier in Columbus, Ohio, not already owned by
Time Warner Telecom.
On January 10, 2001, Time Warner Telecom completed the acquisition of
substantially all of the assets of GST for cash consideration of $627 million,
plus the payment of certain liabilities and fees of $42 million and the
assumption of a $21 million obligation to complete certain fiber networks, for a
total purchase price of $690 million. The acquisition added to Time Warner
Telecom's network 4,210 route miles, 227,674 fiber miles and service to 345
on-net buildings.
S-37
<PAGE> 40
RESULTS OF OPERATIONS
The following table sets forth certain consolidated and combined statements
of operations data of Time Warner Telecom, 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 Time Warner Telecom's financial statements,
including the notes, appearing elsewhere in this prospectus supplement:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- --------------------------------
1997 1998 1999 1999 2000
---------------- -------------- --------------- --------------- --------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Dedicated transport services..... $ 44,529 80% $ 84,024 69% $ 152,468 57% $ 105,727 60% $183,759 52%
Switched services(1)............. 10,872 20 37,848 31 116,285 43 71,558 40 169,308 48
--------- ---- -------- --- --------- --- --------- --- -------- ---
Total revenue.............. 55,401 100 121,872 100 268,753 100 177,285 100 353,067 100
--------- ---- -------- --- --------- --- --------- --- -------- ---
Costs and expenses(2):
Operating........................ 40,349 73 67,153 55 117,567 44 81,949 46 130,846 37
Selling, general and
administrative................. 54,640 99 77,401 63 113,389 42 80,501 46 122,663 35
Depreciation and amortization.... 38,466 69 50,717 42 68,785 25 50,272 28 68,793 19
--------- ---- -------- --- --------- --- --------- --- -------- ---
Total costs and expenses... 133,455 241 195,271 160 299,741 111 212,722 120 322,302 91
--------- ---- -------- --- --------- --- --------- --- -------- ---
Operating income (loss)............ (78,054) (141) (73,399) (60) (30,988) (11) (35,437) (20) 30,765 9
Interest expense(2)................ (1,538) (3) (29,198) (24) (45,264) (17) (35,139) (20) (30,657) (9)
Interest income.................... -- -- 9,731 8 16,589 6 12,828 8 9,016 2
Equity in income (losses) of
unconsolidated affiliate......... (2,082) (4) 127 -- 202 -- 285 -- -- --
Gain on disposition of
investments(3)................... 11,018 20 -- -- -- -- -- -- -- --
--------- ---- -------- --- --------- --- --------- --- -------- ---
Net income (loss) before income
taxes............................ (70,656) (128) (92,739) (76) (59,461) (22) (57,463) (32) 9,124 2
Income tax expense(4).............. -- -- -- -- 29,804 11 29,473 17 4,542 1
--------- ---- -------- --- --------- --- --------- --- -------- ---
Net income (loss).................. $ (70,656) (128)% $(92,739) (76)% $ (89,265) (33)% $ (86,936) (49)% $ 4,582 1%
--------- ---- -------- --- --------- --- --------- --- -------- ---
Basic and diluted earnings (loss)
per share........................ $ (0.87) $ (1.14) $ (0.93) $ (0.94) $ 0.04
Earnings (loss) per share before
income taxes(4):
Basic............................ $ (0.87) $ (1.14) $ (0.62) $ (0.62) $ 0.09
Diluted.......................... $ (0.87) $ (1.14) $ (0.62) $ (0.62) $ 0.08
Weighted average shares
outstanding:
Basic............................ 81,250 81,250 95,898 92,957 105,262
Diluted.......................... 81,250 81,250 95,898 92,957 108,427
EBITDA(1)(5)....................... $ (39,588) (71)% $(22,682) (19)% $ 37,797 14% $ 14,835 8% $ 99,558 28%
Net cash provided by (used in)
operating activities............. (29,419) (343) 54,235 (13,194) 71,238
Net cash provided by (used in)
investing activities............. (120,621) (378,083) (146,917) (124,804) (87,817)
Net cash provided by financing
activities....................... 150,040 483,566 78,128 75,252 84
</TABLE>
------------
(1) Includes the recognition of non-recurring $7.6 million and $27.3 million
settlements of reciprocal compensation in the fourth quarter of 1999 and the
nine months ended September 30, 2000, respectively.
(2) Includes expenses resulting from transactions with affiliates of $17.1
million, $27.7 million, $20.0 million, $15.9 million, and $11.4 million for
the years ended December 31, 1997, 1998 and 1999 and for the nine months
ended September 30, 1999 and 2000, respectively.
(3) In 1997, Time Warner Telecom completed a series of transactions related to
its interests in the Hyperion Partnerships, a group of unconsolidated
telecommunication partnerships serving the New York area, whereby it sold
its interests in the partnerships serving the Buffalo and Syracuse markets
in exchange for approximately $7.0 million of cash and all of the minority
interests in the partnerships
(footnotes on next page)
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<PAGE> 41
serving the Albany and Binghamton markets that were not already owned by
Time Warner Telecom. In connection with these transactions, Time Warner
Telecom recognized a gain of approximately $11.0 million.
(4) A non-recurring charge to earnings of $39.4 million was recorded in 1999 to
reflect the initial net deferred tax liability associated with the change
from a limited liability company to a corporation. Income tax expense for
1999 reflects the $39.4 million charge, net of a $9.6 million deferred
income tax benefit.
(5) "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 those
measures. Management believes that EBITDA is a standard measure of operating
performance and liquidity that is commonly reported and widely used by
analysts, investors and other interested parties in the telecommunications
industry because it eliminates many differences in financial,
capitalization, and tax structures, as well as non-operating one-time
charges to earnings. EBITDA is used internally by Time Warner Telecom's
management to assess ongoing operations and is a component of a covenant of
the 9 3/4% Senior Notes that limits Time Warner Telecom's ability to incur
certain additional future indebtedness. However, EBITDA as used in this
report may not be comparable to similarly titled measures reported by other
companies due to differences in accounting policies.
GENERAL
Time Warner Telecom operates in metropolitan areas that have high
concentrations of medium- and large-sized businesses. Historically, Time Warner
Telecom has focused its sales and marketing efforts on such businesses, as they
are potentially high volume users of Time Warner Telecom's services. To drive
revenue growth in these markets, Time Warner Telecom has expanded its direct
sales force to focus on these business customers while it develops managed
service offerings to meet their voice, data, and Internet needs. Time Warner
Telecom's revenue has been derived primarily from business telephony services,
including dedicated transport, local switched, long distance, data and
high-speed Internet access services. An increasing percentage of Time Warner
Telecom's revenue growth is in switched services provided through the 24 digital
Lucent Technologies Inc. 5ESS switches that Time Warner Telecom has deployed,
and through the rapid growth in demand for switching data traffic. Also, through
the acquisition of Internet Connect, Inc. in 1999, Time Warner Telecom has
deployed a national Internet backbone and has experienced growth in data and
high-speed Internet services. Time Warner Telecom believes that data services
are becoming increasingly more important to Time Warner Telecom's target
customer base. In particular, Time Warner Telecom believes that the demand for
high-speed, high quality local area network and wide area network connectivity
will continue to grow over the near term.
Time Warner Telecom continues to expand its footprint within its existing
markets by expanding its network into new buildings and geographically by
turning up two new markets since this time last year: Northern New Jersey and
Dallas, Texas. Time Warner Telecom is also interconnecting existing service
areas within regional clusters with owned or leased fiber optic facilities. The
goal is to rapidly deploy new services and technologies when technically proven
and when customer demand is evident. As new technologies arise that enable the
switching of voice calls over an Internet protocol and local area network
infrastructure, Time Warner Telecom will evaluate how to best integrate this
soft switch technology into its infrastructure. There is no assurance that Time
Warner Telecom will bring any or all of these products to market successfully or
profitably.
Reciprocal compensation revenue is an element of switched services revenue,
which represents compensation from local exchange carriers for local exchange
traffic terminated on Time Warner Telecom's facilities originated by other local
exchange carriers. Reciprocal compensation is based on contracts between Time
Warner Telecom and local exchange carriers. Time Warner Telecom recognizes
reciprocal compensation revenue as it is earned, except in those cases where the
revenue is under dispute or at risk. Under several of its contracts, the local
exchange carriers have disputed the payment of reciprocal compensation for
traffic terminating to internet service provider customers, contending that the
traffic was not local. As a result, Time Warner Telecom initiated the dispute
resolution process under the applicable contracts to collect these amounts and
filed complaints with various public utility commissions contending that the
internet service provider traffic is local. Several of these with respect to
prior periods were resolved in favor of Time Warner Telecom and are no longer
subject to appeal, but some favorable decisions by public utility commissions in
the
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<PAGE> 42
Midwest have subsequently been appealed by the local exchange carriers. While
Time Warner Telecom believes that these disputes will ultimately be resolved in
its favor, Time Warner Telecom only recognizes revenue on a portion of the cash
received and defers recognition of a portion of this revenue pending the final
outcome of the dispute. In addition, the payment of reciprocal compensation
under certain of Time Warner Telecom'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 internet service provider traffic. Switched services revenue
for the nine months ended September 30, 2000 includes the recognition of $27.3
million of non-recurring reciprocal compensation. A significant portion of the
non-recurring reciprocal compensation revenue recognized during the nine months
ended September 30, 2000 was a result of certain cases involving reciprocal
compensation disputes that were resolved. As of September 30, 2000, Time Warner
Telecom had deferred recognition of $25.4 million in reciprocal compensation
revenue for payments received associated with pending disputes and agreements
that are subject to future reciprocal compensation adjustments. Time Warner
Telecom pays reciprocal compensation expense to the other local exchange
carriers for local exchange traffic it terminates on the local exchange carriers
facilities. These costs are recognized as incurred.
A portion of Time Warner Telecom'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 local exchange carrier--is billed on a per minute of
use basis. Historically, the Federal Communications Commission has regulated the
access rates imposed by the incumbent local exchange carriers, while the
integrated communications provider access rates have been less regulated. During
the second quarter of 2000, the Federal Communications Commission adopted a
proposal that substantially reduces the incumbent local exchange carrier
per-minute access charges while allowing for an increase in the flat monthly
charge paid by local residential service subscribers. While the Federal
Communications Commission decision does not specifically apply to the switched
access rates charged by non-dominant providers of access services, it places
significant downward market pressure on non-dominant providers' access rates.
For the nine months ended September 30, 2000 and 1999, switched access revenue
represented 10% and 11% 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 Time
Warner Telecom'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 rulings 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 Time Warner Telecom'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 6% and 7% of
revenue, excluding the effects of the recognition of $27.3 million on
non-recurring reciprocal compensation during the nine months ended September 30,
2000, for the nine months ended September 30, 2000 and 1999, 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 Internet service
provider traffic may also negatively impact Time Warner Telecom's revenue from
reciprocal compensation since the rates under most interconnection agreements
are subject to change based on such rulings. The FCC is considering proposals to
phase out reciprocal compensation over time and to replace reciprocal
compensation with "bill-and-keep" arrangements. Time Warner Telecom cannot
predict the outcome of these rulings. In addition, legislation has been
introduced in Congress which would prohibit payment of reciprocal compensation
for Internet-bound traffic. Accordingly, there is no assurance that Time Warner
Telecom will be able to compensate for the reduction in reciprocal compensation
with increased volume of terminating local traffic.
Time Warner Telecom benefits from its strategic relationship with Time
Warner Cable both through access to local right-of-way and construction
cost-sharing. Time Warner Telecom's networks have been constructed primarily
through the use of fiber capacity licensed from Time Warner Cable. As of Septem-
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<PAGE> 43
ber 30, 2000, Time Warner Telecom operated networks in 22 metropolitan areas
that spanned 9,457 route miles, contained 363,644 fiber miles and offered
service to 7,228 on-net and off-net buildings.
Time Warner Telecom 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 and other customers, including long distance carriers. Time
Warner Telecom intends to expand its product offerings on a continuous basis to
achieve a diverse revenue base. As part of that process, Time Warner Telecom is
targeting the expansion of data and internet products that can be offered on its
existing network.
Operating expenses consist of costs directly related to the operation and
maintenance of the networks and the ordering and provisioning of Time Warner
Telecom'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
Time Warner Telecom has increased its operations and revenue. Time Warner
Telecom expects these costs to continue to increase as its revenue growth
continues, but generally at a slower rate than revenue growth. The fact that a
significant portion of Time Warner Telecom's traffic rides on its own fiber
infrastructure enhances the Company's ability to control its costs.
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 marketing,
information technology, billing, regulatory and legal costs. These costs have
increased over time as Time Warner Telecom has increased its operations and
revenue. Time Warner Telecom expects these costs to continue to increase as its
revenue growth continues, but generally at a slower rate than revenue growth.
In the normal course of business, Time Warner Telecom 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, Time Warner Telecom entered into several
contracts with Time Warner, Advance/Newhouse Partnership and MediaOne with
respect to certain of those transactions. Time Warner Telecom'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 Time Warner Telecom. 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 those costs that are necessary to present
Time Warner Telecom's operations as if they are operated on a stand alone basis.
In addition, Time Warner Telecom licenses the right to use the majority of its
fiber optic cable capacity 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 Time Warner
Telecom's operating expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
Revenue. Revenue increased $175.8 million, or 99%, to $353.1 million for
the nine months ended September 30, 2000, from $177.3 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
nine months ended September 30, 2000, revenue increased $139.3 million, or 81%
to $311.3 million, from $172.0 million for the comparable period in 1999.
Revenue from the provision of dedicated transport services increased $78.0
million, or 74%, to $183.8 million for the nine months ended September 30, 2000,
from $105.7 million for the comparable period in 1999. Switched service revenue
increased $97.8 million, or 137%, to $169.3 million for the nine months ended
September 30, 2000, from $71.6 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 nine months ended
September 30, 2000, dedicated transport service and switched service revenue
increased 68% and 100%, respectively. The increase in revenue from dedicated
transport services primarily reflects a 30% 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 73%
increase in average switched service customers, increased revenue from switched
access services
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<PAGE> 44
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 nine months ended September 30, 2000 and 1999,
respectively, excluding the effects of the recognition of $27.3 million of
non-recurring reciprocal compensation during the nine months ended September 30,
2000. At September 30, 2000, Time Warner Telecom offered dedicated transport
services in 22 metropolitan areas, all of which also offered switched services.
At September 30, 1999, Time Warner Telecom offered dedicated transport services
in 19 consolidated metropolitan areas, 16 of which also offered switched
services.
Operating Expenses. Operating expenses increased $48.9 million, or 60%, to
$130.8 million for the nine months ended September 30, 2000, from $81.9 million
for the comparable period in 1999. Exclusive of the effects of acquisitions,
these expenses increased 52%. The increase in operating expenses was primarily
attributable to Time Warner Telecom'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 37% for the nine months ended September 30, 2000
from 46% for the comparable period in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $42.2 million, or 52%, to $122.7 million for
the nine months ended September 30, 2000, from $80.5 million for the comparable
period in 1999. Exclusive of the effects of acquisitions, these expenses
increased 51%. 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 $1.0 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. Time Warner Telecom 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
35% for the nine months ended September 30, 2000 from 46% for the comparable
period in 1999.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $18.5 million, or 37%, to $68.8 million for the nine months
ended September 30, 2000, from $50.3 million for the comparable period in 1999.
Exclusive of the effects of acquisitions, this expense increased 35%. The
increase in depreciation and amortization expense was primarily attributable to
increased capital expenditures and increased goodwill generated from
acquisitions.
EBITDA. EBITDA for the nine months ended September 30, 2000 increased $84.7
million to $99.6 million, from $14.8 million in 1999. The increase was $58.1
million, exclusive of the effects of acquisitions and the effects of the
recognition of $27.3 million of non-recurring reciprocal compensation for the
nine months ended September 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 Time Warner Telecom's financing requirements were funded with subordinated
loans from the Former Parent Companies. These loans remained outstanding,
accruing interest, through May 14, 1999. On July 21, 1998, Time Warner Telecom
issued $400 million in 9 3/4% 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 Time Warner, Advance/ Newhouse Partnership and
MediaOne from the IPO proceeds. Interest expense relating to the 9 3/4% Senior
Notes was $30.1 million for the nine months ended September 30, 2000 and
interest expense relating to the 9 3/4% Senior Notes and subordinated loans
payable aggregated $35.1 million for the nine months ended September 30, 1999.
The decrease of $5.0 million is primarily due to the lower weighted average debt
balance during the nine months ended September 30, 2000. Interest expense will
increase in future periods as a result of borrowings to finance the GST
acquisition.
Net Income. Earnings changed $91.5 million to $4.6 million for the nine
months ended September 30, 2000, from a net loss of $86.9 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.
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<PAGE> 45
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue. Revenue increased $146.9 million, or 121%, to $268.8 million for
1999, from $121.9 million for 1998. This increase in revenue is primarily
because of increased customers, increased revenue from existing customers, a
broader array of products offered and acquisitions. Revenue from the provision
of dedicated transport services increased $68.4 million, or 81%, to $152.5
million for 1999, from $84.0 million for 1998. Switched service revenue
increased $78.4 million, or 207%, to $116.3 million for 1999, from $37.8 million
for 1998. Exclusive of the effects of acquisitions and the effects of the
recognition of a non-recurring $7.6 million settlement of reciprocal
compensation in the fourth quarter of 1999, dedicated transport service and
switched service revenue increased 73% and 182%, respectively. The increase in
revenue from dedicated transport services primarily reflects a 54% 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 136% increase in average switched service customers, and an increase
in revenue from switched access services, reciprocal compensation, and a broader
array of products and services offered in existing markets. Reciprocal
compensation, the mutual charges by local carriers for recovery of costs
associated with the termination of traffic on each other's networks, represented
7% and 8% of total revenue for 1999 and 1998, respectively, excluding the
effects of the recognition of a non-recurring $7.6 million settlement of
reciprocal compensation in the fourth quarter of 1999. At December 31, 1999,
Time Warner Telecom offered dedicated transport services in 21 metropolitan
areas, 20 of which also offered switched services. At December 31, 1998, Time
Warner Telecom offered dedicated transport services in 19 metropolitan areas, 16
of which also offered switched services.
Operating Expenses. Operating expenses increased $50.4 million, or 75%, to
$117.6 million for 1999, from $67.2 million for 1998. Exclusive of the effects
of acquisitions, these expenses increased 67%. The increase in operating
expenses was primarily attributable to Time Warner Telecom's expansion of its
business, principally switched services, the ongoing development of existing
markets resulting in higher local exchange carrier charges for circuit leases
and interconnection, and higher technical personnel costs. As a percentage of
revenue, operating expenses decreased to 44% for 1999 from 55% for 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $36.0 million, or 46%, to $113.4 million for
1999, from $77.4 million for 1998. Exclusive of the effects of acquisitions,
these expenses increased 43%. 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 data processing costs and an increase in the provision for doubtful
accounts related to the increase in revenue. As a percentage of revenue,
selling, general and administrative expenses decreased to 42% for 1999 from 63%
for 1998.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $18.1 million, or 36%, to $68.8 million for 1999, from $50.7
million for 1998. Exclusive of the effects of acquisitions, this expense
increased 28%. The increase in depreciation and amortization expense was
primarily attributable to increased capital expenditures and increased goodwill
generated from acquisitions.
EBITDA. EBITDA increased $60.5 million, to $37.8 million, for 1999 from a
loss of $22.7 million for 1998. Exclusive of the effects of acquisitions and the
effects of the recognition of a non-recurring $7.6 million settlement of
reciprocal compensation in the fourth quarter of 1999, this amount increased
$51.6 million. 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 Time Warner Telecom's financing requirements were funded with loans from Time
Warner, Advance/Newhouse Partnership and MediaOne. These loans remained
outstanding, accruing interest, through May 14, 1999. On July 21, 1998, Time
Warner Telecom issued $400 million in 9 3/4% 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 Time Warner, Advance/Newhouse
Partnership and MediaOne from the IPO proceeds. Interest expense relating to
these loans and 9 3/4% Senior Notes totaled $45.3 million and $29.2 million for
1999 and 1998, respectively. The increase of $16.1 million is primarily due to
the higher weighted average debt balance during 1999.
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<PAGE> 46
Net Loss. Net loss decreased $3.5 million, or 4%, to $89.3 million for
1999, from a net loss of $92.7 million for 1998. The decrease in net loss is
primarily related to improved results from operations, partially offset by an
increase in net interest expense of $9.2 million and income tax expense of $29.8
million.
Loss per Common Share. The basic and diluted loss per common share was
computed by dividing net loss applicable to common shares by the weighted
average outstanding common shares for the period. Potential common shares were
not included in the computation of weighted average shares outstanding because
their inclusion would be anti-dilutive. The increase in the weighted average
shares outstanding is due to the issuance of Class A common stock for the IPO,
for acquisitions and upon the exercise of stock options. For 1999, the basic and
diluted loss per common share decreased $0.21 per share, or 18%, to ($0.93) per
share from ($1.14) per share for 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenue. Revenue increased $66.5 million, or 120%, to $121.9 million for
1998, from $55.4 million for 1997. Revenue from the provision of dedicated
transport services increased $39.5 million, or 89%, to $84.0 million for 1998,
from $44.5 million for 1997. Switched service revenue increased $27.0 million,
or 248%, to $37.8 million for 1998, from $10.9 million for 1997. The increase in
revenue from dedicated transport services primarily reflects growth of services
and new products offered in existing markets. The increase in switched services
resulted from the offering of services in new markets and the growth of services
in existing markets including reciprocal compensation. Reciprocal compensation
represented 8% and 9% of total revenue for 1998 and 1997, respectively. At
December 31, 1998, Time Warner Telecom offered dedicated transport services in
19 metropolitan areas, 16 of which also offered switched services, as compared
to offering dedicated transport services in 19 metropolitan areas, 14 of which
also offered switched services at December 31, 1997. The metropolitan areas do
not include MetroComm AxS, L.P., a 50% owned entity of Time Warner Telecom at
such time.
Operating Expenses. Operating expenses increased $26.8 million, or 66%, to
$67.2 million for 1998, from $40.3 million for 1997. The increase in operating
expenses was primarily attributable to Time Warner Telecom'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, higher technical personnel costs, and higher data
processing costs. As a percentage of revenue, operating expenses decreased to
55% in 1998 from 73% for 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $22.8 million, or 42%, to $77.4 million for
1998, from $54.6 million for 1997. The increase in selling, general and
administrative expenses was primarily attributable to higher direct sales costs
associated with the increase in revenue, higher property taxes, an increase in
consulting expenses relating to local regulatory matters, the implementation of
new billing and system software, and an increase in the provision for doubtful
accounts related to the increase in revenue. As a percentage of revenue,
selling, general and administrative expenses decreased to 63% for 1998 from 99%
for 1997.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $12.3 million, or 32%, to $50.7 million for 1998, from $38.5
million for 1997. The increase in depreciation and amortization expense was
primarily attributable to higher capital expenditures related to the ongoing
construction and expansion of Time Warner Telecom's telecommunications networks
in both 1998 and 1997. As a percentage of revenue, depreciation and amortization
expenses decreased to 42% for 1998, from 69% for 1997.
EBITDA. The EBITDA loss for 1998 decreased $16.9 million, or 43%, to a loss
of $22.7 million for 1998, from a loss of $39.6 million for 1997. This
improvement was primarily the result of increased revenue due to Time Warner
Telecom's expansion of local telecommunications networks in new and existing
markets and growth of Time Warner Telecom's customer base, partially offset by
higher operating expenses in support of the larger customer base, and higher
selling, general and administrative expenses required to support the expansion.
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<PAGE> 47
Interest Expense. During the period July 1, 1997 through July 14, 1998, all
of Time Warner Telecom's financing requirements were funded with loans from Time
Warner, Advance/Newhouse Partnership and MediaOne. On July 21, 1998, Time Warner
Telecom issued $400 million in 9 3/4% Senior Notes in a public offering.
Interest expense relating to these loans and 9 3/4% Senior Notes totaled $29.2
million and $1.5 million for 1998 and 1997, respectively.
Net Loss. Net loss increased $22.1 million, or 31%, to $92.7 million for
1998, from a net loss of $70.7 million for 1997. This increase resulted from
higher depreciation and amortization expenses relating to Time Warner Telecom's
expansion of telecommunications networks in new and existing markets, as well as
interest expense relating to the subordinated loans payable to Time Warner,
Advance/Newhouse Partnership and MediaOne and the 9 3/4% Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
Operations. For 1999, Time Warner Telecom's cash provided by operations was
$54.2 million, as compared to cash used in operations of $343,000 for 1998. This
increase in cash provided by operations of $54.6 million principally resulted
from an increase in EBITDA of $60.5 million. During the second quarter of 1999,
Time Warner Telecom achieved positive EBITDA. Time Warner Telecom's cash
provided by operating activities was $71.2 million for the nine months ended
September 30, 2000, as compared to cash used in operating activities of $13.2
million for the comparable period in 1999. This increase in cash provided by
operating activities of $84.4 million principally resulted from an increase in
EBITDA of $84.7 million.
As Time Warner Telecom continues its expansion plan to enter into new
markets, the expenditures incurred, together with initial operating expenses,
will generally result in negative EBITDA and operating losses from a network
until an adequate customer base and revenue stream for the network have been
established. Accordingly, Time Warner Telecom expects that the network
constructed in each new market will generally produce negative EBITDA for at
least eighteen months after operations commence in that market. Additionally,
Time Warner Telecom currently expects the GST operations to generate negative
EBITDA until an adequate customer base and revenue stream for the network have
been established. Although overall Time Warner Telecom expects to continue to
have positive EBITDA for the near future as it develops and expands its business
as well as integrates the GST acquisition, there can be no assurance that Time
Warner Telecom will sustain sufficient positive EBITDA to meet its working
capital requirements and to service its indebtedness.
Investing. Cash used in investing activities decreased $231.2 million to
$146.9 million in 1999, as compared to $378.1 million in 1998. During 1999, a
portion of the proceeds from maturities of marketable securities were used to
partially fund capital expenditures and working capital requirements. During
1998, the net proceeds from the issuance of the 9 3/4% Senior Notes were
primarily invested in marketable securities. Cash used in investing activities
was $87.8 million for the nine months ended September 30, 2000, as compared to
cash provided by investing activities of $124.8 million for the comparable
period in 1999. During both the nine months ended September 30, 2000 and 1999,
proceeds from the maturities of marketable securities were primarily used to
fund capital expenditures. During the nine months ended September 30, 2000,
capital expenditures were also funded through cash flows from operating
activities.
During 1999, capital expenditures were $221.2 million (net of capital
leases incurred of $3.7 million), an increase of $95.2 million from 1998. The
largest commitment of capital was related to the installation of transport and
switch related electronics to support the increase in sales activity and the
addition of 1,904 route miles of fiber since December 31, 1998. During the nine
months ended September 30, 2000, capital expenditures were $213.2 million, an
increase of $74.9 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 585 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, Time Warner Telecom anticipates it will commit approximately
$600 million in 2001 to fund its capital expenditures, and Time Warner Telecom
also expects to have substantial capital expenditures in
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subsequent periods. This target spending includes requirements for current
operating markets and Time Warner Telecom's expansion plans, including the GST
markets.
The facilities-based telecommunications service business is a capital
intensive business. Time Warner Telecom'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.
Time Warner Telecom's expected capital expenditures for general corporate
and working capital purposes include:
-- expenditures with respect to Time Warner Telecom's management
information system and corporate service support infrastructure; and
-- operating and administrative expenses with respect to new networks
and debt service.
Time Warner Telecom plans to make substantial capital investments in
connection with plans to construct and develop new networks, as well as for
technology upgrades. Expansion of Time Warner Telecom's networks will include
the geographic expansion of Time Warner Telecom's existing operations, and Time
Warner Telecom will consider the development of new markets. In addition, Time
Warner Telecom may acquire existing networks in the future.
Time Warner Telecom regularly evaluates potential acquisitions and joint
ventures that would extend its geographic markets, expand its products and
services and/or enlarge the capacity of its networks. In the event Time Warner
Telecom enters into a definitive agreement with respect to any acquisition or
joint venture, it may require additional financing. If Time Warner Telecom
enters into a definitive agreement with respect to any material transaction, it
could result in Time Warner Telecom increasing its leverage or issuing
additional common stock or both. There can be no assurance, however, that Time
Warner Telecom will enter into any transaction or, if it does, on what terms.
See "Risk Factors--We may complete a significant business combination or other
transaction that could affect our leverage, result in a change in control or
both."
While Time Warner Telecom intends to continue to leverage its relationship
with Time Warner Cable in pursuing expansion opportunities, to the extent Time
Warner Telecom seeks to expand into service areas where Time Warner Cable does
not conduct cable operations, Time Warner Telecom may incur significant
additional costs in excess of those historically incurred by Time Warner Telecom
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 Time Warner Telecom under the
Capacity License Agreements. Accordingly, if Time Warner Telecom is unable to
lease additional capacity at the same rates as are currently provided for under
the Capacity License Agreements, Time Warner Telecom may be required to obtain
additional capacity on more expensive terms. See "Certain Relationships and
Related Transactions--Certain Operating Agreements."
The development and expansion of Time Warner Telecom's existing and future
networks and services will require significant capital investment. Time Warner
Telecom expects that its future cash requirements will principally be:
-- for funding growth and capital expenditure;
-- the purchase of network assets; and
-- to finance the cost of the GST asset acquisition.
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In light of future cash requirements, our subsidiary Time Warner Telecom
Holdings replaced its $475 million senior secured revolving credit facility with
a $1 billion amended and restated senior secured credit facility which provides
for $525 million of senior secured term loan facilities and a $475 million
senior secured revolving credit facility. Time Warner Telecom's obligations
under the senior secured credit facility are secured by substantially all of the
assets of Time Warner Telecom's subsidiaries, including the GST assets. In
addition, Time Warner Telecom has pledged its equity interest in its
subsidiaries as collateral. Also, the senior secured credit facility contains
restrictive covenants, including conditions on the ability of Time Warner
Telecom's subsidiaries to declare dividends to Time Warner Telecom, and provides
for customary events of default, including cross default provisions. For a
further description of the senior secured facility, please see "Description of
Certain Indebtedness".
Time Warner Telecom also entered into a senior unsecured bridge loan
facility and borrowed $700 million under this facility to finance the purchase
of the GST assets and pay related fees and expenses. For further information on
the proposed bridge facility, please see "Description of Certain Indebtedness".
Financing. Net cash provided by financing activities for 1999 decreased by
$405.4 million, as compared to 1998. Net cash provided by financing activities
for 1999, reflects the net proceeds from the IPO of $270.2 million, offset by
the repayment of loans from Time Warner, Advance/Newhouse Partnership and
MediaOne of $180 million, as well as acquired debt and capital lease
obligations. Net cash provided by financing activities for 1998, reflects
proceeds from issuance of the 9 3/4% Senior Notes and loans from the Former
Parent Companies. Net cash provided by financing activities for the nine months
ended September 30, 2000 was $84,000 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 our senior secured
revolving credit facility.
During the period from July 1, 1997 through July 14, 1998, all of Time
Warner Telecom'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 Time Warner, Advance/Newhouse
Partnership and MediaOne were subordinated in right of payment to the 9 3/4%
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 Time
Warner Telecom. The $400 million principal amount in 9 3/4% Senior Notes that
Time Warner Telecom issued in July 1998 are unsecured, unsubordinated
obligations of Time Warner Telecom. Interest on the 9 3/4% Senior Notes is
payable semiannually on January 15 and July 15, beginning on January 15, 1999.
Aggregate annual interest payments on the 9 3/4% Senior Notes through 2008 are
expected to be approximately $39 million. The 9 3/4% 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 Time Warner, Advance/Newhouse Partnership and MediaOne in full, including
accrued interest. The proceeds of the IPO remaining after repayment of the
subordinated loans payable, combined with the proceeds from the 9 3/4% Senior
Notes, have been used to continue funding Time Warner Telecom's continued
growth, which includes expansion of its networks, and for general corporate
purposes.
The 9 3/4% 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 Time Warner
Telecom 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 senior secured credit facility are secured by
Time Warner Telecom's interests in all of its subsidiaries and substantially all
of the assets of Time Warner Telecom's subsidiaries, including the assets of
GST, except for certain assets with respect to which the grant of a security
interest is prohibited by governing agreements. The senior secured credit
facility requires Time Warner Telecom 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
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addition, obligations under the senior secured credit facility are subject to
various covenants that limit Time Warner Telecom's ability to:
-- borrow and incur liens on its property;
-- pay dividends or make other distributions; and
-- make capital expenditures.
As with Time Warner Telecom's existing credit facility, the senior secured
credit facility will also contain financial covenants, including a consolidated
leverage ratio, a consolidated interest coverage ratio and a consolidated debt
default, including cross default provisions. Under the cross default provisions,
Time Warner Telecom is deemed to be in default under the amended and restated
facility if Time Warner Telecom has defaulted under any of the other material
outstanding obligations, such as the 9 3/4% Senior Notes.
Time Warner Telecom expects to repay the $700 million senior unsecured
bridge loan facility with net proceeds from this offering and the concurrent
private placement of high yield notes and cash on hand. In connection with the
repayment of the unsecured bridge loan facility, we expect to record $5.8
million of deferred financing costs as a non-recurring expense in the first
quarter of 2001. In connection with the issuance of our Class A common stock,
approximately $13.1 million of unamortized deferred financing costs will be
reclassified to additional paid-in capital in the first quarter of 2001.
We believe that the net proceeds from this offering and the concurrent
private placement of high yield notes, the additional availability of funds
under our senior secured credit facility, funds generated by operations and cash
and cash equivalents will be sufficient to fund our operations and capital
expenditure requirements in accordance with our current business plans.
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on Time Warner
Telecom.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Time Warner Telecom's interest income is sensitive to changes in the
general level of interest rates. In this regard, changes in interest rates can
affect the interest earned on Time Warner Telecom's cash equivalents and
marketable securities. To mitigate the impact of fluctuations in interest rates,
Time Warner Telecom generally enters into fixed rate investing arrangements.
The following table provides information at December 31, 1999, about Time
Warner Telecom's financial instruments that are sensitive to changes in interest
rates. For investment securities, the table presents related weighted-average
interest rates expected by the maturity dates. These investment securities will
mature within one year. At December 31, 1999, the fair value of Time Warner
Telecom's fixed rate 9 3/4% Senior Notes due 2008 was $415 million, as compared
to a carrying value of $400 million on such date, based on market prices at
December 31, 1999.
<TABLE>
<CAPTION>
2000 MATURITIES
---------------
(DOLLAR AMOUNTS
IN THOUSANDS)
<S> <C>
Assets
Marketable securities:
Shares of money market mutual funds.................... $ 4,510
Average interest rate................................ 5.5%
Certificates of deposit with banks..................... $ 54,797
Average interest rate................................ 5.3%
Corporate and municipal debt securities................ $196,455
Average interest rate................................ 5.9%
</TABLE>
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BUSINESS
OVERVIEW
Time Warner Telecom is a leading fiber facilities-based integrated
communications provider offering local business "last mile" broadband
connections for data, high-speed internet access, local voice and long distance
services. Time Warner Telecom's customers are principally
telecommunications-intensive business end-users, long distance carriers,
internet service providers, wireless communications companies and governmental
entities. As of January 9, 2001, Time Warner Telecom operated networks in 24
metropolitan markets in the United States and offered switched services in all
24 service areas. On January 10, 2001, Time Warner Telecom substantially
expanded its geographic coverage by acquiring substantially all of the assets of
GST out of bankruptcy. As a result of the acquisition, Time Warner Telecom added
15 markets in the western United States. Time Warner Telecom expects to activate
networks in five additional markets by the end of 2001.
Time Warner Telecom benefits from its strategic relationship with Time
Warner Cable both through access to local right-of-way and construction
cost-sharing. As a result, Time Warner Telecom's networks have been constructed
primarily through licensing the use of fiber capacity from Time Warner Cable. As
of September 30, 2000, Time Warner Telecom's fiber optic networks spanned 9,457
route miles and contained 363,644 fiber miles and Time Warner Telecom offered
service to 7,228 on-net and off-net buildings. The recent acquisition of the
assets of GST adds to Time Warner Telecom's network 4,210 route miles, 227,674
fiber miles and service to 345 on-net buildings.
BUSINESS STRATEGY
Time Warner Telecom's primary objective is to be a leading provider to
medium- and large-sized businesses of superior telecommunications services
through advanced networks in its existing and future service areas. The key
elements of Time Warner Telecom's business strategy include the following:
Leverage Existing Fiber Optic Networks. Time Warner Telecom has designed
and built local and regional fiber networks to serve geographic locations where
management believes there are large numbers of potential customers. As of
September 30, 2000, Time Warner Telecom operated networks that spanned over
9,457 route miles and contained over 363,644 fiber miles. During 1999, Time
Warner Telecom deployed a fully managed, fiber-based nationwide infrastructure
to ensure that its long-haul internet products provide the capacity and high
quality level of service increasingly demanded by its customers. Time Warner
Telecom's highly concentrated networks are leased from other carriers and will
provide the capacity to serve a substantially larger base of customers with a
larger array of products. Management believes that Time Warner Telecom's
extensive fiber network capacity allows it to:
-- increase orders substantially from new and existing customers while
realizing higher gross margins than non-fiber facilities based
carriers;
-- emphasize its fiber facilities-based services rather than resale of
network capacity of other providers; and
-- provide better customer service because Time Warner Telecom can exert
greater control over its services than its competitors that depend on
off-net facilities.
Time Warner Telecom plans to extend its network in its present markets in
order to reach additional commercial buildings directly with its fiber
facilities. In addition, Time Warner Telecom has deployed new technologies such
as dense wave division multiplexing to provide additional bandwidth and higher
speed without the need to add additional fiber capacity.
Enter New Geographic Areas. Time Warner Telecom's strategy is to target
metropolitan areas possessing demographic, economic and telecommunications
demand profiles that it believes provide it with the potential to generate an
attractive economic return. As of January 9, 2001, Time Warner Telecom operated
networks in a total of 24 metropolitan areas. The acquisition of the GST assets
accelerated Time Warner Telecom's geographic expansion by adding to its network
15 markets in the western United States. These
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markets are a combination of small, medium and large markets, including some
served by Time Warner Cable where Time Warner Telecom may obtain fiber capacity
through its relationship with Time Warner Cable, and others outside of Time
Warner Cable's service area. Time Warner Telecom expects to activate networks in
five additional markets by the end of 2001 and continuously evaluates other
expansion opportunities.
Expand Switched Services. Time Warner Telecom provided a broad range of
switched services in all of its 22 service areas as of September 30, 2000. For
1999, revenue from switched services grew by 207% as compared to 1998. Because
of the market demand for switched services, Time Warner Telecom has rapidly
installed switches in its markets and management expects Time Warner Telecom to
derive a growing portion of its revenue from switched services. Time Warner
Telecom utilizes high-capacity digital 5ESS switches manufactured by Lucent
Technologies Inc. However, as new technologies arise that enable the switching
of voice calls over an internet protocol and local area network infrastructure,
Time Warner Telecom will evaluate how to best integrate this "softswitch"
technology into its infrastructure. Time Warner Telecom has selected Sonus
Networks as the initial supplier of this capability/technology and has begun
deployment to serve a variety of applications including primary rate interface
services and voice over internet protocol.
Expand Data Services. Data services are becoming increasingly more
important to Time Warner Telecom's target end-user and carrier customer base. In
particular, Time Warner Telecom believes that the demand for high-speed, high
quality local area network and wide area network connectivity will continue to
grow over the near term. This demand will grow in support of specific
applications such as virtual private networks, website hosting, e-commerce,
intranet and internet access. Time Warner Telecom will continue to deliver
high-speed traditional transport services, for example, DS1, DS3, OC-n, through
its fiber optic networks, but will also focus on the delivery of next generation
data networking and converged network services, which means voice and data
applications delivered over a common network infrastructure. Time Warner Telecom
anticipates that the converged network will be capable of providing applications
such as virtual private networking, hosted web and e-mail services and new
applications such as unified messaging. Time Warner Telecom believes that key to
the evolution of the converged network is delivery of management services along
with the network service so that the medium and small business customers in the
multi-tenant buildings Time Warner Telecom serves can rely on it to manage the
network 24 hours-a-day, 7 days-a-week.
Target Business Customers. Time Warner Telecom operates networks in
metropolitan areas that have high concentrations of medium- and large-sized
businesses. These businesses tend to be telecommunications-intensive and are
more likely to seek the greater reliability provided by an advanced network such
as Time Warner Telecom's. Historically, Time Warner Telecom has focused its
sales and marketing efforts on such businesses, as they are potentially high
volume users of Time Warner Telecom's services. To drive revenue growth in these
markets, Time Warner Telecom is expanding its direct sales force to focus on
such business customers while it develops managed services offerings to meet the
voice, data and internet needs of those customers. In addition, in order to
achieve further economies of scale and network utilization, Time Warner Telecom
is targeting smaller business customers in buildings Time Warner Telecom already
serves where it can offer a package of network services that may not otherwise
be available to those customers.
Interconnect Service Areas. Time Warner Telecom groups the service areas in
which Time Warner Telecom operates into geographic clusters across the United
States. Time Warner Telecom is in the process of interconnecting certain of its
existing service areas within regional clusters with owned or licensed fiber
optic facilities. The interconnection of service areas is expected to increase
Time Warner Telecom's revenue potential and increase margins by addressing
customers' regional long distance voice, data and video requirements. Time
Warner Telecom began interconnecting its service areas in 1998. The GST asset
acquisition included regional fiber networks in the western United States. Time
Warner Telecom may sell or swap the former GST regional fiber networks that are
not needed for operations for new fiber or conduit.
Utilize Strategic Relationships with Time Warner Cable. Time Warner Telecom
has benefitted from and continues to leverage its relationships with Time Warner
Cable, one of the largest multiple system cable operators in the U.S., by
licensing and sharing the cost of fiber optic facilities. This licensing
arrangement allows Time Warner Telecom to benefit from Time Warner Cable's
access to rights-of-way, easements, poles, ducts and conduits. See "Certain
Relationships and Related Transactions--Certain Operating Agreements."
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By leveraging its existing relationship with Time Warner Cable, Time Warner
Telecom believes that it can benefit from existing regulatory approvals and
licenses, derive economies of scale in network costs and extend its existing
networks in a rapid, efficient and cost-effective manner. Furthermore,
management believes that the strong awareness and positive recognition of the
"Time Warner" brand name contributes to its marketing programs and sales efforts
by distinguishing it from its competitors.
Continue Disciplined Expenditure Program. Time Warner Telecom increases
operational efficiencies by pursuing a disciplined approach to capital
expenditures. This capital expenditure program requires that prior to making
expenditures on a project, the project must be evaluated to determine whether it
meets stringent financial criteria such as minimum recurring revenue, cash flow
margins and rate of return.
The telecommunications industry has experienced, and is expected to
continue to experience, rapid and significant changes in technology. While Time
Warner Telecom believes that, for the foreseeable future, these changes will
neither materially affect the continued use of fiber optic cable or digital
switches and transmission equipment nor materially hinder Time Warner Telecom's
ability to acquire necessary technologies, the effect of technological changes
on Time Warner Telecom's business and operations cannot be predicted. Time
Warner Telecom believes that its future success will depend, in part, on its
ability to anticipate or adapt to these changes and to offer, on a timely basis,
services that meet customer demands on a competitive basis. There can be no
assurance that Time Warner Telecom will obtain access to new technologies on a
timely basis or on satisfactory terms. Any failure by Time Warner Telecom to
obtain new technologies could have a material adverse effect on Time Warner
Telecom's business, financial condition and results of operations. In addition,
Time Warner Telecom's growth plans depend in part upon Time Warner Telecom's
ability to obtain fiber capacity at rates that will allow it to generate a
reasonable rate of return. We cannot assure you that we will be successful in
obtaining such fiber capacity.
SERVICES
Time Warner Telecom currently provides its customers with a wide range of
telecommunications services, including dedicated transmission, local switched,
long distance, data and video transmission services and high-speed dedicated
internet access services. Time Warner Telecom's dedicated services, which
include private line and special access services, use high-capacity digital
circuits to carry voice, data and video transmissions from point-to-point in
multiple configurations. Switched voice services offered by Time Warner Telecom
use high-capacity digital switches to route voice transmissions anywhere on the
public switched telephone network. In offering its dedicated transmission and
switched services, Time Warner Telecom also provides private network management
and systems integration services for businesses that require combinations of
various dedicated and switched telecommunications services. Data services
provided by Time Warner Telecom allow customers to create their own internal
computer networks and access external computer networks and the internet. Time
Warner Telecom can provide its customers, including companies in the media
industry, with advanced video transport services such as point-to-point,
broadcast-quality video to major television networks as well as to advertising
agencies and other customers. Internet services provided by Time Warner Telecom
include dedicated internet access, website hosting, transport and e-commerce
services for business customers and local internet service providers.
DEDICATED TRANSPORT SERVICES
Time Warner Telecom currently provides a complete range of dedicated
transport services with transmission speeds from 64 kilobits per second to 2.488
gigabits per second to its long distance carrier and end-user customers. All
products and services can be used for voice, data, image and video transmission.
Time Warner Telecom offers the following dedicated transport links:
-- POP-to-POP Special Access. Telecommunications lines linking the
points of presence, or POPs, of one long distance carrier or the
points of presence of different long distance carriers in a market,
allowing the points of presence to exchange transmissions for
transport to their final destinations.
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-- End-user/Long Distance Carrier Special Access. Telecommunications
lines between an end-user, such as a large business, and the local
points of presence of its selected long distance carrier.
-- Private Line. Telecommunications lines connecting various locations
of a customer's operations, suitable for transmitting voice and data
traffic internally.
-- Transport Arrangement Service. Provides dedicated transport between
local exchange carrier central offices and customer designated points
of presence of a long distance carrier for transport of local
exchange carrier-provided switched access or local exchange
carrier-provided special access. This point-to-point service is
available at DS1 or DS3 interfaces at both ends. DS1 and DS3
interfaces are standard North American telecommunications industry
digital signal formats that are distinguishable by the number of
binary digits transmitted per second, or bit rate. DS1 has a bit rate
of 1.544 megabits per second and DS3 has a bit rate of 44.736
megabits per second.
Time Warner Telecom provides the following services that use high-capacity
digital circuits to carry voice, data and video transmissions from point to
point in flexible configurations involving different standardized transmission
speeds and circuit capacities:
-- broadcast video TV-1, which is the dedicated transport of broadcast
quality video signals;
-- STS-1, which is the full duplex, synchronous optical transmission of
digital data on synchronous optical network, or SONET, standards, and
eliminates the need to maintain and pay for multiple dedicated lines;
and
-- private network transport service, which is a private, dedicated
premium quality service over fully redundant, diverse routed, SONET
rings with bandwidth that is dedicated and always available.
The transmission speeds and circuit capacities used for these services
include DSO, DS1, DS3 and SONET OC-n. DSO is a standard North American
telecommunications industry digital signal format that has a bit rate of 64
kilobits per second.
SWITCHED SERVICES
Time Warner Telecom's switched services provide business customers with
local calling capabilities and connections to their long distance carriers. Time
Warner Telecom owns, houses, manages and maintains the switches used to provide
the services. Time Warner Telecom's switched services include the following:
-- Business Access Line Service. This service provides voice and data
customers quality analog voice grade telephone lines for use at any
time. Business access line service provides customers with
flexibility in network configurations because lines can be added,
deleted and moved as needed.
-- Access Trunks. Access trunks provide communication lines between two
switching systems. These trunks are utilized by private branch
exchange customers, which are customers that own and operate a switch
on their own premises. Private branch exchange customers use these
trunks to provide access to the local, regional and long distance
telephone networks. Private branch exchange customers may use either
Time Warner Telecom's telephone numbers or their incumbent local
exchange carrier-assigned telephone numbers. Customer access to Time
Warner Telecom's local exchange services is accomplished by a DS1
digital connection or DS0 analog trunks between the customer's
private branch exchange port and Time Warner Telecom's switching
centers.
-- Local Toll Service. This service provides customers with a
competitive alternative to incumbent local exchange carrier service
for intraLATA toll calls. It is a customized, high-quality local
calling plan available to business access line and access trunk
customers. Time Warner Telecom works with customers to devise
cost-saving programs based on actual usage and calling patterns.
-- Local Telephone Service. Local telephone service is basic local
exchange service which can be tailored to a customer's particular
calling requirements. Local telephone service includes operator and
directory assistance services, as well as an optional intraLATA toll
plan.
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-- Long Distance Service. Long distance service provides the
capabilities for a customer to place a voice call from one local
calling area to another, including international calling.
-- Switched Access Service. The connection between a long distance
carrier's POP and an end-user's premises that is provided through the
switching facilities of a local exchange carrier are referred to as
switched access services. These services provide long distance
carriers with a switched connection to their customers for the
origination and termination of long distance telephone calls.
-- Other Services. Other services offered by Time Warner Telecom include
telephone numbers, listings, customized calling features, voice
messaging, hunting, blocking services and two-way, simultaneous voice
and data transmission in digital formats over the same transmission
line, which is an international standard referred to as integrated
services digital network or ISDN.
DATA TRANSMISSION SERVICES
Time Warner Telecom offers its customers a broad array of data transmission
services that enable customers to create their own internal computer networks
and access external computer networks and the internet. In 1996, Time Warner
Telecom introduced its native speed local area network inter-networking data
service that is used to connect workstations and personal computer users on one
or more local area networks. Native speed services avoid the bottleneck problems
that are frequently encountered with customary DS1 connections by providing the
customer with a circuit that matches the transmission speeds of its local area
network. Time Warner Telecom's local area network service provides dedicated
circuits, guaranteed transmission capacity and guaranteed bandwidth for
virtually all local area network applications. Users can share files and
databases as if they are all working on the same computer, or within the same
local area network.
As companies and communications become more sophisticated, there is an
increased need for customer access to superior traffic management of sensitive
data, video and voice transmission within a single metropolitan area, or between
various company operations. Time Warner Telecom's switched data services offer
sophisticated switching technology and provide high standards in reliability and
flexibility while enabling users to reduce the costs associated with
interconnecting architecturally diverse information systems. Time Warner
Telecom's data service offerings support evolving high-speed applications, such
as multimedia, desktop video conferencing and medical imaging. Time Warner
Telecom offers native speed connections to end-users as well as interexchange
data carriers. Time Warner Telecom's services allow users to interconnect both
high-speed and low-speed local area network environments and to benefit from
flexible billing, as well as detailed usage reports.
In 2000, Time Warner Telecom extended its current base of native local area
network services operating at 10 and 100 megabits per second to include gigabit
ethernet that operates at 1000 megabits per second, or 1 gigabit per second.
This extended bandwidth capacity will allow customers to connect at very
high-speeds to the internet, to the application service provider of choice or to
other customer locations.
VIDEO TRANSMISSION SERVICES
Time Warner Telecom provides broadcast quality digital and analog video
link services to its video services customers, including media industry
customers, such as television networks, and advertising agencies. Time Warner
Telecom's video services include offering broadcast quality, digital channel
transmissions that can be provided on a point-to-point or point-to-multipoint
basis.
INTERNET SERVICES
During 1999, Time Warner Telecom deployed a fiber-based internet protocol
backbone connecting Time Warner Telecom's hub cities, including 21 asynchronous
transfer mode data switches through which it provides dedicated internet
connectivity at speeds of up to DS3. This deployment was accomplished in part
through the acquisition of Inc.Net, a regional internet service provider that
became a wholly owned subsidiary of Time Warner Telecom in April 1999. Through
this operating subsidiary, Time Warner Telecom will manage its data network and
new internet products. Although data and internet revenue represented only 4%
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of total 1999 revenue, Time Warner Telecom expects an increasing portion of its
future total revenue to be contributed by these services. Time Warner Telecom is
upgrading its internet backbone to include OC-3e and greater capacity.
LONG DISTANCE SERVICES
Time Warner Telecom began to offer basic long distance services in 1998,
including toll free, calling card and international calling. Time Warner Telecom
offers these services primarily to enhance its ability to offer a complete
package of services to customers, rather than as core services. The target
customers are medium-and small-size business customers. Generally, large
businesses tend to obtain their long distance needs directly from the major long
distance carriers. Time Warner Telecom offers long distance services in a
bundled product because it believes medium- and small-size businesses may prefer
to obtain their long distance services from competitive local exchange carriers
rather than the major long distance carriers.
TELECOMMUNICATIONS NETWORKS AND FACILITIES
Overview. Time Warner Telecom uses advanced technologies and network
architectures to develop a highly reliable infrastructure for delivering
high-speed, quality digital transmissions of voice, data and video
telecommunications. Time Warner Telecom's basic transmission platform consists
primarily of optical fiber equipped with high-capacity SONET equipment deployed
in fully redundant, self-healing rings. These SONET rings give Time Warner
Telecom the capability of routing customer traffic in both directions around the
ring, thereby eliminating loss of service in the event of a cable cut. Time
Warner Telecom's networks are designed for remote automated provisioning, which
allows it to meet customers' real time service needs. Time Warner Telecom
extends SONET rings or point-to-point links from rings to each customer's
premises over its own fiber optic cable and unbundled facilities obtained from
incumbent local exchange carriers. Time Warner Telecom also installs diverse
building entry points where a customer's security needs require such redundancy.
Time Warner Telecom then places necessary customer-dedicated or shared
electronic equipment at a location near or in the customer's premises to
terminate the link.
Time Warner Telecom serves its customers from one or more central offices
or hubs strategically positioned throughout its networks. The central offices
house the transmission and switching equipment needed to interconnect customers
with each other, the long distance carriers and other local exchange networks.
Redundant electronics, with automatic switching to the backup equipment in the
event of failure, protects against signal deterioration or outages. Time Warner
Telecom continuously monitors system components from its network operations
center and proactively focuses on avoiding problems rather than merely reacting
to trouble.
Time Warner Telecom adds switched, dedicated and data services to its basic
fiber optic transmission platform by installing sophisticated digital
electronics at its central offices and nodes and at customer locations. Time
Warner Telecom's advanced 5ESS digital telephone switches from Lucent are
connected to multiple incumbent local exchange carrier and long distance carrier
switches to provide Time Warner Telecom's customers access to telephones in the
local market as well as the public switched telephone network. Similarly, in
certain markets, Time Warner Telecom provides asynchronous transfer mode
switched and local area network multiplexers at its customers' premises and in
its central offices to provide high-speed local area network interconnection
services.
Time Warner Telecom's strategy for adding customers is designed to maximize
the speed and impact of its marketing efforts while maintaining attractive rates
of return on capital invested to connect customers directly to its networks. To
initially serve a new customer, Time Warner Telecom may use various transitional
links, such as reselling a portion of an incumbent local exchange carrier's
network. Once the new customer's communications volume and product needs are
identified, Time Warner Telecom may build its own fiber optic connection between
the customer's premises and Time Warner Telecom's network to accommodate: (i)
the customer's needs; and (ii) Time Warner Telecom's efforts to maximize return
on network investment.
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Telecommunications Networks. The following chart sets forth information
regarding each of Time Warner Telecom's telecommunications networks as of
September 30, 2000:
<TABLE>
<CAPTION>
SWITCHED
NETWORK SERVICES TOTAL MSA
COMMERCIALLY COMMERCIALLY SWITCH & DED.
METROPOLITAN SERVICE AREA AVAILABLE AVAILABLE(1) REV. (000'S)(3)
------------------------- ------------ ------------ ---------------
<S> <C> <C> <C>
Albany, New York(4)...................................... Jul 95 Sep 99 267,380
Austin, Texas(4)......................................... Sep 94 Apr 97 335,979
Binghamton, New York(4).................................. Jan 95 Aug 00 72,726
Charlotte, North Carolina(4)............................. Sep 94 Dec 97 464,254
Cincinnati, Ohio(4)...................................... Jul 95 Nov 97 355,080
Columbus, Ohio(4)........................................ Mar 91 Jul 97 305,953
Dallas, Texas............................................ Sep 99 Sep 99 941,038
Fayetteville, North Carolina(4).......................... Apr 00 Apr 00 42,249
Greensboro, North Carolina(4)............................ Jan 96 Sep 99 295,136
Honolulu, Hawaii(4)...................................... Jun 94 Jan 98 193,977
Houston, Texas(4)........................................ Jan 96 Sep 97 1,062,643
Indianapolis, Indiana(4)................................. Sep 87 Dec 97 311,261
Jersey City, New Jersey.................................. Jul 99 Jul 99 140,162
Manhattan, New York(4)................................... Feb 96 Feb 98 2,396,091
Memphis, Tennessee(4).................................... May 95 May 97 222,876
Milwaukee, Wisconsin(4).................................. Feb 96 Sep 97 330,056
Orlando, Florida(4)...................................... Jul 95 Jul 97 741,266
Raleigh, North Carolina(4)............................... Oct 94 Sep 97 263,492
Rochester, New York(4)................................... Dec 94 Feb 95 315,849
San Antonio, Texas(4).................................... May 93 Nov 97 354,157
San Diego, California(4)................................. Jun 95 Jul 97 556,694
Tampa, Florida(4)........................................ Dec 97 Jan 98 863,010
----------
SUBTOTAL................................................. 10,831,329
UNDER CONSTRUCTION (AS OF SEPTEMBER 30, 2000)
Dayton, Ohio(4).......................................... Nov 00 Nov 00 173,666
Orange County, California................................ Jan 01 Jan 01 654,629
Chicago, Illinois........................................ TBD TBD 1,905,181
Columbia, South Carolina................................. TBD TBD 89,167
Atlanta, Georgia......................................... TBD TBD 1,003,189
Minneapolis, Minnesota................................... TBD TBD 510,442
Denver, Colorado......................................... TBD TBD 516,168
SUBTOTAL................................................. 4,852,442
----------
TIME WARNER TELECOM TOTAL.................................. 15,683,771
GST CITIES
Albuquerque, New Mexico.................................. Jan 96 Sep 97 123,479
Bakersfield, California.................................. Nov 96 Mar 98 108,855
Boise, Idaho............................................. May 97 Mar 98 77,567
Fresno, California....................................... Nov 98 Mar 98 162,719
Houston, Texas........................................... Mar 98 Mar 98 1,062,643
Los Angeles, California(2)............................... Dec 96 Jul 97 3,121,749
Oakland, California(5)................................... Sep 97 Nov 97 588,183
Phoenix, Arizona......................................... Feb 94 Aug 97 581,185
Portland, Oregon......................................... Mar 98 Mar 98 392,329
Sacramento, California................................... Jul 99 -- 307,330
San Francisco, California................................ Sep 97 Mar 98 489,894
San Luis Obispo, California.............................. Mar 98 Dec 97 48,530
Santa Barbara, California................................ Jun 98 June 98 82,682
Seattle, Washington(6)................................... Dec 99 Jan 99 573,533
Spokane, Washington...................................... Sep 96 Dec 97 102,589
</TABLE>
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<TABLE>
<CAPTION>
SWITCHED
NETWORK SERVICES TOTAL MSA
COMMERCIALLY COMMERCIALLY SWITCH & DED.
METROPOLITAN SERVICE AREA AVAILABLE AVAILABLE(1) REV. (000'S)(3)
------------------------- ------------ ------------ ---------------
<S> <C> <C> <C>
Tucson, Arizona.......................................... Sep 95 Sep 97 146,121
----------
--------- ----------
----------
GST TOTAL.................................................. 7,969,388
----------
TOTAL TIME WARNER TELECOM AND GST(7)....................... 21,935,887
==========
</TABLE>
------------
(1) Date of "Switched Services Commercially Available" is the first date on
which switched services were provided to a customer of Time Warner Telecom,
or GST, as the case may be.
(2) Includes Los Angeles, Riverside and Ventura.
(3) Metropolitan statistical area business lines data are modeled from
Statistics of Communications Common Carrier 1999 Business Data.
(4) Metropolitan statistical areas in which Time Warner Telecom obtains or
expects to obtain fiber capacity through licensing agreements with Time
Warner Cable. See "Certain Relationships and Related Transactions--Certain
Operating Agreements."
(5) Includes Oakland and Stockton MSAs.
(6) Does not include 75 miles of conduit in Seattle.
(7) Total adjusted to include Houston and Orange County only once to reflect
true MSA total after both companies are combined.
Information Systems Infrastructure. Time Warner Telecom uses advanced
technology in its information systems infrastructure. Time Warner Telecom also
uses a centrally deployed series of client server platforms and relational
database servers to provide cost effective computing support. These services and
products enable employees to support customers directly, manage the telephony
infrastructure and report and manage trouble resolution. The computing
infrastructure strategy enables Time Warner Telecom to mix and match platforms
to create the best compliment of computing engines to meet its specific business
needs. This includes telephony ordering, provisioning, inventory, engineering,
installation, billing, decision support and customer care business functions.
The strategy of buying "off the shelf" products and integrating them into Time
Warner Telecom's existing information systems infrastructure versus utilizing
several stand-alone applications supports a more responsive and flexible
environment that better suits the needs of a nimble market competitor. Time
Warner Telecom's information systems provide real time support of network
operations and deliver data at the network, regional and corporate level, and
can sort by customer and vendor. The systems selected or built utilize open
system standards and architectures, thus allowing interoperability with third
parties' systems. Time Warner Telecom's Information Systems Development teams
have developed competencies in application integration using the latest in
Enterprise Application products and strategies. Time Warner Telecom has
implemented an enterprise resource system, which provides improved real-time
management information for Time Warner Telecom's financial, procurement and
human resource functions. Time Warner Telecom's Business Systems Analysis teams
have supported the identification and implementation of new revenue assurance
platforms and billing platform enhancements which improve revenue stream
accuracy.
Network Monitoring and Management. Time Warner Telecom provides a single
point of contact for all of its customers and consolidates all of its systems
support, expertise and technical training at its network operations center in
Greenwood Village, Colorado. With approximately 850 technicians and customer
service representatives dedicated to providing superior customer service, Time
Warner Telecom is able to quickly correct, and often anticipate, problems that
may arise in its networks. Time Warner Telecom provides 24 hour-a-day, 7
days-a-week surveillance and monitoring of networks to achieve its network
reliability and performance targets. Network analysts monitor real-time alarm,
status and performance information for network circuits, which allows them to
react swiftly to repair network trouble. The acquisition of GST's assets
provides Time Warner Telecom with a second network operations center, in
Vancouver, Washington. In order to avoid interruption in the ongoing business
being conducted with the GST assets, Time Warner Telecom will
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operate the former GST network operations center in parallel with its Greenwood
Village network operation center to monitor the newly acquired local and
intercity networks. Time Warner Telecom expects to integrate the two network
operations centers within the next two years to three years.
Network Development and Application Laboratory. Time Warner Telecom's
network development and application laboratory is a comprehensive
telecommunications technology, applications and services development laboratory,
equipped with advanced systems and equipment, including those used by Time
Warner Telecom in the operation of its local digital networks. The center is
designed to provide a self-contained testing and integration environment, fully
compatible with Time Warner Telecom's digital networks, for the purposes of:
-- verifying the technical and operational integrity of new equipment
prior to installation in the networks;
-- developing new services and applications;
-- providing a realistic training environment for technicians, engineers
and others; and
-- providing a network simulation environment to assist in fault
isolation and recovery.
Technologies currently under evaluation in the laboratory include dense
wave division multiplexing equipment from new vendors, optical bandwidth
management, internet protocol telephony, including components used to service
next generation softswitches, media gateway technologies, Signaling System 7
gateway systems and related data applications.
Billing Systems. Time Warner Telecom contracts with outside vendors for
customer billing. Time Warner Telecom has licensed a system for switched
services billing that it operates on its own equipment and has a service bureau
arrangement with another vendor for dedicated transport service and
interconnection billing. Since GST used different billing systems than Time
Warner Telecom, Time Warner Telecom plans to continue to bill former GST
customers and new customers in former GST markets under the GST billing systems
until all billing can be converted to Time Warner Telecom's system. This
conversion is planned for 2002, after Time Warner Telecom integrates all of the
ordering systems. See "Risk Factors--We depend on third party vendors for
information systems."
CUSTOMERS AND SALES AND MARKETING
Time Warner Telecom's customers are principally
telecommunications-intensive medium- and large-sized businesses, long distance
carriers, internet service providers, wireless communications companies, other
local providers and various governmental entities. Historically, Time Warner
Telecom's customers were primarily long distance carriers. While Time Warner
Telecom's long distance carrier business has grown by approximately 98% in 1999
over 1998, it has declined as a proportion of total revenue from approximately
26% of Time Warner Telecom's total 1998 revenue to approximately 24% of Time
Warner Telecom's total 1999 revenue. Of this long distance carrier revenue,
approximately 72% is directed by the end-user customer rather than the long
distance carrier since an end user may switch long distance carriers while
retaining Time Warner Telecom as its local exchange carrier.
Time Warner Telecom has substantial business relationships with a few large
customers. For the nine months ended September 30, 2000, Time Warner Telecom's
top ten customers accounted for approximately 46% of its total revenue. Time
Warner Telecom's largest customer for the nine months ended September 30, 2000,
MCI Worldcom, Inc. and its affiliates, accounted for more than 10% of Time
Warner Telecom's total revenue. However, a portion of that revenue results from
traffic that is directed to Time Warner Telecom by customers that have selected
that long distance carrier. No other customer, including customers who direct
their business through long distance carriers, accounted for 10% or more of
revenue.
Time Warner Telecom recently entered into an agreement with AT&T that
specifies the terms under which AT&T will purchase certain switched and
dedicated services in selected metropolitan statistical areas of Time Warner
Telecom. The agreement, but not the individual services purchased under the
agreement, has a five year term ending on December 31, 2005, with a one year
rollover term that AT&T may elect at its option.
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The agreement may be terminated in whole or in part under specified
circumstances of default prior to that time. Certain affiliates of AT&T are also
eligible to purchase services under the agreement. The agreement settles the
dispute process triggered by Time Warner Telecom in December 1999 under its past
agreement with AT&T. The dispute involved the appropriate billing rates for
switched access services.
Time Warner Telecom provides incentives to its sales force to negotiate
service contracts that have a minimum term of one year, and provides enhanced
commissions to its sales force for executing agreements with terms of three
years or greater. Currently, more than half of service agreements have a
duration of greater than three years.
Time Warner Telecom's marketing emphasizes its:
-- reliable, facilities-based networks;
-- flexibly priced, bundled products and services;
-- responsive customer service orientation; and
-- integrated operations, customer support and network monitoring and
management systems.
Time Warner Telecom's centrally managed customer support operations are
designed to facilitate the processing of orders for changes and upgrades in
customer services. To reduce the inherent risk in bringing new and untested
telecommunications products and services to a dynamically changing market, Time
Warner Telecom introduces its products and services once market demand develops
and offers them in diversified, competitively-priced bundles, thereby increasing
usage among its existing customers and attracting new customers. The services
offered by Time Warner Telecom are typically priced at a discount to the prices
of the incumbent local exchange carriers.
With a direct sales force in each of its service areas along with regional
and national sales support, Time Warner Telecom targets medium- and large-sized
telecommunications-intensive businesses in the areas served by its networks.
Compensation for Time Warner Telecom's sales representatives is based primarily
on commissions that are tied to sales generated. Time Warner Telecom's customers
include financial services firms, health care, media, telecommunications
services and high tech companies and various governmental institutions. In
addition, Time Warner Telecom markets its services through sales agents,
landlords, advertisements, trade journals, media relations, direct mail and
participation in trade conferences.
Time Warner Telecom also targets long distance carriers, internet service
providers, large, strategic business accounts and wireless telephone companies
through its national sales organization. Time Warner Telecom has master services
agreements, which generally set forth technical standards, ordering processes,
pricing methodologies and service grade requirements, but do not guarantee any
specified level of business, with a significant number of the long distance
carriers, including AT&T, MCI-WorldCom, Sprint Corporation, and Qwest
Communications. By providing long distance carriers with a local connection to
their customers, Time Warner Telecom enables them to avoid complete dependence
on the incumbent local exchange carriers for access to customers and to obtain a
high quality and reliable local connection. Time Warner Telecom provides a
variety of transport services and arrangements that allow long distance carriers
to connect their own switches in both local areas, or intra-city, and in wide
areas, or inter-city. Additionally, long distance carriers may purchase Time
Warner Telecom's transport services that allow them to connect their switch to
an incumbent local exchange carrier switch and to end-user locations directly.
Time Warner Telecom's advanced networks allow it to offer high volume business
customers and long distance carriers uniformity of services, pricing, quality
standards and customer service.
CUSTOMER SERVICE
With approximately 850 expert technicians and customer service
representatives at September 30, 2000, Time Warner Telecom provides its
customers with continuous support and superior service. To serve its customers,
account representatives are assigned to Time Warner Telecom's customers to act
as effective liaisons with Time Warner Telecom. Technicians and other support
personnel are available in each of Time
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Warner Telecom's service areas to react to any network failures or problems. In
addition, the network operations center provides 24 hour-a-day, 7 days-a-week
surveillance and monitoring of networks to maintain Time Warner Telecom's
network reliability and performance. See "--Telecommunications Networks and
Facilities--Network Monitoring and Management."
COMPETITION
Time Warner Telecom believes that the principal competitive factors
affecting its business are, and will continue to be:
-- pricing;
-- the availability of proven support systems for Time Warner Telecom's
back office systems, including provisioning and billing;
-- competition for skilled, experienced personnel; and
-- regulatory decisions and policies that promote competition.
Time Warner Telecom believes that it competes favorably with other
companies in the industry or is impacted favorably with respect to each of these
factors. The technologies and systems which provide back office support for the
competitive local exchange carrier industry are nascent and may not keep pace
with the growth of order volume, integration with other systems, and production
of required information for systems managers. The best personnel in all areas of
Time Warner Telecom's operations are in demand by the numerous participants in
the highly specialized competitive local exchange carrier industry. While Time
Warner Telecom's employee base is generally stable, it is anticipated that
others in the industry will continue to demand high quality personnel and will
thus drive pressure to maintain extremely competitive compensation and benefits
packages in addition to an attractive work environment. Regulatory environments
at both the state and Federal level differ widely and have considerable
influence on Time Warner Telecom's market and economic opportunities and
resulting investment decisions. Time Warner Telecom believes it must continue
monitoring regulatory developments and remain active in its participation in
regulatory issues.
Services substantially similar to those offered by Time Warner Telecom are
also offered by the incumbent local exchange carriers, which include Verizon
Corporation, BellSouth Corporation, Qwest Communications and SBC Communications,
Inc. Time Warner Telecom believes that many incumbent local exchange carriers
may have competitive advantages over Time Warner Telecom. Incumbent local
exchange carriers generally benefit from their long-standing relationships with
customers and greater technical and financial resources. The incumbent local
exchange carriers have the potential to subsidize services of the type offered
by Time Warner Telecom from service revenue in unrelated businesses. While
regulatory initiatives that allow competitive local exchange carriers such as
Time Warner Telecom to interconnect with incumbent local exchange carrier
facilities and provide increased business opportunities for Time Warner Telecom,
such interconnection opportunities have been accompanied by increased pricing
flexibility for and relaxation of regulatory oversight of the incumbent local
exchange carriers. In addition, in most of the metropolitan areas in which Time
Warner Telecom currently operates, at least one, and sometimes many, other
competitive access providers or competitive local exchange carriers offer
substantially similar services at substantially similar prices to those of Time
Warner Telecom.
Many communications services can be provided without incurring an
incremental charge for an additional unit of service. For example, there is
virtually no marginal cost for a carrier to transmit a call over its own
network. As a result, once there are several facilities-based carriers providing
a service in a given market, price competition is likely and can be severe. As a
result, Time Warner Telecom has experienced price competition, which is expected
to continue. In each of its service areas, additional competitors could build
facilities. If additional competitors build facilities in Time Warner Telecom's
service areas, this price competition may increases significantly.
Time Warner Telecom also faces competition from new entrants in the local
services business who may also be better established and have greater financial
resources. Other competitive local exchange carriers,
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competitive access providers, cable television companies, electric utilities,
long distance carriers, microwave carriers, wireless telephone system operators
and private networks built by large end-users currently do, and may in the
future, offer services similar to those offered by Time Warner Telecom.
Time Warner Telecom believes that the Telecommunications Act of 1996 will
provide increased business opportunities by opening all local markets to
competition. The Telecommunications Act of 1996:
-- requires all local exchange providers to offer their services for
resale;
-- requires incumbent local exchange carriers to provide increased
direct interconnection;
-- requires incumbent local exchange carriers to offer network elements
on an unbundled basis; and
-- requires incumbent local exchange carriers to offer the services they
provide to end-users to other carriers at wholesale rates.
However, under the Telecommunications Act of 1996, the FCC and some state
regulatory authorities may provide incumbent local exchange carriers with
increased flexibility to reprice their services as competition develops and as
incumbent local exchange carriers allow competitors to interconnect to their
networks. In addition, some new entrants in the local market may price certain
services to particular customers or for particular routes below the prices
charged by Time Warner Telecom for services to those customers or for those
routes, just as Time Warner Telecom may itself underprice those new entrants for
other services, customers or routes. If the incumbent local exchange carriers
and other competitors lower their rates and can sustain significantly lower
prices over time, this may adversely affect revenue of Time Warner Telecom if it
is required by market pressure to price at or below the incumbent local exchange
carriers' prices. If regulatory decisions permit the incumbent local exchange
carriers to charge competitive access providers and competitive local exchange
carriers substantial fees for interconnection to the incumbent local exchange
carriers' networks or afford incumbent local exchange carriers other regulatory
relief, such decisions could also have a material adverse effect on Time Warner
Telecom.
However, Time Warner Telecom believes that the negative effects of the
Telecommunications Act of 1996 may be more than offset by:
-- the increased revenue available as a result of being able to address
the entire local exchange market;
-- reciprocal compensation with the incumbent local exchange carrier;
-- obtaining access to off-network customers through more reasonably
priced expanded interconnection with incumbent local exchange carrier
networks; and
-- a shift by long distance carriers to purchase access services from
competitive access providers and competitive local exchange carriers
instead of incumbent local exchange carriers.
Time Warner Telecom cannot assure you, however, that these anticipated
results will offset completely the effects of increased competition as a result
of the Telecommunications Act of 1996.
The current trend of business combinations and alliances in the
telecommunications industry, including mergers between subsidiaries of Bell
operating companies, between Bell operating companies and other incumbent local
exchange carriers or competitive local exchange carriers, and between major long
distance carriers and competitive local exchange carriers, may create
significant new competitors for Time Warner Telecom and may result in
competitors favoring the use of their subsidiaries and division for services
provided by Time Warner Telecom. For example, Bell Atlantic has acquired the
local exchange carriers owned by NYNEX, and SBC, corporate parent of
Southwestern Bell Telephone Company, has acquired Southern New England Telephone
and Pacific Telesis. In addition, SBC and Ameritech have merged, as have Bell
Atlantic and GTE Corporation, with the combined company renamed Verizon, Qwest
Communications has completed its acquisition of U S WEST, now renamed Qwest. In
July 1998, AT&T acquired TCG, a competitor of Time Warner Telecom, and in March
1999, AT&T acquired Tele-Communications, Inc., a major cable operator. In
addition, several other competitive local exchange carrier consolidations have
been announced, including
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Worldcom's acquisition of Intermedia Communications and McLeod USA's acquisition
of CapRock Communications.
In addition, the Telecommunications Act of 1996 allows the regional Bell
operating companies and others such as electric utilities to enter the long
distance market. Certain of the regional Bell operating companies have begun
providing out-of-region long distance services across local access and transport
areas, or interLATA. When a regional Bell operating company obtains authority to
provide in-region interLATA services, it will be able to offer customers both
local and long distance telephone services. Given the market power the regional
Bell operating companies currently possess in the local exchange market, the
ability to provide both local and long distance services is expected to make the
regional Bell operating companies very strong competitors. Certain regional Bell
operating companies are actively working to satisfy prerequisites for entry into
the in-region long distance business. To date, only two Bell Operating
Companies--Bell Atlantic (now Verizon) in New York, and SBC in Texas--have been
granted authority under Section 271 to provide in-region InterLATA service.
However, Verizon has applied to the FCC for Section 271 Authority to provide
interLATA service in Massachusetts, and it is expected that additional
applications for Section 271 authority will be submitted to the FCC in the
future. SBC has requested Section 271 Authority for Kansas and Oklahoma.
The WTO agreement on basic telecommunications services which became
effective in 1998 could increase Time Warner Telecom's competition for
telecommunications services both domestically and internationally. Under this
agreement, the United States and other members of the WTO committed themselves
to opening their telecommunications markets to competition and foreign ownership
and to adopting regulatory measures to protect competitors against
anticompetitive behavior by dominant telephone companies. As part of the U.S.
government's implementation of the WTO agreement, the FCC has established new
rules making it easier for foreign carriers to enter the U.S. telecommunications
market.
Additional competition will arise from internet service providers as they
begin to deliver advanced communications services (e.g., internet protocol
telephony) over their networks. Some of these internet service providers benefit
from the very large scale of their backbones because of their or their
affiliates' other businesses (e.g., Sprint owns its own backbone and benefits
through its long haul assets). At this time, it has not yet been determined
whether to subject internet protocol telephony to the same regulatory
requirements as are applicable to traditional telecommunications services,
including, for example, the obligation to support universal service and the
requirement to pay access charges to local exchange carriers.
To the extent Time Warner Telecom interconnects with and uses incumbent
local exchange carrier networks to service its customers, Time Warner Telecom
will be dependent upon the technology and capabilities of the incumbent local
exchange carriers to meet certain telecommunications needs of Time Warner
Telecom's customers and to maintain its service standards. Time Warner Telecom
will become increasingly dependent on interconnection with incumbent local
exchange carriers as switched services become a greater percentage of Time
Warner Telecom's business. The Telecommunications Act of 1996 imposes
interconnection obligations on incumbent local exchange carriers; however, such
interconnection requires the negotiation of interconnection and collocation
agreements with the incumbent local exchange carriers, which can take
considerable time, effort and expense and are subject to Federal and state
regulation. Time Warner Telecom cannot assure you that it will be able to obtain
the interconnection it requires at rates, and on terms and conditions, that
permit Time Warner Telecom to offer switched services at rates that are both
competitive and profitable. In the event that Time Warner Telecom experiences
difficulties in obtaining high quality, reliable and reasonably priced service
from the incumbent local exchange carriers, the attractiveness of Time Warner
Telecom's services to its customers could be impaired.
Historically, Time Warner Telecom has been able to build new networks and
expand existing networks in a timely and economical manner through strategic
arrangements such as leasing fiber optic cable from Time Warner Cable, which
already possesses rights-of-way. Time Warner Telecom intends to use its
experience and presence in the telecommunications industry to fully exploit its
available capacity, further develop and expand
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its existing telecommunications infrastructure and offer a diversified range of
products and services in competitively priced bundles.
COMPANY NAME
Time Warner Telecom's use of the "Time Warner" name is subject to a license
agreement with Time Warner. See "Risk Factors--Risks Relating to us and our
Business--We may lose the right to use the 'Time Warner' name" and "Certain
Relationships and Related Transactions--Certain Operating Agreements."
EMPLOYEES
As of September 30, 2000, Time Warner Telecom employed approximately 1,697
employees. Time Warner Telecom believes that its relations with its employees
are good. By succession, the New York City operating entity is a party to a
collective bargaining agreement. In connection with the construction and
maintenance of its networks and the conduct of its other business operations,
Time Warner Telecom uses third party contractors, some of whose employees may be
represented by unions or collective bargaining agreements. Time Warner Telecom
believes that its success will depend in part on its ability to attract and
retain highly qualified employees and maintain good working relations with its
current employees.
PROPERTIES
Time Warner Telecom leases network hub sites and other facility locations
and sales and administrative offices, many from Time Warner Cable, in each of
the cities in which it operates networks. During 1999, 1998 and 1997, rental
expense for Time Warner Telecom's facilities and offices totaled approximately
$6.6 million, $4.8 million and $4.7 million, respectively. Time Warner Telecom
owns no material real estate. Management believes that its properties, taken as
a whole, are in good operating condition and are suitable and adequate for Time
Warner Telecom's business operations. Time Warner Telecom currently leases
approximately 83,107 square feet of space in Littleton, Colorado, where its
corporate headquarters are located and approximately 130,000 square feet of
space in Greenwood Village, Colorado, where the network operations center and
other administrative functions are located.
LEGAL PROCEEDINGS
Time Warner Telecom currently has no material legal proceedings pending.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning the individuals who
serve as directors and executive officers of Time Warner Telecom.
<TABLE>
<CAPTION>
NAME AND AGE DIRECTOR SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
------------ -------------- ------------------------------------------
<S> <C> <C>
Larissa L. Herda (42).................. July 1998 President and Chief Executive Officer of
Time Warner Telecom since June 1998.
Senior Vice President--Sales of Time Warner
Telecom from March 1997 to June 1998.
1989-1997 employed by MFS Telecom, Inc., a
competitive local exchange carrier, most
recently as Southeast Regional Vice
president and General Manager.
David J. Rayner (43)................... N/A Senior Vice President and Chief Financial
Officer of Time Warner Telecom since June
1998.
Vice President, Finance of Time Warner
Telecom from February 1997 to May 1998.
Controller of Time Warner Telecom from May
1994 to February 1997.
Financial and operational management
positions at Time Warner Cable from 1982 to
1994.
Paul B. Jones (54)..................... N/A Senior Vice President, General Counsel and
Regulatory Policy of Time Warner Telecom
since August 1998.
Senior Vice President, Legal and Regulatory
Policy of Time Warner Telecom from October
1993 to August 1998.
Senior Vice President, Corporate
Development of Time Warner Cable Ventures
from 1992-1993.
Senior Vice President and General Counsel
of Warner Cable from 1987 to 1992.
Vice President, Strategy and Development of
CBS Publishing Group from 1985 to 1986.
Assistant General Counsel for the FCC from
1977 to 1979.
Pat Gorman (46)........................ N/A Executive Vice President, Corporate
Operations since August 2000.
Director, Frame Relay, ATM and Dial
Services of AT&T from 1995 to 1999.
Vice President, Ordering and Project
Management of AT&T from 1999 to August
2000.
</TABLE>
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<TABLE>
<CAPTION>
NAME AND AGE DIRECTOR SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
------------ -------------- ------------------------------------------
<S> <C> <C>
John T. Blount (42).................... N/A Executive Vice President, Field Operations
since October 2000.
Senior Vice President--Sales of Time Warner
Telecom from June 1998 to October 2000.
Regional Vice President for the Midwest and
Southwest Regions of Time Warner Telecom
from January 1997 to June 1998.
Vice President and General
Manager/Milwaukee of Time Warner Telecom
from January 1996 to January 1997.
General Manager/Milwaukee of Time Warner
Telecom from February 1995 to January 1996.
Employed by U S WEST Enterprise from 1988
to February 1995.
Michael Rouleau (42)................... N/A Senior Vice President, Marketing and
Business Development of Time Warner Telecom
since November 1999.
Vice President, Marketing and Product
Development of Transport Service of U S
WEST, Inc. from July 1997 to November 1999.
Executive Director, Marking and Product
Development of U S WEST, Inc. from April
1995 to June 1997.
A. Graham Powers (54).................. N/A Senior Vice President, Chief Information
Officer of Time Warner Telecom since April
1998.
Senior Vice President, Engineering and
Technology of Time Warner Telecom from June
1996 to March 1998.
Senior Vice President, Operations
Development and Business Implementation of
Time Warner Telecom from August 1993 to May
1996.
President of Telecommunications Strategy
Inc., a technology consulting service, from
May 1992 to July 1993.
Raymond H. Whinery (46)................ N/A Senior Vice President, Engineering,
Technology and Operations of Time Warner
Telecom since April 1999.
Senior Vice President, Technical Operations
of Time Warner Telecom from January 1997 to
April 1999.
Senior Director of Engineering and Planning
of Time Warner Telecom from May 1994 to
January 1997.
Employed by U S WEST, Inc. from 1978 to May
1994.
</TABLE>
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<TABLE>
<CAPTION>
NAME AND AGE DIRECTOR SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
------------ -------------- ------------------------------------------
<S> <C> <C>
Julie A. Rich (47)..................... N/A Senior Vice President, Human Resources and
Business Administration of Time Warner
Telecom since April 1999.
Vice President, Human Resources and
Business Administration of Time Warner
Telecom from March 1998 to April 1999.
Owner of an independent human resources
consulting practice from June 1996 to
February 1998.
Founder of XEL Communications, Inc., a
telecommunications manufacturer, holding
positions of Director and Vice President of
Human Resources from 1984 to 1996.
Mark A. Peters (40).................... N/A Vice President, Treasurer of Time Warner
Telecom since July 1998.
Participant in entrepreneurial start-up
ventures from March 1996 to July 1998.
Executive officer with Nextel
Communications, Inc. and predecessor
OneComm from January 1990 to February 1996,
most recently as Vice President of Finance
and Treasurer.
Glenn A. Britt (51).................... July 1998 Vice President of Time Warner Telecom and
non-executive Chairman of the Board of
Directors since July 1998.
President of Time Warner Cable since
January 1999.
Chief Executive Officer and President of
Time Warner Cable Ventures, a division of
Time Warner Cable, for more than the past
five years.
Bruce Claflin (48)..................... August 1999 President and Chief Operating Officer for
3Com Corporation since August 1998.
Senior Vice President and General Manager,
Sales and Marketing at Digital Equipment
Corporation from July 1997 to June 1998.
Vice President and General
Manager--Personal Computer Business Unit at
Digital Equipment Corporation from October
1995 to June 1997.
Senior management and executive positions
at International Business Machines
Corporation from April 1973 to October
1995.
</TABLE>
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<TABLE>
<CAPTION>
NAME AND AGE DIRECTOR SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
------------ -------------- ------------------------------------------
<S> <C> <C>
Richard J. Davies (52)................. October 1998 Senior Vice President, Corporate
Development of Time Warner Cable since
January 1999.
Senior Vice President of Time Warner Cable
Ventures from June 1996 to December 1998.
Chief Financial Officer of Time Warner
Telecom from March 1993 to June 1996.
Spencer B. Hays (55)................... October 1999 Vice President and Deputy General Counsel
of Time Warner Inc. since its formation in
1990.
Prior to 1990 employed in various
capacities by Time Warner Inc.'s
predecessor, Warner Communications Inc.,
most recently as Senior Vice President and
General Counsel.
William T. Schleyer (49)............... January 2001* Director, Wink Communications, Inc. since
January 1998.
President and Chief Operating Officer,
MediaOne, from November 1996 to October
1997.
President and Chief Operating Officer,
Continental Cablevision, Inc., from
November 1994 to November 1996.
Robert J. Miron (62)................... July 1998 President of Advance/Newhouse
Communications since April 1995.
President of Newhouse Broadcasting
Corporation from October 1986 to April
1995.
</TABLE>
---------------
* To begin serving as director on January 22, 2001.
STRUCTURE OF THE BOARD
Time Warner Telecom's directors are elected annually. The board of
directors currently has six directors, two newly created directorships that have
not yet been filled and one vacancy due to the resignation of Lisa Hook upon
completion of the merger between Time Warner and America Online on January 11,
2001. On January 12, 2001, the board of directors appointed William Schleyer to
serve as an independent director beginning on January 22, 2001. The board of
directors is currently conducting a search to fill the remaining two positions.
At each annual stockholders meeting at which directors are elected, the
Class B Stockholders will vote their shares in favor of the following nominees:
-- up to eight nominees selected by the Holders of Class B common stock;
-- the Chief Executive Officer of Time Warner Telecom; and
-- three nominees selected by the Nominating Committee who are neither
employed by nor affiliated with Time Warner Telecom or any holder of
Class B common stock.
The holders of the Class A common stock do not have the right, as a class,
under Time Warner Telecom's restated certificate of incorporation to nominate
any individuals for election to the board of directors.
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COMMITTEES OF THE BOARD
Audit Committee. The Audit Committee reviews the internal accounting and
financial controls for Time Warner Telecom and the accounting principles and
auditing practices and procedures to be employed in preparation and review of
financial statements of Time Warner Telecom. It also makes recommendations to
the board of directors regarding the appointment of Time Warner Telecom's
independent public accountants and the scope of their audit. The board of
directors established the Audit Committee in August 1999 and the committee held
one meeting in 1999. The members are the independent directors, Mr. Claflin and,
as of January 22, 2001, Mr. Schleyer.
Human Resources and Benefits Committee. The Human Resources and Benefits
Committee determines the salary, bonus and other compensation for our senior
management personnel and makes recommendations with respect to grants of options
and other grants of Company equity securities to senior management personnel and
to directors of Time Warner Telecom, subject to approval of such grants by the
Compensation Committee. The Human Resources and Benefits Committee also
establishes policies with respect to compensation of employees generally and any
other matters that the board of directors may delegate to the committee. The
committee was established in August 1999 and its members are Messrs. Britt,
Miron and Claflin. Hook. The Human Resources and Benefits Committee members
communicate with each other from time to time in person and by telephone and act
on matters by way of a formal meeting or by unanimous written consent. The
committee met twice in 1999.
Compensation Committee. The Compensation Committee approves option grants
to our senior officers and directors under Time Warner Telecom's 1998 Stock
Option Plan and future option plans and addresses other matters that the board
of directors may delegate to it. The committee also makes other determinations
regarding compensation matters that any tax, stock exchange or Federal
securities law or regulation requires to be made by a committee composed
entirely of independent or non-employee directors. The members are the
independent directors as defined by the Nasdaq National Market, Mr. Claflin and,
as of January 22, 2001, Mr. Schleyer. The Compensation Committee acted twice by
unanimous written consent and met twice in 1999.
Nominating Committee. The Nominating Committee consists of Messrs. Britt,
Davies, Hays and Miron. The Nominating Committee nominates the independent
directors. The committee met twice in 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a Compensation Committee until August 1999. Our Class B
Stockholders determined the compensation of our executive officers in effect at
the time of our initial public offering in May 1999, and that compensation was
approved by the board of directors, as reflected in the initial employment
agreements. Some of the members of the board of directors at that time were
employees or officers of the Class B Stockholders or their affiliates. In
addition, our Human Resources and Benefits Committee makes recommendations with
respect to some matters involving executive compensation. Mr. Britt, an officer
of an affiliate of Time Warner, is a member of the Human Resources and Benefits
Committee. We have described certain relationships and transactions between Time
Warner Telecom and Time Warner under "Certain Relationships and Related
Transactions."
COMPENSATION OF DIRECTORS
We do not compensate directors who are our employees or employees of any
Class B Stockholders or their affiliates for services as directors. We have a
target compensation of $60,000 per annum for independent directors of which
$12,500 is provided through an annual retainer plus a per meeting fee of $1,000
and $1,000 for serving as a Committee Chairman. The balance of the compensation
each year is paid in stock options of Time Warner Telecom at a rate of 500 per
quarter. The options are fully vested when granted.
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EXECUTIVE COMPENSATION
The following table summarizes the compensation we paid during 1998 and
1999 to the President and Chief Executive Officer and to each of the four other
most highly compensated executive officers of Time Warner Telecom as of the end
of 1999, based on salary and annual incentive plan bonus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION AWARDS
------------------------------
TIME WARNER TIME
TELECOM CLASS A WARNER INC.
COMMON STOCK COMMON STOCK PAYOUTS
ANNUAL COMPENSATION UNDERLYING UNDERLYING ----------
--------------------------- OPTIONS OPTIONS LTIP ALL OTHER
NAME & PRINCIPAL POSITION YEAR(1) SALARY BONUS AWARDED(2) AWARDED(8) PAYOUTS(7) COMPENSATION(3)
------------------------- ------- ------- ------- --------------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Larissa L. Herda.................... 1999 312,025 234,009 1,000,000 -- -- 8,000
President and Chief Executive
Officer(4) 1998 300,000 169,381 375,000 7,600 -- --
Paul B. Jones....................... 1999 259,242 184,710 100,000 -- 96,900 8,000
Senior Vice President, 1998 259,242 171,748 166,000 16,700 134,400 --
General Counsel & Regulatory
Policy(5)
A. Graham Powers.................... 1999 182,500 132,311 100,000 -- 43,605 8,000
Senior Vice President Engineering 1998 175,479 118,448 100,000 7,600 60,480 --
& Technology(5)
David J. Rayner..................... 1999 182,970 132,653 300,000 -- -- 8,000
Senior Vice President and Chief 1998 171,000 94,792 125,000 7,600 -- --
Financial Officer(5)
John T. Blount...................... 1999 180,730 128,770 300,000 -- -- 8,000
Senior Vice President, Sales(6) 1998 170,500 65,963 100,000 -- -- --
</TABLE>
------------
(1) Time Warner Telecom's predecessor, Time Warner Telecom LLC, was created in
July 1998. Prior to that time, Time Warner Telecom operated as a division of
Time Warner Entertainment Company. The amounts shown for 1998 are the actual
salaries received by the named executive officers for 1998.
(2) Options awarded under Time Warner Telecom's 1998 Option Plan.
(3) Includes contributions made by Time Warner Telecom to its defined
contribution 401(k) plan on behalf of the named executive officers.
(4) Ms. Herda became President and Chief Executive Officer of Time Warner
Telecom on June 22, 1998. Prior to June 22, 1998, Ms. Herda served as the
Senior Vice President, Sales.
(5) Time Warner Telecom does not currently have its own pension plan. However,
Messrs. Jones, Powers and Rayner will, upon retirement, be entitled to
receive benefits under the Time Warner Cable Pension Plan based on service
to Time Warner Telecom and/or Time Warner Cable on or prior to December 31,
1998.
(6) As a result of his previous employment with U S WEST, Inc., the predecessor
of MediaOne, Mr. Blount and certain other former employees of U S WEST
participate in a pension plan under the administration of MediaOne. Mr.
Blount's benefits under that plan upon his retirement are based on service
to U S WEST and/or Time Warner Telecom.
(7) These payouts were made in 1999 to participants in the Time Warner Cable
Long-Term Cash-Flow Incentive Plan for the 1995-1998 four-year cycle.
(8) Options awarded under Time Warner Inc. stock option plans. No options under
Time Warner Inc. plans were awarded to the named executive officers during
1999.
EMPLOYMENT AGREEMENTS
Time Warner Telecom has employment agreements with each of its current
executive officers shown in the Summary Compensation Table. Among other things,
these agreements provide for:
-- a five-year term for Ms. Herda, four-year terms for Messrs. Blount
and Rayner, and three-year terms for Messrs. Jones and Powers,
commencing January 1, 2000;
-- an annual salary and an annual bonus at the discretion of Time Warner
Telecom, generally targeted at 50%-75% of the named executive's
salary; and
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-- participation in any pension, profit-sharing, employee equity
ownership, vacation, insurance, hospitalization, medical, health,
disability and other employee benefit or welfare plan, program or
policy that Time Warner Telecom may adopt if employees at the
executive's level are eligible under the provisions of the plan or
program.
The minimum annual salaries under the agreements in effect in 2000 are
$300,000 for Ms. Herda; $259,000 for Mr. Jones; $175,497 for Mr. Powers;
$171,000 for Mr. Rayner and $170,500 for Mr. Blount.
The agreements include a narrow definition of the term "cause." If the
contract is terminated for cause, the executive will only receive earned and
unpaid base salary accrued through such date of termination.
These agreements provide that if Time Warner Telecom materially breaches or
terminates the executive's employment during the term without cause, the
executive may elect either:
-- to receive a lump-sum payment of the present value of the base salary
and annual bonus otherwise payable during the remaining term of
employment, but not less than the sum of such salary and bonus
prorated for an 18-month period; or
-- to remain an employee of Time Warner Telecom for up to 18 months and,
without performing any services, receive the base salary and annual
bonus otherwise payable.
The executives have the same two options if a change of control occurs and
that change results in:
-- a change of more than 50 miles in the location of the executive's
office or Time Warner Telecom's principal executive offices;
-- a material reduction in the executive's responsibilities; or
-- Time Warner Telecom's material breach of the agreement.
The agreements define change of control to mean that:
-- the Class B Stockholders cease to have the ability as a group to
elect a majority of Time Warner Telecom's board of directors;
-- another person or group has become the beneficial owner of more than
35% of the total voting power of Time Warner Telecom's voting
interests; and
-- the percentage voting interest of that person or group is greater
than that held by the Class B Stockholders.
Executives are not generally required to mitigate damages after such a
termination, except as necessary to prevent Time Warner Telecom from losing any
tax deductions that it otherwise would have been entitled to for any payments
deemed to be "contingent on a change" under the Internal Revenue Code.
If an executive becomes disabled during the term of his or her employment
agreement, the executive typically will receive 75% of the executive's then
current salary and his or her applicable target annual bonus amount prorated for
an 18-month period. These payments will be reduced by amounts received from
worker's compensation, Social Security and disability insurance policies
maintained by Time Warner Telecom.
If an executive dies during the term of an employment agreement, generally
the executive's beneficiaries will receive the executive's earned and unpaid
salary up to thirty days after the date of death and a pro rata portion of the
executive's bonus for the year of death.
STOCK OPTIONS AWARDED BY TIME WARNER TELECOM DURING 1999
The following table lists our grants during 1999 of stock options to the
officers named in the "Summary Compensation Table." All of the options were
nonqualified under the tax code and Time Warner Telecom did not award any stock
appreciation rights. The amounts shown as potential realizable values rely on
arbitrarily
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<PAGE> 72
assumed increases in value required by the Securities and Exchange Commission.
In assessing those amounts, please note that the ultimate value of the options,
as well as your shares, depends on actual future share prices. Market conditions
and the efforts of the directors, the officers and others to foster the future
success of Time Warner Telecom can influence those future share values.
OPTION GRANTS IN 1999
INDIVIDUAL GRANTS(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM
OPTIONS IN 1999 BASE PRICE EXPIRATION -------------------------
NAME GRANTED(2) FISCAL YEAR ($/SHARE) DATE 5%(1) 10%(1)
---- ---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Larissa L. Herda...... 1,000,000 33.9% $34.50 11/17/09 $21,696,864 $54,984,114
Paul B. Jones......... 100,000 3.4% 34.50 11/17/09 2,169,686 5,498,411
A. Graham Powers...... 100,000 3.4% 34.50 11/17/09 2,169,686 5,498,411
David J. Rayner....... 300,000 10.2% 34.50 11/17/09 6,509,059 16,495,234
John T. Blount........ 300,000 10.2% 34.50 11/17/09 6,509,059 16,495,234
</TABLE>
------------
Total shares granted to all employees in 1999: 2,950,750(2)
(1) The options shown in the above table were awarded to the named executive
officers under Time Warner Telecom's 1998 Option Plan and the terms are
governed by that plan and the recipient's option agreement. The exercise
price is the fair market value of the Class A common stock on the date of
grant. The options become exercisable over a four-year vesting period and
expire ten years from the date of grant. As required by Securities and
Exchange Commission rules, the dollar amounts in the last two columns
represent the hypothetical gain or "option spread" that would exist for the
options based on assumed 5% and 10% annual compounded rates of Class A
common stock appreciation over the full ten-year option term (resulting in
63% and 159% appreciation, respectively). These assumed rates of
appreciation applied to the exercise price would result in a Class A common
stock value on November 17, 2009 of $56.20 and $89.48, respectively. These
prescribed rates are not intended to forecast possible future appreciation,
if any, of the Class A common stock.
(2) The options granted to all employees in 1999 include options to purchase
100,000 shares that were granted outside of Time Warner Telecom's 1998
Option Plan.
OPTION EXERCISES AND VALUES IN 1999
None of the named executive officers listed under the heading "Option
Grants in the Last Fiscal Year" exercised options in 1999. The table below shows
the number and value of their exercisable and non-exercisable options as of
December 31, 1999.
AGGREGATED OPTION EXERCISES IN 1999 YEAR AND 1999 YEAR-END OPTION VALUES TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END FISCAL YEAR-END
SHARES ACQUIRED VALUE REALIZED --------------------------- ---------------------------
NAME ON EXERCISE(#) ON EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Larissa H. Herda..... -- -- 140,625 1,234,375 $5,335,031 $24,329,719
Paul B. Jones........ -- -- 62,250 203,750 2,361,641 5,479,868
A. Graham Powers..... -- -- 37,500 162,500 1,422,675 3,914,925
David J. Rayner...... -- -- 46,875 378,125 1,778,344 7,595,306
John T. Blount....... -- -- 37,500 362,500 1,422,675 7,002,525
</TABLE>
The in-the-money value of unexercised options is equal to the excess of the
per share market price of our Class A common stock at December 31, 1999 ($49.94)
over the per share exercise price, multiplied by the number of unexercised
options.
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The following table lists for each of the named executive officers
information with respect to option exercises during 1999 and the status of their
options on December 31, 1999:
-- the number of shares of Time Warner common stock, or MediaOne common
stock in the case of Mr. Blount, underlying options exercised during
1999;
-- the aggregate dollar value realized upon exercise of such options;
-- the total number of shares of Time Warner common stock or of MediaOne
common stock in the case of Mr. Blount, underlying exercisable and
nonexercisable stock options held on December 31, 1999; and
-- the aggregate dollar value of in-the-money exercisable and
nonexercisable stock options on December 31, 1999.
None of the named executive officers has been awarded stock appreciation
rights alone or in tandem with options.
AGGREGATE OPTION EXERCISES OF TIME WARNER AND MEDIAONE OPTIONS IN
1999 YEAR END AND 1999 YEAR-END OPTION VALUES TABLE
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF UNDERLYING UNEXERCISED DOLLAR VALUE OF UNEXERCISED
SHARES OPTIONS ON IN-THE MONEY OPTIONS ON
UNDERLYING DOLLAR VALUE DECEMBER 31, 1999 DECEMBER 31, 1999*
OPTIONS REALIZED ON ---------------------------- ----------------------------
NAME EXERCISED EXERCISE EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
---- ---------- ------------ ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Larissa L. Herda....... -- $ -- 17,600 -- $ 766,772 $ --
Paul B. Jones.......... 101,778 4,133,526 16,698 -- 671,594 --
A. Graham Powers....... 10,000 475,627 34,600 -- 1,635,207 --
David J. Rayner........ 3,868 170,720 5,732 -- 179,691 --
John T. Blount......... -- -- 521 -- 32,583 --
</TABLE>
------------
* Based on a closing price of $72.31 per share of Time Warner common stock, and
$76.81 per share of MediaOne common stock with respect to stock options held
by Mr. Blount, on December 31, 1999 as reported on the New York Stock
Exchange Composite Listing.
The option exercise price of all options held by the named executive
officers is the fair market value of the stock on the date of grant. All of the
options held by the named executive officers become immediately exercisable in
full upon the occurrence of certain events, including the death or total
disability of the option holder, certain change-of-control transactions and, in
most cases, Time Warner Telecom's breach of the holder's employment agreement.
The Time Warner options held by the named executive officers generally remain
exercisable for three years after their employment is terminated without cause,
for one year after death or total disability, for five years after retirement
and for three months after termination for any other reason, except that such
stock options awarded before 1996 are exercisable for three months after a
termination without cause and after retirement and those awarded after July 1997
are exercisable for three years after death or disability. All Time Warner
options terminate immediately if the holder's employment is terminated for
cause. The term "cause" is narrowly defined in the employment agreements. The
terms of the options shown in the chart are ten years.
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<PAGE> 74
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT
The Class B Stockholders entered into a Stockholders Agreement in
connection with the Reconstitution in May 1999. These Class B Stockholders
presently hold all of Time Warner Telecom's Class B common stock. We cannot
assure you that the Class B Stockholders will not change the Stockholders
Agreement or terminate it or cause Time Warner Telecom to waive any provision of
such agreement.
Under the Stockholders Agreement, AOL Time Warner (as successor by merger
to Time Warner) initially has the right to designate four nominees for the board
of directors at each annual stockholders meeting at which directors are elected.
AT&T (as successor by merger to MediaOne) has the right to designate three
nominees and the Advance/Newhouse stockholder group has the right to designate
one. The Class B Stockholders' ability to designate any nominees depends on the
identity of the particular stockholder and the percentage of shares of common
stock owned by it. The Stockholders Agreement provides that the percentage of
common stock that each Class B Stockholder must own in order to have the right
to nominate directors will be adjusted over time to reflect new issuances of
common stock by Time Warner Telecom. As of June 30, 2000, each Class B
Stockholder must own at least 7.28% of the common stock to appoint one director.
AOL Time Warner is entitled to nominate four directors so long as it owns at
least 14.55% of the common stock. If AOL Time Warner owns less than 14.55% of
the common stock ("Time Warner Step Event"), the number of directors that AOL
Time Warner may nominate decreases proportionally with its ownership of the
common stock until it owns less than 7.28%. AT&T is entitled to nominate three
directors as long as it owns at least 7.28% of the common stock. If a Time
Warner Step Event occurs, the number of directors that AT&T is entitled to
nominate decreases proportionally with its ownership of the common stock. The
Advance/Newhouse stockholder group is entitled to nominate one director as long
as it owns at least 7.28% of the common stock. None of the Class B Stockholders
have the right to designate nominees if they own less than 7.28% of the common
stock. These percentages continue to adjust from time to time if Time Warner
Telecom issues additional shares of common stock or takes actions such as stock
splits or recapitalizations so as to maintain the same relative rights. As a
result of MediaOne's underwritten offering on May 1, 2000, of 9,000,000 shares
of Class A common stock of Time Warner Telecom, MediaOne (and subsequently AT&T)
was no longer entitled to nominate three members of Time Warner Telecom's board
of directors and the three directors nominated by MediaOne have resigned.
The Stockholders Agreement requires the Class B Stockholders to vote their
shares in favor of:
-- the nominees selected by the Holders of Class B common stock, as
previously described;
-- the Chief Executive Officer of Time Warner Telecom; and
-- three nominees who are not affiliated with Time Warner Telecom or any
holder of Class B common stock and are selected by the Nominating
Committee.
The Stockholders Agreement prohibits the Class B Stockholders from any
transfer of Class B common stock, unless expressly permitted by the agreement.
In addition, the Stockholders Agreement prohibits any of the Class B
Stockholders from entering into voting agreements relating to the Class B common
stock with any third party.
If a Class B Stockholder wants to sell all of its Class B common stock
pursuant to a bona fide offer from an unaffiliated third party, that stockholder
must give notice (the "Refusal Notice") to all Class B Stockholders. The notice
must contain the identity of the offeror and offer to sell the stock to the
other Class B Stockholders upon the same terms and subject to the conditions as
the offer from the third party. The non-selling holders of Class B common stock
will have the right to purchase pro rata all, but not less than all, of the
Class B common stock. If the non-selling holders fail to exercise their right to
purchase all of the shares, the selling Class B Stockholder is free, for a
period of 90 days, to sell the shares of Class B common stock (as shares of
Class B common stock) to the third party offeror on terms and conditions no less
favorable to the selling Class B Stockholder than those contained in the Refusal
Notice. A Class B Stockholder may transfer
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<PAGE> 75
all of its right to nominate Class B nominees for election to the board of
directors if it sells all of its shares Class B common stock. If AOL Time Warner
wants to sell all of its Class B common stock and its Class A common stock that
represent more than one-third of the outstanding shares of common stock, the
other holders of Class B common stock will have certain "tag-along" rights.
These rights provide them the right to sell their shares of Class A common stock
and Class B common stock on a pro rata basis along with, and on the same terms
and conditions as AOL Time Warner. In that sale, AOL Time Warner (and any other
stockholder transferring all of its shares of Class B common stock) will have
the right to transfer its right to nominate Class B nominees for election to the
board of directors.
Except for transfers to affiliates and the other transfers described above,
all shares of Class B common stock must be converted to Class A common stock
immediately prior to any direct transfer or certain indirect transfers of Class
B common stock. In addition, except for transfers described in the paragraph
above, a stockholder will not have the right to transfer its right to nominate
Class B nominees. A Class B Stockholder that is acquired by a third party or
spins off to its stockholders a company holding its shares of Class B common
stock (as well as other assets), is required to convert its shares into Class A
common stock and its right to nominate Class B nominees to the board of
directors will not terminate.
The Class B Stockholders have demand registration rights for shares of
Class A common stock (including shares of Class A common stock resulting from
the conversion of shares of Class B common stock) if they wish to register Class
A common stock constituting at least 1% of the total outstanding Class A common
stock. Once Time Warner Telecom has registered shares of Class A common stock as
a result of a demand registration, it is not required to register shares again,
pursuant to a Class B Stockholder demand, until 180 days after the first
registration statement is effective. In addition, each Class B Stockholder may
require Time Warner Telecom to include its shares in certain other registered
offerings under the Securities Act of 1933, subject to certain conditions. Each
Class B Stockholder must pay all underwriting discounts, commissions and
transfer taxes attributable to the sale of its shares. Time Warner Telecom will
pay all expenses relating to the filing and effectiveness of a registration
statement, the legal fees of one counsel representing the Class B Stockholders
and the auditors' fees and expenses.
RESTATED CERTIFICATE OF INCORPORATION
Our restated certificate of incorporation prohibits us from (i) engaging in
the business of providing, offering, packaging, marketing, promoting or branding
(alone or jointly with or as an agent for other parties) any residential
services, or (ii) producing or otherwise providing entertainment, information or
other content services, without the consent of all the Class B Stockholders.
This prohibition expires in May 2004 or earlier if the Class B Stockholders no
longer hold 50% of the total voting power for the board of directors.
CERTAIN OPERATING AGREEMENTS
Capacity License Agreements. We currently license much of our fiber
capacity from Time Warner Cable. Each of our local operations where Time Warner
Cable has a network is party to a Capacity License Agreement with the local
cable television operation of Time Warner Cable, providing us with a 30 year
exclusive right to use all of the capacity of specified fiber-optic cable owned
by the Time Warner Cable operation. The Capacity Licenses for network that
existed as of July 1998 have been fully paid and do not require additional
license fees. However, we must pay certain maintenance fees and fees for
splicing and similar services. We may request that Time Warner Cable construct
and provide additional fiber-optic cable capacity to meet our future needs. Time
Warner Cable is not obligated to provide such fiber capacity to us. If Time
Warner Cable provides additional capacity, we must pay an allocable share of the
cost of construction of the fiber upon which capacity is to be provided, plus a
permitting fee. We are responsible for all taxes and franchise or similar fees
arising out of our use of the capacity, and a portion of other out-of-pocket
expenses incurred by Time Warner Cable for the cable use to provide us the
capacity. We are permitted to use the capacity for telecommunications services
and any other lawful purpose, but not for the provision of residential services
and content services. If we violate the limitations on our business activities
contained in our the restated certificate of incorporation or the Capacity
License Agreements, Time Warner Cable may terminate the Capacity License
Agreements. Accordingly, the Capacity License Agreements restrictions will apply
after
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the restrictions in the restated certificate of incorporation have terminated.
Although management does not believe that the restrictions contained in the
Capacity License Agreements will materially affect our business and operations
in the immediate future, we cannot predict the effect of such restrictions in
the rapidly changing telecommunications industry.
The Capacity License Agreements do not restrict us from licensing
fiber-optic capacity from parties other than Time Warner Cable. The Capacity
License Agreements expire in 2028. Although Time Warner Cable has agreed to
negotiate renewal or alternative provisions in good faith at that time, we
cannot assure that the parties will agree on the terms of any renewal or
alternative provisions or that the terms of any renewal or alternative
provisions will be favorable to us. If the Capacity License Agreements are not
renewed in 2028, we will have no further interest in the capacity under the
Capacity License Agreements and may need to build, lease or otherwise obtain
transmission capacity in order to serve our customers in the service areas
covered by the Capacity License Agreements. The terms of such arrangements could
have a material adverse effect on our business, financial condition and results
of operations. We have the right to terminate a Capacity License Agreement in
whole or in part at any time upon 180 days' notice and payment of any
outstanding fees regarding the terminated capacity. Time Warner Cable has the
right to terminate a Capacity License Agreement upon 180 days' notice in the
event of, among other things, certain governmental proceedings or third party
challenges to Time Warner Cable's franchises or a Capacity License Agreement.
The Capacity License Agreements include substantial limitations on liability for
service interruptions.
Facility Lease Agreements. We lease or sublease physical space located at
Time Warner Cable's facilities for various purposes under Facility Lease
Agreements. If certain events occur we will be required, at our own expense, to
segregate and partition our space in a reasonable, secure manner. Those events
are:
-- at least a majority of any Time Warner Cable system is not owned by
one or more of the Class B Stockholders;
-- Time Warner owning less than 30% of Time Warner Telecom's common
stock;
-- Time Warner having the right to nominate less than three nominees to
our board of directors;
-- our non-compliance with the restrictions in the restated certificate
of incorporation regarding residential services and content services;
or
-- a Class B Stockholder transferring its Class B common stock together
with its rights to designate nominees to the board of directors under
the Stockholders Agreement.
The lease rates for properties Time Warner Cable owns and leases to us are
based upon comparable rents in the local market, taking into account other
factors such as the term of the lease, type of space, square footage, location
and leasehold improvements funded. Generally, the leases have 15-year terms,
with two five year options to renew. For properties Time Warner Cable subleases
to us, we pay a pro rata portion of the rent and fees payable under the primary
lease. The duration of our subleases are as long as Time Warner Cable's primary
lease.
Services Agreement. Time Warner Cable provides us certain tax and
management information systems and support services pursuant to the
Administrative Services Agreement. Time Warner Cable determines the costs for
such services based upon our historical and projected usage, depending on the
amount and type of administrative services to be provided.
Residential Support Agreements. We provide certain support services or
service elements, on an unbundled basis, to Time Warner Cable for its
residential telephony business. Generally, we may adjust all rates for such
residential support services we provide to Time Warner Cable annually, but the
rates may not be less favorable than the rates we charge other customers for
comparable services.
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Time Warner License Agreement. We use the "Time Warner" name under a
license agreement with Time Warner. We may change our name to "TW Telecom Inc."
and will no longer have the right to use the "Time Warner" name when the initial
four year term or any renewal term expires. We must also discontinue using the
"Time Warner" name if:
-- Time Warner owns less than 30% of Time Warner Telecom's common stock;
-- Time Warner has the right to nominate less than three nominees to our
board of directors;
-- our non-compliance with the restrictions in the restated certificate
of incorporation regarding residential services and content services;
or
-- a Class B Stockholder transfers its Class B common stock together
with its rights to designate nominees to the board of directors under
the Stockholders Agreement.
This name change, and the inability to use the "Time Warner" name, could
adversely effect our ability to conduct our business and our financial condition
and results of operations.
We believe that the terms and conditions, taken as a whole, of the
transactions described under the headings "Capacity License Agreements,"
"Facility Lease Agreements," "Services Agreement," "Residential Support
Agreements" and the "Time Warner License Agreement" were no less favorable to us
than we could have obtained from unaffiliated parties.
The Class B Stockholders hold all of our Class B common stock and have the
collective ability to control all matters requiring stockholder approval,
including the election of directors. All of the Class B Stockholders are in the
cable television business and may provide the same services or similar services
to those we provide. There is no restriction on the Class B Stockholders'
ability to compete with Time Warner Telecom and we cannot assure that the Class
B Stockholders will not compete with Time Warner Telecom. Our directors, who are
also directors, officers or employees of the Class B Stockholders, may encounter
conflicts of interest in certain business opportunities available to, and
certain transactions involving, Time Warner Telecom. The Class B Stockholders
have not adopted any special voting procedures to deal with conflicts of
interest, and we cannot assure that any conflict will be resolved in Time Warner
Telecom's favor.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
9 3/4% SENIOR NOTES
On July 21, 1998, Time Warner Telecom completed the public offering of $400
million aggregate principal amount of the 9 3/4% Senior Notes. For the purposes
of this section only, the term "obligor" refers to Time Warner Telecom.
The 9 3/4% Senior Notes are unsecured unsubordinated obligations, ranking
equally in right of payment with all existing and future unsubordinated
indebtedness and senior in right of payment to all subordinated indebtedness.
Interest on the 9 3/4% Senior Notes will accrue at the rate of 9 3/4% per annum,
payable semiannually on January 15 and July 15. The 9 3/4% Senior Notes will be
subject to redemption at the option of the obligor, in whole or in part, at any
time on or after July 15, 2003, initially at 104.875% of their principal amount
and declining to 100% of their principal amount at maturity on or after July 15,
2006, plus accrued and unpaid interest to the applicable redemption date. In
addition, at any time prior to July 15, 2001, in the event of an offering of the
common stock of Time Warner Telecom for cash, the obligor may, at its option,
within 90 days of an offering, use the net proceeds of the offering to redeem up
to 35% of the aggregate principal amount at maturity of the 9 3/4% Senior Notes
at a redemption price of 109.75% of the principal amount on the redemption date;
provided that at least 65% of the aggregate principal amount at maturity of the
9 3/4% Senior Notes originally issued remain outstanding immediately after each
redemption. Upon the occurrence of a change of control under the indenture, the
obligor must offer to purchase the 9 3/4% Senior Notes then outstanding at a
purchase price of 101% of their principal amount; provided that the obligor
shall not be required to commence an offer to purchase if, at any time within 30
days of the later of the occurrence of the change of control and the end of the
change of control period, the 9 3/4% Senior Notes shall be rated investment
grade under the indenture.
The indenture limits, and in some circumstances prohibits, the ability of
Time Warner Telecom (and its restricted subsidiaries) to:
-- incur additional debt;
-- pay dividends;
-- make investments or other restricted payments;
-- engage in transactions with stockholders and affiliates;
-- create liens;
-- sell assets;
-- issue or sell capital stock of subsidiaries; and
-- engage in mergers and consolidations.
The indenture also provides for the repayment of subordinated debt,
including the subordinated indebtedness to affiliates of the Class B
Stockholders, prior to maturity with the net proceeds of any offering of common
stock or equivalent interests of Time Warner Telecom.
SENIOR SECURED CREDIT FACILITY
On December 8, 2000, we entered into a senior secured credit agreement with
The Chase Manhattan Bank, Morgan Stanley Senior Funding and certain other
lenders, which took effect on January 10, 2001, and which amends, restates and
supersedes our $475 million senior secured credit facility in its entirety. The
senior secured credit facility provides for an aggregate of $1 billion in
borrowings, comprised of $525 million of senior secured term loan facilities and
a $475 million senior secured revolving credit facility. We also have the option
to increase the size of the senior secured credit facility with the consent of
the participating banks. Borrowings under the senior secured credit facility
will be made by Time Warner Telecom Holdings Inc., one of our wholly owned
subsidiaries.
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On January 10, 2001, we made a term loan borrowing of $250 million as
discussed more fully below. The proceeds of the $250 million term loan, along
with the revolving credit facility and the remaining amounts available under the
term loan facilities, will be used for capital expenditures, purchase of network
assets, working capital and general corporate purposes.
The $525 million term loan portion of the senior secured credit facility
consists of a $275 million delayed-draw term facility and a $250 million tranche
B term facility. Under the delayed-draw facility, we have the ability to make
multiple borrowings (up to 10 drawings) for up to 24 months after the initial
funding date for the senior secured credit facility, which occurred on January
10, 2001, and coincided with the closing date for the GST asset purchase.
Borrowings under the delayed-draw facility will not be available after the
expiration of the 24 month period. Amounts borrowed under the delayed-draw
facility will be repaid in quarterly installments beginning in 2003, with the
final installment due on December 31, 2007. The entire amount of the tranche B
facility, $250 million, was borrowed on the initial funding date. The tranche B
loan will be repaid in nominal amounts beginning in 2003, with substantially all
of the principal due in a final installment on March 31, 2008.
Loans under the delayed draw and revolving credit facilities will bear
interest initially at a yearly rate equal to:
-- for any base rate loans, the banks' announced base rate under the
senior secured credit facility plus an applicable margin of 1.75%;
and
-- for any LIBOR loans, the eurodollar rate plus an applicable margin of
2.75%.
The applicable margins may be reduced based upon our financial performance.
Our $250 million tranche B term loan will bear interest initially at a
yearly rate equal to:
-- to the extent that this loan is treated as a base rate loan, the
banks' announced base rate under the senior secured credit facility
plus an applicable margin of 3.00%; and
-- to the extent that this loan is treated as a LIBOR loan, the
eurodollar rate plus an applicable margin of 4.00%.
We are required to pay customary commitment fees on a quarterly basis on
the undrawn available commitments and we paid certain underwriting, escrow and
arrangement fees on the initial funding date.
Our obligations under the senior secured credit facility are secured by
substantially all of the assets of our subsidiaries, including the GST assets,
together with any assets that may be acquired in the future. We also have
pledged the capital stock of all of our subsidiaries as collateral.
We are required to prepay any amounts that we have borrowed with the
proceeds we receive from a number of specified events or transactions. In
addition, our obligations under the senior secured credit facility are subject
to various covenants that will limit our ability to:
-- borrow and incur liens on our property;
-- pay dividends or make other distributions; and
-- make capital expenditures.
The senior secured credit facility also contains financial covenants,
including a consolidated and senior debt leverage ratio, a consolidated interest
coverage ratio and a consolidated debt service coverage ratio. In addition, the
senior secured credit facility contains customary events of default, including
cross default provisions. Under the cross default provisions, we will be deemed
to be in default under the restated facility if we have defaulted under any of
our other material outstanding obligations, such as our Senior Notes or under
the senior unsecured bridge loan facility described below.
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SENIOR UNSECURED BRIDGE LOAN FACILITY
On December 15, 2000, we entered into a senior unsecured bridge loan
agreement with Morgan Stanley Senior Funding, Lehman Commercial Paper Inc., The
Chase Manhattan Bank, Bear Stearns Corporate Lending Inc. and ABN AMRO Bank N.V.
On January 10, 2001, we borrowed $700 million under the senior unsecured bridge
loan facility to finance the purchase of the GST assets and pay related fees and
expenses. In contrast to our senior secured credit facility, the borrowing under
the senior unsecured bridge loan facility was made by Time Warner Telecom Inc.
Our borrowing under the senior unsecured bridge loan facility was required
to be made in a single drawing, which coincided with the initial funding date
under the senior secured credit facility. No additional borrowings are available
under the senior unsecured bridge loan facility.
Our $700 million borrowing under the senior unsecured bridge loan facility
is represented by notes that we issued to the various lenders. The notes issued
under the senior unsecured bridge loan facility are repayable on January 10,
2002 and bear interest payable quarterly (beginning on March 31, 2001) at a
yearly rate equal to:
-- to the extent that the base rate applies to the notes, the banks'
announced base rate under the senior unsecured bridge loan facility
plus an applicable margin. The applicable margin increases over the
term of the senior unsecured bridge loan facility according to a
fixed schedule and ranges from 2.25% to 4.00%.
-- to the extent that the LIBOR rate applies to the notes, the
eurodollar rate under the senior unsecured bridge loan facility plus
an applicable margin. The applicable margin increases over the term
of the senior unsecured bridge loan facility according to a fixed
schedule and ranges from 3.25% to 5.00%.
The applicable margins may be further increased if our credit rating
deteriorates. We have the ability to repay the senior unsecured bridge loan
facility at any time prior to the maturity date upon 10 days' written notice. In
addition, the bridge notes must be repaid with the proceeds of any debt or
equity financings, as well as certain other events, that occur prior to the
maturity date.
On the bridge funding date, we paid customary commitment and borrowing
fees.
In the event that we are not able to repay the bridge notes within one
year, we are obligated to issue new notes in exchange for the bridge notes. Any
such exchange notes would have the same principal amount as the bridge notes and
mature on December 15, 2011. In addition, we are required to pay cash fees
totaling approximately 5.50% of the principal amount outstanding under the
bridge notes upon issuance of any exchange notes. Interest on the exchange notes
is payable quarterly at an interest rate equal to the higher of (i) the yield to
maturity of our 9 3/4% Senior Notes plus 0.75% or (ii) the LIBOR rate plus a
specified margin equal to the applicable margin that would otherwise be in
effect for the bridge notes plus 1.00%.
In addition, our obligations under the senior unsecured bridge loan
facility and under any exchange notes are subject to various covenants that will
limit our ability to:
-- borrow and incur liens on our property;
-- pay dividends and make other distributions; and
-- make capital expenditures
We also are subject to various financial covenants and customary events of
default, including cross default provisions.
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DESCRIPTION OF CAPITAL STOCK
Time Warner Telecom's restated certificate of incorporation provides for
authorized capital stock of 459.8 million shares, including 277.3 million shares
of Class A common stock, $.01 par value per share, 162.5 million shares of Class
B common stock, $.01 par value per share, and 20 million shares of preferred
stock, $.01 par value per share. No preferred stock is outstanding and the Class
B Stockholders own of record all of the outstanding shares of Class B common
stock. See "Principal Stockholders."
The following summary description relating to the capital stock of Time
Warner Telecom does not purport to be complete. The rights of the holders of
Time Warner Telecom's capital stock are set forth in its restated certificate of
incorporation. The summary set forth below is qualified by reference to such
exhibits and to the applicable provisions of the Delaware General Corporation
Law.
COMMON STOCK
The relative rights of the Class A common stock and Class B common stock
are substantially identical in all respects, except for voting rights and
conversion rights.
Voting Rights. Each share of Class A common stock entitles the holder to
one vote and each share of Class B common stock entitles the holder to 10 votes
on each matter to be voted upon by the holders of the common stock. The holders
of the shares of Class A common stock and Class B common stock vote as one class
on all matters to be voted on by stockholders, including, without limitation,
the election of directors and any proposed amendment to the restated certificate
of incorporation of Time Warner Telecom that would increase the authorized
number of shares of common stock or any class thereof or any other class or
series of stock or decrease the number of authorized shares of any class or
series of stock (but not below the number then outstanding), except as required
by the Delaware General Corporation Law and except that,
(1) as long as the outstanding Class B common stock represents at least
50% of the aggregate voting power of both classes of common stock outstanding,
the approval of 100% of the Class B Stockholders is required:
-- to amend, alter or repeal any provision of the restated certificate
of incorporation, other than in connection with certain ministerial
actions; or
-- for any direct or indirect disposition by Time Warner Telecom of
capital stock of subsidiaries or assets that in either case represent
substantially all the assets of Time Warner Telecom and its
subsidiaries on a consolidated basis.
(2) The approval of 100% of the Class B Stockholders is required for the
issuance of any additional shares of Class B common stock or any capital stock
having more than one vote per share.
(3) without a majority vote of the holders of the Class A common stock,
certain provisions of the restated certificate of incorporation relating to the
termination of, and vote required to waive, the limitations on business purposes
described in the next sentence may not be amended, altered or repealed.
Under the restated certificate of incorporation, Time Warner Telecom may
not directly or indirectly, through a subsidiary or affiliate of Time Warner
Telecom,
(a) engage in the business of providing, offering, packaging, marketing,
promoting or branding (alone or jointly with or as an agent for other parties)
any wireline telecommunications services or other services, including data
services, to residences (collectively, "residential services") or
(b) engage in the business of producing, packaging, distributing,
marketing, hosting, offering, promoting, branding or otherwise providing
entertainment, information or any other content services, whether fixed or
interactive, or any services incidental thereto, but excluding acting solely as
a carrier of video, audio or data of unaffiliated third parties by providing
transport services, so long as Time Warner Telecom has no other direct or
indirect pecuniary interest in the transmitted information or content
(collectively, "content services"), in each case until the earlier of (1) the
date that is five years after the date of the filing of the restated certificate
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of incorporation and (2) the date on which the holders of Class B common stock
no longer represent at least 50% of the voting power of the outstanding Common
Stock of Time Warner Telecom.
Neither the holders of Class A common stock nor the holders of Class B
common stock have cumulative voting rights. For a discussion of the effects of
the disproportionate voting rights of the Class A common stock and Class B
common stock, see "Risk Factors--We are controlled by the Class B Stockholders."
Dividends. Each share of common stock is entitled to receive dividends from
funds legally available therefor if, as and when declared by the board of
directors of Time Warner Telecom. Class A common stock and Class B common stock
share equally, on a share-for-share basis, in any dividends declared by the
board of directors.
Conversion. Under the restated certificate of incorporation, each share of
Class B common stock is convertible at any time and from time to time at the
option of the holder thereof into one share of Class A common stock. The Class A
common stock has no conversion rights.
Equivalent Consideration in Certain Transactions. In the event of any
merger, consolidation, acquisition of all or substantially all the assets of
Time Warner Telecom or other reorganization to which Time Warner Telecom is a
party, in which any consideration is to be received by the holders of Class A
common stock and Class B common stock, those holders must receive the Equivalent
Consideration (as defined below) on a per share basis. Under the restated
certificate of incorporation of Time Warner Telecom, "Equivalent Consideration"
is defined as consideration of substantially equivalent economic value as
determined by the board of directors of Time Warner Telecom at the time of
execution of the definitive agreement relating to the applicable merger,
consolidation, acquisition or reorganization, provided, that (i) the holders of
Class A common stock can receive consideration of a different form from the
consideration to be received by the holders of Class B common stock and (ii) if
the holders of Class A common stock and Class B common stock are to receive
securities of any other person, such securities (and, if applicable, the
securities into which the received securities are convertible, or for which they
are exchangeable, or which they evidence the right to purchase) can differ with
respect to their relative voting rights and related differences in conversion
and share distribution provisions, with the holders of shares of Class B common
stock receiving the class or series having the higher relative voting rights,
and the differences permitted by this clause (ii) are not taken into account in
the determination of equivalent economic value.
Other. Stockholders of Time Warner Telecom have no preemptive or other
rights to subscribe for additional shares. All holders of common stock,
regardless of class, are entitled to share equally on a share-for-share basis in
any assets available for distribution to stockholders on liquidation,
dissolution or winding up of Time Warner Telecom. All outstanding shares are
validly issued, fully paid and nonassessable. Time Warner Telecom may not
subdivide or combine shares of common stock without at the same time
proportionally subdividing or combining shares of the other classes.
In April 1999, we issued 307,550 shares of Class A common stock in
connection with our acquisition of Internet Connect, Inc. in a private placement
under Section 4(2) of the Securities Act of 1933. The former stockholders of
Internet Connect may require us to include their shares in certain registered
offerings of our Class A common stock under the Securities Act of 1933, subject
to certain conditions. If we sell any of our securities in such an offering, we
must pay all expenses (other than underwriting discounts, commissions and fees
and expenses of counsel attributable to the sale of the shares) relating to the
filing and effectiveness of a registration statement. If we do not sell any of
our securities, the selling stockholders will pay their share of the
registration expenses.
During the second quarter of 1999, we issued 2,190,308 shares of Class A
common stock to the former partners of MetroComm, Inc. in a private placement
under Section 4(2) of the Securities Act of 1933 in connection with the
acquisition of the remaining 50% of MetroComm that we did not own. The former
stockholders of MetroComm have one demand registration right collectively for
shares of Class A common stock if they wish to register Class A common stock
constituting at least 50% of the aggregate number of shares of Class A common
stock issued in the merger. Once we have registered shares of Class A common
stock as a result of any other registration statement, we are not required to
register shares pursuant to this
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demand until six months after the other registration statement is effective. In
addition, each former stockholder of MetroComm may require us to include its
shares in certain other registered offerings under the Securities Act of 1933,
subject to certain conditions. Each former stockholder of MetroComm must pay all
underwriting discounts and commissions attributable to the sale of its shares.
We will pay all expenses relating to the filing and effectiveness of a
registration statement, the legal fees of one counsel representing the former
stockholders of MetroComm and the auditors' fees and expenses.
PREFERRED STOCK
Time Warner Telecom's board of directors is authorized to provide for the
issuance of preferred stock in one or more series and to fix the designation,
preferences, powers and relative, participating, optional and other rights,
qualifications, limitations and restrictions thereof, including the dividend
rate, conversion rights, voting rights, redemption price and liquidation
preference and to fix the number of shares to be included in any such series.
Any preferred stock so issued may rank senior to the common stock with respect
to the payment of dividends or amounts upon liquidation, dissolution or winding
up, or both. In addition, any such shares of preferred stock may have class or
series voting rights.
CORPORATE OPPORTUNITIES
The restated certificate of incorporation provides that the Class B
Stockholders are not restricted from engaging directly or indirectly in the same
or similar business activities or lines of business as Time Warner Telecom. In
the event that any of the Class B Stockholders acquires knowledge of a potential
transaction or matter that may be a corporate opportunity for any of the Class B
Stockholders and Time Warner Telecom, such corporate opportunity shall be
allocated to the Class B Stockholder if offered to any person who is an officer,
employee or director of the Class B Stockholder and/or Time Warner Telecom,
unless such opportunity is expressly offered to such person primarily in his or
her capacity as an officer, employee or director of Time Warner Telecom. Other
than under these circumstances, the Class B Stockholders shall have no duty to
communicate or present such corporate opportunity to Time Warner Telecom.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The restated certificate of incorporation of Time Warner Telecom expressly
states that it has elected not to be governed by Section 203 of the Delaware
General Corporation Law, which prohibits a publicly held Delaware corporation
from engaging in a "business combination," as defined in clause (c)(3) of that
section, with an "interested stockholder," as defined in clause (c)(5) of that
section, for a period of three years after the date of the transaction in which
the stockholder became an interested stockholder.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The restated certificate of incorporation limits the liability of directors
to the fullest extent permitted by the Delaware General Corporation Law. In
addition, the restated certificate of incorporation provides that Time Warner
Telecom shall indemnify directors and officers of Time Warner Telecom to the
fullest extent permitted by that law. Time Warner Telecom has entered into
separate indemnification agreements with its current directors and executive
officers which have the effect of providing such persons indemnification
protection in the event the restated certificate of incorporation is
subsequently amended.
NASDAQ TRADING
The Class A common stock is listed on the Nasdaq National Market of the
Nasdaq National Market under the symbol "TWTC."
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES FOR NON-U.S. HOLDERS
GENERAL
This section summarizes the material U.S. federal income tax consequences
to a holder of shares that is a "Non-U.S. Holder" (as defined below). It
represents the views of our tax counsel, Cravath, Swaine & Moore. However, the
discussion is limited in the following ways:
-- The discussion only covers you if you hold your shares as a capital
asset (that is, for investment purposes), and if you do not have a
special tax status.
-- The discussion does not cover tax consequences that depend upon your
particular tax situation in addition to your ownership of shares. We
suggest that you consult your tax advisor about the consequences of
holding shares in your particular situation.
-- The discussion is based on current law. Changes in the law may change
the tax treatment of the shares.
-- The discussion does not cover state, local or foreign law.
-- We have not requested a ruling from the IRS on the tax consequences
of owning the shares. As a result, the IRS could disagree with
portions of this discussion.
IF YOU ARE CONSIDERING BUYING SHARES, WE SUGGEST THAT YOU CONSULT YOUR TAX
ADVISOR ABOUT THE TAX CONSEQUENCES OF HOLDING THE SHARES IN YOUR PARTICULAR
SITUATION.
For the purposes of this discussion, a "Non-U.S. Holder" is:
-- an individual that is a nonresident alien;
-- a corporation--or entity taxable as a corporation for U.S. federal
income tax purposes--created under non-U.S. law; or
-- an estate or trust that is not taxable in the U.S. on its worldwide
income.
If a partnership holds shares, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. If you are a partner of a partnership holding shares, we suggest
that you consult your tax advisor.
WITHHOLDING TAXES IN GENERAL
Unless an exception applies, all dividends paid to a Non-U.S. Holder will
be subject to U.S. withholding tax at a rate of 30%. These taxes will be
withheld either by the paying agent or by the bank, broker, or other
intermediary through which you hold your shares.
In general, the entire dividend we pay is subject to withholding tax.
However, special rules apply if we pay a dividend that is greater than our
current or accumulated "earnings and profits" as calculated for U.S. federal
income tax purposes. In that case, either:
-- We (or the intermediary) may elect to withhold only on the portion of
the dividend that is out of our earnings and profits. In this case,
the remainder of the dividend would not be subject to withholding
tax.
-- We (or the intermediary) may withhold on the entire dividend. In that
case, you would be entitled to obtain a refund from the IRS for the
withholding tax on the portion of the dividend that exceeds our
earnings and profits.
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<PAGE> 85
EXCEPTIONS TO 30% WITHHOLDING TAXES
You may be entitled to a reduced rate of withholding taxes--or exemption
from withholding taxes--if you are eligible for a tax treaty between the United
States and your country of residence. The particular withholding tax rate that
would apply to you depends on your tax status and on the particular tax treaty.
However, the rate under most treaties is 15% for a typical portfolio investor.
To be eligible for a tax treaty, you generally must meet each of the
following requirements:
-- You are the beneficial owner of the shares. That is, you are not
holding the shares on behalf of someone else.
-- You are a resident of the tax treaty jurisdiction and you satisfy all
the other requirements in the treaty.
-- You comply with the documentation requirements discussed below.
-- If you are treated as a partnership or other pass-through entity
either for U.S. federal income tax purposes or under the tax laws of
the treaty jurisdiction, you must satisfy additional requirements.
In order to comply with the documentation requirements to claim tax treaty
benefits, you must satisfy one of the following conditions. These conditions
have been significantly changed for dividends paid on or after January 1, 2001.
-- You complete Form W-8BEN and provide it to the intermediary. The Form
W-8BEN must contain your name and address, and you must fill out Part
II of the form to state your claim for treaty benefits. As long as
the shares remain actively traded, you are not required to obtain a
Taxpayer Identification Number to claim treaty benefits.
-- You hold your shares directly through a "qualified intermediary." In
this case, you need not file Form W-8BEN if the qualified
intermediary has in its files, or obtains from you, certain
information concerning your eligibility for treaty benefits. A
qualified intermediary is an intermediary that (1) is either a U.S.
or non-U.S. entity, (2) is acting out of a non-U.S. branch or office
and (3) has signed an agreement with the IRS providing that it will
administer all or part of the U.S. tax withholding rules under
specified procedures.
-- In some limited circumstances, you may be permitted to provide
documentary evidence in lieu of Form W-8BEN even if you hold your
shares through an intermediary that is not a qualified intermediary.
Alternatively, dividends paid to you will be exempt from U.S. withholding
tax if the dividend income is effectively connected with the conduct of your
trade or business in the U.S., and is not exempt from U.S. tax under a tax
treaty. To claim this exemption, you must generally complete Form W-8ECI.
Even if you meet one of the above requirements, you will not be entitled to
the reduction in--or exemption from--withholding tax on dividends paid to you
under any of the following circumstances:
-- The withholding agent or an intermediary knows or has reason to know
that you are not entitled to the reduction in rate or the exemption
from withholding tax. Specific rules apply for this test.
-- The IRS notifies the withholding agent that information that you or
an intermediary provided concerning your status is false.
-- An intermediary through which you hold the shares fails to comply
with the necessary procedures. In particular, an intermediary is
generally required to forward a copy of your Form W-8BEN (or other
documentary information concerning your status) to the withholding
agent for the shares. However, if you hold your shares through a
qualified intermediary--or if there is a qualified intermediary in
the chain of title between yourself and the withholding agent for the
shares--the qualified intermediary will not generally forward this
information to the withholding agent.
S-83
<PAGE> 86
The amount of dividends paid to you, and the amount withheld from the
dividends, will generally be reported to the IRS and to you on Form 1042-S.
However, this reporting does not apply to you if you hold your shares directly
through a qualified intermediary and the applicable procedures are complied
with.
The rules regarding withholding are complex and vary depending on your
individual situation. They are also subject to change, and certain transition
rules apply for calendar year 2001. In addition, special rules apply to certain
types of non-U.S. holders of shares, including partnerships, trusts, and other
entities treated as pass-through entities for U.S. federal income tax purposes.
We suggest that you consult with your tax advisor regarding the specific methods
for satisfying these requirements.
SALE OF SHARES
If you sell a share, you will not be subject to U.S. federal income tax on
any gain unless one of the following applies:
-- The gain is connected with a trade or business that you conduct in
the U.S.
-- You are an individual, you are present in the U.S. for at least 183
days during the year in which you dispose of the share, and certain
other conditions are satisfied.
U.S. TRADE OR BUSINESS
If you hold your shares in connection with a trade or business that you are
conducting in the U.S.:
-- Any dividends on the shares, and any gain from disposing of the
shares, generally will be subject to income tax at the usual U.S.
rates applicable to U.S. persons.
-- If you are a corporation, you may be subject to the "branch profits
tax" on your earnings that are connected with your U.S. trade or
business, including earnings from the shares. This tax is 30%, but
may be reduced or eliminated by an applicable income tax treaty.
ESTATE TAXES
If you are an individual, your shares will be subject to U.S. estate tax
when you die unless you are entitled to the benefits of an estate tax treaty
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under the U.S. information reporting rules, when a shareholder receives
dividends or proceeds of the sale of stock, the appropriate intermediary must
report to the IRS and to the shareholder the amount of the dividends or sale
proceeds. Some shareholders, including all corporations, are exempt from these
rules.
In addition, a nonexempt shareholder is required to provide the
intermediary with certain identifying information. If this information is not
supplied, or if the intermediary knows or has reason to know that it is not
true, dividends or sale proceeds are subject to "backup withholding" at a rate
of 31%. Backup withholding is not an additional tax, and the shareholder may use
the tax as a credit against the tax it otherwise owes.
These rules apply to Non-U.S. Holders of shares as follows:
-- Dividends paid to you will be exempt from the usual information
reporting rules if you are eligible for a reduced withholding rate
under a tax treaty as discussed above. However, as described above,
dividends paid to you may be reported to the IRS on Form 1042-S.
-- If you are not eligible for a tax treaty and do not provide
information to the intermediary identifying yourself as a Non-U.S.
Holder, in some cases you may be subject to backup withholding at the
rate of 31% instead of regular dividend withholding at the rate of
30%. If necessary, you may provide the intermediary with Form W-8BEN,
without claiming treaty benefits, in order to claim the 30% rate.
S-84
<PAGE> 87
-- Sale proceeds you receive on a sale of your shares through a broker may be
subject to information reporting and/or backup withholding if you are not
eligible for an exemption. In particular, information reporting and backup
withholding may apply if you use the U.S. office of a broker, and
information reporting (but not backup withholding) may apply if you use
the foreign office of a broker that has certain connections to the U.S. In
general, you may file Form W-8BEN, without claiming treaty benefits, to
claim an exemption from information reporting and backup withholding. We
suggest that you consult your tax advisor concerning information reporting
and backup withholding on a sale.
S-85
<PAGE> 88
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 38,103,892 shares of Class
A common stock outstanding and 72,226,500 shares of Class B common stock
outstanding, all of which are convertible into Class A common stock on a share
for share basis. Time Warner Telecom has reserved for issuance 9,030,000 shares
of Class A common stock upon the exercise of stock options. Options to purchase
657,000 shares were outstanding as of December 31, 2000.
Time Warner Telecom and each of the Class B Stockholders has agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, it will
not, during the period ending 90 days after the date of this prospectus
supplement, (1) publicly offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend, or otherwise transfer, dispose of or
distribute, directly or indirectly, any shares of Class A common stock or any
securities convertible into the Class A common stock (other than the Class B
common stock) or (2) enter into any public swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the Class A common stock, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Class A common stock or
such other securities, in cash or otherwise. The foregoing sentence shall not
apply to (a) the sale of any shares of Class A common stock to the underwriters
pursuant to the underwriting agreement, (b) transactions relating to shares of
Class A common stock or other securities acquired in open market transactions
after the completion of this offering, (c) the surrender of unexercised options
or shares upon a "cashless exercise" of options or other incentive compensation
awards or (d) private transactions relating to shares of Class A common stock,
provided that Time Warner Telecom or such Class B Stockholder shall ensure that
any transferee that receives shares of Class A common stock in a private
transaction shall be subject to the remainder of the 90-day lock-up period set
forth in clauses (1) and (2) above. See "Underwriters." After that 90-day
period, other holders of the Class B common stock may or may not decide, based
upon then prevailing market and other conditions, to convert their Class B
common stock to Class A common stock and to dispose of all or a portion of such
stock pursuant to the provisions of Rule 144 under the Securities Act of 1933 or
pursuant to the demand registration rights contained in the stockholders
agreement among the Class B Stockholders. See "Certain Relationships and Related
Transactions--Stockholders Agreement."
Future sales of substantial amounts of Class A common stock in the public
market, or the perception that such sales could occur, may have an adverse
impact on the market price for the shares of Class A common stock offered hereby
or on the ability of Time Warner Telecom to raise capital through a public
offering of its equity securities. See "Risk Factors--Future sales of shares of
Class A common stock could depress the price of the Class A common stock."
S-86
<PAGE> 89
UNDERWRITERS
Under the terms and conditions contained in an underwriting agreement dated
the date of this prospectus supplement, the underwriters named below, for whom
Morgan Stanley & Co. Incorporated, Lehman Brothers Inc., Chase Securities Inc.
(JP Morgan is a division of Chase Securities Inc.) and Bear, Stearns & Co. Inc.
are acting as representatives, have severally agreed to purchase, and we have
agreed to sell to them, severally, the respective number of shares of Class A
common stock indicated below.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Lehman Brothers Inc. .......................................
Chase Securities Inc. ......................................
Bear, Stearns & Co. Inc. ...................................
----------
Total............................................. 4,400,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of Class A common
stock offered by this prospectus supplement are subject to approval of certain
legal matters by counsel and to certain other conditions. The underwriters are
obligated to take and pay for all of the shares of Class A common stock offered
in this offering if any such shares are taken. However, the underwriters are not
required to take or pay for the shares covered by the underwriters' over-
allotment option described below.
The underwriters initially proposed to offer some of the Class A common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus supplement and some of the common stock to certain
dealers at a concession not in excess of $ per share. The underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share on sales to certain other dealers. If all of the shares are not sold at
the initial offering price, the representatives may change the public offering
price and other selling terms.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to an aggregate of
additional shares of Class A common stock at the public offering price listed on
the cover page of this prospectus supplement, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of Class A common stock offered by this prospectus supplement. To the
extent the option is exercised, each underwriter will become obligated, subject
to certain conditions, to purchase about the same percentage of the additional
shares of Class A common stock as the number listed next to the underwriter's
name in the preceding table bears to the total number of shares of Class A
common stock listed next to the names of all underwriters in the preceding
table. If the underwriters' option is exercised in full, the total price to the
public would be $ , the total underwriters' discounts and commissions
would be $ and the total proceeds to Time Warner Telecom would be
$ .
We, certain of our directors, executive officers and certain stockholders
have agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, during the period 90 days after the
date of this prospectus supplement, we and each of them will not directly or
indirectly:
(i) public offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer, dispose
of or distribute, directly or indirectly, any share of Class A common stock
or any securities convertible into Class A common stock (other than the
Class B common stock); or
(ii) enter into any public swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of
ownership of the Class A common stock;
S-87
<PAGE> 90
whether any such transaction described above is to be settled by delivery of
Class A common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
(i) the sale of shares of Class A common stock to the underwriters
under the underwriting agreement;
(ii) transactions relating to shares of Class A common stock or other
securities acquired in open market transactions after the completion of
this offering;
(iii) the surrender of unexercised options or shares upon a cashless
exercise of options or other incentive compensation awards; or
(iv) private transactions relating to shares of Class A common stock,
provided that the transferor shall ensure that any transferee that receives
shares of Class A common stock in a private transaction shall be subject to
the remainder of the 90-day lock-up period as set forth above.
Our common stock is listed on the Nasdaq National Market under the symbol
"TWTC."
In order to facilitate the offering of the Class A common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A common stock. Specifically, the underwriters may
sell more shares than they are obligated to purchase under the underwriting
agreement, creating a short position in the Class A common stock for their own
account. In addition, to cover over-allotments or to stabilize the price of the
Class A common stock, the underwriters may bid for, and purchase, shares of
Class A common stock in the open market. Finally, the underwriting syndicate may
claim selling concessions allowed to an underwriters or a dealer for
distributing the Class A common stock in the offering, if the syndicate
repurchases previously distributed shares of Class A common stock in transaction
to cover syndicate short positions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the Class
A common stock above independent market levels. The underwriters are not
required to engage in these activities and may end any of these activities at
any time.
Morgan Stanley Dean Witter Online Inc., an affiliate of Morgan Stanley &
Co. Incorporated, will be distributing shares of Class A common stock over the
Internet to its respective eligible account holders.
A prospectus in electronic format may be made available on the Web sites
maintained by one or more underwriters. The underwriters may agree to allocate a
number of shares to underwriters for sale to their online brokerage account
holders. Internet distributions will be allocated by the lead managers to
underwriters that may make Internet distributions on the same basis as other
allocations.
In the ordinary course of the underwriters' respective businesses, the
underwriters and their affiliates have engaged and may engage in commercial and
investment banking transactions with us and our affiliates. The underwriters'
and their affiliates also provide or have provided advisory and other financial
services. They have received customary fees and expenses for these commercial
and investment banking transactions and for these advisory and other financial
services. In particular, on December 8, 2000, we, Time Warner Telecom Holdings
and the lenders thereto, including The Chase Manhattan Bank, an affiliate of
Chase Securities Inc., and Morgan Stanley Senior Funding, Inc., an affiliate of
Morgan Stanley & Co. Incorporated, entered into a $1 billion senior secured
credit facility. In addition, on December 15, 2000, Morgan Stanley Senior
Funding, Inc., Lehman Commercial Paper Inc., an affiliate of Lehman Brothers
Inc., Bear Stearns Corporate Lending Inc., an affiliate of Bear, Stearns & Co.
Inc., The Chase Manhattan Bank and ABN AMRO Bank, N.V. entered into a $700
million senior unsecured bridge loan agreement. The purpose of the senior
unsecured bridge loan agreement was to provide interim funding for the
acquisition of substantially all of the assets of GST Telecommunications, Inc.
We intend to use the proceeds from this offering to repay a portion of this $700
million senior unsecured bridge loan agreement.
S-88
<PAGE> 91
Because more than ten percent of the proceeds of this offering, not
including underwriting compensation, may be received by entities who are
affiliated with National Association of Securities Dealers, Inc. members who are
participating in this offering, this offering is being conducted in compliance
with the NASD Conduct Rule 2710(c)(8). Pursuant to that rule, the appointment of
a qualified independent underwriter is not necessary in connection with this
offering, as a bona fide independent market (as defined in the NASD Conduct
Rules) exists in our class A common stock.
Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. were
underwriters for Time Warner Telecom's offering of its 9 3/4% Senior Notes in
July 1998. Morgan Stanley & Co. Incorporated, Lehman Brothers Inc. and Bear,
Stearns & Co. Inc. were underwriters for Time Warner Telecom's initial public
offering of Class A common stock in May 1999. Lehman Brothers Inc., Morgan
Stanley & Co. Incorporated and Bear, Stearns & Co. Inc. were underwriters for
the offering by Media One Holdings II, Inc., as selling stockholders, of Time
Warner Telecom's Class A common stock in April 2000.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
S-89
<PAGE> 92
LEGAL MATTERS
The validity of the Class A common stock offered hereby and certain legal
matters relating thereto will be passed upon for Time Warner Telecom by Cravath,
Swaine & Moore, New York, New York. Certain legal matters will be passed upon
for the underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated and combined financial statements of Time Warner Telecom
Inc. as of December 31, 1999 and 1998 and for each of the three years in the
period ended December 31, 1999, appearing in this Prospectus Supplement and
included in the Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
S-90
<PAGE> 93
TIME WARNER TELECOM INC.
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TIME WARNER TELECOM INC. AND SUBSIDIARIES:
Audited Consolidated Financial Statements
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets at December 31, 1999 and
1998................................................... F-3
Consolidated and Combined Statements of Operations for the
years ended December 31, 1999, 1998 and 1997........... F-4
Consolidated and Combined Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997........... F-5
Consolidated and Combined Statements of Changes in
Stockholders' Equity for the years ended December 31,
1999, 1998 and 1997.................................... F-6
Notes to Consolidated and Combined Financial Statements... F-7
Unaudited Interim Condensed Consolidated Financial
Statements
Consolidated and Condensed Balance Sheets at September 30,
2000 and December 31, 1999 (unaudited)................. F-20
Consolidated and Condensed Statements of Operations for
the three months and nine months ended September 30,
2000 and 1999 (unaudited).............................. F-21
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999...................... F-22
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended September 30, 2000........... F-23
Notes to Consolidated and Condensed Financial
Statements............................................. F-24
GST TELECOMMUNICATIONS, INC. AND SUBSIDIARIES:
Audited Consolidated Financial Statements
Independent Auditors' Report.............................. F-33
Consolidated Balance Sheets at December 31, 1999 and
1998................................................... F-34
Consolidated Statement of Operations for the years ended
December 31, 1999 and 1998, the three-month period
ended December 31, 1997 and the year ended September
30, 1997............................................... F-35
Consolidated Statement of Shareholders' (Deficit) Equity
for the years ended December 31, 1999 and 1998, the
three-month period ended December 31, 1997 and the year
ended September 30, 1997............................... F-36
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998, the three-month period
ended December 31, 1997 and the year ended September
30, 1997............................................... F-37
Notes to Consolidated Financial Statements................ F-38
Unaudited Interim Condensed Consolidated Financial
Statements
Condensed Consolidated Balance Sheets at September 30,
2000 and December 31, 1999............................. F-61
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and
1999................................................... F-62
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999.......... F-63
Notes to Condensed Consolidated Financial Statements...... F-64
</TABLE>
F-1
<PAGE> 94
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Time Warner Telecom Inc:
We have audited the accompanying consolidated balance sheets of Time Warner
Telecom Inc. (the "Company") as of December 31, 1999 and 1998, and the related
consolidated and combined statements of operations, cash flows and stockholders'
equity for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 1999 and 1998, and the consolidated and combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 4, 2000
F-2
<PAGE> 95
TIME WARNER TELECOM INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 90,586 $105,140
Marketable securities (note 3)............................ 173,985 231,107
Receivables, less allowances of $7,857 and $2,692......... 52,652 26,690
Prepaid expenses.......................................... 2,938 2,176
---------- --------
Total current assets.............................. 320,161 365,113
---------- --------
Investment in unconsolidated affiliate (note 2)............. -- 5,707
Property, plant and equipment............................... 868,770 612,119
Less accumulated depreciation............................. (191,664) (117,961)
---------- --------
677,106 494,158
Long-term marketable securities (note 3).................... -- 19,750
Intangible and other assets, net of accumulated amortization
(note 2).................................................. 45,745 19,616
---------- --------
Total assets...................................... $1,043,012 $904,344
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 64,678 $ 38,946
Deferred revenue.......................................... 37,913 10,524
Accrued taxes, franchise and other fees................... 23,280 15,214
Accrued interest.......................................... 17,983 17,333
Accrued payroll and benefits.............................. 13,945 8,821
Payable to Time Warner Cable (note 6)..................... 5,085 16,801
Other current liabilities................................. 26,459 14,114
---------- --------
Total current liabilities......................... 189,343 121,753
Long-term debt and capital lease obligations (notes 4 and
9)........................................................ 403,627 400,000
Deferred income taxes (note 7).............................. 27,126 --
Subordinated loans payable to the Former Parent Companies
(including $3,399 of accrued interest in 1998) (note 5)... -- 174,940
Stockholders' equity (note 1):
Preferred stock, $0.01 par value, 20,000,000 shares
authorized, no shares issued and outstanding........... -- --
Class A common stock, $0.01 par value, 277,300,000 shares
authorized, 23,543,422 shares issued and outstanding in
1999................................................... 235 --
Class B common stock, $0.01 par value, 162,500,000 shares
authorized, 81,214,285 and 81,250,000 shares issued and
outstanding in 1999 and 1998, respectively............. 812 813
Additional paid-in capital................................ 559,950 255,654
Accumulated deficit....................................... (138,081) (48,816)
---------- --------
Total stockholders' equity........................ 422,916 207,651
---------- --------
Total liabilities and stockholders' equity........ $1,043,012 $904,344
========== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 96
TIME WARNER TELECOM INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Dedicated transport services.............................. $152,468 $ 84,024 $ 44,529
Switched services......................................... 116,285 37,848 10,872
-------- -------- --------
Total revenue..................................... 268,753 121,872 55,401
-------- -------- --------
Costs and expenses(a):
Operating................................................. 117,567 67,153 40,349
Selling, general and administrative....................... 113,389 77,401 54,640
Depreciation and amortization............................. 68,785 50,717 38,466
-------- -------- --------
Total costs and expenses.......................... 299,741 195,271 133,455
-------- -------- --------
Operating loss.............................................. (30,988) (73,399) (78,054)
Interest expense(a):........................................ (45,264) (29,198) (1,538)
Interest income............................................. 16,589 9,731 --
Equity in income (losses)................................... 202 127 (2,082)
Gain on disposition of investments.......................... -- -- 11,018
-------- -------- --------
Net loss before income taxes................................ (59,461) (92,739) (70,656)
Income tax expense (note 7)................................. 29,804 -- --
-------- -------- --------
Net loss.................................................... $(89,265) $(92,739) $(70,656)
======== ======== ========
Basic and diluted loss per common share..................... $ (0.93) $ (1.14) $ (0.87)
======== ======== ========
Average common shares outstanding........................... 95,898 81,250 81,250
======== ======== ========
</TABLE>
---------------
(a) Includes expenses resulting from transactions with affiliates (note 6):
<TABLE>
<S> <C> <C> <C>
Operating................................................ $ 2,513 $ 2,041 $1,731
======= ======= ======
Selling, general and administrative...................... $ 1,579 $ 5,063 $6,810
======= ======= ======
Depreciation and amortization............................ $10,792 $ 9,010 $7,064
======= ======= ======
Interest expense......................................... $ 5,078 $11,582 $1,544
======= ======= ======
</TABLE>
See accompanying notes.
F-4
<PAGE> 97
TIME WARNER TELECOM INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (89,265) $ (92,739) $ (70,656)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 68,785 50,717 38,466
Equity in (income) losses of unconsolidated affiliate... (202) (127) 2,082
Deferred income tax expense............................. 29,804 -- --
Gain on disposition of investments...................... -- -- (11,018)
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Receivables and prepaid expenses...................... (22,384) (17,808) (4,019)
Accounts payable...................................... 27,491 6,037 7,265
Accrued interest...................................... 650 20,732 1,544
Payable to Time Warner Cable.......................... (11,716) 16,801 --
Accrued payroll and benefits.......................... 5,124 2,488 4,093
Other current liabilities............................. 44,698 16,882 5,472
Other balance sheet changes........................... 1,250 (3,326) (2,648)
--------- --------- ---------
Net cash provided by (used in) operating
activities....................................... 54,235 (343) (29,419)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (221,224) (126,023) (127,315)
Cash paid for acquisitions, net of cash acquired.......... (2,565) (1,204) (334)
Purchases of marketable securities........................ (290,811) (286,356) --
Proceeds from maturities of marketable securities......... 367,683 35,500 --
Proceeds from sale of investments......................... -- -- 7,028
--------- --------- ---------
Net cash used in investing activities.............. (146,917) (378,083) (120,621)
--------- --------- ---------
Cash flows from financing activities:
Proceeds of loans from Former Parent Companies............ -- 96,066 73,931
Repayment of loans to Former Parent Companies............. (180,018) -- --
Payment of capital lease obligations...................... (174) -- --
Repayment of acquired debt................................ (15,668) -- --
Net proceeds from issuance of debt........................ -- 387,500 --
Net proceeds from issuance of common stock upon exercise
of stock options........................................ 3,806 -- --
Net proceeds from initial public offering................. 270,182 -- --
Capital contributions from the Former Parent Companies.... -- -- 127,550
Distributions to the Former Parent Companies.............. -- -- (51,441)
--------- --------- ---------
Net cash provided by financing activities.......... 78,128 483,566 150,040
--------- --------- ---------
Increase (decrease) in cash and cash equivalents... (14,554) 105,140 --
Cash and cash equivalents at beginning of period............ 105,140 -- --
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 90,586 $ 105,140 $ --
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ 47,011 $ -- $ --
--------- --------- ---------
Cash paid for income taxes................................ $ 168 $ 181 $ 4
========= ========= =========
</TABLE>
SUPPLEMENTAL SCHEDULE FOR NONCASH INVESTING AND FINANCING ACTIVITIES:
Time Warner Telecom Inc. (the "Company") issued Class A common stock aggregating
$27.9 million to purchase the common stock of Internet Connect, Inc. ("Inc.Net")
and MetroComm, Inc. ("MetroComm").
In 1999, the Company incurred capital lease obligations of $3.7 million for the
purchase of fiber, equipment and furniture leases.
See accompanying notes.
F-5
<PAGE> 98
TIME WARNER TELECOM INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------
CLASS A CLASS B ADDITIONAL TOTAL
--------------- --------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997.................... -- $ -- 81,250 $813 $478,885 $(184,761) $294,937
Net capital
contributions from
the former Parent
Companies............ -- -- -- -- 76,109 -- 76,109
Net loss................ -- -- -- -- -- (70,656) (70,656)
------ ---- ------ ---- -------- --------- --------
Balance at December 31,
1997.................... -- -- 81,250 813 554,994 (255,417) 300,390
Net loss prior to
Reorganization....... -- -- -- -- -- (43,923) (43,923)
------ ---- ------ ---- -------- --------- --------
81,250 813 554,994 (299,340) 256,467
Effect of Reorganization
(note 1)............. -- -- -- -- (299,340) 299,340 --
Net loss after
Reorganization....... -- -- -- -- -- (48,816) (48,816)
------ ---- ------ ---- -------- --------- --------
Balance at December 31,
1998.................... 81,250 813 255,654 (48,816) 207,651
Initial public offering
net of offering
expenses of $19,618
(note 1)............. 20,700 207 -- -- 269,975 -- 270,182
Issuance of common stock
for acquisitions
(note 2)............. 2,498 25 -- -- 27,839 -- 27,864
Issuance of common stock
upon exercise of
stock options........ 309 2 -- -- 6,482 -- 6,484
Conversion of shares by
related party........ 36 1 (36) (1) -- -- --
Net loss................ -- -- -- -- -- (89,265) (89,265)
------ ---- ------ ---- -------- --------- --------
Balance at December 31,
1999.................... 23,543 $235 81,214 $812 $559,950 $(138,081) $422,916
====== ==== ====== ==== ======== ========= ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 99
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Capital Structure
The Company, a Delaware corporation, is a leading fiber facilities-based
integrated communications 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 MediaOne
Group, Inc. ("MediaOne"); and
(2) TWE-A/N is a partnership of TWE, Time Warner and Advance/Newhouse
Partnership ("Advance").
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 all the
Company's service areas and expanding the range of business telephony services
offered by the Company.
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 such
transaction, referred to as the "Reorganization," the Class B Stockholders
(either directly or through subsidiaries) became the owners of all the limited
liability company interests in TWT LLC. The Reorganization has been reflected as
of July 1, 1998 for accounting purposes.
On May 10, 1999, 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 Inc.Net, 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.
F-7
<PAGE> 100
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
On May 14, 1999, in conjunction with the Reconstitution, the Company
completed an initial public offering of 20,700,000 shares, including an
over-allotment of 2,700,000 shares, of Class A common stock at a price of $14
per share (the "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 5).
Remaining proceeds have been and will continue to be used to fund the Company's
continued growth, which may include acquisitions and joint ventures, and for
general corporate purposes.
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,
35,715 shares of Class B common stock were converted into Class A common stock.
As of December 31, 1999, the Class B Stockholders had approximately 97.2% 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 December 31, 1999.
On May 6, 1999, MediaOne and AT&T Corp. ("AT&T") entered into a merger
agreement providing for MediaOne to be acquired by AT&T. The MediaOne
stockholders have approved the merger, but the merger is subject to various
regulatory approvals. There is no assurance that the approvals will be obtained
or that the merger will be consummated. If the merger is completed, the Class B
common stock beneficially owned by MediaOne (through a subsidiary) will be
beneficially owned by AT&T. However, the transaction will not affect the
MediaOne subsidiary's rights 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. Under
the terms of the merger agreement, Time Warner and AOL stock will be converted
to AOL Time Warner stock at fixed exchange ratios. Upon consummation of the
merger, current Time Warner shareholders will receive approximately 45% of the
stock of AOL Time Warner, and current AOL shareholders will receive
approximately 55%. 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 is subject to
customary closing conditions, including regulatory clearance and stockholder
approvals. There is no assurance that the approvals 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 and continued to operate in a partnership
structure through May 10, 1999. The consolidated and combined statements of
operations have been adjusted
F-8
<PAGE> 101
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
to retroactively reflect an allocation of certain expenses pursuant to the final
terms of agreements related to the Reorganization, primarily relating to office
rent, overhead charges for various administrative functions performed by the
Former Parent Companies and certain facility maintenance and pole rental costs.
These allocations were required to reflect all costs of doing business and have
been based on various methods which management believes result in reasonable
allocation of such costs.
Basis of Consolidation and Accounting for Investments
The consolidated and combined financial statements include the accounts of
the Company and all entities in which the Company has a controlling voting
interest ("subsidiaries"). Significant intercompany accounts and transactions
have been eliminated. Significant accounts and transactions with the Former
Parent Companies are disclosed as related party transactions.
Investments in entities in which the Company has significant influence, but
less than a controlling voting interest, are accounted for using the equity
method. At December 31, 1998, the Company's investment in unconsolidated
affiliate consisted solely of a 50% investment in MetroComm AxS, L.P.
("MetroComm L.P."), a joint venture providing commercial telecommunications
services in the central Ohio area. Under the equity method, only the Company's
investment in and amounts due to and from the equity investee are included in
the consolidated balance sheets, and only the Company's share of the investee's
income (losses) are included in the consolidated and combined statements of
operations. During the second quarter of 1999, the remaining 50% of MetroComm
L.P. was acquired (see note 2) and, accordingly, is accounted for on a
consolidated basis as of May 31, 1999.
Cash, Cash Equivalents and Marketable Securities
Prior to July 14, 1998, the Company did not maintain any cash or marketable
securities since all funding of the Company's operating, investing and financing
activities was provided by capital contributions from the Former Parent
Companies or by subordinated loans payable to the Former Parent Companies (see
note 5). Such funding consisted of subordinated loans during the period from
July 1, 1997 through July 14, 1998, and remained outstanding until May 14, 1999.
The capital contributions of the Former Parent Companies, which are non-interest
bearing, have been included in additional paid-in capital. Prior to repayment of
the subordinated loans in May 1999, the subordinated loans, including accrued
interest, had been reflected as long-term liabilities in the accompanying
consolidated balance sheets.
The Company considers all highly liquid debt instruments with an original
maturity of three months or less, when purchased, to be cash equivalents.
The Company records its marketable securities in conformity with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." This statement entails
categorizing all debt and equity securities as held-to-maturity securities,
trading securities, or available-for-sale securities, and then measuring the
securities at either fair value or amortized cost.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Interest on securities classified
as held-to-maturity is included in interest income.
F-9
<PAGE> 102
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Receivables
The Company does not require collateral for telecommunication services
provided to customers. However, the Company performs ongoing credit evaluations
of its customers' financial conditions and has provided an allowance for
doubtful accounts based on the expected collectability of all accounts
receivable. The provision for doubtful accounts was $6.7 million, $2.0 million
and $1.2 million for 1999, 1998 and 1997, respectively.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Construction costs,
labor and applicable overhead related to the development, installation and
expansion of the Company's networks, and interest costs related to construction
are capitalized. During 1999, 1998 and 1997, interest capitalized was not
significant. Repairs and maintenance costs are charged to expense when incurred.
The Company licenses the right to use the majority of its fiber optic cable
from Time Warner Cable, in which they are co-located. The cost of these rights,
which are prepaid by the Company, is capitalized and reflects an allocable share
of Time Warner Cable's costs, which, prior to the Reorganization, generally
reflected the incremental costs incurred by Time Warner Cable to construct the
fiber for the Company. Subsequent to the Reorganization, the Company pays for
its allocable share of the cost of fiber and construction incurred by Time
Warner Cable in routes where they are in joint construction. In routes where the
Company is not in joint construction with Time Warner Cable, the Company pays
for the full cost of construction. Depreciation is provided on the straight-line
method over estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5-20 years
Communications networks..................................... 5-15 years
Vehicles and other equipment................................ 3-10 years
Fiber optic right to use.................................... 15 years
</TABLE>
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Buildings and improvements.................................. $ 15,741 $ 14,453
Communications networks..................................... 556,054 380,150
Vehicles and other equipment................................ 91,666 58,224
Fiber optic right to use.................................... 205,309 159,292
--------- ---------
868,770 612,119
Less accumulated depreciation............................... (191,664) (117,961)
--------- ---------
Total............................................. $ 677,106 $ 494,158
========= =========
</TABLE>
Intangible Assets
Intangible assets primarily consist of goodwill, deferred right of way
costs and covenants not to compete, which are amortized over periods of 10 to 20
years using the straight-line method. Amortization expense amounted to $2.7
million, $2.3 million and $2.0 million for 1999, 1998 and 1997, respectively.
Accumulated amortization of intangible assets at December 31, 1999 and 1998,
amounted to $7.0 million and $2.2 million, respectively.
F-10
<PAGE> 103
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Impairment of Long-Lived Assets
The Company periodically reviews the carrying amounts of property, plant
and equipment and its identifiable intangible assets to determine whether
current events or circumstances warrant adjustments to such carrying amounts. If
an impairment adjustment is deemed necessary, such loss is measured by the
amount that the carrying value of such assets exceeds their fair value.
Considerable management judgment is necessary to estimate the fair value of
assets, accordingly, actual results could vary significantly from such
estimates. Assets to be disposed of are carried at the lower of their financial
statement carrying amount or fair value less costs to sell.
Revenue
The Company's revenue has been derived primarily from the provision of
"private line" or "direct access" telecommunications services; however, an
increasing portion is derived from the provision of switched services. The
Company's customers are principally telecommunications-intensive business
end-users, long distance carriers, Internet service providers, wireless
communications companies and governmental entities. Such customers are offered a
wide range of integrated telecommunications products and services, including
dedicated transmission, local switched, long distance, data and high-speed
Internet access services. In addition, the Company benefits from its strategic
relationship with the Class B Stockholders both through access rights and
construction cost-sharing. As a result, the Company's networks have been
constructed primarily through the use of fiber capacity licensed from the Class
B Stockholders.
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 Internet service provider ("ISP") customers contending
that such traffic was not local. As a result, the Company has 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 significant portion of this revenue pending outcome
of the dispute. As of December 31, 1999, the Company deferred recognition of
$32.8 million in reciprocal compensation revenue for payments received
associated with these disputes. 1999 switched services revenue includes the
recognition of a non-recurring $7.6 million settlement of reciprocal
compensation. The Company pays reciprocal compensation expense to the other LECs
for local exchange traffic it terminates on the LECs facilities. These costs are
recognized as incurred and are reported as a component of operating expenses in
the Consolidated and Combined Statements of Operations.
Significant Customers
The Company has substantial business relationships with a few large
customers, including the major long distance carriers. For the years ended
December 31, 1999 and 1998, the Company's top 10 customers accounted for 39% and
38% of the Company's consolidated and combined revenue, respectively. AT&T
F-11
<PAGE> 104
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
accounted for more than 10% of the Company's total revenue in 1999 and AT&T and
MCI WorldCom, Inc., accounted for more than 10% of the Company's total revenue
in 1998. However, a substantial portion of such revenue results from traffic
that is directed to the Company by the Company's customers who have selected
such carriers as their long distance providers. Revenue includes sales to both
AT&T and MCI WorldCom, Inc. (including sales directed to the Company by the
Company's customers) of approximately $58.8 million, $28.9 million and $14.7
million 1999, 1998 and 1997, respectively.
Segment Reporting
The Company operates in 21 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, have similar customers and
networks, are regulated by the same type of authorities, and are managed
directly by the Company's executives, allowing the 21 service areas to be
aggregated, resulting in one reportable line of business.
Loss Per Common Share
The Company computes loss per common share in accordance with the
provisions of Statement of Financial Accounting Standard No. 128, Earnings Per
Share ("SFAS 128"). SFAS 128 requires companies with complex capital structures
to present basic and diluted earnings per share ("EPS"). Basic EPS is measured
as the income or loss available to common stockholders divided by the weighted
average outstanding common shares for the period. Diluted EPS is similar to
basic EPS, but presents the dilutive effect on a per share basis of potential
common shares (e.g., convertible securities, stock options, etc.) as if they had
been converted at the beginning of the periods presented. Potential common
shares that have an anti-dilutive effect (e.g., those that increase income per
share or decrease loss per share) are excluded from diluted EPS.
The basic and diluted loss per common share for all periods presented
herein was computed by dividing the net loss attributable to common shares by
the weighted average outstanding common shares for the period. Potential common
shares were not included in the computation of weighted average shares
outstanding because their inclusion would be anti-dilutive.
Estimates
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.
Reclassifications
Certain prior year amounts have been reclassified for comparability with
the 1999 presentation.
2. ACQUISITIONS
During the second quarter of 1999, the Company acquired all of the
outstanding common stock of Inc.Net, an Internet service provider, for
consideration consisting of $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, such
Class A limited liability interests were converted into 307,550 shares of Class
A common stock of the Company. The Class A common stock of the Company into
which the limited liability interests were converted will be held in escrow to
be released to the former Inc.Net shareholders over a period of three years.
Through the acquisition of this subsidiary, the Company plans to manage current
and future data networks and provide new Internet products. The
F-12
<PAGE> 105
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
transaction was accounted for under the purchase method of accounting and
generated $6.9 million in goodwill, which is being amortized on a straight-line
basis over a ten-year period. Amortization expense for 1999 was approximately
$462,000.
During the second quarter of 1999, the Company acquired all of the
outstanding common stock of MetroComm through the issuance of 2,190,308 shares
of Class A common stock of the Company 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. 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 for 1999 was approximately $1.1 million.
The two acquisitions completed during 1999 are summarized as follows
(amounts in thousands):
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Recorded value of assets acquired........................... $ 32,003
Goodwill.................................................... 25,746
Elimination of investment in unconsolidated affiliate....... (5,278)
Assumed liabilities......................................... (22,042)
Common stock issued in acquisitions......................... (27,864)
--------
Cash paid for acquisitions........................ $ 2,565
========
</TABLE>
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. Had both acquisitions
occurred on January 1, 1998, revenue, net loss, and basic and diluted loss per
common share would not have been materially different for 1998 and 1999.
3. MARKETABLE SECURITIES
The Company's marketable securities portfolio includes shares of money
market mutual funds, corporate debt securities, certificates of deposit with
banks and foreign government debt securities. All of the Company's marketable
securities are categorized as "held-to-maturity" and carried at amortized cost.
F-13
<PAGE> 106
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Marketable securities at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Cash equivalents:
Shares of money market mutual funds....................... $ 4,510 $ 3,338
Certificates of deposit with banks........................ -- 5,000
Corporate and municipal debt securities................... 77,267 93,394
-------- --------
81,777 101,732
-------- --------
Current marketable securities:
Certificates of deposit with banks........................ 54,797 57,014
Corporate and municipal debt securities................... 119,188 169,085
Foreign government debt securities........................ -- 5,008
-------- --------
173,985 231,107
-------- --------
Long-term marketable securities:
Corporate debt securities................................. -- 19,750
-------- --------
Total marketable securities....................... $255,762 $352,589
======== ========
</TABLE>
The estimated fair value of the marketable securities is not materially
different from the amortized cost.
4. 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 $40.3 million and
$17.9 million for 1999 and 1998, respectively. At December 31, 1999, the fair
market value for the $400 million of Senior Notes was $415 million, based on
market prices.
The Senior Notes are governed by an Indenture that contains certain
restrictive covenants. Such 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.
5. SUBORDINATED LOANS PAYABLE TO THE FORMER PARENT COMPANIES
During the period from July 1, 1997 through July 14, 1998, all of the
Company's financing requirements were funded with subordinated loans from the
Former Parent Companies. Such loans remained outstanding, accruing interest,
through May 14, 1999. Such loans from the Former Parent Companies were
subordinated in right of payment to the Senior Notes, except for a provision
allowing repayment prior to maturity with the net proceeds of any offering of
common stock or equivalent interest of the Company. Such loans bore interest
(payable in kind) at The Chase Manhattan Bank's prime rate, which was 7.75% from
January 1, 1999 through the payoff of the loan in May 1999. Interest expense
relating to such loans totaled approximately $5.1 million, $11.6 million and
$1.5 million for 1999, 1998 and 1997, respectively. 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.
F-14
<PAGE> 107
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company engages in various
transactions with the Former Parent Companies, generally on negotiated terms
among the affected units that, in management's opinion, result in reasonable
allocations.
The Company licenses the right to use the majority of its fiber optic cable
from Time Warner Cable. The Company paid Time Warner Cable $16.8 million, $23.8
million and $32.5 million for 1999, 1998 and 1997, respectively, under this
arrangement. Such costs have been capitalized by the Company. The amortization
expense of these costs and fiber previously capitalized in the amount of $10.8
million, $9.0 million and $7.1 million for 1999, 1998 and 1997, respectively,
has been classified as a component of depreciation and amortization expense in
the accompanying consolidated and combined statements of operations. In
addition, under this licensing arrangement, the Company reimburses Time Warner
Cable for facility maintenance and pole rental costs, which aggregated $2.5
million, $2.0 million and $1.7 million for 1999, 1998 and 1997, 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 such divisions. Prior to the Reorganization, such
allocations were based on direct labor, total expenses or headcount relative to
each operating unit. The Company is also allocated rent based on the square
footage of space occupied by the Company at Time Warner Cable's facilities.
After the Reorganization, these costs are based on contracts with Time Warner
Cable. Such charges aggregated approximately $1.6 million, $2.1 million and $4.4
million for 1999, 1998 and 1997, respectively.
During the period July 1, 1997 through May 14, 1999, the Former Parent
Companies provided all or a portion of the Company's financing requirements.
Interest expense relating to such loans aggregated approximately $5.1 million,
$11.6 million and $1.5 million for 1999, 1998 and 1997, respectively (see note
5).
During 1998 and 1997, the Company participated in the Time Warner Cable
Pension Plan (the "TW Pension Plan"), a noncontributory defined benefit pension
plan which covered approximately 75% of all employees. The remaining 25% of
employees participated in a pension plan under the administration of MediaOne,
their previous employer (the "MediaOne Pension Plan"). The Company also
participated in the Time Warner Cable Employees Savings Plan (the "Savings
Plan"), a defined contribution plan. Both the TW Pension Plan and Savings Plan
were administered by a committee appointed by the Board of Representatives of
TWE and covered substantially all employees.
Benefits under the TW Pension Plan are determined based on formulas which
reflect employees' years of service and compensation levels during their
employment period. Total pension cost aggregated $1.1 million for 1998 and 1997.
Benefit costs under the MediaOne Pension Plan for certain employees of the
Company aggregated $0.8 million and $0.6 million for 1998 and 1997,
respectively.
The Company's contributions to the Savings Plan represented up to 6.67% of
the employees' compensation during the plan year. Defined contribution plan
expense aggregated $1.0 million and $0.7 million for 1998 and 1997,
respectively.
As of January 1, 1999, the Company did not participate in the TW Pension
Plan, the MediaOne Pension Plan or the Savings Plan because the Company adopted
its own benefit plans. (See note 10). The Company has no future obligation to
fund both the TW Pension Plan and the MediaOne Pension Plan.
F-15
<PAGE> 108
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
On May 10, 1999, in conjunction with the Reconstitution, a one-time charge
to earnings of $39.4 million was recorded to recognize the net deferred tax
liability associated with the change from a limited liability company to a
corporation, as all of the Company's tax operating losses prior to May 10, 1999
were absorbed by the Former Parent Companies. The income tax benefit for 1999,
shown below, includes the effect of the Reconstitution and the tax impact of
operations from the date of the Reconstitution through December 31, 1999.
Income tax expense is summarized as follows (amounts in thousands):
<TABLE>
<S> <C>
Total income tax expense.................................... $29,804
Less -- tax benefit related to exercise of non-qualified
stock options............................................. (2,678)
-------
Total deferred income taxes....................... 27,126
Less current.............................................. --
-------
Net deferred...................................... $27,126
=======
</TABLE>
Variations from the federal statutory rate for activity since the
Reconstitution date are as follows:
<TABLE>
<S> <C>
Expected federal income tax benefit at statutory rate....... (35.0)%
Effect of net operating losses incurred prior to the
Reconstitution............................................ 18.5
Effect of the initial deferred tax liability recorded at the
time of the Reconstitution................................ 66.4
Effect of permanent differences............................. 1.1
State income tax benefit, net of federal income tax
benefit................................................... (2.1)
Other....................................................... 1.2
-----
Income tax expense................................ 50.1%
=====
</TABLE>
Significant components of the Company's net deferred tax liability at
December 31, 1999 are as follows (amounts in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Accrued expenses.......................................... $ 4,933
Allowance for doubtful accounts........................... 3,159
Net operating losses since the Reconstitution............. 5,869
-------
Total deferred tax assets......................... 13,961
-------
Deferred tax liability -- depreciation and amortization..... 41,087
-------
Net deferred tax liability........................ $27,126
=======
</TABLE>
At December 31, 1999, the Company has a net operating loss carryforward
since the Reconstitution for federal income tax purposes of approximately $14.6
million. The net operating loss carryforward is scheduled to expire in 2019.
8. OPTION PLANS -- COMMON STOCK AND STOCK OPTIONS
Time Warner Telecom 1998 Option Plan
The Company maintains a stock option plan reserving 9,027,000 shares of
Class A common stock to be issued to officers and key employees under terms and
conditions to be set by the Company's Board of Directors. Generally, the options
vest over periods of up to four years and expire ten years from the date of
issuance. Such options have generally been granted to employees of the Company
at an estimated fair value at the date of grant, and accordingly, no
compensation cost has been recognized by the Company relating to such option
plan.
F-16
<PAGE> 109
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
During 1999, the Company granted options to purchase 100,000 shares outside
of the option plan. Deferred compensation expense of $2.1 million was recorded
and will be amortized on a straight-line basis over the four-year vesting
period. In 1999, stock compensation expense of approximately $88,000 was
recorded for such options and are reported as a component of selling, general
and administrative expenses in the accompanying consolidated and combined
statements of operations.
The Company has elected to follow Accounting Principles Board Opinion No.
25 ("APB 25"), "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options is generally
equal to the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. SFAS No. 123, "Accounting and Disclosure of
Stock-Based Compensation," establishes an alternative method of expense
recognition for stock-based compensation awards to employees based on fair
values. The Company elected not to adopt SFAS No. 123 for expense recognition
purposes.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998 and 1999, respectively: risk-free interest rate of 6.5%
during each period; dividend yield of 0.0% during each period; volatility factor
of the expected market price of the Company's common stock of 0.74 for 1999; and
a weighted-average expected life of the option of five years during each period.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The weighted-average fair value of options granted during 1998 and 1999 was
$3.33 and $19.98, respectively. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period. The Company's pro forma net loss and pro forma net loss per
share applicable to Class A common stock as if the company had used the fair
value accounting provisions of SFAS No. 123 would be a loss of $103.1 million
and a loss per share of $1.07 for the year ended December 31, 1999. The
Company's shares were not publicly traded and no shares were exercisable as of
December 31, 1998.
A summary of the Company's stock option activity, and related information
for the year ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year....... 5,810,750 $12.00 -- $ --
Granted................... 2,950,750 29.90 6,115,250 12.00
Exercised................. (309,849) 12.00 -- --
Forfeited................. (277,594) 12.63 (304,500) 12.00
--------- ---------
Options outstanding at end
of year................. 8,174,057 18.44 5,810,750 12.00
--------- ---------
Exercisable at end of
year.................... 1,784,036 $12.00 -- $12.00
========= =========
</TABLE>
F-17
<PAGE> 110
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Exercise prices for options outstanding as of December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AS OF AVERAGE WEIGHTED EXERCISABLE AS OF WEIGHTED
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1999 CONTRACTUAL LIFE EXERCISE PRICE 1999 EXERCISE PRICE
--------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$12.00-12.00......... 5,465,557 8.64 $12.00 1,784,036 $12.00
14.00-34.00......... 662,250 9.51 21.38 0 0.00
34.50-34.50......... 2,000,000 9.88 34.50 0 0.00
35.75-48.13......... 46,250 9.96 43.02 0 0.00
--------- ---------
8,174,057 9.02 $18.44 1,784,036 $12.00
========= =========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company leases office space and furniture, switching facilities and
fiber optic use rights. Certain of these leases contain renewal clauses.
At December 31, 1999, commitments under capital and non-cancelable
operating leases with terms in excess of one year were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Year ended December 31:
2000...................................................... $ 737 $11,023
2001...................................................... 736 9,152
2002...................................................... 519 9,003
2003...................................................... 433 8,804
2004...................................................... 401 8,449
Thereafter................................................ 5,416 51,549
------- -------
Total minimum lease payments...................... 8,242 $97,980
=======
Less amount representing interest........................... (4,139)
-------
Present value of obligations under capital leases........... 4,103
Less current portion of obligations under capital leases.... (476)
-------
Obligations under capital leases, excluding current
portion................................................... $ 3,627
=======
</TABLE>
The obligations under capital leases have been discounted at an imputed
interest rate of 9.75%. Rental expense under operating leases, aggregated $9.4
million, $7.0 million and $5.4 million for 1999, 1998 and 1997, respectively.
Pending legal proceedings are substantially limited to litigation
incidental to the business of the Company. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse effect on
the Company's financial statements.
F-18
<PAGE> 111
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
10. EMPLOYEE BENEFIT PLANS
Effective January 1, 1999, the Company adopted the "TWTC 401(k) by Time
Warner Telecom" qualified retirement plan (the "401(k) Plan"). Employees who
meet certain eligibility requirements may contribute up to 15% of their eligible
compensation, subject to statutory limitations, to a trust for investment in
several diversified investment choices, as directed by the employee. The Company
made a matching contribution of 100% of each employee's contribution up to a
maximum of 5% of the employee's eligible compensation. Contributions to the
401(k) Plan aggregated $3.3 million for 1999.
Effective January 1, 2000, the Company adopted the "Time Warner Telecom
2000 Qualified Stock Purchase Plan" (the "Stock Purchase Plan"). Employees who
meet certain eligibility requirements may elect to designate up to 15% of their
eligible compensation to be used to purchase shares of the Company's Class A
common stock, up to an annual limit of $25,000 in the Company's Class A common
stock, at a 15% discount to fair market value. Stock purchases occur twice a
year on January 1 and July 1, with the price per share equaling the lower of 85%
of the market price at the beginning or end of the offering period. Subject to
stockholder approval at the Company's annual meeting, the Company is authorized
to issue a total of 750,000 shares of the Company's Class A common stock to
participants in the Stock Purchase Plan.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summarizes the Company's unaudited quarterly results of
operations for 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Year Ended December 31, 1999
Total revenue(1)................ $47,589 $ 58,381 $ 71,315 $ 91,468
Operating income (loss)......... (15,536) (11,340) (8,561) 4,449
Net loss........................ (24,642) (53,178) (9,115) (2,330)
Basic and diluted loss per
common share................. (0.30) (0.57) (0.09) (0.02)
Year Ended December 31, 1998
Total revenue................... 22,048 27,047 32,686 40,091
Operating loss.................. (19,719) (19,407) (17,532) (16,741)
Net loss........................ (21,788) (22,135) (24,490) (24,326)
Basic and diluted loss per
common share................. $ (0.27) $ (0.27) $ (0.30) $ (0.30)
</TABLE>
---------------
(1) Total revenue for the quarter ended December 31, 1999 includes the
recognition of a non-recurring $7.6 million settlement of reciprocal
compensation.
The total net loss per share for the 1999 quarter does not equal net loss
per share for the respective year as the per share amounts for each quarter and
for the year are computed based on their respective discrete periods.
F-19
<PAGE> 112
TIME WARNER TELECOM INC.
CONSOLIDATED AND CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 74,091 $ 90,586
Marketable debt securities................................ 28,578 173,985
Receivables, less allowances of $18,479 and $7,857........ 81,821 52,652
Prepaid expenses.......................................... 2,247 2,938
---------- ----------
Total current assets.............................. 186,737 320,161
---------- ----------
Property, plant and equipment............................... 1,082,016 868,770
Less accumulated depreciation............................. (257,881) (191,664)
---------- ----------
824,135 677,106
---------- ----------
Intangible and other assets, net of accumulated amortization
(notes 1 and 2)........................................... 93,663 45,745
---------- ----------
Total assets...................................... $1,104,535 $1,043,012
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 46,407 $ 64,678
Deferred revenue.......................................... 35,719 37,913
Other current liabilities................................. 127,356 86,752
---------- ----------
Total current liabilities......................... 209,482 189,343
---------- ----------
Long-term debt and capital lease obligations (note 3)....... 403,311 403,627
Deferred income taxes....................................... 21,231 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, 277,300,000 shares
authorized, 33,428,172 and 23,543,422 shares issued and
outstanding in 2000 and 1999, respectively............. 334 235
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................................ 590,924 559,950
Accumulated other comprehensive income, net of taxes...... 12,030 --
Accumulated deficit....................................... (133,499) (138,081)
---------- ----------
Total stockholders' equity........................ 470,511 422,916
---------- ----------
Total liabilities and stockholders' equity........ $1,104,535 $1,043,012
========== ==========
</TABLE>
See accompanying notes.
F-20
<PAGE> 113
TIME WARNER TELECOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Dedicated transport services..................... $ 71,129 $ 40,666 $183,759 $105,727
Switched services................................ 50,027 30,649 169,308 71,558
-------- -------- -------- --------
Total revenue............................ 121,156 71,315 353,067 177,285
-------- -------- -------- --------
Costs and expenses(a):
Operating........................................ 48,299 30,488 130,846 81,949
Selling, general and administrative.............. 44,475 30,097 122,663 80,501
Depreciation and amortization.................... 23,994 19,291 68,793 50,272
-------- -------- -------- --------
Total costs and expenses................. 116,768 79,876 322,302 212,722
-------- -------- -------- --------
Operating income (loss).................. 4,388 (8,561) 30,765 (35,437)
Interest expense(a)................................ (10,043) (9,983) (30,657) (35,139)
Interest income.................................... 2,220 3,840 9,016 12,828
Equity in income of unconsolidated affiliate (note
2)............................................... -- -- -- 285
-------- -------- -------- --------
Income (loss) before income taxes........ (3,435) (14,704) 9,124 (57,463)
Income tax expense (benefit)....................... (1,110) (5,589) 4,542 29,473
-------- -------- -------- --------
Net income (loss)........................ $ (2,325) $ (9,115) $ 4,582 $(86,936)
======== ======== ======== ========
Basic and diluted earnings (loss) per share........ $ (0.02) $ (0.09) $ 0.04 $ (0.94)
======== ======== ======== ========
Weighted average shares outstanding:
Basic............................................ 105,531 104,480 105,262 92,957
======== ======== ======== ========
Diluted.......................................... 105,531 104,480 108,427 92,957
======== ======== ======== ========
</TABLE>
---------------
(a) Includes expenses resulting from transactions with affiliates (note 4):
<TABLE>
<S> <C> <C> <C> <C>
Operating..................................... $ 290 $ 749 $ 755 $ 1,764
======== ======== ======== ========
Selling, general and administrative........... $ 399 $ 312 $ 1,100 $ 1,259
======== ======== ======== ========
Depreciation and amortization................. $ 3,231 $ 2,626 $ 9,594 $ 7,842
======== ======== ======== ========
Interest expense.............................. $ -- $ -- $ -- $ 5,078
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-21
<PAGE> 114
TIME WARNER TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 4,582 $ (86,936)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 68,793 50,272
Amortization of deferred debt issue costs.............. 1,661 937
Equity in income of unconsolidated affiliate........... -- (285)
Deferred income tax expense............................ 4,542 29,473
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Receivables and prepaid expenses..................... (28,478) (8,641)
Accounts payable, deferred revenue and other current
liabilities......................................... 20,138 1,986
--------- ---------
Net cash provided by (used in) operating
activities...................................... 71,238 (13,194)
--------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (213,246) (138,305)
Cash paid for acquisitions, net of cash acquired.......... (10,000) (2,567)
Purchases of marketable securities........................ (93,919) (116,557)
Proceeds from maturities of marketable securities......... 239,326 132,625
Other investing activities................................ (9,978) --
--------- ---------
Net cash used in investing activities............. (87,817) (124,804)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock upon exercise
of stock options....................................... 10,370 889
Net proceeds from issuance of common stock in connection
with the employee stock purchase plan.................. 2,089 --
Payment of capital lease obligations...................... (315) (133)
Deferred debt issue costs................................. (12,060) --
Net proceeds from initial public offering................. -- 270,182
Repayment of loans to Former Parent Companies............. -- (180,018)
Repayment of acquired debt................................ -- (15,668)
--------- ---------
Net cash provided by financing activities......... 84 75,252
--------- ---------
Decrease in cash and cash equivalents............. (16,495) (62,746)
Cash and cash equivalents at beginning of period............ 90,586 105,140
--------- ---------
Cash and cash equivalents at end of period.................. $ 74,091 $ 42,394
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ 38,407 $ 46,825
========= =========
Tax benefit related to exercise of non-qualified stock
options................................................ $ 18,524 $ --
========= =========
Cash paid for income taxes................................ $ 419 $ 168
========= =========
</TABLE>
See accompanying notes.
F-22
<PAGE> 115
TIME WARNER TELECOM INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 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
------ ------ ------ ------ ---------- ------------- ----------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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................... 844 8 -- -- 28,886 -- -- 28,894
Shares issued for cash in
connection with the
employee stock purchase
plan...................... 54 1 -- -- 2,088 -- -- 2,089
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.... -- -- -- -- -- 12,030 -- 12,030
Net income.................. -- -- -- -- -- -- 4,582 4,582
------ ---- ------ ---- -------- ------- --------- --------
Balance at September 30,
2000........................ 33,428 $334 72,227 $722 $590,924 $12,030 $(133,499) $470,511
====== ==== ====== ==== ======== ======= ========= ========
</TABLE>
See accompanying notes.
F-23
<PAGE> 116
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 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 provider of integrated communications services
and solutions to medium and large business customers in selected metropolitan
markets across the United States. The Company offers 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 "IPO"). The IPO generated $270.2 million
in proceeds for the Company, net of underwriting discounts and expenses. The net
F-24
<PAGE> 117
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
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 September 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 September 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 and continued to operate in a partnership
structure through May 10, 1999. The consolidated statements of operations have
been adjusted to retroactively
F-25
<PAGE> 118
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
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 in 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 September 30, 2000, the fair value of the Company's available-for-sale
security was $23.1 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 September
30, 2000, the unrealized holding gain on this security was $12.0 million, net of
taxes. There were no sales of marketable securities for the nine months ended
September 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.
F-26
<PAGE> 119
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 nine months ended September 30, 2000 includes the
recognition of $27.3 million of non-recurring reciprocal compensation. A
significant portion of the non-recurring reciprocal compensation revenue
recognized during the nine months ended September 30, 2000 was a result of the
resolution of certain cases involving reciprocal compensation disputes. As of
September 30, 2000, the Company had deferred recognition of $25.4 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 nine months ended
September 30, 2000 and 1999, the Company's top 10 customers accounted for 46%
and 45%, respectively, of the Company's consolidated revenue. MCI WorldCom, Inc.
("MCI") accounted for more than 10% of the Company's total revenue, or $36.4
million, during the nine months ended September 30, 2000, but accounted for less
than 10% of the Company's total revenue during the nine months ended September
30, 1999. AT&T accounted for more than 10% of the Company's total revenue or
$23.5 million, during the nine months ended September 30, 1999, but accounted
for less than 10% of the Company's total revenue during the nine months ended
September 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 or MCI as their long distance provider.
F-27
<PAGE> 120
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 nine months ended
September 30, 1999 and the three months ended September 30, 2000 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 nine months ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss) for basic and diluted
earnings (loss) per share............... $ (2,325) $ (9,115) $ 4,582 $(86,936)
-------- -------- -------- --------
Weighted-average number of
shares--basic........................... 105,531 104,480 105,262 92,957
Dilutive effect of stock options.......... -- -- 3,165 --
-------- -------- -------- --------
Weighted-average number of
shares--diluted......................... $105,531 $104,480 $108,427 $ 92,957
======== ======== ======== ========
Earnings (loss) per share:
Basic................................... $ (0.02) $ (0.09) $ 0.04 $ (0.94)
======== ======== ======== ========
Diluted................................. $ (0.02) $ (0.09) $ 0.04 $ (0.94)
======== ======== ======== ========
</TABLE>
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended,
which is required to be adopted in years beginning after June 15, 2000. Because
the Company has historically not made use of derivatives, management does not
anticipate that the adoption of the new statement will have a significant effect
on earnings or the financial position of the Company.
F-28
<PAGE> 121
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
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 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 $521,000 and $289,000 for the nine
months ended September 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 $1,412,000 and $627,000 for the
nine months ended September 30, 2000 and 1999, respectively.
Since both acquisitions are accounted for as purchases, the results of
operations of Internet Connect, Inc. and MetroComm are consolidated with the
Company's results of operations from their respective acquisition dates.
On September 11, 2000, the Company executed a definitive purchase agreement
to acquire substantially all of the assets of GST Telecommunications, Inc
("GST") out of bankruptcy. GST is a facilities-based integrated communications
provider offering voice, data, and Internet services primarily to business
customers throughout the western United States. The asset purchase agreement
provides for the purchase of substantially all of the GST assets for cash
consideration of $640 million, plus the assumption of certain liabilities and
fees, for a total purchase price of $690 million, subject to certain purchase
price adjustments. The bankruptcy court approved the transaction, but the
closing is still subject to regulatory approvals and certain other closing
conditions. There is no assurance that all necessary regulatory approvals will
be obtained or that all closing conditions will be satisfied. The GST asset
acquisition, if completed, is expected to accelerate the Company's build-out
strategy by adding to the Company's network 15 additional markets in the western
United States, 4,210 route miles, 227,674 fiber miles, and service to 345 on-net
buildings. In addition, the Company will acquire GST's network operations center
in Vancouver, Washington, SS7 networks, voice and data switches, and
substantially all other assets excluding certain customers and certain assets in
Hawaii. The acquisition is expected to close by the end of 2000 or the first
quarter of 2001.
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 $30.1 million for
both the nine months ended September 30, 2000 and 1999. At September 30, 2000,
the fair market value for the $400 million of Senior Notes was $360 million,
based on market prices.
F-29
<PAGE> 122
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
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 $1,997,000 for the nine months ended September 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
September 30, 2000, the undrawn available commitment under the Revolver was $475
million.
Under a commitment letter with The Chase Manhattan Bank ("Chase") and
Morgan Stanley Senior Funding ("Morgan Stanley") dated September 11, 2000, the
Company expects to replace its existing $475 million senior secured revolving
credit facility with a new $1 billion amended and restated facility. Chase and
Morgan Stanley's commitments to provide the amended and restated facility are
subject to various conditions.
The amended and restated facility will provide up to $525 million of senior
secured term loan financing, a substantial portion of which the Company expects
to use for the purchase of the GST assets, and a $475 million senior secured
revolving credit facility. As with the Company's existing credit facility,
borrowings under the amended and restated facility will be secured by the
Company's interest in all of its subsidiaries and substantially all of the
assets of the Company's subsidiaries, including the assets to be acquired from
GST, except for certain assets with respect to which the grant of a security
interest is prohibited by governing agreements. As with the Company's existing
credit facility, the amended and restated facility will require 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 amended and restated facility will be 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.
As with the Company's existing credit facility, the amended and restated
facility will also contain financial covenants, including a consolidated
leverage ratio, a consolidated interest coverage ratio, a consolidated debt
service coverage ratio, and a consolidated debt default, including cross default
provisions. Under the cross default provisions, the Company is deemed to be in
default under the amended and restated facility if the Company has defaulted
under any of the other material outstanding obligations, such as the 9 3/4%
Senior Notes.
The Company also entered into a commitment letter with Chase, Morgan
Stanley, and Lehman Commercial Paper Inc. for a $700 million senior unsecured
bridge loan facility. The Company expects to borrow the entire $700 million on
the closing date of the GST asset acquisition. The commitments of the bridge
lenders to provide the bridge facility are subject to various conditions.
F-30
<PAGE> 123
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Any notes issued under the proposed bridge facility will be repayable one
year from the date of the issuance under the bridge facility and will bear
interest quarterly at the London Interbank Offered Rate plus a specified margin
that increases over time. The specified margin may be increased if the Company's
credit rating deteriorates. The Company will have the ability to repay the
bridge facility at any time prior to the maturity date upon 10 days' written
notice. In addition, the bridge notes must be repaid with the proceeds of any
debt or equity financings, as well as certain other events, that occur prior to
the maturity date. The Company also expects to pay customary commitment and
other fees in connection with the bridge facility.
In the event that the Company is not able to repay the bridge notes within
one year, it will be obligated to issue new notes in exchange for the bridge
notes. Any such exchange notes would have the same principal amount as the
bridge notes and mature 10 years from the date of issuance. In addition, the
Company would be required to pay customary fees under the bridge notes upon
issuance of any exchange notes. Interest on the exchange notes would be payable
quarterly at a specified interest rate.
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 $1.4 million and $13.7 million for the nine
months ended September 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 $9.6 million and $7.8 million for the
nine months ended September 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 $755,000 and $1.8 million for the nine
months ended September 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 $1.1 million and $1.3 million for the nine months
ended September 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 Chase'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 nine months ended September 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.
F-31
<PAGE> 124
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-32
<PAGE> 125
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
GST Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of GST
Telecommunications, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, shareholders' deficit, and
cash flows for each of the years in the two-year period ended December 31, 1999,
the three-month period ended December 31, 1997, and for the year ended September
30, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GST
Telecommunications, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and cash flows for each of the years in the
two-year period ended December 31, 1999, the three-month period ended December
31, 1997, and for the year ended September 30, 1997 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in note
16(c) and (d) to the consolidated financial statements, on May 17, 2000 the
Company filed for protection from its creditors under Chapter 11 of the U.S.
Bankruptcy Laws. Subsequent to this filing, the Company conducted an auction
under the supervision of the Bankruptcy Court that has resulted in a definitive
agreement to sell a substantial portion of the Company's assets to Time Warner
Telecom Inc. These actions raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Portland, Oregon
March 17, 2000, except for note 16(c) and (d), as to
which the date is September 21, 2000
F-33
<PAGE> 126
GST TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 42,983 $ 86,070
Restricted investments.................................... 19,828 34,107
Trade accounts receivable, net............................ 45,244 32,935
Construction contracts receivable......................... 26,823 3,338
Investments............................................... 44,596 16,246
Prepaid and other current assets.......................... 8,562 9,601
---------- ----------
Total current assets.............................. 188,036 182,297
---------- ----------
Restricted investments...................................... 9,848 247,257
Property and equipment, net................................. 832,047 615,852
Goodwill, net............................................... 41,409 51,091
Other assets, net........................................... 41,289 54,786
---------- ----------
Total assets...................................... $1,112,629 $1,151,283
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 30,579 $ 26,411
Accrued expenses.......................................... 49,759 37,445
Deferred revenue.......................................... 10,066 6,030
Current portion of capital lease obligations.............. 6,693 5,649
Current portion of long-term debt......................... 17,466 13,417
---------- ----------
Total current liabilities......................... 114,563 88,952
---------- ----------
Long-term interest payable.................................. 43,134 21,377
Capital lease obligations, less current portion............. 16,813 19,741
Long-term debt, less current portion........................ 1,151,778 1,092,959
Commitments and contingencies
Redeemable preference shares:
Authorized -- 10,000,000 no par shares; 500 shares issued
and outstanding at December 31, 1999 and 1998.......... 69,688 61,741
Shareholders' deficit:
Common shares:
Authorized -- unlimited number of no par common shares;
issued and outstanding -- December 31,
1999 -- 37,734,507 shares, December 31,
1998 -- 36,264,066 shares............................. 238,626 234,267
Accumulated deficit.................................... (566,523) (383,954)
Accumulated other comprehensive income................. 44,550 16,200
---------- ----------
(283,347) (133,487)
---------- ----------
Total liabilities and shareholders' deficit....... $1,112,629 $1,151,283
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE> 127
GST TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED THREE-MONTH
DECEMBER 31, PERIOD ENDED YEAR ENDED
--------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
--------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications and other
services........................... $ 202,686 $ 149,783 $ 26,064 $ 82,593
Construction, facility sales and
other.............................. 115,147 8,826 1,488 --
Product............................... 4,089 4,708 8,706 23,374
--------- --------- -------- ---------
Total revenues................ 321,922 163,317 36,258 105,967
--------- --------- -------- ---------
Operating costs and expenses:
Network expenses...................... 129,761 104,320 19,127 66,250
Facilities administration and
maintenance........................ 21,074 16,703 3,511 12,304
Cost of construction revenues......... 74,940 1,424 300 --
Cost of product revenues.............. 2,484 2,999 3,102 7,990
Selling, general and administrative... 122,974 96,506 22,428 72,046
Research and development.............. -- -- 781 2,316
Depreciation and amortization......... 70,973 45,957 8,864 24,159
Special charges....................... -- 30,580 -- 7,445
--------- --------- -------- ---------
Total operating costs and
expenses.................... 422,206 298,489 58,113 192,510
--------- --------- -------- ---------
Loss from operations.......... (100,284) (135,172) (21,855) (86,543)
--------- --------- -------- ---------
Other expenses (income):
Interest income....................... (9,736) (24,145) (4,101) (7,026)
Interest expense, net of amounts
capitalized........................ 115,481 101,648 18,948 37,665
Gain on sale of subsidiary shares..... -- (61,266) -- (7,376)
Other................................. (23,460) 3,281 1,569 2,017
--------- --------- -------- ---------
82,285 19,518 16,416 25,280
--------- --------- -------- ---------
Loss before minority interest
in income of subsidiaries
and income tax.............. (182,569) (154,690) (38,271) (111,823)
--------- --------- -------- ---------
Income tax expense:
Current............................... -- -- 758 1,802
Deferred.............................. -- -- 92 (899)
--------- --------- -------- ---------
-- -- 850 903
--------- --------- -------- ---------
Loss before minority interest
in income of subsidiaries... (182,569) (154,690) (39,121) (112,726)
Minority interest in income of
subsidiaries.......................... -- -- (472) (612)
--------- --------- -------- ---------
Net loss...................... (182,569) (154,690) (39,593) (113,338)
Accretion of preference shares.......... 7,948 7,106 3,145 2,969
--------- --------- -------- ---------
Net loss to common shareholders......... $(190,517) $(161,796) $(42,738) $(116,307)
========= ========= ======== =========
Net loss per share, basic and
dilutive.............................. $ (5.11) $ (4.52) $ (1.39) $ (4.71)
========= ========= ======== =========
Weighted average common shares, basic
and diluted........................... 37,270,710 35,834,196 30,804,376 24,702,870
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE> 128
GST TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMITMENT TO ISSUE ACCUMULATED
COMMON SHARES COMMON SHARES OTHER
--------------------- -------------------- COMPREHENSIVE ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT LOSS DEFICIT INCOME
---------- -------- ---------- ------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1996........ 21,257,697 $ 72,647 1,988,230 $25,454 $ -- $ (76,333) $ --
Issuance of shares for services..... 25,000 221 -- -- -- -- --
Issuance of shares in business
combinations....................... 3,132,854 29,394 (1,700,169) (21,049) -- -- --
Issuances of shares and warrants,
net................................ 2,505,882 32,666 -- -- -- -- --
Issuance of shares under option
plans.............................. 643,016 3,309 -- -- -- -- --
Issuance of shares under employee
share purchase plan................ 62,993 400 -- -- -- -- --
Accrual of compensation costs for
share awards and option plans...... -- 9,807 -- -- -- -- --
Accretion of redeemable preference
shares............................. -- (2,969) -- -- -- -- --
Net loss............................ -- -- -- -- (113,338) (113,338) --
---------- -------- ---------- ------- --------- --------- -------
Comprehensive loss.................. (113,338)
-------------
Balances, September 30, 1997........ 27,627,442 145,475 288,061 4,405 -- (189,671) --
Issuance of shares in business
combinations....................... 246,392 3,801 (237,174) (3,801) -- -- --
Issuance of shares, net............. 6,440,000 73,092 -- -- -- -- --
Issuance of shares under option
plans.............................. 158,209 1,107 -- -- -- -- --
Issuance of shares under employee
share purchase plan................ 75,198 463 -- -- -- -- --
Accrual of compensation costs for
share awards and option plans...... -- 179 -- -- -- -- --
Accretion of redeemable preference
shares............................. -- (3,145) -- -- -- -- --
Conversion of senior subordinated
discount notes..................... 17,657 133 -- -- -- -- --
Net loss............................ -- -- -- -- (39,593) (39,593) --
---------- -------- ---------- ------- --------- --------- -------
Comprehensive loss.................. (39,593)
-------------
Balances, December 31, 1997......... 34,564,898 221,105 50,887 604 -- (229,264) --
Issuance of shares for business
combinations....................... 57,632 2,952 (50,887) (604) -- -- --
Issuance of shares under option
plans.............................. 429,350 3,258 -- -- -- -- --
Issuance of shares for warrant
exercise........................... 991,343 12,852 -- -- -- -- --
Issuance of shares under employee
share purchase plan................ 220,843 1,563 -- -- -- -- --
Accrual of compensation costs for
share awards and option plans...... -- (357) -- -- -- -- --
Accretion of redeemable preference
shares............................. -- (7,106) -- -- -- -- --
Net loss............................ -- -- -- -- (154,690) (154,690) --
Other comprehensive income --
unrealized gain on securities...... -- -- -- -- 16,200 -- 16,200
---------- -------- ---------- ------- --------- --------- -------
Comprehensive loss.................. $(138,490)
=============
Balances, December 31, 1998......... 36,264,066 234,267 -- -- (383,954) 16,200
Issuance of shares under option
plans.............................. 989,504 7,495 -- -- -- -- --
Issuance of shares under employee
share purchase plan................ 348,610 1,876 -- -- -- -- --
Accrual of compensation costs for
share awards and option plans...... 30,000 2,161 -- -- -- -- --
Accretion of redeemable preference
shares............................. -- (7,948) -- -- -- -- --
Conversion of senior subordinated
discount notes..................... 102,327 775 -- -- -- -- --
Net loss............................ -- -- -- -- (182,569) (182,569) --
Other comprehensive income --
unrealized gain on securities...... -- -- -- -- 28,350 -- 28,350
---------- -------- ---------- ------- --------- --------- -------
Comprehensive loss.................. $(154,219)
=============
Balances, December 31, 1999......... 37,734,507 $238,626 -- $ -- $(566,523) $44,550
========== ======== ========== ======= ========= =======
<CAPTION>
TOTAL
SHAREHOLDERS'
DEFICIT
-------------
<S> <C>
Balances, September 30, 1996........ $ 21,768
Issuance of shares for services..... 221
Issuance of shares in business
combinations....................... 8,345
Issuances of shares and warrants,
net................................ 32,666
Issuance of shares under option
plans.............................. 3,309
Issuance of shares under employee
share purchase plan................ 400
Accrual of compensation costs for
share awards and option plans...... 9,807
Accretion of redeemable preference
shares............................. (2,969)
Net loss............................ (113,338)
---------
Comprehensive loss..................
Balances, September 30, 1997........ (39,791)
Issuance of shares in business
combinations....................... --
Issuance of shares, net............. 73,092
Issuance of shares under option
plans.............................. 1,107
Issuance of shares under employee
share purchase plan................ 463
Accrual of compensation costs for
share awards and option plans...... 179
Accretion of redeemable preference
shares............................. (3,145)
Conversion of senior subordinated
discount notes..................... 133
Net loss............................ (39,593)
---------
Comprehensive loss..................
Balances, December 31, 1997......... (7,555)
Issuance of shares for business
combinations....................... 2,348
Issuance of shares under option
plans.............................. 3,258
Issuance of shares for warrant
exercise........................... 12,852
Issuance of shares under employee
share purchase plan................ 1,563
Accrual of compensation costs for
share awards and option plans...... (357)
Accretion of redeemable preference
shares............................. (7,106)
Net loss............................ (154,690)
Other comprehensive income --
unrealized gain on securities...... 16,200
---------
Comprehensive loss..................
Balances, December 31, 1998......... (133,487)
Issuance of shares under option
plans.............................. 7,495
Issuance of shares under employee
share purchase plan................ 1,876
Accrual of compensation costs for
share awards and option plans...... 2,161
Accretion of redeemable preference
shares............................. (7,948)
Conversion of senior subordinated
discount notes..................... 775
Net loss............................ (182,569)
Other comprehensive income --
unrealized gain on securities...... 28,350
---------
Comprehensive loss..................
Balances, December 31, 1999......... $(283,347)
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 129
GST TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE-MONTH
DECEMBER 31, PERIOD ENDED YEAR ENDED
--------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
--------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Operations:
Net loss.................................................. $(182,569) $(154,690) $(39,593) $(113,338)
Adjustments to reconcile net loss to net cash used in
operations:
Minority interest in income of subsidiary............... -- -- 472 612
Depreciation and amortization........................... 77,086 51,328 10,115 26,634
Deferred income taxes................................... -- -- 92 (899)
Accretion and accrual of interest....................... 73,894 59,783 8,276 19,236
Non-cash stock compensation and other expense........... 2,161 (253) 374 2,583
Loss on disposal of assets.............................. 4,160 239 -- 679
Non-cash special charges................................ -- 29,467 -- 7,445
Equity in losses of investments and joint venture....... -- 593 1,286 1,482
Gain on sale of subsidiary shares....................... -- (61,266) -- (7,376)
Changes in non-cash operating working capital:
Trade accounts receivable, net........................ (13,573) (15,321) (3,547) (11,284)
Construction contracts receivable..................... (23,485) (3,338) -- --
Prepaid, other current and other assets, net.......... (507) 3,859 (585) (7,627)
Accounts payable and accrued liabilities.............. 26,368 (754) (18,177) 24,970
Other liabilities..................................... 4,036 6,430 707 (119)
--------- --------- -------- ---------
Cash used in operations............................. (32,429) (83,923) (40,580) (57,002)
--------- --------- -------- ---------
Investments:
Acquisition of subsidiaries, net of cash acquired......... -- (35,471) (2,105) (1,618)
Purchase of investments................................... -- -- (4,297) (3,247)
Proceeds from sale of investments......................... -- 327 -- 5,176
Purchase of property and equipment........................ (259,965) (219,129) (45,970) (222,001)
Proceeds from sale of property and equipment.............. 6,514 3,589 -- 5,774
Purchase of other assets.................................. (1,684) (3,014) (1,866) (14,058)
Change in investments restricted for the purchase of
property and equipment.................................. 218,878 (170,288) 11,143 (58,701)
Proceeds from the sale of subsidiary shares, net.......... -- 85,048 141 27,105
Cash disposed of in sale of subsidiary.................... -- (5,252) -- --
--------- --------- -------- ---------
Cash used in investing activities................... (36,257) (344,190) (42,954) (261,570)
--------- --------- -------- ---------
Financing:
Proceeds from long-term debt.............................. 1,782 300,955 151,420 353,257
Issuance of redeemable preference shares, net............. -- -- -- 48,679
Principal payments on long-term debt and capital leases... (18,364) (23,769) (10,101) (7,455)
Issuance of common shares, net of issuance costs.......... 9,371 17,673 74,629 27,692
Deferred debt financing costs............................. -- (13,103) (5,380) (12,033)
Change in investments restricted to finance interest
payments................................................ 32,810 33,374 16,157 (97,049)
--------- --------- -------- ---------
Cash provided by financing activities............... 25,599 315,130 226,725 313,091
--------- --------- -------- ---------
Increase (decrease) in cash and cash equivalents.... (43,087) (112,983) 143,191 (5,481)
Cash and cash equivalents, beginning of period.............. 86,070 199,053 55,862 61,343
--------- --------- -------- ---------
Cash and cash equivalents, end of period.................... $ 42,983 $ 86,070 $199,053 $ 55,862
========= ========= ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 48,802 $ 50,315 $ 21,684 $ 4,982
Cash paid for income taxes................................ -- -- 1,038 638
Supplemental schedule of non-cash investing and financing
activities:
Recorded in business combinations:
Assets.................................................. -- 45,719 2,605 14,148
Liabilities............................................. -- 7,900 500 4,369
Common shares........................................... -- 2,348 -- 8,161
Disposition of subsidiaries:
Assets.................................................. 8,096 35,480 -- --
Liabilities............................................. (213) 4,218 -- --
Minority interest....................................... -- 12,732 -- --
Amounts in accounts payable and accrued liabilities for
the purchase of fixed assets at end of period........... 28,880 25,945 19,029 19,718
Unrealized gain on securities........................... 28,350 16,200 -- --
Accretion of redeemable preference shares............... 7,948 7,106 3,145 2,969
Assets acquired through capital leases.................. 5,068 10,079 480 21,765
Debt converted to equity................................ 775 -- 133 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 130
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of the Company
GST Telecommunications, Inc., a Canadian company, and its U.S. subsidiaries
collectively, (the Company or GST), is in the business of providing integrated
telecommunications products and services primarily in the western United States.
The Company provides a range of telecommunications services, including local,
long distance, Internet and data services, and constructs telecommunications
network segments for other providers, and produces telecommunications software.
The consolidated financial statements for the years ended December 31, 1999
and 1998, the three-month period ended December 31, 1997 and the year ended
September 30, 1997 have been reported in U.S. dollars, the functional currency
of the Company. These consolidated financial statements are prepared in
conformity with generally accepted accounting principles in the United States.
The Company also prepares separate consolidated financial statements in
accordance with Canadian generally accepted accounting principles.
(b) Change in Fiscal Year-end
In 1997, the Company changed its fiscal year-end from September 30 to
December 31. Included in the accompanying audited consolidated financial
statements are the results of operations for the three-month transition period
ended December 31, 1997. Unaudited results of operations for the comparable
three-month period ended December 31, 1996 are summarized below:
<TABLE>
<S> <C>
Revenues.................................................... $ 23,217
Loss from operations........................................ (17,988)
Other expenses, net......................................... (4,646)
Net loss.................................................... (22,634)
Loss per share, basic and diluted........................... (1.02)
</TABLE>
(c) Basis of Consolidation
These consolidated financial statements include the accounts of the Company
and its greater than 50% owned subsidiaries. The Company's investments in
unconsolidated companies owned 20% or more or where the Company exercise
significant influence are accounted for using the equity method. At December 31,
1999, the Company held no investments accounted for pursuant to the equity
method. All significant intercompany accounts have been eliminated.
(d) Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments with
original maturities of ninety days or less.
(e) Accounts and Notes Receivable
Gross trade accounts receivable total $52,518 and $38,209 at December 31,
1999 and 1998, respectively. Notes receivable total $268 and $208 at December
31, 1999 and 1998, respectively. Management provides an allowance for doubtful
accounts and customer credits based on current customer information and
historical statistics. The allowance was $7,542 and $5,482 at December 31, 1999
and 1998, respectively.
F-38
<PAGE> 131
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Valuation and qualifying accounts for the allowance for doubtful accounts
and customer credits is as follows:
<TABLE>
<CAPTION>
YEARS ENDED THREE-MONTH
DECEMBER 31, PERIOD ENDED YEAR ENDED
----------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------- ------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at beginning of period.............. $ 5,482 $ 3,956 $ 3,582 $ 1,264
Charged to bad debt expense................. 8,629 4,776 1,541 5,737
Charged to revenue.......................... 1,500 -- -- --
Written off................................. (8,069) (3,250) (1,167) (3,419)
------- ------- ------- -------
Balance at end of period.................... $ 7,542 $ 5,482 $ 3,956 $ 3,582
======= ======= ======= =======
</TABLE>
Results of operations are derived from United States operations and
substantially all assets reside in the United States. The Company is exposed to
concentration of credit risk principally from accounts receivable. The Company's
five largest telecommunications and other services customers accounted for
approximately 11.3%, 16.4%, 16.8% and 20.8% of the Company's consolidated
telecommunications and other services revenue for the years ended December 31,
1999 and 1998, the three-month period ended December 31, 1997 and the year ended
September 30, 1997, respectively.
In certain cities, the Company relies on incumbent local exchange carriers
for the provision of local telephone service. In addition, the Company relies on
other carriers to provide transmission and termination services for a majority
of its long distance traffic. The inability of any of these companies or
carriers to fulfill service delivery requirements could impact the Company's
future results.
Construction contracts receivable consists of costs in excess of billings
on certain contracts and amounts due from joint construction partners.
Construction contracts receivable consists of balances due from three customers.
(f) Restricted and Unrestricted Investments
Restricted investments classified as available-for-sale consist primarily
of U.S. Treasury securities maturing between one and eight months which are
restricted for the purchase and installation of network assets. Held-to-maturity
investments consist of U.S. Treasury securities and certificates of deposit
maturing between four months and eighteen months which are primarily restricted
for interest payments. Restricted investments are recorded at amortized cost,
which approximates fair value for all periods presented.
Unrestricted available-for-sale investments consist of the Company's
approximate 14% equity interest in Global Light Telecommunications, Inc.
(Global) at December 31, 1999 and U.S. Government securities and certificates of
deposit at December 31, 1998. An unrealized gain of $28,350 related to the
Company's interest in Global, which is carried at fair value, is included in
comprehensive income for the year ended December 31, 1999. See note 16 for a
discussion of the sale of the Company's investment in Global.
F-39
<PAGE> 132
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities, the Company classifies its investments as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- --------
<S> <C> <C>
Restricted investments:
Available-for-sale........................................ $ 9,848 $230,014
Held-to-maturity.......................................... 19,828 51,350
Unrestricted investments:
Available-for-sale........................................ 44,596 16,246
</TABLE>
(g) Investments in Former Affiliate
At December 31, 1997, the Company held a greater than 20% equity interest
in Global, a publicly-traded corporation listed on the Vancouver Stock Exchange,
which conducts telecommunications operations on a worldwide basis. The carrying
value of this investment at December 31, 1997 totaled $593 and was included in
other assets in the accompanying consolidated balance sheet. At both December
31, 1998 and 1999, the Company held a less than 20% interest in Global. See note
1(f), note 11(a) for a discussion of litigation with Global and note 16 for a
discussion of the sale of the Company's investment in Global subsequent to
year-end.
(h) Minority Interest
In March 1997, the Company's then wholly-owned subsidiary, NACT
Telecommunications, Inc. (NACT), completed an initial public offering of its
common stock, pursuant to which the Company and NACT sold one and two million
shares, respectively, of NACT's common stock, resulting in net proceeds of
approximately $9,000 and $18,100, respectively. As a result of the offering, the
Company's ownership was reduced to 63%. Minority interest represents the
non-Company owned shareholder interest in NACT's equity resulting from the 1997
offering.
In February 1998, the Company sold its remaining interest in NACT for net
proceeds of $85,048, which resulted in a gain of $61,266.
(i) Property and Equipment
Property and equipment are recorded at cost and are depreciated on the
straight-line basis over their estimated useful lives, which are as follows:
<TABLE>
<S> <C>
Telecommunications networks................................. 20 years
Electronic and related equipment............................ 10 years
Leasehold improvements...................................... 10 years
Computer equipment, office equipment and other.............. 3 - 7 years
Buildings................................................... 40 years
</TABLE>
Construction, engineering and overhead costs directly related to the
development of the Company's networks are capitalized. The Company capitalizes
internal information systems costs in accordance with Statement of Position
(SOP) 98-1, "Accounting for the costs of computer software developed or obtained
for internal use." The amount capitalized under SOP 98-1 was $13,075, and $621
of amortization was charged to operations for the year ended December 31, 1999.
These amounts are included in Property and Equipment. The Company begins
depreciating these costs when the assets become operational. Depreciation
expense totaled $55,368, $30,056, $6,240 and $14,985 for the years ended
December 31, 1999 and 1998, the three-month period ended December 31, 1997 and
for the year ended September 30, 1997, respectively.
F-40
<PAGE> 133
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(j) Goodwill
Goodwill is amortized using the straight-line method over periods ranging
from five to ten years. Amortization charged to operations was $6,785, $6,218,
$1,054 and $4,044 for the years ended December 31, 1999 and 1998, the
three-month period ended December 31, 1997 and for the year ended September 30,
1997, respectively.
(k) Other Assets
Other assets consists primarily of customer lists, software development
costs and deferred financing costs. These assets are amortized using the
straight-line method over periods ranging from three to ten years. Amortization
charged to operations for customer lists and software development costs was
$10,320, $11,183, $1,945 and $5,630 for the years ended December 31, 1999 and
1998, the three-month period ended December 31, 1997 and for the year ended
September 30, 1997, respectively. Amortization charged to interest expense for
deferred financing costs was $4,613, $3,873, $669 and $1,495 for the years ended
December 31, 1999 and 1998, the three-month period ended December 31, 1997 and
for the year ended September 30, 1997, respectively.
(l) Asset Impairment
The Company reviews long-lived assets, goodwill and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
During 1998, the Company recorded a non-cash special charge of $3,881
related to the impairment of certain long-lived assets associated with the
Company's shared tenant services operations. The impaired assets primarily
consist of customer lists and electronic and related equipment. As the projected
future cash flows were less than the assets' carrying value, an impairment loss
was recognized. The impairment loss was measured as the amount by which the
carrying amount of the assets exceeded the estimated fair value of the assets,
which was determined based on current market prices for similar assets.
As discussed in note 14, the Company also recorded a non-cash special
charge of $15,668 during 1998 related to the impairment of a prepaid reseller
agreement and advances to Magnacom Wireless LLC.
(m) Revenue Recognition
Telecommunication services revenue is recognized monthly as services are
provided. Amounts billed in advance of the service month are recorded as
deferred revenue. Product revenue is recorded upon installation of products and
is presented in the accompanying consolidated statements of operations net of
product returns.
Network construction services revenue is recognized using the percentage of
completion method. Accordingly, the Company recognizes revenues and expenses as
construction progresses. Cost of construction revenue is estimated using
weighted average allocations of the total costs of constructing the specific
phase of the network.
The Company treats certain long term fiber and conduit lease contracts
entered into prior to June 30, 1999 as sales-type leases and recognizes revenue
under the percentage of completion method. In June 1999, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 43, Real Estate
Sales, an Interpretation of FASB Statement No. 66. The interpretation is
effective for sales of real estate with property improvements or integral
equipment entered into after June 30, 1999. Under this interpretation, conduit
is considered integral equipment and dark fiber will likely be considered
integral equipment. Accordingly, title must transfer to a lessee in order for a
lease transaction to be accounted for as a sales-type lease. For contracts
entered into after June 30, 1999, sales-type lease accounting is no longer
appropriate for dark fiber and conduit
F-41
<PAGE> 134
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
leases and therefore, these transactions will be accounted for as operating
leases unless title transfers to the lessee.
(n) Net Loss Per Share
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period. Common equivalent shares,
consisting of options, warrants and convertible securities, were antidilutive
for all periods presented and were not included in determining diluted weighted
average shares outstanding. If the Company had reported net income for the
periods presented, the weighted average number of common equivalent shares used
to determine diluted net loss per share would have increased by 11,245,435,
10,411,640, 9,741,498 and 8,186,050 for the years ended December 31, 1999 and
1998, the three-month period ended December 31, 1997 and the year ended
September 30, 1997, respectively.
Net loss per share is increased for redeemable preference shares' accretion
totaling $7,948, $7,106, $3,145 and $2,969 for the years ended December 31, 1999
and 1998, the three-month period ended December 31, 1997 and the year ended
September 30, 1997, respectively.
(o) Issuance of Subsidiary Stock
Issuances of subsidiary stock are accounted for as capital transactions in
the accompanying consolidated financial statements.
(p) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred income taxes reflect the future
tax consequences of differences between the tax basis of assets and liabilities
and their financial reporting amounts at the end of each reporting period.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the period in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in the tax rates is recognized in income in
the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
(q) Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income, on
January 1, 1998. Comprehensive income is defined as changes in stockholders'
equity exclusive of transactions with owners such as capital contributions and
dividends. For the years ended December 31, 1999 and 1998, comprehensive loss
includes a $28,350 and $16,200 unrealized gain on available-for-sale securities.
There are no differences between net loss and comprehensive loss for all other
periods presented.
(r) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(s) Advertising Costs
The Company expenses advertising costs as incurred.
F-42
<PAGE> 135
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(t) Reclassifications
Certain reclassifications have been made in the accompanying consolidated
financial statements for prior periods to conform with the December 31, 1999
presentation.
(2) ACQUISITIONS
The Company has made the acquisitions set forth below, each of which was
accounted for using the purchase method of accounting. The consolidated
financial statements include the operating results from the effective date of
acquisition.
(a) ICON Communications Corp. (ICON)
In April 1998, the Company acquired 100% of the outstanding capital stock
of ICON, a Washington company which provides long distance and ancillary
communications services. Consideration paid for this acquisition consisted of
$23,916 in cash. Goodwill of $15,957 was recorded as a result of this
acquisition.
(b) KLP, Inc. (D/B/A Call America) (Call America Phoenix)
In March 1998, the Company acquired 100% of the outstanding capital stock
of Call America Phoenix, an Arizona company which provides long distance
services. Consideration paid for this acquisition consisted of $3,838 in cash.
Goodwill of $2,405 was recorded as a result of this acquisition.
(c) Whole Earth Networks, LLC (Whole Earth)
In March 1998, the Company acquired the assets of Whole Earth, a California
Internet services provider. Consideration paid for this acquisition consisted of
$9,053 in cash and the assumption of $1,273 in liabilities. Goodwill of $3,293
was recorded as a result of this acquisition.
(d) Action Telcom Co. (Action Telcom)
In May 1997, the Company acquired 100% of the outstanding capital stock of
Action Telcom, a Texas company which provides long distance and ancillary
telecommunications services, and produces software used in the
telecommunications industry. The Company acquired Action Telcom for
consideration of 903,000 common shares valued at $8,161, $1,290 in cash and
$2,580 in notes payable. Goodwill of $3,863 was recorded as a result of this
acquisition.
In October 1999, the Company sold the assets of the long distance portion
of Action Telcom for $4,895 in cash. A loss of $163 was recognized as a result
of this divestiture.
(e) Guam Operations of Sprint Communications Company L.P. (Sprint)
In October 1997, the Company purchased the assets of the Guam operations of
Sprint which provide long distance and ancillary services in Guam. Consideration
paid for this acquisition consisted of $2,000 in cash and $500 in liabilities
for services to be provided to Sprint.
In July 1999, the Company sold the assets of its Guam operations for $1,500
in cash. A gain of $294 was recognized as a result of this divestiture.
F-43
<PAGE> 136
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The unaudited pro forma results shown below reflect results of operations
as if the 1998 and 1997 acquisitions described above occurred as of the
beginning of each of the periods presented.
<TABLE>
<CAPTION>
THREE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
Revenues................................ $ 167,556 $ 40,521 $ 133,958
Net loss................................ (155,236) (39,655) (115,266)
Net loss per share...................... (4.33) (1.29) (4.67)
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred had the acquisitions been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results that may be achieved from the combined operations.
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Telecommunications networks................................. $264,229 $178,008
Electronic and related equipment............................ 314,880 181,270
Leasehold improvements...................................... 28,708 24,509
Computer equipment, office equipment and other.............. 55,820 40,585
Buildings................................................... 2,808 2,803
Construction in progress.................................... 277,965 251,199
-------- --------
944,410 678,374
Less accumulated depreciation............................... (112,363) (62,522)
-------- --------
$832,047 $615,852
======== ========
</TABLE>
Property and equipment includes $277,965 and $251,199 of equipment which
had not been placed in service at December 31, 1999 and 1998, respectively, and
accordingly, is not being depreciated. During the years ended December 31, 1999
and 1998, the three-month period ended December 31, 1997 and the year ended
September 30, 1997, $32,133, $25,920, $3,726 and $15,170 of interest,
respectively, was capitalized as part of property and equipment.
(4) ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Fixed asset purchases....................................... $ 6,012 $ 9,552
Carrier costs............................................... 13,814 4,885
Interest payable............................................ 8,223 9,272
Payroll and related liabilities............................. 5,694 5,252
Other....................................................... 16,016 8,484
------- -------
Total............................................. $49,759 $37,445
======= =======
</TABLE>
F-44
<PAGE> 137
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
13.25% Senior Secured Notes due May 1, 2007................. $ 265,000 $ 265,000
10.5% Senior Secured Discount Notes due May 1, 2008......... 355,587 320,997
Note payable to Tomen, LIBOR plus 3.0% (9.0% at December 31,
1999)..................................................... 42,187 45,262
Note payable to NTFC, LIBOR plus 3.5% (9.5% at December 31,
1999)..................................................... 44,375 50,000
Note payable to Siemens, LIBOR plus 3.5% (9.5% at December
31, 1999)................................................. 10,000 9,463
13.875% Senior Discount Notes due December 15, 2005......... 274,800 240,304
13.875% Convertible Senior Subordinated Discount Notes, due
December 15, 2005......................................... 33,295 29,884
12.75% Senior Subordinated Accrual Notes due November 15,
2007...................................................... 144,000 144,000
Other....................................................... -- 1,466
---------- ----------
1,169,244 1,106,376
Less current portion of long-term debt...................... 17,466 13,417
---------- ----------
$1,151,778 $1,092,959
========== ==========
</TABLE>
The schedule of future debt service payments is as follows:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST
------------ --------
<S> <C> <C>
Year ending December 31:
2000.................................................... $ 17,466 $ 43,267
2001.................................................... 19,814 90,143
2002.................................................... 20,511 88,265
2003.................................................... 21,388 130,919
2004.................................................... 11,582 155,636
Thereafter.............................................. 1,265,105(a) 373,200
------------ --------
Less unaccreted discount................................ (186,622) --
------------ --------
$ 1,169,244 $881,430
============ ========
</TABLE>
------------
(a) Includes $500,000, $312,448 and $37,856 of 10.5% Senior Secured Notes,
13.875% Senior Discount Notes and 13.875% Convertible Senior Subordinated
Discount Notes, respectively, due at maturity.
Senior Secured Notes
In May 1997, the Company issued $265,000 in Senior Secured Notes (the
Secured Notes) due May 1, 2007. The Secured Notes bear interest at a rate of
13.25% with semiannual interest payments due beginning November 1, 1997.
Approximately $93,790 of the proceeds were set aside to fund the first six
scheduled interest payments. The remainder of the net proceeds were restricted
to finance the cost of design, development, construction, acquisition,
installation and integration of telecommunications equipment. The Secured Notes
are secured by the assets financed with the proceeds and are subject to certain
debt covenants.
Senior Secured Discount Notes
In May 1998, the Company issued $300,000 in 10.5% Senior Secured Discount
Notes (the Senior Secured Discount Notes) maturing on May 1, 2008. The Senior
Secured Discount Notes sold at a substantial discount and there will be no
accrual of cash interest prior to May 1, 2003, or payment of interest until
November 1, 2003. The Senior Secured Discount Notes accrete to a total principal
amount, due May 1, 2008,
F-45
<PAGE> 138
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of approximately $500,000. The net proceeds from the sale of the Senior Secured
Discount Notes are restricted to finance the cost of design, development,
construction, acquisition, installation and integration of telecommunications
equipment. The Senior Secured Discount Notes are secured by the assets financed
with the proceeds and are subject to certain debt covenants.
Tomen Facility
In October 1994, the Company entered into a master financing agreement with
Tomen. Under the agreement, Tomen will loan up to $100,000 to subsidiaries of
the Company for development and construction of network projects. As of December
31, 1999, Tomen had provided a total of $69,468 (of which $42,187 was
outstanding at December 31, 1999) in debt financing to the Company's
subsidiaries for construction and operation of fiber optic networks in southern
California, New Mexico, Arizona and Hawaii. The Tomen financing is secured by
equipment at the funded network locations and is subject to certain debt
covenants. Although, Tomen has the right of first refusal to finance fiber optic
projects for the Company, management does not believe that it is likely that
they will finance any additional projects.
NTFC Capital Corporation (NTFC) Agreement
In March 1997, the Company entered into a $50,000 ($44,375 of which was
outstanding at December 31, 1999) loan and security agreement with NTFC to
finance the purchase of certain equipment from Northern Telecom, Inc. Amounts
borrowed under the agreement bear interest at LIBOR plus 3.5% and will be repaid
in twenty quarterly installments which began in March 1999. The loan is secured
by the equipment purchased with the proceeds and subject to certain debt
covenants.
Siemens Telecom Networks (Siemens) Agreement
In September 1996, the Company entered into a loan and security agreement
with Siemens. Under the terms of the agreement, Siemens will loan up to $226,000
to the Company for the purchase and installation of telecommunications switching
and related equipment. At December 31, 1999, $116,000 was available to the
Company and $10,000 was outstanding. Amounts borrowed under the agreement
initially bear interest at LIBOR plus 4.5% and are secured by the equipment.
Such interest decreases to LIBOR plus 3.5% at the time each initial loan is
converted to a term loan, which conversion occurs at the first calendar quarter
following the initial loan. Amounts borrowed under the agreement will be repaid
in twenty-four quarterly installments beginning five quarters after the initial
loan is converted to a term loan. The loan is subject to certain debt covenants.
Senior Discount Notes and Convertible Senior Subordinated Discount Notes
In December 1995, the Company issued approximately $160,000 in 13.875%
Senior Discount Notes (the Senior Notes) and $20,000 in 13.875% Convertible
Senior Subordinated Discount Notes (the Convertible Notes) maturing on December
15, 2005 (together the Notes). The Notes were sold at a substantial discount and
there will be no accrual of cash interest prior to December 15, 2000 or payment
of interest until June 15, 2001. The Notes accrete to a total principal amount,
due December 15, 2005, of approximately $350,304 by December 15, 2000. The
Senior Notes rank in right of payment with all unsubordinated indebtedness of
the Company while the Convertible Notes are junior to all senior Company debt.
Each of the Convertible Notes is convertible at the option of the holder
into common shares. The number of shares to be issued upon conversion is based
on an accreted value on the conversion date divided by $7.563. In addition, all
of the Convertible Notes may be automatically converted to common shares by the
Company if the Company's common shares sustain certain market value levels for
thirty consecutive trading days. On or after December 15, 2000, the Notes will
be redeemable at the option of the Company. The Notes are subject to certain
debt covenants.
F-46
<PAGE> 139
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Senior Subordinated Accrual Notes
In November and December 1997, the Company issued $144,000 in 12.75% Senior
Subordinated Accrual Notes (the Accrual Notes). Cash interest on the Accrual
Notes will not be paid until May 15, 2003. The Accrual Notes are subordinated to
all senior indebtedness, including the Notes.
The Accrual Notes are redeemable at the option of the Company, in whole or
in part after November 15, 2002. Prior to November 15, 2000, up to one-third of
the aggregate principal amount of the Accrual Notes may be redeemed by the
Company from the proceeds of one or more sales of the Company's common shares.
The Accrual Notes are subject to certain debt covenants.
Debt Covenants and Classification of Long-term Debt
In November 1998, the Company informed the trustee who represents the
holders of the Senior Secured Notes, the Senior Secured Discount Notes, the
Senior Notes, the Convertible Notes and the Accrual Notes that it may have
violated certain technical covenants contained in the indentures related to each
of the aforementioned debt issuances. In particular, the Company advised the
trustee that the transfer to Global of its interest in a telecommunications
project to be developed in Mexico may have constituted a violation of certain
provisions in the indentures. In February 1999, the trustee informed the
noteholders of the potential violations. The noteholders did not declare a
default, as defined within the indentures of each of the notes.
On September 16, 1999, the Company received $30,000 in cash from Global and
others in connections with the settlement of various lawsuits and has taken
other actions to cure the potential technical violations. As a result, the
Company believes that there is currently no basis on which the noteholders could
declare a default under the indentures relating to the Company's debt issuances.
Accordingly, the Company has classified the related debt obligations as
non-current in the accompanying consolidated balance sheets.
(6) REDEEMABLE PREFERENCE SHARES
The Company's Board of Directors has the authority, without any further
vote or action by the Company's shareholders, to issue up to 10,000,000
Preference Shares, without par value, in one or more series and to determine the
designations, powers, preferences and relative, participating, optional or other
rights thereof, including, without limitation, the dividend rate (and whether
dividends are cumulative), conversion rights, voting rights, rights and terms of
redemption, redemption price and liquidation preference.
In February 1997, the Company consummated a private placement of $50,000 of
500 Redeemable Preference Shares. The Redeemable Preference Shares do not pay
dividends in cash, except to the extent such dividends are paid on Common
Shares. In addition, the liquidation, conversion and redemption prices of the
Redeemable Preference Shares accrete semiannually at a rate of 11.875%.
The Company is required to redeem the Redeemable Preference Shares on
February 28, 2004 (the Mandatory Redemption Date) in cash at a redemption price
of approximately $224,000 per share (the Mandatory Redemption Price); provided
that to the extent the Company is prohibited from paying such redemption price
in cash, the holders of Redeemable Preference Shares have the option to convert
each Redeemable Preference Share into a number of Common Shares equal to the
Mandatory Redemption Price divided by 95% of the then market price for Common
Shares.
In the event the Company is prevented from paying the redemption price for
Redeemable Preference Shares in cash and any holder of Redeemable Preference
Shares does not exercise such conversion option, the Company has the option of
extending the Mandatory Redemption Date to August 28, 2007. The Company has the
option of redeeming the Redeemable Preference Shares at any time after February
2000 in cash at a redemption price per Redeemable Preference Share equal to the
number of Common Shares into which such
F-47
<PAGE> 140
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Redeemable Preference Share is then convertible multiplied by the price at which
such Redeemable Preference Share would become subject to mandatory conversion.
Redeemable Preference Shares are convertible at the option of the holders
into Common Shares at any time after February 28, 2000 or earlier upon a change
of control of the Company. The holders of Redeemable Preference Shares have the
right to require the Company to repurchase their shares upon a change of control
of the Company after February 28, 2002; prior to that time, holders have a right
to convert their Redeemable Preference Shares into Common Shares upon a change
of control. Further, the Redeemable Preference Shares are subject to mandatory
conversion into Common Shares if the market price of Common Shares exceeds
$15.925 per share (subject to adjustment) for a specified period after February
28, 2000.
(7) SHAREHOLDERS' (DEFICIT) EQUITY
(a) Stock-based Compensation
The Company has six stock-based compensation plans, which are described
below. The Company follows SFAS No. 123, Accounting for Stock-based Compensation
(SFAS 123). In accordance with SFAS 123, the Company applies APB Opinion No. 25
and related Interpretations in accounting for its plans. Accordingly,
compensation cost is generally not recognized for options awarded in the 1995
and 1996 Stock Incentive Plans, the Employee Stock Purchase Plan and fixed stock
option awards under the Senior Operating and Executive Officer Stock Option
Plans. Compensation cost recognized in the statements of operations for the
years ended December 31, 1999 and 1998, the three-month period ended December
31, 1997 and for the year ended September 30, 1997 totaled $2,161, $(357), $149
and $9,747, respectively. The fair value of each option grant is estimated on
the date of the grant using the Black-Scholes option-pricing model assuming no
dividend yield and the following weighted average assumptions for grants for the
years ended December 31, 1999 and 1998, the three-month period ended December
31, 1997 and for the year ended September 30, 1997 are as follows:
<TABLE>
<CAPTION>
OPTION AWARDS
----------------------------------
DECEMBER 31,
------------------ SEPTEMBER 30,
1999 1998 1997 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Expected volatility.............................. 70% 62% 58% 56%
Risk free interest rate.......................... 5.6% 5.2% 5.4% 6.3%
Expected life (in years)......................... 3.5 3.5 3.5 3.5
</TABLE>
<TABLE>
<CAPTION>
EMPLOYEE STOCK PURCHASE PLAN
----------------------------------
DECEMBER 31,
------------------ SEPTEMBER 30,
1999 1998 1997 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Expected volatility.............................. 70% 62% 58% 56%
Risk free interest rate.......................... 5.0% 4.8% 5.3% 5.4%
Expected life (in years)......................... .5 .5 .5 .5
</TABLE>
The weighted average fair value of stock awards granted under the various
plans are as follows:
<TABLE>
<CAPTION>
YEARS ENDED THREE-MONTH
DECEMBER 31, PERIOD ENDED YEAR ENDED
-------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
----- ----- ------------ -------------
<S> <C> <C> <C> <C>
Stock option awards.................. $5.41 $6.50 $6.17 $4.68
Employee Stock Purchase Plan......... 5.04 2.16 1.81 1.81
</TABLE>
F-48
<PAGE> 141
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Had compensation cost for the Company's six stock-based compensation plans
been determined pursuant to SFAS 123, the Company's net loss and net loss per
common share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED THREE-MONTH
DECEMBER 31, PERIOD ENDED YEAR ENDED
--------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
--------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Net loss to common shareholders:
As reported........................... $(190,517) $(161,796) $(42,738) $(116,307)
Pro forma............................. (200,460) (170,184) (44,487) (119,183)
Net loss per share, basic and diluted:
As reported........................... $ (5.11) $ (4.52) $ (1.39) $ (4.71)
Pro forma............................. (5.38) (4.75) (1.44) (4.82)
</TABLE>
Pro forma net loss reflects only options granted since October 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting period
and compensation cost for options granted prior to September 30, 1995 is not
considered.
(b) Stock Option Awards
Under the 1995, 1996, 1997 and 1999 Stock Option Plans (the Plans), the
Company has authorized the issuance of 1,750,000, 1,000,000, 1,000,000 and
2,000,000 common shares, respectively. The Plans provide for the granting of
incentive stock options and non-statutory stock options to employees, officers
and employee directors and consultants at an exercise price no less than 100% of
the market value on the last trading day prior to the date of grant. The 1995,
1996 and 1997 options have a maximum term of five years and the 1999 options
have a maximum term of ten years and become exercisable at such times and in
such installments, for each individual option, as determined by the Board of
Directors.
In addition, the Company grants fixed option awards under the 1996 Senior
Operating Officer Stock Option Plan (Operating Officer Plan). These options have
a term of six years and become exercisable at such time and in such installments
for each individual option, as determined by the Board of Directors.
Under the Operating Officer Plan and the 1996 Senior Executive Officer
Stock Option Plan (Executive Plan), the Company may grant stock options to
purchase up to 900,000 and 600,000 common shares, respectively, to selected
individuals. The options have a maximum term of six years.
F-49
<PAGE> 142
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's fixed and performance-based stock
option awards as of December 31, 1999, 1998, 1997 and September 30, 1997 and the
changes during the period of years ended on those dates is presented below:
<TABLE>
<CAPTION>
STOCK OPTIONS AWARDS
-----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at September 30, 1996..................... 3,061,205 $ 7.68
Granted............................................... 1,490,000 9.91
Exercised............................................. (643,016) 5.15
Canceled.............................................. (83,655) 8.89
----------
Outstanding at September 30, 1997..................... 3,824,534 8.95
Granted............................................... 175,000 10.29
Exercised............................................. (158,209) 7.00
Canceled.............................................. (236,218) 10.94
----------
Outstanding at December 31, 1997...................... 3,605,107 8.97
Granted............................................... 2,927,357 11.02
Exercised............................................. (429,350) 7.58
Canceled.............................................. (1,807,987) 12.20
----------
Outstanding at December 31, 1998...................... 4,295,127 9.15
Granted............................................... 3,116,343 10.02
Exercised............................................. (989,504) 7.57
Canceled.............................................. (1,565,370) 10.57
----------
Outstanding at December 31, 1999...................... 4,856,596 9.57
==========
Number of options exercisable at end of period........ 1,690,821 $ 9.27
==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.00 - 5.99............ 125,000 9.3 years $ 5.88 41,667 $ 5.88
6.00 - 8.99............. 2,593,721 2.5 years 7.90 936,905 7.96
9.00 - 11.99............ 1,406,115 5.9 years 10.86 603,593 10.47
12.00 - 14.99........... 469,787 8.7 years 12.81 -- --
15.00 - 16.4375......... 261,973 3.5 years 15.08 108,656 15.10
</TABLE>
On December 14, 1998, options to purchase 1,197,830 shares were repriced
from prices ranging between $8.25 and $15.00 per share, to $7.15 per share. The
vesting terms for the repriced options were extended from three to four years
from the original date of grant. Options for directors, officers and key
executives were not repriced.
(c) Employee Stock Purchase Plan
In April 1999, the Company amended the 1996 Employee Stock Purchase Plan
(the Purchase Plan), to authorize the issuance of an additional 600,000 common
shares. The total shares authorized since adoption of
F-50
<PAGE> 143
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Plan is 1,100,000. The Purchase Plan allows eligible employees of the
Company to purchase common shares of the Company at a price equal to 85% of the
lower of the fair market value at the beginning or end of the six-month offering
period. Fair market value is calculated as the lesser of (i) the closing price
of the Company's common shares on the last trading day immediately before the
date of determination, or (ii) the weighted average trading price for such
shares for the five trading days immediately before the date of determination.
Employees who own 5% or more of the voting rights of the Company's outstanding
common shares may not participate in the Purchase Plan. Employees purchased
260,317, 220,843, 75,198 and 62,993 shares under the purchase plan during the
years ended December 31, 1999 and 1998, the three-month period ended December
31, 1997 and the year ended September 30, 1997, respectively.
In April 1999, the Company adopted the 1999 Supplemental Employee Stock
Purchase Plan (the Supplemental Plan). The Supplemental Plan allowed employees
participating in the Purchase Plan for the October 1998 to March 1999 offering
period rights to shares that were not available in the Purchase Plan due to a
shortfall in available shares. The Supplemental Plan authorized 150,000 common
shares at $4.83 per share of which 88,293 were granted and subsequently 61,707
were cancelled. The related compensation cost recognized in the statement of
operations for the year ended December 31, 1999 was $700.
(d) Warrants Outstanding
At December 31, 1999, a warrant to purchase 300,000 common shares at $6.75
per share was outstanding and exercisable. The warrant was granted to a former
director and expires in September 2000.
(e) Dividend Restrictions
The indentures related to the Secured Notes, the Senior Secured Discount
Notes, the Notes and the Accrual Notes prohibit the payment of dividends.
(8) INCOME TAXES
The provision for income taxes differs from the amount computed by applying
the Canadian statutory income tax rate to net income before taxes for the years
ended December 31, 1999 and 1998, the three-month period ended December 31, 1997
and the year ended September 30, 1997 as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Computed expected income
tax benefit at Canadian
statutory rate.............. (39)% (39)% (39)% (39)%
Expected state/province income
tax benefit................. (5) (5) (4) (4)
Increase in valuation
allowance................... 37 41 37 30
Amortization of goodwill...... 1 1 1 1
Effect of difference in United
States statutory rate....... 5 5 5 5
Effect of acquisition of new
subsidiaries................ -- 1 -- 2
Non-deductible interest....... -- -- 2 2
Other......................... 1 (4) -- 4
--- --- --- ---
Income tax expense............ --% --% 2% 1%
=== === === ===
</TABLE>
F-51
<PAGE> 144
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's deferred tax asset and liability are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
United States Federal and state net operating loss
carryforwards.......................................... $ 96,520 $ 76,241
Canadian net operating loss carryforwards................. 28,291 15,975
Non-deductible interest................................... 66,046 39,199
Canadian non-deductible interest.......................... 7,044 5,269
Canadian capital loss carryforward........................ 128 128
Other..................................................... 4,174 3,361
--------- ---------
Total deferred tax assets......................... 202,203 140,173
Less valuation allowance.................................. (197,488) (129,757)
--------- ---------
Total gross deferred tax assets................... 4,715 10,416
--------- ---------
Deferred tax liabilities:
Furniture, fixtures and equipment, due to differences in
depreciation........................................... 4,071 6,217
Capitalized software/intangibles.......................... 644 4,199
--------- ---------
Total gross deferred tax liabilities.............. 4,715 10,416
--------- ---------
Net deferred tax liabilities...................... $ -- $ --
========= =========
</TABLE>
The valuation allowance for deferred tax assets as of October 1, 1996 was
$19,429. The net change in total valuation allowance for the years ended
December 31, 1999 and 1998, the three-month period ended December 31, 1997 and
for the year ended September 30, 1997 was an increase of $67,731, $61,787,
$14,490 and $34,051, respectively.
The Company has non-capital losses for income tax purposes of approximately
$60,826 available to reduce Canadian taxable income of future years, expiring as
follows:
<TABLE>
<S> <C>
2001...................................................... $ 1,574
2002...................................................... 1,877
2003...................................................... 3,079
2004...................................................... 2,909
2005...................................................... 23,755
2006...................................................... 27,632
-------
$60,826
=======
</TABLE>
Based on a history of recurring losses, it is questionable whether the
Company will be allowed to utilize these Canadian losses if the tax authority
determines that the Company has no reasonable expectation of profit. As of
December 31, 1999, the Company also has a Canadian net capital loss carryforward
of $280. Net capital losses can be carried forward indefinitely but can only be
utilized to offset taxable capital gain.
F-52
<PAGE> 145
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has net operating losses for income tax purposes of
approximately $264,506 available to reduce United States taxable income of
future years, expiring as follows:
<TABLE>
<S> <C>
2006..................................................... $ 405
2007..................................................... 537
2008..................................................... 2,800
2009..................................................... 5,020
2010..................................................... 36,922
2011..................................................... 64,283
2017..................................................... 36,601
2018..................................................... 61,039
2019..................................................... 56,899
--------
$264,506
========
</TABLE>
Approximately 58% of these net operating losses may be utilized for state
income tax purposes.
For United States income tax purposes, utilization of net operating losses
may be subject to limitation in the event of certain substantial stock ownership
changes pursuant to IRC Section 382 and referred to hereinafter as an ownership
change. An ownership change would limit the utilization of any net operating
losses incurred prior to the change in ownership date. The Company has completed
an analysis under IRC Section 382 and has determined that no ownership change
has occurred.
(9) LEASES
The Company is obligated under capital lease agreements for equipment which
expire at various dates during the next twenty years. Certain of these
agreements contain clauses which allow the lessor to cancel the agreement upon
twelve-month written notice. However, the Company believes that the likelihood
of such clauses being exercised is remote. Gross amounts of equipment and
related accumulated amortization recorded under capital leases were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
-------- -------
<S> <C> <C>
Network facilities and equipment............................ $ 38,608 $33,540
Less accumulated amortization............................... (15,864) (9,307)
-------- -------
$ 22,744 $24,233
======== =======
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
The Company also has noncancelable operating leases, primarily for
facilities, which expire over the next five years. Rental expense under
operating leases was $7,582, $6,281, $1,114 and $3,385 for the years ended
December 31, 1999 and 1998, the three-month period ended December 31, 1997 and
for the year ended September 30, 1997, respectively.
F-53
<PAGE> 146
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under noncancelable leases (with initial or
remaining lease terms in excess of one year) and future minimum capital lease
payments as of December 31, 1999 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ending December 31:
2000...................................................... $ 9,202 $ 6,942
2001...................................................... 5,333 6,147
2002...................................................... 3,672 5,814
2003...................................................... 3,431 5,423
2004...................................................... 3,320 4,583
Thereafter................................................ 14,064 9,243
------- -------
Total minimum lease payments...................... 39,022 $38,152
======= =======
Less amount representing interest (at rates ranging from 9%
to 17%)................................................... 15,516
-------
Net minimum lease payments........................ 23,506
Current portion of capital leases obligations............... 6,693
-------
Capital lease obligations, less current portion... $16,813
=======
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES
(a) Pension and Profit Sharing Plans
The Company has a defined contribution 401(k) plan (the Plan). Employees
are eligible to participate in the Plan upon commencement of service.
Participants may defer up to 15% of eligible compensation. In October 1999, the
Company amended the Plan to provide matching contributions of 50% on the first
6% of employee deferrals. The matching contributions vest over five years.
Company contributions were $272 for the year ended December 31, 1999.
(b) Employment Agreements
The Company has entered into employment agreements with key members of
management. These agreements provide for certain payments in the event of death,
disability and change of control. The agreements also contain covenants not to
compete.
(c) Construction Contracts
The Company is party to various construction contracts arising in the
ordinary course of business.
(11) LEGAL PROCEEDINGS
(a) Global and Current and Former Officers and Directors
On October 20, 1998, the Company and GST Telecom filed a Complaint in the
Superior Court of California, County of Santa Clara, against Global and six
former GST officers and directors (the Defendants). The Complaint included
claims for fraud, negligent misrepresentation, unjust enrichment, and unfair
competition primarily related to the alleged misappropriation of a Mexican
business opportunity. The Complaint sought an accounting, a constructive trust,
and restitution of GST's interest in the opportunity and also sought unspecified
exemplary and punitive damages and attorneys' fees.
On January 27, 1999, Global and GST Mextel, Inc. (Mextel) filed a Complaint
in the Supreme Court of British Columbia, against GST and GST Telecom. The
Complaint, which arose from the same matters for
F-54
<PAGE> 147
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
which GST and GST Telecom filed its complaint against Global, et al., in the
Superior Court of California, included claims for declaratory and injunctive
relief and unspecified general and special damages.
On January 28, 1999, five former GST officers or directors filed a
Complaint in the Supreme Court of British Columbia against the Company, GST
Telecom and four current GST directors. The Complaint, which arose from the same
matters for which GST and GST Telecom filed its complaint against Global, et
al., in the Superior Court of California, included claims for oppression and
declaratory relief, and seeks unspecified actual and punitive damages, costs and
attorneys' fees.
On September 16, 1999, the Company received $30,000 in cash from Global and
others in connection with the settlement of various lawsuits, including the
above lawsuits between GST, Global, Mextel and three of the former directors.
Pursuant to the settlement, all claims against these parties have been dismissed
with the exception of the claim discussed in 11(d) below. The Company claims
against the non-settling parties are unaffected by this settlement.
(b) Former Director and Counsel
On December 16, 1998, GST, GST USA, Inc. (GST USA) and GST Telecom filed a
Complaint in the United States District Court, Southern District of New York,
against a former director and a law firm which previously represented the
Company as general counsel. The Complaint includes claims for professional
negligence, breach of fiduciary duty, and breach of contract, and seeks
compensatory damages and attorneys' fees.
On February 12, 1999, the former director filed his Answer to the
Complaint. The law firm filed its Answer and Counterclaims to the Complaint on
February 17, 1999. The law firm counterclaimed against GST, GST USA and GST
Telecom for breach of contract, unjust enrichment, quantum meruit, and "account
stated," based on invoices submitted to GST of approximately $250.
On March 10, 2000, the parties entered into a settlement of the Complaint
and certain of the proceedings described in 11(a) and (c). The settlement is
subject to the execution of a final agreement and payment by the law firm.
(c) Former Chairman and Chief Executive Officer
On January 25, 1999, the Company's former Chairman and Chief Executive
Officer, filed a Complaint in the Superior Court of Washington, King County,
against GST, GST USA and GST Telecom. The Complaint, which relates to the
circumstances under which the former Chairman and Chief Executive Officer ceased
to serve as an officer and director of GST, includes claims for breach of
employment agreement, breach of the covenant of good faith and fair dealing,
violation of wage statutes, and indemnity.
On February 23, 1999, the Company answered by denying all liability and
filed counterclaims against the former Chairman and Chief Executive Officer,
Global and five other former officers and directors for liability with respect
to the matters leading to the termination of the former Chairman and Chief
Executive Officer's employment. In particular, GST seeks recovery under
Washington law for matters described in note 11(a), above, as well as for
breaches committed with respect to the wrongful use of GST funds for the
purchase of telecommunications licenses. The matter is currently in discovery.
(d) Former Treasurer and Former Directors
On February 9, 1999, the Company filed a Complaint in the Superior Court
for the State of Washington, Clark County, against the former treasurer of the
Company. The Complaint is based on alleged misconduct and includes claims for
fraud, breach of fiduciary duty, unjust enrichment, and unfair business
practices, and seeks an accounting, imposition of a constructive trust,
compensatory damages, costs of suit, attorneys' fees,
F-55
<PAGE> 148
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and treble damages. In particular, the Complaint seeks relief based on misuse of
insider information in the purchase of stock, wrongful disbursements to third
parties, and involvement in a fraudulent release of stock from escrow. This
claim has been consolidated with the claim against the Former Chairman and Chief
Executive Officer described in note 11(c), above.
On June 4, 1999, the Company filed a Complaint in the Supreme Court of
British Columbia, against three former directors and the former treasurer
seeking a constructive trust over the proceeds of 750,000 common shares of GST
which the Company believes were wrongfully removed from an escrow account. The
defendants have denied liability. The matter is currently in discovery.
(e) Class Action Securities Lawsuits
On October 21, 1999, the first of several class action lawsuits was filed
in the United States District Court for the Western District of Washington
against GST, certain former officers and directors and in one lawsuit against
Global Light Telecommunications, Inc. No current director or officer of GST is
named as a defendant. The Complaint claims that the Company and the other
defendants committed securities fraud by failing to make disclosures concerning
a transaction with Global regarding the Company's joint venture in Bestel, S.A.
de C.V., the owner of a 2,270 kilometer fiber optic telecommunications network
in Mexico, that is the subject of 11(a) discussed above. The Complaints do not
specify the amount of damages sought. A single consolidated complaint was filed
by the plaintiffs on March 14, 2000. The Company denies liability, and will
vigorously dispute the allegations of the Complaint.
(f) Former Employee of Magnacom
In February 1999, a former employee of Magnacom Wireless, LLC filed suit in
Oregon state court against the Company. It has subsequently been transferred to
federal court. The suit claims that the Company should be liable for Magnacom's
obligations on the basis that the Company was involved in many functions of
Magnacom. The Company has denied liability and the matter is currently in
discovery.
Pursuant to the guidance set forth in SFAS 5, Accounting for Contingencies,
the Company has accrued loss provisions related to certain of the legal
proceedings detailed above. In the opinion of management, the ultimate
disposition of such matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
The Company is also involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
(12) RELATED PARTY TRANSACTIONS
(a) Magnacom Wireless, LLC (Magnacom)
In 1996, the Company and Magnacom, a company which was controlled by the
Company's former Chairman and Chief Executive Officer, entered into a reseller
agreement pursuant to which (i) the Company was to become a reseller of PCS
services in markets in which Magnacom had obtained FCC licenses, and (ii)
Magnacom was to use the Company to provide switched local and long distance
services in markets where the Company had operational networks. Pursuant to such
agreement, the Company paid Magnacom $0, $200, $0 and $8,403 during the years
ended December 31, 1999 and 1998, the three-months ended December 31, 1997 and
the year ended September 30, 1997, respectively. In addition, the Company made
operating advances to Magnacom of $0, $925, $91 and $52 during the years ended
December 31, 1999 and 1998, the three-months ended December 31, 1997 and the
year ended September 30, 1997, respectively.
F-56
<PAGE> 149
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In October 1998, Magnacom filed a petition for reorganization under Chapter
11 of the United States Bankruptcy Code. As a result, the Company wrote-off all
amounts previously paid to Magnacom in the third quarter of 1998. The total
write-off of approximately $15,668 is included in special charges in the
accompanying consolidated statement of operations for the years ending December
31, 1998.
The transactions with Magnacom form the basis for certain of the legal
proceedings described in notes 11(b), 11(c) and 11(d), and 11(f).
(b) Pacwest Network, Inc. (PNI)
The operations of the Company's Hawaiian microware network require the use
of radio licenses from the FCC. Such licenses are owned by PNI, a company
controlled by the Company's former Chairman and the former treasurer. Under
agreements between the Company and PNI, (1) the Company pays a monthly fee to
PNI to utilize PNI's licenses for its communications traffic and (2) PNI pays an
equal monthly fee to the Company for the right to utilize the Company's
facilities for other communications traffic using up to 10% of PNI's license
capacity.
(c) Global
In a series of transactions during the third and fourth quarters of 1996,
the Company acquired 3,600,000 shares of Canadian Programming Concepts, Inc.
(CPC), a Canadian corporation which is publicly traded on the Vancouver Stock
Exchange, for consideration of $3,659. CPC's name was subsequently changed to
Global. The Company's shares constitute approximately 14% of Global's total
outstanding shares at December 31, 1999. As noted in note 11(a), the Company has
reached a settlement of the litigation with Global, and as described in note 16,
has disposed of its shares in Global.
(d) Tomen
Under the Tomen facility, Tomen has the right to act as procurement agent
for each network project it finances. The Company has purchased equipment
through Tomen at competitive prices. Additionally, an upfront fee of 1.50% of
the aggregate principal amount of each project loan advanced and a commitment
fee of .50% per annum on the unused portion of each project loan is payable to
Tomen.
Pursuant to the Tomen agreements, Tomen has purchased 1,586,595 shares of
common stock for total cash consideration of $10,400.
(e) Other
The Company paid approximately $0, $1,929, $104, and $2,066 in legal fees
during the years ended December 31, 1999 and 1998, the three-month period ended
December 31, 1997 and the year ended September 30, 1997, respectively, to a firm
having a member who was also a director of the Company.
The Company paid approximately $264 in compensation, in addition to
director fees, for the year ended December 31, 1999 to the Company's
non-employee Chairman of the Board.
Prior to June 1997, the Company's former Chairman and Chief Executive
Officer served as a paid consultant to Tomen. Additionally, Pacwest Network LLC
received a fee equal to 1% of the aggregate debt and equity financing provided
by Tomen to the Company through October 1997. Such fees incurred by the Company
totaled $437 during the year ended September 30, 1997.
(13) SEGMENTS
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. As an integrated communications provider,
the Company has one reportable operating segment.
F-57
<PAGE> 150
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
While the Company's chief decision-maker monitors the revenue streams of various
services, operations are managed and financial performance is evaluated based
upon the delivery of multiple services over common network and facilities. This
allows the Company to leverage its network costs in an effort to maximize
return. As a result, there are many shared expenses generated by the various
revenue streams; because management believes that any allocation of the expenses
to multiple revenue streams would be impractical and arbitrary, management does
not currently make such allocations internally. The chief decision-maker does,
however, monitor revenue streams at a more detailed level than those depicted in
the Company's historical general purpose financial statements. The following
table presents revenues by service type:
<TABLE>
<CAPTION>
YEARS ENDED THREE-MONTH
DECEMBER 31, PERIOD ENDED YEAR ENDED
------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
-------- -------- ------------ -------------
<S> <C> <C> <C> <C>
Local service............................. $ 93,620 $ 48,859 $ 7,034 $ 16,993
Long distance services.................... 65,590 65,701 12,609 44,981
Data services............................. 19,843 8,770 1,100 2,000
Internet services......................... 9,601 8,404 1,013 3,006
Longhaul services......................... 11,603 14,673 3,395 12,057
Product................................... 4,089 4,708 8,706 23,374
Other..................................... 2,429 3,376 913 3,556
Construction and facility sales........... 115,147 8,826 1,488 --
-------- -------- ------- --------
Total revenues.................. $321,922 $163,317 $36,258 $105,967
======== ======== ======= ========
</TABLE>
Substantially all of the Company's revenue is attributable to customers in
the United States. Additionally, all significant operating assets are located
within the United States.
(14) SPECIAL CHARGES
There were no special charges for the year ended December 31, 1999. Special
charges for the year ended December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Write-off of amounts paid to Magnacom pursuant to a reseller
agreement................................................. $14,600
Write-off of operating advances paid to Magnacom............ 1,068
Write-off of costs related to abandoned projects............ 9,918
Impairment of assets........................................ 3,881
-------
Non-cash special charges.......................... 29,467
Accrual of severance-related costs.......................... 1,113
-------
Total special charges............................. $30,580
=======
</TABLE>
In 1998, the Company changed its strategic direction to focus on its core,
domestic business. In conjunction with the change, management identified certain
in-process network construction projects no longer considered compatible due to
geographic location or technology changes. The write-off totaled $9,918 and
represented the entire amount of the costs related to these in-process projects,
including the costs of fiber optic networks and electronic equipment. These
assets had never been placed in service and, as such, were not an integral part
of the Company's ongoing operations. While the historical cost of these assets
has been written-off of the accompanying consolidated balance sheets, the
Company holds these assets for disposal.
In conjunction with the change in strategic direction, management halted
further development of and investment in shared tenant services. The decision
resulted in an impairment charge of $2,728 for property, plant and equipment,
and $1,153 for customer lists associated with such services. At December 31,
1998, the
F-58
<PAGE> 151
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company held its shared tenant services assets for sale and sold approximately
80% of such assets in 1999 for $207. The impairment loss was measured as the
amount by which the carrying amount of these assets exceeded the estimated fair
value of the assets, which was determined based on current market prices for
similar assets. The loss reserve was recorded by increasing accumulated
depreciation for the property, plant and equipment, and accumulated amortization
for the customer lists. The amount of the write-off of customer lists represents
the remaining unamortized balance of such lists, which were related to the 1996
acquisition of Tri-Star Residential Communications, Inc. (Tri-Star) a
shared-tenant service provider. No goodwill had been recorded in conjunction
with the acquisition of Tri-Star.
In the fourth quarter of 1998, management consummated a plan to
involuntarily terminate approximately 40 employees, including former members of
management, and to pay termination benefits to such employees. The employees
worked in a variety of functions and operations throughout the Company. The
termination of those employees did not have a material impact on the Company's
business functions. At December 31, 1998, the Company had accrued $1,113 in
severance-related costs. The majority of these costs relate to the termination
plan and all but $315 were paid out in 1999. The following table details 1999
activity related to the severance accrual:
<TABLE>
<S> <C>
Accrual at December 31, 1998................................ $1,113
Payments.................................................... (737)
Adjustments................................................. (61)
------
Accrual at December 31, 1999................................ $ 315
======
</TABLE>
See footnote 12 for a discussion of the amounts paid to Magnacom.
Special charges for the year ended September 30, 1997 relate to a $7,445
non-cash compensation charge incurred when 750,000 common shares were released
from escrow to former members of management. This transaction is part of the
litigation described in note 11(d).
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash
and cash equivalents, accounts and notes receivable, investments, accounts
payable and accrued expenses approximate fair values due to the short-term
maturities of those instruments. The carrying amounts for current and
non-current restricted investments approximate fair value due to the composition
of such investments and the related maturities. The carrying amount of
unrestricted investments is based upon fair value as determined by quoted market
prices.
The following table details the carrying amounts and estimated fair values
of long-term debt and redeemable preference shares at December 31, 1999 (the
financial instruments for which carrying value and estimated fair value differ
at December 31, 1999 and 1998):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Long-term debt:
Senior Secured Notes, 13.25%............. $265,000 $262,350 $265,000 $273,933
Senior Secured Discount Notes, 10.5%..... 355,587 242,500 320,997 239,555
Senior Discount Notes, 13.875%........... 274,800 228,087 240,304 228,415
Convertible Senior Subordinated Discount
Notes, 13.875%........................ 33,295 27,635 29,884 28,406
Senior Subordinated Accrual Notes,
12.75%................................ 144,000 136,800 144,000 133,920
Redeemable preference shares, 11.875%...... 69,688 70,675 61,741 54,950
</TABLE>
F-59
<PAGE> 152
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of publicly traded long-term debt is estimated based on
quoted market prices. For substantially all other long-term obligations,
carrying amounts approximate fair values as incremental borrowings available to
the Company are at similar rates and terms. The fair value of redeemable
preference shares is estimated based upon rates available to the Company for
redeemable preferred equity with similar maturities and features.
Fair value estimates are made at a specific point in time based on relevant
market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgement and therefore cannot be determined with precision. Changes in
assumptions could significantly impact the estimates.
(16) SUBSEQUENT EVENTS
(a) President and Chief Executive Officer Resignation
On January 25, 2000, the President and Chief Executive Officer of the
Company resigned. The Company has appointed the Chief Operating Officer as
Acting Chief Executive Officer until a permanent appointment is made.
(b) Sale of Global Investment
In a series of transactions in February 2000, the Company sold its
investment in Global described in note 1 for $56,534 in cash, resulting in a
realized gain of the same amount.
(c) Bankruptcy
On May 17, 2000, the Company filed a voluntary petition for bankruptcy
under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy
Court of the District of Delaware. Pursuant to the bankruptcy filing, the
Company has remained in possession of the Company's assets and properties, and
all business and affairs will continue to be managed by the Company's directors.
(d) Disposition of Assets
On September 21, 2000, the U.S. District Court for the District of Delaware
approved the agreement between the Company and Time Warner Telecom Inc. ("Time
Warner Telecom") for Time Warner Telecom to purchase substantially all of the
assets of the Company, excluding certain operations in Hawaii and certain
non-core businesses, for $690 million. The Court approved the definitive
purchase agreement between the Company and Time Warner Telecom following an
auction for the Company's assets that concluded on August 25, 2000. Closing of
the purchase is subject to regulatory approvals and other customary terms and
conditions.
F-60
<PAGE> 153
GST TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999(1)
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 30,740 $ 42,983
Restricted investments.................................... 10,152 19,828
Accounts receivable, net.................................. 43,881 45,244
Construction contracts receivable......................... 37,625 26,823
Investments............................................... 910 44,596
Prepaid and other current assets.......................... 8,519 8,562
---------- ----------
Total current assets.............................. 131,827 188,036
---------- ----------
Restricted investments...................................... 3,510 9,848
Property and equipment, net................................. 652,158 832,047
Other assets, net........................................... 2,661 82,698
---------- ----------
Total assets...................................... $ 790,156 $1,112,629
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities not subject to compromise:
Accounts payable.......................................... $ 1,214 $ 30,579
Accrued expenses.......................................... 56,443 49,759
Deferred revenue.......................................... 12,307 10,066
Current portion of capital lease obligations.............. -- 6,693
Current portion of long-term debt......................... -- 17,466
---------- ----------
Total current liabilities not subject to
compromise...................................... 69,964 114,563
---------- ----------
Liabilities subject to compromise (see Note 3).............. 1,322,642 --
Long-term liabilities not subject to compromise:
Long-term interest payable................................ -- 43,134
Capital lease obligations, less current portion........... -- 16,813
Long-term debt, less current portion...................... -- 1,151,778
Deferred revenue from construction contracts.............. 25,460 --
Redeemable preference shares................................ 74,008 69,688
Shareholders' deficit:
Common shares............................................. 251,575 238,626
Accumulated deficit....................................... (953,493) (566,523)
Accumulated other comprehensive income.................... -- 44,550
---------- ----------
Total shareholders' deficit....................... (701,918) (283,347)
---------- ----------
Total liabilities and shareholders' deficit....... $ 790,156 $1,112,629
========== ==========
</TABLE>
---------------------
(1) The information in this column was derived from the Company's audited
financial statements as of December 31, 1999.
See notes to condensed consolidated financial statements.
F-61
<PAGE> 154
GST TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services............ $ 52,533 $ 50,424 $ 160,223 $ 150,362
Construction, facility sales and
other............................... 11,965 53,692 24,563 98,979
Product................................ -- 1,342 205 3,581
----------- ----------- ----------- -----------
Total revenues................. 64,498 105,458 184,991 252,922
----------- ----------- ----------- -----------
Operating costs and expenses:
Network expenses....................... 28,085 32,295 94,531 96,770
Facilities administration and
maintenance......................... 7,046 5,348 19,275 14,748
Cost of construction revenues.......... 8,098 37,203 16,581 63,068
Cost of product revenues............... -- 689 307 2,039
Selling, general and administrative.... 30,567 32,590 97,380 90,559
Depreciation and amortization.......... 22,075 18,676 67,569 52,300
Impairment of assets (see Note 13)..... 260,827 -- 260,827 --
----------- ----------- ----------- -----------
Total operating costs and
expenses..................... 356,698 126,801 556,470 319,484
----------- ----------- ----------- -----------
Loss from operations........... (292,200) (21,343) (371,479) (66,562)
----------- ----------- ----------- -----------
Other expenses (income):
Interest income........................ (587) (2,037) (2,117) (8,520)
Interest expense, net of amounts
capitalized (contractual interest of
$40,306 and $75,903 not recorded for
the three- and nine-month periods
ended September 30, 2000)........... 2,538 28,022 52,576 84,058
Other.................................. (211) (27,898) (47,745) (26,406)
----------- ----------- ----------- -----------
1,740 (1,913) 2,714 49,132
----------- ----------- ----------- -----------
Loss before reorganization expenses and
income tax expense..................... (293,940) (19,430) (374,193) (115,694)
Reorganization expenses (see Note 6)..... 8,179 -- 12,777 --
----------- ----------- ----------- -----------
Net loss............................... $ (302,119) $ (19,430) $ (386,970) $ (115,694)
=========== =========== =========== ===========
Net loss per share, basic and
diluted(1).......................... $ (7.56) $ (.52) $ (9.95) $ (3.22)
=========== =========== =========== ===========
Weighted average shares outstanding.... 39,983,569 37,550,357 39,324,074 37,121,573
=========== =========== =========== ===========
</TABLE>
---------------------
(1) Net loss per share is increased for preference shares' accretion totaling $0
for the three-month periods ended September 30, 2000 and 1999, and $4,320
and $3,862 for the nine-month periods ended September 30, 2000 and 1999,
respectively.
See notes to condensed consolidated financial statements.
F-62
<PAGE> 155
GST TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operations:
Net loss.................................................. $(386,970) $(115,694)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization.......................... 70,019 56,990
Accretion and accrual of interest...................... 32,798 53,832
Non-cash stock compensation and other expense.......... 224 1,662
(Gain) loss on disposal of assets...................... (1,411) 3,430
Gain on sale of investments............................ (42,349) --
Loss on impairment of assets........................... 260,827 --
Changes in non-cash operating working capital:
Accounts receivable, net............................. 950 (39,395)
Construction contracts receivable.................... (3,728) 281
Prepaid, other current and other assets, net......... (7,310) (14,318)
Accounts payable and accrued liabilities, prior to
reorganization...................................... (4,453) 32,328
Post-petition accounts payable and accrued
liabilities......................................... 50,861 --
Pre-petition accounts payable and accrued
liabilities, authorized by the court................ (3,537) --
Deferred revenue..................................... 2,409 8,584
Deferred revenue from construction contracts......... 25,460 --
--------- ---------
Cash used in operations........................... (6,210) (12,300)
--------- ---------
Investments:
Proceeds from sale of investments......................... 56,580 --
Purchase of property and equipment........................ (80,643) (215,323)
Proceeds from sale of assets.............................. 5,966 1,500
Purchase of other assets.................................. -- (333)
Change in investments restricted for the purchase of
property and equipment................................. 6,338 173,148
--------- ---------
Cash used in investing activities................. (11,759) (41,008)
--------- ---------
Financing:
Proceeds from long-term debt.............................. 2,311 1,782
Principal payments on long-term debt and capital leases,
prior to reorganization................................ (13,915) (13,312)
Issuance of common shares, net of issuance costs.......... 1,273 8,357
Deferred debt financing costs............................. (1,135) --
Change in investments restricted to finance interest
payments............................................... 17,192 15,615
--------- ---------
Cash provided by financing activities............. 5,726 12,442
--------- ---------
Decrease in cash and cash equivalents............. (12,243) (40,866)
Cash and cash equivalents, beginning of period.............. 42,983 86,070
--------- ---------
Cash and cash equivalents, end of period.................... $ 30,740 $ 45,204
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
F-63
<PAGE> 156
GST TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BANKRUPTCY PROCEEDINGS
On May 17, 2000, GST Telecommunications, Inc. ("GST" or the "Company"), and
its subsidiaries filed voluntary petitions for protection from creditors under
Chapter 11 of the United States Bankruptcy Code in the District of Delaware
("Bankruptcy Code"). The Company and its subsidiaries (collectively the
"Debtors") are currently operating as debtors-in-possession under the
supervision of the United States District Court for the District of Delaware
(the "Bankruptcy Court"). The Chapter 11 cases have been consolidated for the
purpose of joint administration under Case No. 00-1982 (GMS).
On May 17, 2000, the Debtors also commenced ancillary proceedings under the
Companies' Creditors Arrangement Act in Canada in the Ontario Superior Court of
Justice.
Under the proceedings, substantially all liabilities, litigation and claims
pending against the Debtors in existence at the filing date are stayed unless
the stay is modified or lifted or payment has been otherwise authorized by the
Bankruptcy Court.
On May 11, 2000, we obtained a commitment letter from Heller Financial,
Inc. ("Heller") which will provide us, subject to satisfying certain conditions,
debtor-in-possession financing for $50,000 and the potential for up to an
additional $75,000 in cash. On May 26, 2000, the Bankruptcy Court entered an
order approving the initial $30,000 of this financing. On July 26, 2000, the
Bankruptcy Court entered an order providing a superpriority interest for Heller
over the secured debt of existing bondholders, upon the consent of a majority of
the secured bondholders, which will in turn permit Heller to provide
approximately $40,000 of the $50,000 in financing mentioned above. Based upon
current unencumbered assets, the additional $10,000 is available without the
consent of the bondholders. To date, we have not drawn on the Heller credit
facility, or sought bondholder consent.
On June 13, 2000, we opened the bidding procedures with the approval of the
Bankruptcy Court in an auction format for substantially all of our assets. After
an extension of the original bid and auction dates, qualified buyers were
required to submit their bids as of August 11, 2000. On September 11, 2000, the
Company and Time Warner Telecom Inc. executed a definitive asset purchase
agreement which provides for the purchase of substantially all of the Company's
assets, excluding certain assets in Hawaii and certain non-core businesses, for
$690,000. On September 21, 2000, the Bankruptcy Court approved the definitive
asset purchase agreement between the Company and Time Warner Telecom Inc.
Closing of the sale is anticipated in the last quarter of 2000, or first quarter
of 2001, subject to regulatory approvals and other customary terms and
conditions. In addition, the Company is seeking purchasers for certain of its
remaining assets.
Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and shareholders may be substantially altered. At this time, it is not
possible to predict the outcome of the Chapter 11 cases in general or the effect
of the cases on our business, or on the interests of creditors and shareholders.
Management believes that it is highly unlikely that current equity security
holders will receive any distribution under any reorganization or liquidation of
our assets.
2. BASIS OF PRESENTATION
The accompanying condensed, consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. However,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed, or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the statements
include all adjustments necessary (which are of a normal and recurring nature)
for the fair presentation of the results of the interim periods presented. The
statements also include an impairment of assets charge (see "Note 13"). The
results of operations for the periods
F-64
<PAGE> 157
GST TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
presented are not necessarily indicative of the results to be expected for the
full fiscal year or for subsequent periods. These financial statements should be
read in conjunction with the Company's audited consolidated financial statements
for the fiscal year ended December 31, 1999, as included in the Company's annual
report on Form 10-K.
3. LIABILITIES SUBJECT TO COMPROMISE
As of September 30, 2000, liabilities subject to compromise consist of the
following:
<TABLE>
<S> <C>
Trade payables.............................................. $ 43,837
Accrued liabilities......................................... 18,495
Current portion, long-term debt............................. 20,030
Current portion, capital lease obligations.................. 4,331
Long-term debt, less current portion........................ 1,155,990
Capital lease obligations, less current portion............. 13,767
Long-term interest payable.................................. 52,007
Other long-term liabilities................................. 14,185
----------
Total............................................. $1,322,642
==========
</TABLE>
4. BASIC AND DILUTED NET LOSS PER SHARE
For the three- and nine-month periods ended September 30, 2000 and 1999,
common stock equivalents were antidilutive and were not included in diluted
weighted average shares outstanding. If the Company had reported net income for
the periods presented, the weighted average number of common equivalent shares
used to determine diluted net loss per share would have increased by 39,911 and
699,406 for the three- and nine-month periods ended September 30, 2000,
respectively, compared to 14,693,507 and 15,122,291 for the three- and
nine-month periods ended September 30, 1999.
5. SHAREHOLDERS' EQUITY
Shares issued and outstanding are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Common shares, no par value............................ 40,023,480 37,734,507
</TABLE>
6. REORGANIZATION EXPENSES
For the three- and nine-month periods ended September 30, 2000,
reorganization expenses totaled $8,179 and $12,777, respectively. This consisted
of $3,543 and $6,107 for professional expenses, and $4,066 and $6,100 for a
retention bonus accrual, and $570 and $0 in other reorganization expenses for
the three- and nine-months ended September 30, 2000, respectively. The retention
bonus accrual is pursuant to a Bankruptcy Court-approved plan to retain our
employees through the bankruptcy process. For the three- and nine-months ended
September 30, 2000, cash expended for reorganization costs totaled $3,355,
consisting of $206 for professional expenses and $3,149 for retention bonuses.
At September 30, 2000, we had accrued $3,860 for professional expenses, $2,951
related to the retention bonus plan, and $570 for other reorganization expenses.
F-65
<PAGE> 158
GST TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. ACCUMULATED OTHER COMPREHENSIVE INCOME
The Company accounts for comprehensive income under Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
Comprehensive income is defined as changes in stockholders' equity exclusive of
transactions with owners such as capital contributions and dividends. The change
in the Company's accumulated other comprehensive income is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Balance, beginning of period........................... $ 44,550 $36,675
Change in unrealized gain on available-for-sale
investment sold during the period.................... (44,550) 7,875
-------- -------
Balance, end of period................................. $ -- $44,550
</TABLE>
The balance as of September 30, 2000, is $0 because the Company sold its
investment in Global Light Telecommunications, Inc. during the three-months
ended March 31, 2000 (see "Note 11").
8. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2000 1999
---------- -------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Pre-petition cash paid for interest....................... $ 22,808 $27,143
Post-petition cash paid for interest...................... 228 --
Supplemental schedule of non-cash investing and financing
activities:
Disposition of subsidiary:
Assets................................................. (4,182) 2,579
Liabilities............................................ (266) (216)
Amounts in accounts payable and accrued liabilities for the
purchase of fixed assets at end of period................. -- 28,560
Assets acquired through capital leases...................... -- 1,590
Conversion of debt to equity................................ 15,772 774
Long-term debt and capital leases reclassified to
"Liabilities subject to compromise"....................... 1,194,118 --
</TABLE>
9. CAPITALIZATION OF INTEREST
The Company capitalized interest of $0 and $8,488 as a part of property and
equipment for the three- and nine-month periods ended September 30, 2000,
respectively, compared to $9,884 and $29,001 for the three-and nine-month
periods ended September 30, 1999, respectively.
10. ACCRUED SEVERANCE
In the fourth quarter of 1998, the Company accrued $1,113 in
severance-related costs. The following table details activity related to the
severance accrual.
<TABLE>
<S> <C>
Accrual at December 31, 1998................................ $1,113
Payments.................................................... (737)
Adjustments................................................. (61)
------
Accrual at September 30, 2000............................... $ 315
======
</TABLE>
F-66
<PAGE> 159
GST TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SALE OF GLOBAL INVESTMENT
In a series of transactions during the three-months ended March 31, 2000,
the Company sold its investment in Global Light Telecommunications, Inc.
("Global"). The Company was accounting for the investment as available-for-sale
under SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." The after-tax net gain as a result of these transactions was
$42,349.
12. DEBT SERVICE REQUIREMENTS
At September 30, 2000, the Company had $1,194,118 of indebtedness
outstanding along with $74,008 of mandatorily redeemable preference shares. As a
result of filing for protection under bankruptcy law, the Company is not
permitted to make any payments of the debt service requirements with the
exception of certain capital lease obligations. All of these obligations are
subject to discharge in bankruptcy upon the completion of all proceedings.
13. IMPAIRMENT OF ASSETS
As a result of entering into the definitive asset purchase agreement with
Time Warner Telecom Inc. in the amount of $690,000 and anticipated proceeds from
the sale or sales of all remaining assets, the Company recorded an impairment
charge, pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long Lived Assets to be Disposed of," of $260,800 during the
three-months ended September 30, 2000.
14. ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 43 ("FIN 43"), "Real Estate Sales, an interpretation of FASB
Statement No. 66." The interpretation is effective for sales of real estate with
property improvements or integral equipment entered into after June 30, 1999.
Under this interpretation, conduit is considered integral equipment and dark
fiber will likely be considered integral equipment. Accordingly, title must
transfer to a lessee in order for a lease transaction to be accounted for as a
sales-type lease. For contracts entered into after June 30, 1999, sales-type
lease accounting will no longer be appropriate for conduit and dark fiber leases
and, therefore, these transactions will be accounted for as operating leases
unless title transfers to the lessee.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation," an interpretation of
Accounting Principles Board Opinion No. 25. This Interpretation clarifies the
application of Opinion 25 for certain issues: a) the definition of employee for
purposes of applying Opinion 25, b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation became effective July 1, 2000. The adoption of
this Interpretation has not had a material effect on our financial position or
on the results of operations.
F-67
<PAGE> 160
PROSPECTUS
Time Warner Telecom Inc.
From time to time, we may sell any of the following securities:
-- Debt Securities, including Convertible Debt Securities
-- Preferred Stock, including Convertible Preferred Stock
-- Class A common stock
We will provide the specific terms of these securities in one or more
supplements to this prospectus. You should read this prospectus and any
prospectus supplement carefully before you invest. The aggregate of the offering
prices of securities covered by this prospectus will not exceed $700,000,000.
Our Class A common stock is traded over-the-counter on the NASDAQ Stock
Market's National Market under the trading symbol "TWTC." The applicable
prospectus supplement will contain information, where applicable, as to any
other listing (if any) on the NASDAQ Stock Market's National Market or any
securities exchange of the securities covered by the prospectus supplement.
The securities may be sold to investors, through agents designated from
time to time or to or through underwriters or dealers. See "Plan of
Distribution." If any underwriters are involved in the sale of any securities in
respect of which this prospectus is being delivered, the names of such
underwriters and any applicable commissions or discounts will be set forth in a
prospectus supplement. The net proceeds we expect to receive from such sale also
will be set forth in a prospectus supplement.
INVESTING IN THE SECURITIES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 3.
This prospectus may not be used to offer or sell any securities unless
accompanied by a prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES TO BE ISSUED UNDER THIS
PROSPECTUS OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is January 12, 2001
<PAGE> 161
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ABOUT THIS PROSPECTUS....................................... 1
WHERE YOU CAN FIND MORE INFORMATION......................... 1
INCORPORATION OF INFORMATION WE FILE WITH THE SEC........... 1
FORWARD-LOOKING STATEMENTS.................................. 2
THE COMPANY................................................. 2
RISK FACTORS................................................ 3
RATIO OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS............... 14
USE OF PROCEEDS............................................. 14
DESCRIPTION OF DEBT SECURITIES.............................. 15
DESCRIPTION OF CAPITAL STOCK................................ 51
PLAN OF DISTRIBUTION........................................ 54
VALIDITY OF SECURITIES...................................... 55
EXPERTS..................................................... 55
</TABLE>
ii
<PAGE> 162
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC utilizing a "shelf" registration process. Under this shelf process, we may
sell any combination of the securities described in this prospectus in one or
more offerings up to an aggregate offering price of $700,000,000.
This prospectus provides you with a general description of the securities
we may offer. Each time we sell securities, we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information
contained in this prospectus. You should read both this prospectus and any
prospectus supplement together with additional information described immediately
below under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's website at http://www.sec.gov. You may also read and copy
any document we file with the SEC at the SEC's following public reference
facilities:
<TABLE>
<S> <C> <C>
Chicago Regional Office
Public Reference Room New York Regional Office Citicorp Center
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661-2511
</TABLE>
You may also obtain copies of the documents at prescribed rates by writing
to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information on
the operations of the public reference facilities. Our SEC filings are also
available at the offices of The NASDAQ Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006.
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" the information we file
with them, which means:
-- incorporated documents are considered part of this prospectus;
-- we can disclose important information to you by referring you to
those documents; and
-- information that we file with the SEC will automatically update and
supersede this incorporated information.
We incorporate by reference the documents listed below:
(1) Our Annual Report on Form 10-K for the year ended on December 31,
1999.
(2) Our Quarterly Reports on Form 10-Q for the quarters ended on March 31,
2000, June 30, 2000 and September 30, 2000.
(3) The description of our common stock contained in the Registration
Statement on Form S-1, as amended (file No. 333-33166), filed April 26, 2000.
(4) Our Current Reports on Form 8-K dated September 18, 2000, November 1,
2000, January 12, 2001 and on Form 8-K/A dated November 8, 2000.
1
<PAGE> 163
We also incorporate by reference each of the following documents that we
will file with the SEC after the date of the initial filing of the registration
statement and prior to the time we sell all of the securities offered by this
prospectus:
-- Reports filed under Section 13(a) and (c) of the Exchange Act;
-- Definitive proxy or information statements filed under Section 14 of
the Exchange Act in connection with any subsequent stockholders
meeting; and
-- Any reports filed under Section 15(d) of the Exchange Act.
You can obtain any of the filings incorporated by reference in this
document through us, or from the SEC through the SEC's web site or at the
addresses listed above. Documents incorporated by reference are available from
us without charge, excluding any exhibits to those documents unless the exhibit
is specifically incorporated by reference as an exhibit in this prospectus. You
can obtain documents incorporated by reference in this prospectus by requesting
them in writing or by telephone from us at the following address:
Time Warner Telecom Inc.
10475 Park Meadows Drive
Littleton, CO 80124
Telephone: (303) 566-1000
If you request any incorporated documents from us, we will mail them to you
by first class mail, or another equally prompt means, within one business day
after we receive your request.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including statements
regarding, among other items, our business and operating strategy, operations,
economic performance and financial condition. These forward-looking statements
are subject to risks, uncertainties and assumptions, some of which are beyond
our control. Actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause such
differences include, but are not limited to, those discussed under "Risk
Factors." We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this prospectus might not
occur.
THE COMPANY
We are 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. We offer a wide range
of business telephony services, primarily to medium- and large-sized
telecommunications-intensive business end-users, long distance carriers,
internet service providers, wireless communications companies and governmental
entities. These business telephony services include dedicated transmission,
local switched, long distance, data and video transmission services and
high-speed dedicated internet access.
As of January 9, 2001, we operated networks in 24 metropolitan markets in
the United States. On January 10, 2001, we substantially expanded our geographic
coverage by acquiring substantially all of the assets of GST Telecommunications,
Inc. out of bankruptcy. As a result of this acquisition, we added 15 markets in
the western United States. We expect to activate networks in five additional
markets by the end of 2001. As of September 30, 2000, our networks covered 9,457
route miles, contained 363,644 fiber miles and offered service to 7,228 on-net
and off-net buildings. The acquisition of the GST assets added to our network
4,210 route miles, 227,674 fiber miles and service to 345 on-net buildings.
Our principal executive offices are located at 10475 Park Meadows Drive,
Littleton, Colorado 80124, and our telephone number is (303) 566-1000.
2
<PAGE> 164
RISK FACTORS
An investment in the securities is risky. You should carefully consider the
following risks, as well as the other information contained in this prospectus.
If any of the following risks actually occurs, our business could be harmed. The
risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties not presently known to us, or that we
currently see as immaterial, may also harm our business.
RISKS RELATING TO US AND OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAY NOT BE A RELIABLE BASIS FOR EVALUATING
OUR PROSPECTS.
Time Warner Cable began our business in 1993. Subsequently, we spun-off to
become an independent company in July 1998. Since the beginning of 1997, our
business has changed substantially as it has rapidly expanded into switched
services. As a result, prospective purchasers have limited historical financial
information available to evaluate our likely future performance. When making a
decision to invest in the securities, prospective purchasers should consider the
risks, expenses and difficulties frequently encountered by companies that are in
their development stage.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO EXPERIENCE OPERATING
LOSSES FOR THE FORSEEABLE FUTURE.
We have incurred operating losses for most of our history, net of the
effect of non-recurring reciprocal compensation settlements. For the year ended
December 31, 1999 and the nine months ended September 30, 2000, we had operating
losses of $38.6 million and operating income of $3.5 million, net of the effect
of non-recurring reciprocal settlements of $7.6 million and $27.3 million,
respectively. After giving effect to the acquisition of the assets of GST and
associated financings, we would have had operating losses of $102.7 million and
$63.7 million for the year ended December 31, 1999 and the nine months ended
September 30, 2000, net of the effect of non-recurring reciprocal compensation
settlements of $7.6 million and $27.3 million, respectively. We expect to
continue to incur, and perhaps increase, operating losses as we build our
networks, expand our customer base and as we integrate the acquired assets of
GST. Operating losses will reduce our ability to meet working capital needs and
increase our need for external financing.
The development of our business requires substantial capital expenditures.
As described below, we plan to increase our annual capital expenditures during
2001 to expand our operations. We expect to incur a substantial part of these
expenditures in new markets before we realize any related revenue. We also
expect that capital expenditures and other operating expenditures will result in
negative cash flow and operating losses for our new markets until and unless we
develop an adequate customer base and revenue stream from those markets. We
expect that each network will produce negative cash flow for at least two and a
half years after it begins operations. Moreover, we may never develop an
adequate customer base, sustain profitability, or generate sufficient cash flow.
WE MAY COMPLETE A SIGNIFICANT BUSINESS COMBINATION OR OTHER TRANSACTION
THAT COULD AFFECT OUR LEVERAGE, RESULT IN A CHANGE IN CONTROL OR BOTH.
We continually evaluate potential business combinations, joint ventures and
other transactions that would extend our geographic markets, expand our products
and services and/or enlarge the capacity of our networks. To that end, we have
had exploratory discussions with several other companies in our industry
regarding potentially material transactions. If we enter into a definitive
agreement with respect to any material transaction, it could result in an
increase in our leverage or issuing additional common stock or both, or it could
result in a change of control. There can be no assurance, however, that we will
enter into any transaction or, if we do, on what terms.
A change of control could result in a requirement that we offer to purchase
certain indebtedness and the acceleration of other indebtedness. There can be no
assurance that we will have sufficient funds available to make that repurchase
and repay any accelerated indebtedness.
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THE INDENTURE FOR THE 9 3/4% SENIOR NOTES, AND THE INDENTURE FOR ANY
NON-CONVERTIBLE DEBT SECURITIES OFFERED UNDER THIS PROSPECTUS, CONTAIN
RESTRICTIVE COVENANTS THAT MAY LIMIT OUR FLEXIBILITY.
The indentures limit, and in some circumstances prohibit, our ability to:
-- incur additional debt;
-- pay dividends;
-- make investments or other restricted payments;
-- engage in transactions with stockholders and affiliates;
-- create liens;
-- sell assets;
-- issue or sell capital stock of subsidiaries; and
-- engage in mergers and acquisitions.
These covenants may limit our financial and operating flexibility. In
addition, if we do not comply with these covenants, the holders of the 9 3/4%
Senior Notes may accelerate our debt under the 9 3/4% Senior Notes and the
holders of the debt securities may accelerate our debt under the debt
securities.
WE WILL REQUIRE SUBSTANTIAL CAPITAL TO EXPAND OUR OPERATIONS.
The development and expansion of our networks requires substantial capital
investment. If this capital is not available when needed, our business will be
adversely affected. Including the effects of the GST acquisition, we expect our
principal capital requirements for 2001 to be:
-- approximately $550 million to purchase and install switches,
electronics, fiber and other technologies in existing, acquired and
future networks; and
-- approximately $50 million for capital expenditures for our management
information system infrastructure.
We also expect to have substantial capital expenditures in subsequent
periods.
We recently executed agreements with various financial institutions for
$1.25 billion of additional financing, including $525 million of secured term
loan financing available to our subsidiaries, and a $700 million unsecured
bridge financing available to us. The GST acquisition was initially financed
with borrowings under the unsecured bridge loan facility. We expect to apply
some or all of the proceeds of offerings under this prospectus to refinance
borrowings under these credit facilities. We may be required to seek additional
financing if:
-- our business plans and cost estimates prove to be inaccurate;
-- we decide to further accelerate the expansion of our business and
existing networks;
-- we consummate further acquisitions or joint ventures that require
capital; or
-- we are not able to generate sufficient cash flow from operations.
When we seek additional financing, the terms offered may place significant
limits on our financial and operating flexibility, or may not be acceptable to
us. The failure to raise sufficient funds when needed and on reasonable terms
may require us to modify or significantly curtail our business expansion plans.
This could have a material adverse impact on our growth, ability to compete, and
ability to service our existing debt.
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OUR SUBSTANTIAL INDEBTEDNESS, AND SERVICING OUR INDEBTEDNESS, MAY IMPAIR
OUR FINANCIAL AND OPERATING FLEXIBILITY.
We have a substantial amount of debt outstanding and we incurred
substantial additional debt to acquire GST. This substantial indebtedness may
have an adverse impact on us. For example:
-- our ability to obtain additional financing may be limited;
-- a substantial portion of our cash flow will be dedicated to pay
interest and principal on our debt;
-- our ability to satisfy our debt obligations may be diminished
including obligations under the debt securities;
-- we may be more vulnerable to economic downturns; and
-- our ability to withstand competitive pressure may decrease.
As of September 30, 2000, we had approximately $400 million of consolidated
total debt and after giving effect to the acquisition of the assets of GST and
related borrowings under the new credit facilities and bridge loan facility, we
would have had approximately $1.35 billion of consolidated total debt as of that
date.
TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH,
AND OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR
CONTROL.
Our ability to make payments on our indebtedness, including the debt
securities, and to fund planned capital expenditures will depend on our ability
to generate cash in the future.
Our historical financial results have been, and our future financial
results might be, subject to substantial fluctuations. We cannot assure you that
our business will generate sufficient cash flow from operations, that currently
anticipated cost savings and operating improvements will be realized on schedule
or that future borrowings will be available to us in an amount sufficient to
enable us to pay our indebtedness, including the debt securities, or to fund our
other liquidity needs. If we are unable to pay our debts, we will be required to
pursue one or more alternative strategies, such as selling assets, refinancing
or restructuring our indebtedness or selling equity capital. However, we cannot
assure you that any alternative strategies will be feasible at the time due to
market conditions or other factors or prove adequate. Also, certain alternative
strategies will require the consent of our senior secured lenders before we
engage in any such strategy.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE DO NOT SUCCESSFULLY MANAGE OUR
EXPANSION INTO NEW MARKETS AND SERVICES.
We plan to offer new communications services, expand service in our
existing markets, interconnect our existing markets and enter new markets. If we
are not successful in implementing these changes on-time and on-budget, our
results of operations will likely be adversely affected.
Our ability to manage this expansion depends on many factors, including the
ability to:
-- attract new customers and sell new services to existing customers;
-- design, acquire and install transmission and switching facilities;
-- employ new technologies;
-- obtain any required governmental permits and rights-of-way;
-- implement interconnection with local exchange carriers;
-- expand, train and manage our employee base;
-- enhance our financial, operating and information systems to
effectively manage our growth; and
-- accurately predict and manage the cost and timing of our capital
expenditure programs.
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Even if we are successful in completing the infrastructure to support our
expanded business, that business may not be profitable and may not generate
positive cash flow for us.
OUR BUSINESS MAY BE LIMITED IF THE CAPACITY LICENSE WITH TIME WARNER CABLE
EXPIRES OR IS TERMINATED.
If the capacity license with Time Warner Cable is not renewed on expiration
in 2028 or is terminated prior to that time, we may need to build, lease or
otherwise obtain fiber optic capacity. The terms of those arrangements may be
materially less favorable to us than the terms of our existing capacity license.
At expiration of the capacity license, Time Warner Cable is obligated to
negotiate a renewal in good faith, but we may be unable to reach agreement with
Time Warner Cable on acceptable terms. In addition, Time Warner Cable may
terminate the capacity license before expiration upon:
-- a material impairment of Time Warner Cable's ability to provide the
license by law;
-- a material breach of the capacity license by us; or
-- the institution of any proceedings to impose any public utility or
common carrier status or obligations on Time Warner Cable, or any
other proceedings challenging Time Warner Cable's operating authority
as a result of the services provided to us under the capacity
license.
The capacity license prohibits us from offering residential services or
content services with the capacity licensed from Time Warner Cable.
WE MAY LOSE THE RIGHT TO USE THE "TIME WARNER" NAME.
We believe the "Time Warner" brand name is valuable and its loss could have
an adverse effect on us. Under a license agreement with Time Warner, we are
required to discontinue use of the "Time Warner" name in the following
circumstances:
-- the license agreement expires after an initial term ending July 2002
or any permitted renewal;
-- Time Warner no longer owns at least 30% of our common stock;
-- Time Warner no longer has the right to nominate at least three
members of our board of directors;
-- we violate covenants in the capacity license with Time Warner Cable
relating to residential services and content services; or
-- a Class B Stockholder transfers its Class B common stock and its
rights to designate nominees to the board of directors to a third
party.
Under these circumstances, we may change our name to "TW Telecom Inc." or
some other name. Such name change, and the inability to use the "Time Warner"
name, could have an adverse effect on our ability to conduct our business and on
our financial condition and results of operations.
SEVERAL CUSTOMERS ACCOUNT FOR A SIGNIFICANT AMOUNT OF OUR REVENUE.
We have substantial business relationships with a few large customers. For
the nine months ended September 30, 2000, our top ten customers accounted for
approximately 46% of our total revenue. Our largest customer for the nine months
ended September 30, 2000, MCI Worldcom, Inc. and its affiliates, accounted for
more than 10% of our total revenue. However, a substantial portion of that
revenue results from traffic that is directed to us by customers that have
selected that long distance carrier. No other customer, including customers who
direct their business through long distance carriers, accounted for 10% or more
of revenue.
SOME OF OUR CUSTOMER AGREEMENTS MAY NOT CONTINUE.
Some of our customer agreements are subject to termination on short notice
and do not require the customer to maintain its agreements at current levels,
and we cannot assure you that such customers will
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continue to purchase the same services or level of services. We believe that
certain interexchange carriers are pursuing alternatives to their current
practices with regard to obtaining local telecommunications services, including
acquisition or construction of their own facilities. In addition, interexchange
carriers may be able to provide local service by reselling the facilities or
services of an incumbent local exchange carrier, which may be more
cost-effective for an interexchange carrier than using our services or another
competitive access provider or competitive local exchange carrier.
WE ARE DEPENDENT ON TIME WARNER CABLE'S PERMITS, LICENSES AND
RIGHTS-OF-WAY.
We currently license a significant portion of our fiber optic capacity from
Time Warner Cable. Municipalities that regulate Time Warner Cable may or may not
seek to impose additional franchise fees or otherwise charge Time Warner Cable.
We must reimburse Time Warner Cable for any new fees or increases. Time Warner
Cable or Time Warner Telecom may not be able to obtain all necessary permits,
licenses or agreements from governmental authorities or private rights-of-way
providers necessary to effect future license transactions. This would hinder our
ability to expand our existing networks or develop new networks successfully in
locations served by Time Warner Cable.
OUR QUARTERLY OPERATING RESULTS WILL FLUCTUATE.
As a result of the limited revenue and significant expenses associated with
the expansion and development of our networks and services, we anticipate that
our operating results could vary significantly from quarter to quarter. In fact,
we expect our recurring EBITDA margins to decrease in 2001 as compared to 2000
due to the acquisition and expected commencement of services in five additional
markets. Changes in the usage or payment patterns of significant customers may
also cause operating results to vary.
WE DEPEND ON THIRD PARTY VENDORS FOR INFORMATION SYSTEMS.
We have entered into agreements with vendors that provide for the
development and operation of back office systems, such as ordering, provisioning
and billing systems. The failure of those vendors to perform their services in a
timely and effective manner at acceptable costs could have a material adverse
effect on our growth and our ability to monitor costs, bill customers, provision
customer orders and achieve operating efficiencies.
IF WE DO NOT ADAPT TO RAPID CHANGES IN THE TELECOMMUNICATIONS INDUSTRY, WE
COULD LOSE CUSTOMERS OR MARKET SHARE.
The telecommunications industry will continue to experience rapid changes
in technology. Our future success may depend on our ability to adapt to any
changes in the industry. Our failure to adopt new technology, or our choice of
one technological innovation over another, may have an adverse impact on our
ability to compete or meet customer demands.
WE ARE CONTROLLED BY THE CLASS B STOCKHOLDERS.
Time Warner Inc., AT&T Corporation (as successor by merger to MediaOne
Group, Inc.) and Time Warner Entertainment-Advance/Newhouse Partnership, the
Class B Stockholders, hold all the outstanding shares of Class B common stock.
The Class B stockholders generally have the collective ability to control all
matters requiring stockholder approval, including the nomination and election of
directors. The Class B common stock is not subject to any mandatory conversion
provisions other than pursuant to certain transfer restrictions. The
disproportionate voting rights of the Class B common stock relative to the Class
A common stock may delay or prevent a change in control of Time Warner Telecom,
and may make us a less attractive takeover target.
Our board of directors consists of seven directors. Under the Stockholders
Agreement, Time Warner has the right to designate three nominees for the board
of directors and Advance/Newhouse Partnership has the right to designate one
nominee. Under the Stockholders Agreement, Class B Stockholders agree to vote in
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favor of all nominees selected by the Class B Stockholders. Class B Stockholders
will also have the power to elect the other members of our board of directors.
EACH OF THE CLASS B STOCKHOLDERS HAS VETO RIGHTS OVER CERTAIN ACTIONS.
Under our restated certificate of incorporation, as long as the outstanding
Class B common stock represents at least 50% of the aggregate voting power of
both classes of common stock outstanding, the approval of 100% of the Class B
Stockholders is required:
-- to permit us to provide residential services or content services
prior to May 2004;
-- to amend our restated certificate of incorporation, other than in
connection with certain ministerial actions; or
-- for any direct or indirect disposition by us of capital stock of
subsidiaries or assets that in either case represents substantially
all our assets on a consolidated basis.
The approval of 100% of the Class B Stockholders is also required for the
issuance of any additional shares of Class B common stock or any capital stock
having more than one vote per share.
THE HOLDERS OF CLASS B COMMON STOCK CAN SELL CONTROL OF TIME WARNER TELECOM
AT A TIME WHEN THEY DO NOT HAVE A MAJORITY ECONOMIC INTEREST IN TIME WARNER
TELECOM, AND EXCLUDE THE HOLDERS OF CLASS A COMMON STOCK FROM PARTICIPATING
IN THE SALE.
The Stockholders Agreement provides that, subject to the rights of first
refusal of the other holders of Class B common stock, the Class B Stockholders
may transfer their Class B common stock. If a holder sells all, but not less
than all, of its Class B common stock as shares of Class B common stock, such
holder may transfer its right to nominate Class B nominees for election to the
board of directors. In addition, all of the holders of Class B common stock have
the right to participate in certain sales by Time Warner of its Class B common
stock. Accordingly, majority control of Time Warner Telecom could be transferred
by one or more holders of Class B common stock at a time when such holder or
holders of Class B common stock do not have a majority of the economic interest
in Time Warner Telecom and with no assurance that the holders of Class A common
stock would be given the opportunity to participate in the transaction or, if
they were permitted to participate in the transaction, to receive the same
amount and type of consideration for their stock in Time Warner Telecom as the
holders of Class B common stock.
In addition, we have elected not to be subject to Section 203 of the
Delaware General Corporation Law, which would otherwise provide certain
restrictions on "business combinations" between us and any person acquiring a
significant, 15% or greater, interest in us other than in a transaction approved
by our board of directors and in certain cases by our stockholders.
THE CLASS B STOCKHOLDERS MAY COMPETE WITH US.
The Class B Stockholders are in the cable television business. There is no
restriction on the Class B Stockholders' ability to compete with us. They may,
now or in the future, provide the same or similar services to those that we
provide.
SOME OF OUR BUSINESS ACTIVITIES ARE RESTRICTED.
Our restated certificate of incorporation restricts our business
activities. These restrictions limit our ability to expand our business and
could deprive us of valuable future opportunities. Under the restated
certificate of incorporation, we may not, directly or through a subsidiary or
affiliate:
-- provide residential services; or
-- produce or otherwise provide entertainment, information, or any other
content services, with certain limited exceptions.
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We may engage in these activities with the affirmative vote of all the
holders of the Class B common stock or on the earlier of:
-- five years from the date of our restated certificate of
incorporation, which is May 2004; or
-- the date the Class B common stock represents less than 50% of our
voting power (as of September 30, 2000, Class B common stock
represented approximately 95.6% of our voting power).
We are subject to the same restrictions under the capacity license with
Time Warner Cable, except that those restrictions apply only to our use of the
leased capacity but last until the capacity license expires in 2028 or is
terminated. We believe these restrictions will not materially affect our ability
to operate our business as currently planned.
SOME OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST.
Some of our directors are also directors, officers or employees of the
Class B Stockholders or their affiliates. Although these directors have
fiduciary obligations to Time Warner Telecom under Delaware law, they may face
conflicts of interest. For example, conflicts of interest may arise with respect
to certain business opportunities available to, and certain transactions
involving, Time Warner Telecom. The Class B Stockholders have not adopted any
special voting procedures to deal with such conflicts of interest. The
resolution of these conflicts may be unfavorable to us. Our restated certificate
of incorporation provides for the allocation of corporate opportunities between
us and the Class B Stockholders. See "Description of Capital Stock."
RISKS RELATING TO OUR ACQUISITION OF THE ASSETS OF GST
OUR ACQUISITION OF THE GST ASSETS INCREASES OUR LEVERAGE AND POSES OTHER
RISKS.
Our acquisition of the GST assets increases our geographic presence,
expands our products and services and enlarges the capacity of our networks.
This transaction is considerably larger than the transactions we have completed
in the past.
This transaction involves the following operating risks to us:
-- the difficulty of assimilating the acquired operations and personnel;
-- the potential disruption of our ongoing business;
-- the diversion of resources;
-- the possible inability of management to maintain uniform standards,
controls, procedures and policies;
-- the possible difficulty of managing our growth and information
systems;
-- the risks of entering markets in which we have little or no
experience;
-- the potential impairment of relationships with employees or
customers; and
-- the possibility that the liabilities we assumed to complete
performance under GST contracts may prove to be more burdensome than
anticipated.
WE MAY HAVE DIFFICULTY INTEGRATING THE ACQUIRED ASSETS AND BUSINESSES OF
GST.
We purchased substantially all of the assets of GST with the expectation
that the asset purchase would result in certain benefits, including expansion of
the markets we serve and increasing our operational efficiencies. Achieving the
benefits of the asset purchase will depend upon the successful integration of
the acquired businesses into our existing operations. We cannot assure you that
we will be successful in integrating
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the acquired GST assets into our current businesses. The integration risks
associated with the acquisition include but are not limited to:
-- the diversion of our management's attention as integrating the GST
operations and assets will require a substantial amount of our
management's attention,
-- difficulties associated in assimilating GST's technology, including
billing and customer information systems, and
-- any significant loss of key GST personnel could lead to interruptions
in our billing, accounting, information technologies and engineering
capabilities.
We cannot assure you that we will be able to successfully overcome the
risks associated with integrating the assets we acquired from GST. There is a
risk that the costs of integration could have a material adverse effect on our
operating results.
RISKS RELATING TO OUR INDUSTRY
WE DEPEND ON INTERCONNECTION WITH INCUMBENT LOCAL EXCHANGE CARRIERS.
Our services may be less attractive if we cannot obtain high quality,
reliable and reasonably priced interconnection from incumbent local exchange
carriers. The Telecommunications Act of 1996 requires incumbent local exchange
carriers to allow us to connect to their networks, thereby connecting to end
users not on our networks, which is commonly referred to as "interconnection"
within our industry. However, negotiating interconnection agreements with the
incumbent local exchange carriers takes considerable time, effort and expense.
The agreements are also subject to state regulation. We may be unable to obtain
interconnection at rates that are both competitive and profitable.
THE LOCAL SERVICES MARKET IS HIGHLY COMPETITIVE, AND MANY OF OUR
COMPETITORS HAVE SIGNIFICANT ADVANTAGES THAT MAY ADVERSELY AFFECT OUR
ABILITY TO COMPETE WITH THEM.
We operate in an increasingly competitive environment and some companies
may have competitive advantages over us. Most incumbent local exchange carriers
offer substantially the same services as we offer. Incumbent local exchange
carriers benefit from:
-- longstanding relationships with their customers;
-- greater financial and technical resources;
-- the ability to subsidize local services from revenue in unrelated
businesses; and
-- recent regulations that relax price restrictions and decrease
regulatory oversight of incumbent local exchange carriers.
We also face competition from new entrants into the local services business
who may also be better established and have greater financial resources. These
advantages may impair our ability to compete in price and service offerings or
require us to sustain prolonged periods of operating losses in order to retain
customers. The current trend of consolidation of telecommunications companies
and strategic alliances within the industry could give rise to significant new
or stronger competitors for us. Some long distance carriers who are our
customers are pursuing alternative ways to obtain local telecommunications
services, including by acquiring local exchange carriers or constructing their
own facilities.
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COMPETITION IN LOCAL SERVICES HAS ALSO INCREASED AS A RESULT OF CHANGING
GOVERNMENT REGULATIONS.
The Telecommunications Act of 1996 has increased competition in the local
telecommunications business. The Telecommunications Act of 1996:
-- requires incumbent local exchange carriers to interconnect their
networks with those of requesting telecommunications carriers and to
allow requesting carriers to collocate equipment at the premises of
the incumbent local exchange carriers;
-- requires all local exchange providers to offer their services for
resale;
-- allows long distance carriers to resell local services;
-- requires incumbent local exchange carriers to offer to requesting
telecommunications carriers network elements on an unbundled basis;
and
-- requires incumbent local exchange carriers to offer to requesting
telecommunications carriers the services they provide to end-users to
other carriers at wholesale rates.
However, under the Telecommunications Act of 1996, the FCC and some state
regulatory authorities may provide incumbent local exchange carriers with
increased flexibility to reprice their services as competition develops and as
incumbent local exchange carriers allow competitors to interconnect to their
networks. In addition, some new entrants in the local market may price certain
services to particular customers or for particular routes below the prices we
charge for services to those customers or for those routes. If the incumbent
local exchange carriers and other competitors lower their rates and can sustain
significantly lower prices over time, this may adversely affect our revenue if
we are required by market pressure to price at or below the incumbent local
exchange carriers' prices.
Competition may also increase as a result of a recent World Trade
Organization agreement on telecommunications services. As a result of the
agreement, the FCC has made it easier for foreign companies to enter the U.S.
telecommunications market.
Recently, a number of competitive local carriers have filed for bankruptcy
protection, due to high leverage, substantial price competition, technical
difficulties and other problems faced by new market entrants.
WE ARE SUBJECT TO SIGNIFICANT FEDERAL AND STATE REGULATIONS THAT CAN
SIGNIFICANTLY AFFECT PRICING AND PROFITABILITY.
Existing federal and state regulations, or new regulations, could have a
material impact on our prices and revenue. Certain rates that we charge to our
customers must be filed with the FCC and/or state regulators, which provides
price transparency to customers and competitors.
In addition, when we provide local exchange services in a market, the
Telecommunications Act of 1996 and FCC rules require us to:
-- not unreasonably limit the resale of our services;
-- provide telephone number portability if technically feasible;
-- provide dialing parity to competing providers;
-- provide access to poles, ducts and conduits that we own; and
-- establish reciprocal compensation arrangements for the transport and
termination of telecommunications.
WE MAY RECEIVE LESS REVENUE IF INCUMBENT LOCAL EXCHANGE CARRIERS
SUCCESSFULLY CHALLENGE RECIPROCAL COMPENSATION.
We currently receive compensation from incumbent local exchange carriers
for terminating local calls at the premises of internet service providers. Some
companies have challenged our right and the right of others to
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receive this compensation. Determinations by the FCC or by state utility
commissions that such traffic should not be subject to termination compensation
could adversely affect our revenue. The FCC may issue rules or an order that may
have the effect of reducing reciprocal compensation revenue.
WE MAY EXPERIENCE A REDUCTION IN SWITCHED ACCESS REVENUE AS A RESULT OF
REGULATORY RATE REFORM.
The FCC has established a framework for the eventual deregulation of
incumbent local exchange carrier interstate access charges, which will exert a
downward pressure on our interstate access rates. We cannot assure you that we
will be able to compensate for the reduction in switched access revenue from
regulatory rate reform with other revenue sources or increased volume.
WE DEPEND ON GOVERNMENTAL AND OTHER AUTHORIZATIONS.
The development, expansion and maintenance of our networks will depend on,
among other things, our ability to obtain rights-of-way and other required
governmental authorizations and permits. Any increase in the difficulty or cost
of obtaining these authorizations and permits could adversely affect us,
particularly where we must compete with companies that already have the
necessary permits. In order to compete effectively, we must obtain these
authorizations in a timely manner, at reasonable costs and on satisfactory terms
and conditions. In certain of the cities or municipalities where we provide
network services, we pay license or franchise fees. The Telecommunications Act
of 1996 permits municipalities to charge these fees only if they are
competitively neutral and nondiscriminatory, but certain municipalities may not
conform their practices to the requirements of the Telecommunications Act of
1996 in a timely manner or without legal challenge. We also face the risks that
other cities may start imposing fees, fees will be raised or franchises will not
be renewed. Some of our franchise agreements also provide for increases or
renegotiation of fees at certain intervals. Any increases in these fees may have
a negative impact on our financial condition.
RISKS RELATING TO AN INVESTMENT IN THE DEBT SECURITIES
BECAUSE THE DEBT SECURITIES RANK BELOW OUR SENIOR SECURED DEBT, YOU MAY NOT
RECEIVE FULL PAYMENT ON YOUR DEBT SECURITIES.
Before paying principal and interest on the debt securities, we must first
make payments on our existing and future senior secured debt, including any
outstanding amounts under our existing $475 million senior bank credit facility.
In connection with our acquisition of the assets of GST, we replaced this
existing credit facility with a new $1 billion amended and restated senior
secured credit facility. As of September 30, 2000, after giving effect to the
acquisition of substantially all the assets of GST and the borrowings we drew
down under the credit facilities which consisted of $250 million under the new
credit facility and $700 million under the bridge loan facility, we would have
had approximately $250 million of senior secured indebtedness and $1.1 billion
of senior unsecured indebtedness. We would have had the ability to incur $750
million of additional debt under our new senior credit facility, subject to
certain conditions.
Our obligations under the new senior credit facility are secured by
substantially all of our assets. If we are unable to repay amounts due on our
secured debt, the lenders could proceed against the collateral securing the debt
and we may not have enough assets left to pay you. In addition, the new senior
credit facility prohibits us from paying amounts due on the debt securities that
represent senior unsecured or subordinated debt. This facility also prohibits us
from purchasing, redeeming or otherwise acquiring the debt securities, if a
default exists under our senior secured debt.
The debt securities, whether they be senior unsecured or subordinated
indebtedness, are not secured by any of our assets. If we become insolvent or
are liquidated, or if our debt under the new senior credit facility is
accelerated as a result of a cross-default provision in our outstanding debt or
otherwise, the lenders under such facility would be entitled to exercise the
remedies available to secured lenders under applicable law. Our bank lenders
have a claim on substantially all our assets. Accordingly there may be no assets
or sufficient assets to pay in full holders of our senior unsecured debt or
holders of our subordinated indebtedness. You should also be aware that holders
of our subordinated debt securities rank behind holders of our senior unsecured
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indebtedness, and as such, if we become insolvent, then holders of our
subordinated debt will not be eligible for payment until all holders of our
senior unsecured debts are satisfied in full.
None of our subsidiaries are guaranteeing the debt securities. Our
subsidiary, Time Warner Telecom Holdings is the borrower under the new credit
facility. Furthermore, all of our direct and indirect subsidiaries have
guaranteed or will guarantee our obligations under our existing senior credit
facility or new senior credit facility, respectively. As a result, the debt
securities are effectively subordinated in right of payment to all other debt
and other liabilities, including trade payables and guarantees, of our
subsidiaries. As of September 30, 2000, after giving effect to the acquisition
of substantially all the assets of GST and related borrowings under the new
credit facility and bridge loan facility, we would have had approximately $278
million in other liabilities. Substantially all of our consolidated assets are
held by our subsidiaries. Any right we may have to receive assets of our
subsidiaries upon their liquidation or reorganization, and your resulting rights
to participate in those assets, would be effectively subordinated to the claims
of our subsidiaries' creditors and to our senior secured creditors.
We depend upon our subsidiaries for the cash flow necessary to service our
debt obligations, including the debt securities.
The debt securities are obligations exclusively of Time Warner Telecom,
which is a holding company. We derive substantially all of our revenue from our
operating subsidiaries and do not have significant operations of our own. As a
result, we are depending upon the ability of our subsidiaries to provide us with
cash, in the form of dividends, intercompany credits, loans or otherwise, to
meet our debt service obligations, including our obligations under the debt
securities. These subsidiaries are separate and distinct legal entities and have
no obligations to pay any amounts due on the debt securities or to make any
funds available. In addition, dividends, loans or other distributions to us from
our subsidiaries may be subject to contractual or other restrictions, will
depend upon the results of operations of such subsidiaries and may be subject to
other business considerations.
YOUR RIGHTS TO BE REPAID WOULD BE ADVERSELY AFFECTED IF A COURT DETERMINED
THAT WE ISSUED THE DEBT SECURITIES FOR INADEQUATE CONSIDERATION OR WITH
INTENT TO DEFRAUD OUR CREDITORS.
Our ability to repay the debt securities may be adversely affected if it is
determined in a bankruptcy, insolvency or similar proceeding that:
-- we issued the debt securities with intent to delay or defraud any
creditor;
-- we contemplated insolvency with a design to prefer some creditors to
the exclusion of others; or
-- we issued the debt securities for less than reasonably equivalent
value and were insolvent at the time the debt securities were
originally issued.
In such event, a court could, among other things, void all or a portion of
our obligations to you. In this case, you may not be repaid in full. A court may
also subordinate our obligations to you to our other debt to a greater extent
than would otherwise be the case. In this case, other creditors would be
entitled to be paid in full before any payment could be made on the debt
securities. We cannot assure you that, after providing for all prior claims,
there would be sufficient assets to satisfy your claims.
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RATIO OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth our consolidated ratio of earnings to fixed
charges (in thousands).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- ----------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
-------------------------------- --------- ---------- ---------
1995 1996 1997 1998 1999 1999(B) 2000 2000(B)
---- ---- ---- ---- ---- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charge... (a) (a) (a) (a) (a) (a) 1.18 (a)
</TABLE>
------------
(a) The deficiency of earnings to cover fixed charges was $51,105, $86,116,
$70,656, $92,927 and $59,714 for the years ended December 31, 1995, 1996,
1997, 1998 and 1999, respectively, and $259,300 and $147,240 for the pro
forma year ended December 31, 1999 and the nine months ended September 30,
2000, respectively.
(b) The pro forma data for the nine months ended September 30, 2000 and the year
ended December 31, 1999 give effect to the acquisition of substantially all
of the assets of GST and related borrowings under the new credit facility
and bridge loan facility.
For purposes of computing the ratio of earnings to fixed charges and the
deficiency of earnings to cover fixed charges, earnings were calculated by
adding (i) net income (loss) before income taxes and (ii) interest expense,
including the portion of rents representative of an interest factor. Fixed
charges consist of interest expense, capitalized interest and the portion of
rents representative of an interest factor.
Because we do not have any preferred stock outstanding, the ratio of
earnings to fixed charges and preferred stock dividends, and the deficiency of
earnings to cover fixed charges and preferred stock dividends were the same as
the ratio of earnings to fixed charges and the deficiency of earnings to cover
fixed charges.
USE OF PROCEEDS
We will use the net proceeds from our sale of the securities to repay the
borrowings under the unsecured bridge loan facility that we used to purchase the
assets of GST. In addition, we may use the proceeds from our sale of any debt
securities or preferred stock that are not convertible into common stock for
capital expenditures and other corporate purposes.
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DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the debt securities sets forth
certain general terms and provisions of the debt securities to which any
prospectus supplement may relate. The particular terms of the debt securities
offered by any prospectus supplement and the extent, if any, to which such
general provisions may apply to the debt securities so offered will be described
in the prospectus supplement relating to such debt securities. Accordingly, for
a description of the terms of a particular issue of debt securities, reference
must be made to both the prospectus supplement relating thereto and to the
following description.
The debt securities will be our general obligations. In the event that any
series of debt securities will be subordinated to other securities, that we have
outstanding or may incur, the terms of the subordination will be set forth in
the prospectus supplement relating to the subordinated debt securities. Debt
securities will be issued under one or more indentures between us and one or
more commercial banks to be selected as trustees (collectively, the "Trustee").
A copy of the form of indenture has been filed as an exhibit to the registration
statement filed with the SEC. Set forth below is a summary of the material terms
of the indenture.
GENERAL
The indenture does not limit the aggregate principal amount of debt
securities that can be issued under it. The debt securities may be issued in one
or more series as we may authorize from time to time. You should refer to the
applicable prospectus supplement for the following terms of the debt securities
of the series with respect to which that prospectus supplement is being
delivered:
(1) the title of the debt securities of the series;
(2) any limit on the aggregate principal amount of the debt
securities of the series that may be authenticated and delivered under the
indenture;
(3) the date or dates on which the principal and premium with respect
to the debt securities of the series are payable;
(4) the rate or rates (which may be fixed or variable) at which the
debt securities of the series shall bear interest (if any) or the method of
determining such rate or rates, the date or dates from which such interest
shall accrue, the interest payment dates on which such interest shall be
payable or the method by which such dates will be determined, the record
dates for the determination of holders thereof to whom such interest is
payable (in the case of Registered Securities (as defined below)), and the
basis upon which interest will be calculated if other than that of a
360-day year of twelve 30-day months;
(5) the currency or currencies in which debt securities of the series
shall be denominated, if other than U.S. dollars, the place or places, if
any, in addition to or instead of the corporate trust office of the Trustee
(in the case of Registered Securities) or the principal New York office of
the Trustee (in the case of Bearer Securities (as defined below)), where
the principal, premium, and interest with respect to debt securities of the
series shall be payable;
(6) the price or prices at which, the period or periods within which,
and the terms and conditions upon which debt securities of the series may
be redeemed, in whole or in part at our option or otherwise;
(7) whether debt securities of the series are to be issued as
Registered Securities or Bearer Securities or both and, if Bearer
Securities are to be issued, whether coupons will be attached to them,
whether Bearer Securities of the series may be exchanged for Registered
Securities of the series, and the circumstances under which and the places
at which any such exchanges, if permitted, may be made;
(8) if any debt securities of the series are to be issued as Bearer
Securities or as one or more Global Securities (as defined below)
representing individual Bearer Securities of the series, whether certain
provisions for the payment of additional interest or tax redemptions shall
apply; whether interest with respect to any portion of a temporary Bearer
Security of the series payable with respect to any interest payment date
prior to the exchange of such temporary Bearer Security for definitive
Bearer Securities of the series shall be paid to any clearing organization
with respect to the portion of such
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temporary Bearer Security held for its account and, in such event, the
terms and conditions (including any certification requirements) upon which
any such interest payment received by a clearing organization will be
credited to the Persons entitled to interest payable on such interest
payment date; and the terms upon which a temporary Bearer Security may be
exchanged for one or more definitive Bearer Securities of the series;
(9) our obligation, if any, to redeem, purchase, or repay debt
securities of the series under any sinking fund or analogous provisions or
at the option of a holder of such debt securities and the price or prices
at which, the period or periods within which, and the terms and conditions
upon which debt securities of the series shall be redeemed, purchased, or
repaid, in whole or in part, under such obligations;
(10) the terms, if any, upon which the debt securities of the series
may be convertible into or exchanged for our or any other issuer's or
obligor's common stock, preferred stock, other debt securities or warrants
for common stock, preferred stock, indebtedness or other securities of any
kind and the terms and conditions upon which such conversion or exchange
shall be effected, including the initial conversion or exchange price or
rate, the conversion or exchange period and any other additional
provisions;
(11) if other than denominations of $1,000 or any integral multiple
thereof, the denominations in which debt securities of the series shall be
issuable;
(12) if the amount of principal, premium or interest with respect to
the debt securities of the series may be determined with reference to an
index or pursuant to a formula, the manner in which such amounts will be
determined;
(13) if the principal amount payable at the Stated Maturity (as
defined below) of debt securities of the series will not be determinable as
of any one or more dates prior to such Stated Maturity, the amount that
will be deemed to be such principal amount as of any such date for any
purpose, including the principal amount thereof which will be due and
payable upon any maturity other than the Stated Maturity or which will be
deemed to be outstanding as of any such date (or, in any such case, the
manner in which such deemed principal amount is to be determined), and if
necessary, the manner of determining the equivalent thereof in United
States currency;
(14) any changes or additions to the provisions of the indenture
dealing with defeasance;
(15) if other than the principal amount thereof, the portion of the
principal amount of debt securities of the series that shall be payable
upon declaration of acceleration of the maturity thereof or provable in
bankruptcy;
(16) the terms, if any, of the transfer, mortgage, pledge or
assignment as security for the debt securities of the series of any
properties, assets, moneys, proceeds, securities or other collateral,
including whether certain provisions of the Trust Indenture Act of 1939, as
amended, are applicable and any corresponding changes to provisions of the
indenture as then in effect;
(17) any addition to or change in the Events of Default (as defined
below) with respect to the debt securities of the series and any change in
the right of the Trustee or the holders to declare the principal, premium
and interest with respect to such debt securities due and payable;
(18) if the debt securities of the series shall be issued in whole or
in part in the form of a global security, the terms and conditions, if any,
upon which such global security may be exchanged in whole or in part for
other individual debt securities in definitive registered form, the
depositary for such global security, if different from The Depositary Trust
Company, and the form of any legend or legends to be borne by any such
global security in addition to or in lieu of the legend referred to in the
indenture;
(19) any authenticating or paying agents, transfer agents or
registrars;
(20) the applicability of, and any addition to or change in, the
covenants and definitions then set forth in the indenture or in the terms
then set forth in the indenture relating to permitted consolidations,
mergers, or sales of assets;
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(21) the terms, if any, of any guarantee of the payment of principal,
premium, and interest with respect to debt securities of the series and any
corresponding changes to the provisions of the indenture as then in effect;
(22) the subordination, if any, of the debt securities of the series
pursuant to the indenture and any changes or additions to the provisions of
the indenture relating to subordination;
(23) with regard to debt securities of the series that do not bear
interest, the dates for certain required reports to the Trustee; and
(24) any other terms of the debt securities of the series (which
terms shall not be prohibited by the provisions of the indenture).
The prospectus supplement will also describe any material United States
federal income tax consequences or other special considerations applicable to
the series of debt securities to which such prospectus supplement relates,
including those applicable to:
(1) Bearer Securities;
(2) debt securities with respect to which payments of principal,
premium or interest are determined with reference to an index or formula
(including changes in prices of particular securities, currencies or
commodities);
(3) debt securities with respect to which principal, or interest is
payable in a foreign or composite currency;
(4) debt securities that are issued at a discount below their stated
principal amount, bearing no interest or interest at a rate that at the
time of issuance is below market rates ("Original Issue Discount Debt
Securities"); and
(5) variable rate debt securities that are exchangeable for fixed
rate debt securities.
Unless otherwise provided in the applicable prospectus supplement,
Registered Securities may be transferred or exchanged at the office of the
Trustee at which its corporate trust business is principally administered in the
United States or at the office of the Trustee or the Trustee's agent in the
Borough of Manhattan, the City and State of New York, at which its corporate
agency business is conducted, subject to the limitations provided in the
indenture, without the payment of any service charge, other than any tax or
governmental charge payable in connection therewith. Bearer Securities will be
transferable only by delivery. Provisions with respect to the exchange of Bearer
Securities will be described in the prospectus supplement relating to such
Bearer Securities.
All funds which we pay to a paying agent for the payment of principal,
premium or interest with respect to any debt securities that remain unclaimed at
the end of two years after such principal, premium or interest shall have become
due and payable will be repaid to us, and the holders of such debt securities or
any coupons appertaining thereto will thereafter look only to us for payment
thereof.
GLOBAL SECURITIES
The debt securities of a series may be issued in whole or in part in the
form of one or more global securities. A global security is a debt security that
represents, and is denominated in an amount equal to the aggregate principal
amount of, all outstanding debt securities of a series, or any portion thereof,
in either case having the same terms, including the same original issue date,
date or dates on which principal and interest are due, and interest rate or
method of determining interest. A global security will be deposited with, or on
behalf of, a depositary, which will be The Depositary Trust Company, New York,
New York (the "Depositary").
The Depositary has advised us that it is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of the New York banking law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
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Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. The Depositary was created to hold
securities of its participants and to facilitate the clearance and settlement of
securities transactions among its participants through electronic book-entry
changes in accounts of the participants, thereby eliminating the need for
physical movement of securities certificates. The Depositary's participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations, some of which (and/or their
representatives) own the Depositary. Access to the Depositary's book-entry
system is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
Global securities may be issued in either registered or bearer form and in
either temporary or definitive form. Unless and until it is exchanged in whole
or in part for the individual debt securities represented thereby, a global
security may not be transferred except as a whole by the Depositary to a nominee
of the Depositary, by a nominee of the Depositary to the Depositary or another
nominee of the Depositary, or by the Depositary or any nominee of the Depositary
to a successor Depositary or any nominee of such successor.
Upon the issuance of a global security, the Depositary will credit, on its
book entry registration and transfer system, the respective principal amounts of
the individual debt securities represented by such global security to the
accounts of persons that have accounts with the Depositary ("Participants").
Such accounts will be designated by the dealers or underwriters with respect to
such debt securities or, if such debt securities are offered and sold directly
by us or through one or more agents, by us or such agents. Ownership of
beneficial interests in a global security will be limited to Participants or
persons that hold beneficial interests through Participants. Ownership of
beneficial interests in such global security will be shown on, and the transfer
of that ownership will be effected only through, records maintained by the
Depositary (with respect to interests of Participants) or records maintained by
Participants (with respect to interests of persons other than Participants). The
laws of some states require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limitations and laws may
impair the ability to transfer beneficial interests in a global security.
So long as the Depositary or its nominee is the registered owner or holder
of such global security, such Depositary or nominee, as the case may be, will be
considered the sole owner or holder of the individual debt securities
represented by such global security for all purposes under the indenture. Except
as provided below, owners of beneficial interests in a global security will not
be entitled to have any of the individual debt securities represented by such
global security registered in their names, will not receive or be entitled to
receive physical delivery of any of such debt securities in definitive form, and
will not be considered the owners or holders thereof under the indenture.
Subject to the restrictions applicable to Bearer Securities described in an
applicable prospectus supplement (see "Limitations on Issuance of Bearer
Securities" below), payments of principal, premium, and interest with respect to
individual debt securities represented by a global security will be made to the
Depositary or its nominee, as the case may be, as the registered owner or holder
of such global security. Neither we, the Trustee, any paying agent or registrar
for such debt securities or any agent of ours or the Trustee's will have any
responsibility or liability for (1) any aspect of the records relating to or
payments made by the Depositary, its nominee or any Participants on account of
beneficial interests in the global security or for maintaining, supervising or
reviewing any records relating to such beneficial interests, (2) the payment to
the owners of beneficial interests in the global security of amounts paid to the
Depositary or its nominee or (3) any other matter relating to the actions and
practices of the Depositary, its nominee or its Participants. Neither we, the
Trustee, any paying agent or registrar for such debt securities or any agent of
ours or the Trustee will be liable for any delay by the Depositary, its nominee
or any of its participants in identifying the owners of beneficial interests in
the global security, and we and the Trustee may conclusively rely on, and will
be protected in relying on, instructions from the Depositary or its nominee for
all purposes.
We have been advised by the Depositary that the Depositary or its nominee,
upon receipt of any payment of principal, premium or interest with respect to a
definitive global security representing any of such debt securities, will
immediately credit Participants' accounts with payments in amounts proportionate
to their
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respective beneficial interests in the principal amount of such global security,
as shown on the records of the Depositary or its nominee. We expect that
payments by Participants to owners of beneficial interests in such global
security held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers and registered in "street name." Such payments
will be the responsibility of such Participants. Receipt by owners of beneficial
interests in a temporary global security of payments of principal, premium or
interest with respect thereto will be subject to the restrictions described in
an applicable prospectus supplement (see "Limitation on Issuance of Bearer
Securities" below).
If the Depositary for a series of debt securities is at any time unwilling,
unable or ineligible to continue as depositary, we shall appoint a successor
depositary. If a successor depositary is not appointed by us within 90 days, we
will issue individual debt securities of such series in exchange for the global
security representing such series of debt securities. In addition, we may at any
time and in our sole discretion, subject to any limitations described in the
prospectus supplement relating to such debt securities, determine to no longer
have debt securities of a series represented by a global security and, in such
event, will issue individual debt securities of such series in exchange for the
global security representing such series of debt securities. Furthermore, if we
so specify with respect to the debt securities of a series, an owner of a
beneficial interest in a global security representing debt securities of such
series may, on terms acceptable to us, the Trustee, and the Depositary, receive
individual debt securities of such series in exchange for such beneficial
interests, subject to any limitations described in the prospectus supplement
relating to such debt securities. In any such instance, an owner of a beneficial
interest in a global security will be entitled to physical delivery of
individual debt securities of the series represented by such global security
equal in principal amount to such beneficial interest and to have such debt
securities registered in its name (if the debt securities are issuable as
Registered Securities). Individual debt securities of such series so issued will
be issued (1) as Registered Securities in denominations, unless otherwise
specified by us, of $1,000 and integral multiples thereof if the debt securities
are issuable as Registered Securities, (2) as Bearer Securities in the
denomination or denominations specified by us if the debt securities are
issuable as Bearer Securities or (3) as either Registered Securities or Bearer
Securities as described above if the debt securities are issuable in either
form.
LIMITATIONS ON ISSUANCE OF BEARER SECURITIES
The debt securities of a series may be issued as Registered Securities
(which will be registered as to principal and interest in the register
maintained by the registrar for such debt securities) or Bearer Securities
(which will be transferable only by delivery). If such debt securities are
issuable as Bearer Securities, the applicable prospectus supplement will
describe certain special limitations and considerations that will apply to such
debt securities.
CERTAIN COVENANTS
The following covenants will apply to any senior non-convertible
indebtedness issued under the indenture.
Limitation on Indebtedness
A. We will not, and will not permit any of our Restricted Subsidiaries to,
Incur any Indebtedness (other than Indebtedness existing on the Existing High
Yield Closing Date); provided that we may Incur Indebtedness if, after giving
effect to the Incurrence of such Indebtedness and the receipt and application of
the proceeds therefrom, the Consolidated Leverage Ratio would be greater than
zero and less than 6.0:1.
Notwithstanding the foregoing, we and any Restricted Subsidiary may Incur
each and all of the following:
(1) Indebtedness outstanding at any time in an aggregate principal
amount not to exceed $300 million, less any amount of such Indebtedness
permanently repaid as provided under the "Limitation on Asset Sales"
covenant;
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(2) Indebtedness owed:
(A) to us evidenced by a promissory note; or
(B) to any Restricted Subsidiary; provided that any event which
results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of such Indebtedness (other than
to us or another Restricted Subsidiary) shall be deemed, in each case,
to constitute an Incurrence of such Indebtedness not permitted by this
paragraph (2);
(3) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness (other than
Indebtedness incurred under paragraph (1), (2), (4), (6), (8) or (9) of
this paragraph) and any refinancings thereof in an amount not to exceed the
amount so refinanced or refunded (plus premiums, accrued interest, fees and
expenses); provided that Indebtedness the proceeds of which are used to
refinance or refund any series of debt securities under the indenture or
Indebtedness that is pari passu with, or subordinated in right of payment
to, such debt securities shall only be permitted under this paragraph (3)
if:
(A) in case any series of debt securities under the indenture are
refinanced in part or the Indebtedness to be refinanced is pari passu
with such debt securities, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new
Indebtedness is outstanding, is expressly made pari passu with, or
subordinate in right of payment to, such debt securities that remain
outstanding;
(B) in case the Indebtedness to be refinanced is subordinated in
right of payment to such debt securities such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which
such new Indebtedness is issued or remains outstanding, is expressly
made subordinate in right of payment to such debt securities at least to
the extent that the Indebtedness to be refinanced is subordinated to
such debt securities; and
(C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity
of the Indebtedness to be refinanced or refunded, and the Average Life
of such new Indebtedness is at least equal to the remaining Average Life
of the Indebtedness to be refinanced or refunded; and provided further
that in no event may our Indebtedness be refinanced by means of any
Indebtedness of any Restricted Subsidiary pursuant to this paragraph
(3);
(4) Indebtedness:
(A) in respect of performance, surety or appeal bonds provided in
the ordinary course of business;
(B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements are:
(i) designed solely to protect us or our Restricted
Subsidiaries against fluctuations in foreign currency exchange rates
or interest rates; and
(ii) do not increase our Indebtedness outstanding at any time
other than as a result of fluctuations in foreign currency exchange
rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder; and
(C) arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from Guarantees
or letters of credit, surety bonds or performance bonds securing any of
our obligations or those of a Restricted Subsidiary pursuant to such
agreements, in any case Incurred in connection with the disposition of
any business, assets or Restricted Subsidiary (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing
such acquisition), in a principal amount not to exceed the gross
proceeds actually received by us or any Restricted Subsidiary in
connection with such disposition;
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(5) our Indebtedness, to the extent the net proceeds thereof are
promptly:
(A) used to purchase debt securities tendered in an Offer to
Purchase made as a result of a Change of Control; or
(B) deposited to defease any series of debt securities under the
indenture as described below under "Defeasance";
(6) Guarantees of any series of debt securities under the indenture
and Guarantees of Indebtedness of us by any Restricted Subsidiary provided
the Guarantee of such Indebtedness is permitted by and made in accordance
with the "Limitation on Issuance of Guarantees by Restricted Subsidiaries"
covenant;
(7) Indebtedness Incurred to finance the cost (including the cost of
design, development, acquisition, construction, installation, improvement,
transportation or integration and all transaction costs related to the
foregoing) to acquire equipment, inventory or network assets (including
acquisitions by way of Capitalized Lease and acquisitions of the Capital
Stock of a Person that becomes a Restricted Subsidiary to extent of the
fair market value of the equipment, inventory or network assets so
acquired, plus associated goodwill) by us or a Restricted Subsidiary after
the date of the indenture;
(8) our Indebtedness not to exceed, at any one time, outstanding, two
times:
(A) the Net Cash Proceeds received by us after the Existing High
Yield Closing Date from the issuance and sale of our Capital Stock
(other than Disqualified Stock) to a Person that is not our Subsidiary,
to the extent:
(i) such Net Cash Proceeds have not been used pursuant to
(4)(C)(2) of the first paragraph or clauses (3), (4), (6) or (7) of
the second paragraph of the "Limitation on Restricted Payments"
covenant to make a Restricted Payment; and
(ii) if such Net Cash Proceeds are used to consummate a
transaction pursuant to which we Incur Acquired Indebtedness, the
amount of such Net Cash Proceeds exceeds one-half of the amount of
Acquired Indebtedness so Incurred; and
(B) 80% of the fair market value of property (other than cash and
cash equivalents) received by us after the Existing High Yield Closing
Date from the sale of our Capital Stock (other than Disqualified Stock)
to a Person that is not our Subsidiary, to the extent:
(i) such sale of Capital Stock has not been used pursuant to
clauses (3), (4), (6) or (7) of the second paragraph of the
"Limitation on Restricted Payments" covenant to make a Restricted
Payment; and
(ii) if such Capital Stock is used to consummate a transaction
pursuant to which we Incur Acquired Indebtedness, 80% of the fair
market value of the property received exceeds one-half of the amount
of Acquired Indebtedness so Incurred; provided that such Indebtedness
does not mature prior to the longest Stated Maturity of any debt
securities outstanding under the indenture and has an Average Life
longer than the Average Life of all debt securities outstanding under
the indenture;
(9) Acquired Indebtedness;
(10) Strategic Subordinated Indebtedness; and
(11) our subordinated Indebtedness (in addition to Indebtedness
permitted under clauses (1) through (10) above) in an aggregate principal
amount outstanding at any time not to exceed $200 million, less any amount
of such Indebtedness permanently repaid as provided under the "Limitation
on Asset Sales" covenant.
B. Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that we or a
Restricted Subsidiary may Incur pursuant to this "Limitation on
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Indebtedness" covenant shall not be deemed to be exceeded, with respect to any
outstanding Indebtedness due solely to the result of fluctuations in the
exchange rate of currencies.
C. For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant:
(1) Guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of
such particular amount shall not be included; and
(2) any Liens granted pursuant to the equal and ratable provisions
referred to in the "Limitation on Liens" covenant shall not be treated as
Indebtedness.
For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, we, in our sole discretion, shall classify, and from time to time may
reclassify, such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in one of such clauses.
D. For purposes of determining compliance with any Dollar-denominated
restriction on the Incurrence of Indebtedness denominated in a foreign currency,
the Dollar-equivalent principal amount of such Indebtedness Incurred pursuant
thereto shall be calculated based on the relevant currency exchange rate in
effect on the date that such Indebtedness was Incurred, provided that:
(1) the Dollar-equivalent principal amount of any such Indebtedness
outstanding on the Existing High Yield Closing Date shall be calculated
based on the relevant currency exchange rate in effect on the Existing High
Yield Closing Date; and
(2) if such Indebtedness is Incurred to refinance other Indebtedness
denominated in a foreign currency, and such refinancing would cause the
applicable Dollar-denominated restriction to be exceeded if calculated at
the relevant currency exchange rate in effect on the date of such
refinancing, such Dollar-denominated restriction shall be deemed not to
have been exceeded so long as the principal amount of such refinancing
Indebtedness, converted into the currency in which the Indebtedness being
refinanced is denominated at the currency exchange rate in effect on the
date of such refinancing, does not exceed the principal amount of such
Indebtedness being refinanced (plus premiums, accrued interest, fees and
expenses). The principal amount of any Indebtedness Incurred to refinance
other Indebtedness, if Incurred in a different currency from the
Indebtedness being refinanced, shall be calculated based on the foreign
currency exchange rate applicable to the currencies in which such
respective Indebtedness is denominated that is in effect on the date of
such refinancing.
Limitation on Restricted Payments
We will not, and will not permit any Restricted Subsidiary to directly or
indirectly:
(1) declare or pay any dividend or make any distribution on or with
respect to its Capital Stock (other than (A) dividends or distributions
payable solely in shares of our Capital Stock (other than Disqualified
Stock) or in options, warrants or other rights to acquire such shares of
Capital Stock and (B) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons
other than us or any of our Restricted Subsidiaries;
(2) purchase, redeem, retire or otherwise acquire for value any
shares of Capital Stock of:
(A) us or an Unrestricted Subsidiary (including options, warrants
or other rights to acquire such shares of Capital Stock) held by any
Person; or
(B) a Restricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by an Affiliate of
us (other than a Wholly Owned Restricted Subsidiary) or any holder (or
any Affiliate of such holder) of 5% or more of our Capital Stock;
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(3) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of our Indebtedness that is subordinated in right of
payment to the debt securities outstanding under the indenture; or
(4) make any Investment, other than a Permitted Investment, in any
Person (all such payments or other actions described in clauses (1) through
(4) above are collectively called "Restricted Payments") if, at the time
of, and after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be
continuing;
(B) we could not Incur at least $1.00 of Indebtedness under the
first paragraph of the "Limitation on Indebtedness" covenant; or
(C) the aggregate amount of all Restricted Payments (the amount,
if other than in cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a
board resolution) made after the date of the indenture shall exceed the
sum of:
(i) the amount by which Consolidated EBITDA exceeds 150% of
Consolidated Interest Expense, in each case, determined on a
cumulative basis during the period (taken as one accounting period)
beginning on the first day of the fiscal quarter immediately
following the Existing High Yield Closing Date and ending on the last
day of the last fiscal quarter preceding the Transaction Date for
which reports have been filed with the SEC or provided to the Trustee
pursuant to the "SEC Reports and Reports to Holders" covenant; plus
(ii) the aggregate Net Cash Proceeds received by us after the
Existing High Yield Closing Date from the issuance and sale permitted
by the indenture of our Capital Stock (other than Disqualified Stock)
to a Person who is not our Subsidiary, including an issuance or sale
permitted by our indenture of Indebtedness for cash subsequent to the
Existing High Yield Closing Date upon the conversion of such
Indebtedness into our Capital Stock (other than Disqualified Stock),
or from the issuance to a Person who is not our Subsidiary of any
options, warrants or other rights to acquire our Capital Stock (in
each case, exclusive of any Disqualified Stock or any options,
warrants or other rights that are redeemable at the option of the
holder, or are required to be redeemed, prior to the Stated Maturity
of any series of debt securities under the indenture), in each case
except to the extent such Net Cash Proceeds are used to Incur
Indebtedness pursuant to clauses (8) or (9) of the "Limitation on
Indebtedness" covenant; plus
(iii) an amount equal to the net reduction in Investments
(other than reductions in Permitted Investments) in any Person
resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in
each case to us or any Restricted Subsidiary or from the Net Cash
Proceeds from the sale of any such Investment (except, in each case,
to the extent any such payment or proceeds are included in the
calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of
Investments previously made by us or any Restricted Subsidiary in
such Person or Unrestricted Subsidiary.
The foregoing provisions shall not be violated by reason of:
(1) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph;
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to any series of debt securities under the indenture including
premium, if any, and accrued and unpaid interest, with the proceeds of, or
in exchange for, Indebtedness Incurred under clause (a)(3) of the
"Limitation on Indebtedness" covenant;
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(3) the repurchase, redemption or other acquisition of our Capital
Stock or that of an Unrestricted Subsidiary (or options, warrants or other
rights to acquire such Capital Stock) in exchange for, or out of the
proceeds of a substantially concurrent offering of, shares of our Capital
Stock (other than Disqualified Stock) (or options, warrants or other rights
to acquire such Capital Stock);
(4) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for value of our
Indebtedness which is subordinated in right of payment to any series of
debt securities under the indenture (including, without limitation, Parent
Company Debt) in exchange for, or out of the proceeds of a substantially
concurrent sale of, shares of our Capital Stock (other than Disqualified
Stock) (or options, warrants or other rights to acquire such Capital
Stock);
(5) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger
or transfer of assets that complies with the provisions of the indenture
applicable to mergers, consolidations and transfers of all or substantially
all of our property and assets;
(6) Investments in any Person the primary business of which is
related, ancillary or complementary to our business and that of our
Restricted Subsidiaries on the date of such Investments; provided that the
aggregate amount of Investments made pursuant to this clause (6) does not
exceed the sum of:
(A) $10 million; and
(B) the amount of Net Cash Proceeds received by us after the
Existing High Yield Closing Date from the sale of our Capital Stock
(other than Disqualified Stock) to a Person who is not our Subsidiary,
except to the extent such Net Cash Proceeds are used to Incur
Indebtedness pursuant to clause (a)(8) under the "Limitation on
Indebtedness" covenant or to make Restricted Payments pursuant to clause
(4)(C)(2) of the first paragraph, or clauses (3) or (4) of this
paragraph, of this "Limitation on Restricted Payments" covenant; and
(C) the net reduction in Investments made pursuant to this clause
(6) resulting from distributions on or repayments of such Investments or
from the Net Cash Proceeds from the sale of any such Investment (except
in each case to the extent any such payment or proceeds is included in
the calculation of Adjusted Consolidated Net Income) or from such Person
becoming a Restricted Subsidiary (valued in each case as provided in the
definition of "Investments"), provided that the net reduction in any
Investment shall not exceed the amount of such Investment;
(7) Investments acquired in exchange for our Capital Stock (other
than Disqualified Stock);
(8) other Restricted Payments in an aggregate amount not to exceed
$10 million;
(9) for so long as we are treated as a pass-through entity for United
States Federal income tax purposes, distributions to our equity holders in
an amount not to exceed the Tax Amount for such period; and
(10) the repurchase, redemption or other acquisition of our Capital
Stock (or options, warrants, or other rights to acquire such Capital Stock)
from Persons who are or were formerly our directors, officers or employees
or those of our Restricted Subsidiaries, provided that the aggregate amount
of all such repurchases made in any calendar year pursuant to this clause
(10) shall not exceed $2.0 million;
provided that, except in the case of clauses (1) and (3) of this paragraph no
Default or Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in (2) thereof, an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in clause (3) or (4)
thereof and an Investment referred to in clause (6) thereof), and the Net Cash
Proceeds from any issuance of Capital Stock referred to in clauses (3), (4) and
(6), shall be included in calculating whether the conditions of clause (4)(C) of
the first paragraph of this "Limitation on Restricted Payments" covenant have
been met with respect to any subsequent Restricted Payments. In the event the
proceeds of an
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issuance of our Capital Stock are used for the redemption, repurchase or other
acquisition of any series of debt securities under the indenture, or
Indebtedness that is pari passu with such debt securities, then the Net Cash
Proceeds of such issuance shall be included in clause (4)(C) of the first
paragraph of this "Limitation on Restricted Payments" covenant only to the
extent such proceeds are not used for such redemption, repurchase or other
acquisition of Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
We will not, and will not permit any Restricted Subsidiary to, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by
us or any other Restricted Subsidiary;
(2) pay any Indebtedness owed to us or any other Restricted
Subsidiary;
(3) make loans or advances to us or any other Restricted Subsidiary;
or
(4) transfer any of our or its property or assets to us or any other
Restricted Subsidiary.
The foregoing shall not restrict any encumbrances or restrictions:
(1) existing on the date of the indenture or any other agreements in
effect on the Existing High Yield Closing Date, and any extensions,
refinancings, renewals or replacements of such agreements; provided that
the encumbrances and restrictions in any extensions, refinancings, renewals
or replacements are no less favorable in any material respect to the
Holders than those encumbrances or restrictions that are then in effect and
that are being extended, refinanced, renewed or replaced;
(2) existing under or by reason of applicable law or required by any
regulatory authority having jurisdiction over us or any Restricted
Subsidiary;
(3) existing with respect to any Person or the property or assets of
such Person acquired by us or any Restricted Subsidiary, existing at the
time of such acquisition and not incurred in contemplation thereof, which
encumbrances or restrictions are not applicable to any Person or the
property or assets of any Person other than such Person or the property or
assets of such Person so acquired, and any extensions, renewals or
replacements of such encumbrances or restrictions; provided that the
encumbrances and restrictions in any such extensions, renewals or
replacements are no less favorable in any material respect to the Holders
than those encumbrances or restrictions that are then in effect and that
are being extended, renewed or replaced;
(4) in the case of clause (4) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant:
(A) that restrict in a customary manner the subletting, assignment
or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset;
(B) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on any of our property or
assets or those of a Restricted Subsidiary not otherwise prohibited by
the indenture; or
(C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in the
aggregate, detract from the value of our property or assets of those of
a Restricted Subsidiary in any manner material to us or any Restricted
Subsidiary;
(5) with respect to a Restricted Subsidiary and imposed pursuant to
an agreement that has been entered into for the sale or disposition of all
or substantially all of the Capital Stock of, or property and assets of,
such Restricted Subsidiary; or
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(6) contained in the terms of any Indebtedness or any agreement
pursuant to which such Indebtedness was issued if:
(A) the encumbrance or restriction either:
(i) applies only in the event of a payment default or
non-compliance with respect to a financial covenant contained in such
Indebtedness or agreement; or
(ii) is contained in a Credit Agreement;
(B) the encumbrance or restriction is not materially more
disadvantageous to the Holders of debt securities than is customary in
comparable financing (as determined by us); and
(C) we determine on the date of the Incurrence of such
Indebtedness that any such encumbrance or restriction would not be
expected to materially impair either our ability to make principal or
interest payments on any series of debt securities under the indenture.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent us or any
Restricted Subsidiary from:
(1) creating, incurring, assuming or suffering to exist any Liens
otherwise permitted in the "Limitation on Liens" covenant; or
(2) restricting the sale or other disposition of our property or
assets of those of any of our Restricted Subsidiaries that secure our
Indebtedness or that of any of our Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
We will not sell, and will not permit any Restricted Subsidiary, directly
or indirectly, to issue or sell, any shares of Capital Stock of a Restricted
Subsidiary (including options, warrants or other rights to purchase shares of
such Capital Stock) except:
(1) to us or a Wholly Owned Restricted Subsidiary;
(2) issuances of director's qualifying shares or sales to foreign
nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to
the extent required by applicable law;
(3) if, immediately after giving effect to such issuance or sale,
such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary and any Investment in such Person remaining after giving effect
to such issuance or sale would have been permitted to be made under the
"Limitation on Restricted Payments" covenant if made on the date of such
issuance or sale; or
(4) issuances or sales of common stock of a Restricted Subsidiary,
provided that we or such Restricted Subsidiary applies the Net Cash
Proceeds, if any, of any such sale in compliance with the "Limitation on
Asset Sales" covenant.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
We will not permit any Restricted Subsidiary, directly or indirectly, to
Guarantee any of our Indebtedness which is pari passu with or subordinate in
right of payment to any series of debt securities under the indenture
("Guaranteed Indebtedness"), unless:
(1) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the indenture providing for a Guarantee (a
"Subsidiary Guarantee") of payment of such debt securities by such
Restricted Subsidiary; and
(2) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against us or
any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Subsidiary Guarantee; provided that this
paragraph shall not be applicable to any Guarantee of any
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Restricted Subsidiary that existed at the time such Person became a
Restricted Subsidiary and was not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary.
If the Guaranteed Indebtedness is (1) pari passu with any series of debt
securities under the indenture, then the Guarantee of such Guaranteed
Indebtedness shall be pari passu with, or subordinated to, the Subsidiary
Guarantee or (2) subordinated to any series of debt securities under the
indenture, then the Guarantee of such Guaranteed Indebtedness shall be
subordinated to the Subsidiary Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated to such debt securities.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon:
(1) any sale, exchange or transfer, to any Person not an Affiliate of
us, of all of our and each Restricted Subsidiary's Capital Stock in, or all
or substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the indenture); or
(2) the release or discharge of the Guarantee which resulted in the
creation of such Subsidiary Guarantee, except a discharge or release by or
as a result of payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
We will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, enter into, renew or extend any transaction (including, without
limitation, the purchase, sale, lease or exchange of property or assets, or the
rendering of any service) with a Related Person or with any of our Affiliates or
any Restricted Subsidiary, except upon fair and reasonable terms no less
favorable to us or such Restricted Subsidiary than could be obtained, at the
time of such transaction or, if such transaction is pursuant to a written
agreement, at the time of the execution of the agreement providing therefor, in
a comparable arm's-length transaction with a Person that is not such a Related
Person or an Affiliate.
The foregoing limitation does not limit and shall not apply to:
(1) transactions:
(A) approved by a majority of the disinterested members of the
Board of Directors; or
(B) for which we or a Restricted Subsidiary delivers to the
Trustee a written opinion of a nationally recognized investment banking
firm stating that the transaction is fair to us or such Restricted
Subsidiary from a financial point of view;
(2) any transaction solely between us and any of our Wholly Owned
Restricted Subsidiaries or solely between Wholly Owned Restricted
Subsidiaries;
(3) the payment of reasonable and customary regular fees to our
directors who are not our employees;
(4) any payments or other transactions pursuant to any tax-sharing
agreement between us and any other Person with which we file a consolidated
tax return or with which we are part of a consolidated group for tax
purposes;
(5) any transaction with respect to the lease or sharing or other use
of cable or fiber lines, equipment, transmission capacity, right-of-way or
other access rights, between us or any Restricted Subsidiary and any other
Person; provided that such transaction is on terms that:
(A) are consistent with our past practice and those of our
Restricted Subsidiaries; and
(B) are no less favorable, taken as a whole, to us or the relevant
Restricted Subsidiary than those that could have been obtained in a
comparable transaction by us or such Restricted Subsidiary with an
unrelated Person or, in the event that there are no comparable
transactions involving unrelated Persons to apply for comparative
purposes, is otherwise on terms that, taken as a whole, we have
determined to be fair to us or the relevant Restricted Subsidiary; or
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(6) any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant.
Notwithstanding the foregoing, any transaction or series of related
transactions covered by the first paragraph of this "Limitation on Transactions
with Shareholders and Affiliates" covenant and not covered by (2) and (6) of
this paragraph, the aggregate amount of which exceeds $10 million in value, must
be determined to be fair in the manner provided for in clause (1)(A) or (B)
above.
Limitation on Liens
Under the indenture, we will not, and will not permit any Restricted
Subsidiary to, create, incur, assume or suffer to exist any Lien on any of our
assets or properties of any character (including, without limitation, licenses),
or any shares of Capital Stock or Indebtedness of any Restricted Subsidiary,
without making effective provision for any series of debt securities under the
indenture and all other amounts due under the indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to such debt securities, prior to)
the obligation or liability secured by such Lien.
This restriction will not apply to:
(1) Liens existing on the Existing High Yield Closing Date;
(2) Liens granted after the Existing High Yield Closing Date on any
of our or any Restricted Subsidiary's assets or Capital Stock created in
favor of the Holders;
(3) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to us or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to us or such other Restricted
Subsidiary;
(4) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under (3) of the
"Limitation on Indebtedness" covenant; provided that such Liens do not
extend to or cover any of our or a Restricted Subsidiary's property or
assets securing the Indebtedness being refinanced;
(5) Liens on the Capital Stock of, or any property or assets of, a
Restricted Subsidiary securing Indebtedness of such Restricted Subsidiary
permitted under the "Limitation on Indebtedness" covenant; or
(6) Permitted Liens.
Limitation on Sale-Leaseback Transactions
We will not, and will not permit any Restricted Subsidiary to, enter into
any sale-leaseback transaction involving any of our assets or properties or
those of a Restricted Subsidiary whether now owned or hereafter acquired,
whereby we sell or transfer and a Restricted Subsidiary sells or transfers such
assets or properties and then or thereafter we lease assets or properties or a
Restricted Subsidiary leases such assets or properties or any part thereof or
any other assets or properties which we or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if:
(1) the lease is for a period, including renewal rights, of not in
excess of three years;
(2) the lease secures or relates to industrial revenue or pollution
control bonds;
(3) the transaction is solely between us and any Wholly Owned
Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or
(4) we or such Restricted Subsidiary applies an amount not less than
the net proceeds received from such sale in compliance with the "Limitation
on Asset Sales" covenant.
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Limitation on Asset Sales
We will not, and will not permit any Restricted Subsidiary to, consummate
any Asset Sale, unless:
(1) the consideration received by us or our Restricted Subsidiary is
at least equal to the fair market value of the assets sold or disposed of;
and
(2) at least 75% of the consideration received consists of cash,
Temporary Cash Investments or the assumption of Indebtedness by us (other
than Indebtedness that is subordinated to any series of debt securities
under the indenture) or of a Restricted Subsidiary and unconditional
release of us and our Restricted Subsidiaries from all liability on the
Indebtedness assumed; provided, however, that this clause shall not apply
to long-term assignments of capacity in a telecommunications network.
In the event and to the extent that the Net Cash Proceeds received by us or
any of our Restricted Subsidiaries from one or more Asset Sales occurring on or
after the date of the indenture in any period of 12 consecutive months exceed
10% of Adjusted Consolidated Net Tangible Assets (determined as of the date
closest to the commencement of such 12-month period for which our consolidated
balance sheet and those of our Subsidiaries has been filed with the SEC pursuant
to the "SEC Reports and Reports to Holders" covenant), then we shall or shall
cause the relevant Restricted Subsidiary to:
(1) within 12 months after the date Net Cash Proceeds so received
exceed 10% of Adjusted Consolidated Net Tangible Assets:
(A) apply an amount equal to such excess Net Cash Proceeds less
any amounts invested within 6 months prior to such Asset Sale in
property or assets of a nature or type or that are used in a business
(or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the
property and assets of, or the business of, us and our Restricted
Subsidiaries on the date of such Asset Sale (the "Adjusted Net Cash
Proceeds") to permanently repay our unsubordinated Indebtedness or that
of any Restricted Subsidiary providing a Subsidiary Guarantee pursuant
to the "Limitation on Issuances of Guarantees by Restricted
Subsidiaries" covenant or Indebtedness of any other Restricted
Subsidiary, in each case owing to a Person other than us or our
Restricted Subsidiaries;
(B) invest an equal amount, or the amount of Adjusted Net Cash
Proceeds not so applied pursuant to clause (A) (or enter into a
definitive agreement committing to so invest within 12 months after the
date of such agreement), in property or assets (other than current
assets) of a nature or type or that are used in a business (or in a
company having property and assets of a nature or type, or engaged in a
business) similar or related to the nature or type of the property and
assets of, or the business of, us and our Restricted Subsidiaries
existing on the date of such investment (as determined in good faith by
the Board of Directors, whose determination shall be conclusive and
evidenced by a board resolution); and
(2) apply (no later than the end of the 12-month period referred to
in the above paragraph (1)) such excess Adjusted Net Cash Proceeds (to the
extent not applied pursuant to the above paragraph as provided in the
following paragraph of this "Limitation on Asset Sales" covenant):
The amount of such excess Adjusted Net Cash Proceeds required to be applied
(or to be committed to be applied) during such 12-month period as set forth in
clause (1) of the preceding sentence and not applied as so required by the end
of such period shall constitute "Excess Proceeds".
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10 million, we must
commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of all the debt securities issued under the indenture
and to the extent permitted or required by the terms thereof, any other of our
Indebtedness that is pari passu with any series of debt securities under the
indenture, equal to the Excess Proceeds on such date, at a purchase price equal
to 100% of the principal amount of the debt securities and
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such other Indebtedness, if applicable, on the relevant Payment Date, plus, in
each case, accrued interest (if any) to the Payment Date.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the indenture. Reference is made to the
indenture for the definition of any other capitalized terms used herein for
which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; provided that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
upon consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, aggregate net
income (or loss) of us and our Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(1) the net income (or loss) of any Person that is not a Restricted
Subsidiary, except (A) with respect to net income, to the extent of the
amount of dividends or other distributions actually paid to us or any of
our Restricted Subsidiaries by such Person during such period and (B) with
respect to net losses, to the extent of the amount of Investments made by
us or any Restricted Subsidiary in such Person during such period;
(2) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause 4(C) of the first paragraph of
the "Limitation on Restricted Payments" covenant (and in such case, except
to the extent includable pursuant to clause (1) above), the net income (or
loss) of any Person accrued prior to the date it becomes a Restricted
Subsidiary or is merged into or consolidated with us or any of our
Restricted Subsidiaries or all or substantially all of the property and
assets of such Person are acquired by us or any of our Restricted
Subsidiaries;
(3) the net income of any Restricted Subsidiary to the extent that
the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary;
(4) any gains or losses (on an after-tax basis) attributable to Asset
Sales;
(5) except for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause 4(C) of the first paragraph of
the "Limitation on Restricted Payments" covenant, any amount paid or
accrued as dividends (other than dividends to the extent paid or payable in
shares of Capital Stock (other than our Disqualified Stock)) on our
Preferred Stock or any Restricted Subsidiary owned by Persons other than us
and any of our Restricted Subsidiaries;
(6) all extraordinary gains and extraordinary losses; and
(7) any compensation expense paid or payable solely with Capital
Stock (other than our Disqualified Stock) or any options, warrants or other
rights to acquire Capital Stock (other than Disqualified Stock).
"Adjusted Consolidated Net Tangible Assets" means the total amount of our
assets and those of our Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the
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extent resulting from write-ups of capital assets (excluding write-ups in
connection with accounting for acquisitions in conformity with GAAP), after
deducting therefrom:
(1) all our current liabilities and those of our Restricted
Subsidiaries (excluding intercompany items); and
(2) all goodwill, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles, all as set forth on our
most recent quarterly or annual consolidated balance sheet and those of our
Restricted Subsidiaries, prepared in conformity with GAAP and filed with
the SEC or provided to the Trustee pursuant to the "SEC Reports and Reports
to Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means:
(1) an investment by us or any of our Restricted Subsidiaries in any
other Person pursuant to which such Person shall become a Restricted
Subsidiary or shall be merged into or consolidated with us or any of our
Restricted Subsidiaries; provided that such Person's primary business is
related, ancillary or complementary to our businesses and those of our
Restricted Subsidiaries on the date of such investment; or
(2) an acquisition by us or any of our Restricted Subsidiaries of the
property and assets of any Person other than us or any of our Restricted
Subsidiaries that constitute substantially all of a division or line of
business of such Person; provided that the property and assets acquired are
related, ancillary or complementary to our businesses and those of our
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by us or any of our
Restricted Subsidiaries (other than to us or another Restricted Subsidiary) of:
(1) all or substantially all of the Capital Stock of any Restricted
Subsidiary; or
(2) all or substantially all of the assets that constitute a division
or line of business of us or any of our Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by us or any of our Restricted Subsidiaries
to any Person other than us or any of our Restricted Subsidiaries of:
(1) all or any of the Capital Stock of any Restricted Subsidiary;
(2) all or substantially all of the property and assets of an
operating unit or business of us or any of our Restricted Subsidiaries; or
(3) any other property and assets (other than the Capital Stock or
other Investment in an Unrestricted Subsidiary) of us or any of our
Restricted Subsidiaries outside the ordinary course of our business or that
of such Restricted Subsidiary and, in each case, that is not governed by
the provisions of the indenture applicable to mergers, consolidations and
sales of all or substantially all of our assets; provided that "Asset Sale"
shall not include:
(A) sales or other dispositions of inventory, receivables and
other current assets;
(B) sales, transfers or other dispositions of assets constituting
a Restricted Payment permitted to be made under the "Limitation on
Restricted Payments" covenant;
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(C) sales, transfers or other dispositions of assets with a fair
market value (as certified in an Officer's Certificate) not in excess of
$5 million in any transaction or series of related transactions; or
(D) sales or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold or disposed of,
to the extent that the consideration received would constitute property,
assets or securities of the kind described in clause (1)(B) of the
"Limitation on Asset Sales" covenant.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (1) the sum of the products of (A)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (B) the amount
of such principal payment by (2) the sum of all such principal payments.
"Board of Directors" means our Board of Directors.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the date
of the indenture or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as:
(1) the Former Parent Companies as a group cease to have the ability
to elect a majority of the members of the Board of Directors (other than
our chief executive officer and independent directors; provided that
independent directors shall be included in calculating whether the
foregoing majority requirement is satisfied if the directors nominated by
the Former Parent Companies do not constitute a majority of the committee
that selects the Board of Directors' nominees for independent directors)
and a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) (other than the Former Parent Companies) has
become the ultimate "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of more than 35% of the total voting power of our Voting
Stock, on a fully diluted basis and such ownership represents a greater
percentage of the total voting power of our Voting Stock, on a fully
diluted basis, than is held by the Former Parent Companies as a group on
such date; or
(2) individuals who on the date of the indenture constitute the Board
of Directors (together with any new directors whose election by the Board
of Directors or whose nomination by the Board of Directors for election by
our stockholders or members, as the case may be, was approved by a vote of
at least two-thirds of the members of the Board of Directors then in office
who either were members of the Board of Directors on the date of the
indenture or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the members of
the Board of Directors then in office.
"Change of Control Period" means, with respect to a Change of Control, the
period of 60 days commencing on the date of the earlier to occur of (1) public
notice of the occurrence of a Change of Control or of our intention to effect a
Change of Control and (2) the Change of Control.
"Common Stock" means, with respect to any Person, such Person's equity
other than Preferred Stock of such Person, whether outstanding on the date of
the indenture or issued thereafter including, without limitation, all series and
classes of such Common Stock, including any and all shares, interests,
participations or other equivalents (however designated, whether voting or
non-voting) thereof.
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"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period:
(1) plus, to the extent such amount was deducted in calculating such
Adjusted Consolidated Net Income:
(A) Consolidated Interest Expense;
(B) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or
losses or sales of assets);
(C) depreciation expense;
(D) amortization expense; and
(E) all other non-cash items reducing Adjusted Consolidated Net
Income (other than items that will require cash payments and for which
an accrual or reserve is, or is required by GAAP to be, made), less all
non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for us and our Restricted
Subsidiaries in conformity with GAAP; and
(2) solely for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (4)(C) of the first paragraph
of the "Limitation on Restricted Payments" covenant, less (to the extent
not otherwise reduced in accordance with GAAP) the aggregate amount of
deposits made by us and our Restricted Subsidiaries after the Existing High
Yield Closing Date in connection with proposed Asset Acquisitions that are
forfeited by us or any of our Restricted Subsidiaries; provided that, if
any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced
in accordance with GAAP) by an amount equal to:
(A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by;
(B) the percentage ownership interest in the income of such
Restricted Subsidiary not owned on the last day of such period by us or
any of our Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of Original Issue Discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and interest
on Indebtedness that is Guaranteed or secured by us or any of our Restricted
Subsidiaries) and all but the principal component of rentals in respect of
Capitalized Lease Obligations, in each case that is paid, accrued or scheduled
to be paid or to be accrued by us and our Restricted Subsidiaries during such
period: excluding, however:
(1) in calculating Consolidated EBITDA, any amount of such interest
of any Restricted Subsidiary if the net income of such Restricted
Subsidiary is excluded in the calculation of Adjusted Consolidated Net
Income pursuant to clause (3) of the definition thereof (but only in the
same proportion as the net income of such Restricted Subsidiary is excluded
from the calculation of Adjusted Consolidated Net Income pursuant to clause
(3) of the definition thereof); and
(2) any premiums, fees and expenses (and any, amortization thereof)
payable in connection with offering of any series of debt securities under
the indenture, all as determined on a consolidated basis, (without taking
into account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of:
(1) the aggregate amount of Indebtedness of us and our Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date
to;
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(2) the aggregate amount of Consolidated EBITDA for the then most
recent four fiscal quarters for which our financial statements have been
filed with the SEC or provided to the Trustee pursuant to the "SEC Reports
and Reports to Holders" covenant (such four fiscal quarter period being the
"Four Quarter Period"); provided that, in making the foregoing calculation:
(A) pro forma effect shall be given to any Indebtedness to be
Incurred or repaid on the Transaction Date;
(B) pro forma effect shall be given to Asset Dispositions and
Asset Acquisitions (including giving pro forma effect to the application
of proceeds of any Asset Disposition) that occur from the beginning of
the Four Quarter Period through the Transaction Date (the "Reference
Period"), as if they had occurred and such proceeds had been applied on
the first day of such Reference Period; and
(C) pro forma effect shall be given to asset dispositions and
asset acquisitions (including giving pro forma effect to the application
of proceeds of any asset disposition) that have been made by any Person
that has become a Restricted Subsidiary or has been merged with or into
us or any Restricted Subsidiary during such Reference Period and that
would have constituted Asset Dispositions or Asset Acquisitions had such
transactions occurred when such Person was a Restricted Subsidiary as if
such asset dispositions or asset acquisitions were Asset Dispositions or
Asset Acquisitions that occurred on the first day of such Reference
Period;
provided that to the extent that clause (B) or (C) of this sentence requires
that pro forma effect be given to an Asset Acquisition or Asset Disposition,
such pro forma calculation shall be based upon the four full fiscal quarters
immediately preceding the Transaction Date of the Person, or division or line of
business of the Person, that is acquired or disposed of for which financial
information is available.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on our most recently available quarterly or annual
consolidated balance sheet and those of our Restricted Subsidiaries (which shall
be as of a date not more than 90 days prior to the date of such computation, and
which shall not take into account Unrestricted Subsidiaries), less any amounts
attributable to Disqualified Stock or any equity security convertible into or
exchangeable for Indebtedness, the cost of treasury stock and the principal
amount of any promissory notes receivable from the sale of our Capital Stock or
any of our Restricted Subsidiaries, each item to be determined in conformity
with GAAP (excluding the effects of foreign currency exchange adjustments under
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 52).
"Credit Agreement" means credit agreements, vendor financings, or similar
facilities or arrangements made available from time to time to us and our
Restricted Subsidiaries from banks, other financial institutions and/or
equipment manufacturers for the Incurrence of Indebtedness, including letters of
credit and any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, as the same may be amended,
supplemented, modified or restated from time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is:
(1) required to be redeemed prior to the Stated Maturity of the debt
securities of a series;
(2) redeemable at the option of the holder of such class or series of
Capital Stock at any time prior to the Stated Maturity of the debt
securities of a series; or
(3) convertible into or exchangeable for Capital Stock referred to in
clause (1) or (2) above or Indebtedness having a scheduled maturity prior
to the Stated Maturity of the debt securities of a series;
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provided that any Capital Stock that would not constitute Disqualified Stock but
for provisions thereof giving holders thereof the right to require such Person
to repurchase or redeem such Capital Stock upon the occurrence of an Asset Sale
or Change of Control occurring prior to the Stated Maturity of the debt
securities of a series shall not constitute Disqualified Stock if the Asset Sale
or Change of Control provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than the provisions contained in
"Limitation on Asset Sales" and "Repurchase of Debt Securities Upon a Change of
Control" covenants and such Capital Stock, or the agreements or instruments
governing the redemption rights thereof, specifically provides, that such Person
will not repurchase or redeem any such stock pursuant to such provision prior to
our repurchase of such debt securities as are required to be repurchased
pursuant to the "Limitation on Asset Sales" and "Repurchase of Debt Securities
Upon a Change of Control" covenant.
"Equity Offering" means an offering of our Common Stock for cash pursuant
to an effective registration statement under the Securities Act or an exemption
from the registration requirements contained therein.
"Existing High Yield Closing Date" means July 21, 1998.
"Fair Market Value" means the price that would be paid in an arm's length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a board resolution; provided that for purposes of clause (8) of the
second paragraph of "Limitation on Indebtedness" covenant,
(1) the fair market value of any security registered under the
Exchange Act shall be the average of the closing prices, regular way, of
such security for the 20 consecutive trading days immediately preceding the
sale of Capital Stock and
(2) in the even the aggregate fair market value of any other property
(other than cash or cash equivalents) received by us exceeds $15 million,
the fair market value of such property shall be determined by a nationally
recognized investment banking firm and set forth in their written opinion
which shall be delivered to the Trustee.
"Former Parent Companies" means Time Warner Inc., MediaOne Group, Inc.
(since acquired by AT&T), Advance/Newhouse Partnership and the Affiliates of
each of the foregoing.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the indenture, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations contained or referred
to in the indenture shall be computed in conformity with GAAP applied on a
consistent basis, except that calculations made for purposes of determining
compliance with the terms of the covenants and with other provisions of the
indentures shall be made without giving effect to:
(1) the amortization of any expenses incurred in connection with the
offering of any series of debt securities under the indenture; and
(2) except as otherwise provided, the amortization of any amounts
required or permitted by Accounting Principles Board Opinion Nos. 16 and
17.
"Guarantee" means, any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person
(1) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services (unless such purchase
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arrangements are on arm's length terms and are entered into in the ordinary
course of business), to take-or-pay, or to maintain financial statement
conditions or otherwise); or
(2) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness of payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part); provided that the
term "Guarantee" shall not include endorsements for collection or deposit
in the ordinary course of business. The term "Guarantee" used as a verb has
a corresponding meaning.
"Incur" means, with respect to Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):
(1) all indebtedness of such Person for borrowed money;
(2) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(3) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto, but excluding obligations with respect to letters of credit
(including trade letters of credit) securing obligations (other than
obligations described in (1) or (2) above or (5), (6) or (7) below) entered
into in the ordinary course of business of such Person to the extent such
letters of credit are not drawn upon or, if drawn upon, to the extent such
drawing is reimbursed no later than the third business day following
receipt by such Person of a demand for reimbursement);
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services,
except Trade Payables;
(5) all Capitalized Lease Obligations of such Person;
(6) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided that the amount of such Indebtedness shall be the lesser of (A)
the fair market value of such asset at such date of determination and (B)
the amount of such Indebtedness;
(7) all Indebtedness of other Persons Guaranteed by such Person to
the extent such Indebtedness is Guaranteed by such Person; and
(8) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as
described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the
obligation, provided
(A) that the amount outstanding at any time of any Indebtedness
issued with Original Issue Discount is the face amount of such
Indebtedness less the remaining unamortized portion of the Original
Issue Discount of such Indebtedness at the time of its issuance as
determined in conformity with GAAP;
(B) that money borrowed and set aside at the time of the
Incurrence of any Indebtedness in order to prefund the payment of the
interest on such Indebtedness shall not be deemed to be "Indebtedness"
so long as such money is held to secure the payment of such interest;
and
(C) that Indebtedness shall not include any liability for federal,
state, local or other taxes.
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"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on our balance sheet or those of any Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include;
(1) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary; and
(2) the fair market value of the Capital Stock (or any other
Investment), held by us or any of our Restricted Subsidiaries, of (or in)
any Person that has ceased to be a Restricted Subsidiary, including without
limitation, by reason of any transaction permitted by clause (3) of the
"Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant; provided that the fair market value of the
Investment remaining in any Person that has ceased to be a Restricted
Subsidiary shall not exceed the aggregate amount of Investments previously
made in such Person valued at the time such Investments were made less the
net reduction of such Investments.
For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant:
(1) "Investment" shall include the fair market value of the assets
(net of liabilities (other than liabilities of us or any of our Restricted
Subsidiaries)) of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary;
(2) the fair market value of the assets (net of liabilities (other
than liabilities of us or any of our Restricted Subsidiaries)) of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary shall be considered a reduction in
outstanding Investments; and
(3) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer.
"Investment Grade" means a rating of any series of debt securities under
the indenture by both S&P and Moody's, each such rating being in one of such
agency's four highest generic rating categories that signifies investment grade
(i.e., BBB- (or the equivalent) or higher by S&P and Baa3 (or the equivalent) or
higher by Moody's) provided, in each case, such ratings are publicly available;
provided further, that in the event Moody's or S&P is no longer in existence,
for purposes of determining whether such debt securities are rated "Investment
Grade," such organization may be replaced by a nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) designated
by us, notice of which designation shall be given to the Trustee.
"Lien" means any mortgage, pledge, security interest, encumbrance, Lien or
charge of any kind (including without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means;
(1) with respect to any Asset Sale, the proceeds of such Asset Sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal,
but not interest, component thereof) when received in the form of cash or
cash equivalents (except to the extent such obligations are financed or
sold with recourse to us or any
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Restricted Subsidiary) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of
(A) brokerage commissions and other fees and expenses (including
fees and expenses of counsel and investment bankers) related to such
Asset Sale,
(B) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without
regard to our consolidated results of operations and those of our
Restricted Subsidiaries, taken as a whole,
(C) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (A) is secured by
a Lien on the property or assets sold or (B) is required to be paid as a
result of such sale, and
(D) appropriate amounts to be provided by us or any Restricted
Subsidiary as reserve against any liabilities associated with such Asset
Sale, including, without limitation, pension and other post employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such
Asset Sale, all as determined in conformity with GAAP and
(2) with respect to any issuance or sale of Capital Stock, the
proceeds of such issuance or sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the
extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent
such obligations are financed or sold with recourse to us or any Restricted
Subsidiary) and proceeds from the conversion of other property received
when converted to cash or cash equivalents, net of attorney's fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection
with such issuance or sale and net of taxes paid or payable as a result
thereof.
"Offer to Purchase" means an offer to purchase by us from the Holders
commenced by mailing a notice to the Trustee and each Holder stating:
(1) the covenant pursuant to which the offer is being made and that
all debt securities of a series validly tendered will be accepted for
payment on a pro rata basis;
(2) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed) (the "Payment Date");
(3) that any debt securities of a series not tendered will continue
to accrue interest pursuant to their terms;
(4) that, unless we default in the payment of the purchase price, any
debt securities of a series accepted for payment pursuant to the Offer to
Purchase shall cease to accrue interest on and after the Payment Date;
(5) that Holders electing to have debt securities of a series
purchased pursuant to the Offer to Purchase will be required to surrender
such debt securities, together with the form entitled "Option of the Holder
to Elect Purchase" on the reverse side of such debt securities completed,
to the Paying Agent at the address specified in the notice prior to the
close of business on the business day immediately preceding the Payment
Date;
(6) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of any debt securities of a series under the indenture delivered for
purchase and a statement that such Holder is withdrawing his election to
have such debt securities purchased; and
(7) that Holders whose debt securities of a series are being
purchased only in part will be issued new notes equal in principal amount
to the unpurchased portion of such debt securities surrendered;
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provided that each such debt security purchased and each new debt security
issued shall be in a principal amount of $1,000 or an integral multiple
thereof.
On the Payment Date, we shall:
(A) accept for payment on a pro rata basis any debt securities of
a series under the indenture or portions thereof tendered pursuant to an
Offer to Purchase;
(B) deposit with the Paying Agent money sufficient to pay the
purchase price of such debt securities or portions thereof so accepted;
and
(C) deliver, or cause to be delivered, to the Trustee all such
debt securities or portions thereof so accepted together with an
Officer's Certificate specifying the debt securities or portions thereof
accepted for payment by us.
The Paying Agent shall promptly mail to the Holders of debt securities so
accepted payment in an amount equal to the purchase price, and the Trustee shall
promptly authenticate and mail to such Holders new debt securities equal in
principal amount to any unpurchased portion of the debt securities surrendered;
provided that each debt security purchased and each new debt security issued
shall be in a principal amount of $1,000 or an integral multiple thereof. We
will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The Trustee shall act as the Paying Agent
for an Offer to Purchase.
We will comply with Rule 14e-1 under the Securities Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that we are required to repurchase any
debt securities of a series under the indenture pursuant to an Offer to
Purchase.
"Original Issue Discount Security" means (1) any security which provides
for an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration of the maturity thereof, and (2) any other
security which is issued with "original issue discount" within the meaning of
Section 1273(a) of the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Permitted Investment" means:
(1) an Investment in us or a Restricted Subsidiary or a Person which
will, upon the making of such Investment, become a Restricted Subsidiary or
be merged or consolidated with or into, or transfer or convey all or
substantially all its assets to us, or a Restricted Subsidiary; provided
that such Person's primary business is related, ancillary or complementary
to the businesses of us and our Restricted Subsidiaries on the date of such
Investment;
(2) Temporary Cash Investments;
(3) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP;
(4) stock, obligations or securities received in settlement of
Indebtedness Incurred in the ordinary course of business, upon foreclosure
of a Lien created in the ordinary course of business or in satisfaction of
judgments, including in connection with a bankruptcy proceeding; or
(5) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and worker's compensation, performance and
other similar deposits;
(6) Interest Rate Agreements and Currency Agreements designed solely
to protect us or our Restricted Subsidiaries against fluctuations in
interest rates or foreign currency exchange rates;
(7) loans or advances to our officers or employees or those of any
Restricted Subsidiary that do not in the aggregate exceed $2 million at any
time outstanding; and
(8) Investments in any Person that is engaged in the
telecommunications business and that is not our Affiliate or a Related
Person.
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"Permitted Liens" means
(1) Liens for taxes, assessments, governmental charges or claims that
are being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made;
(2) statutory and common law Liens of landlords and carriers,
warehousement, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect
to amounts not yet delinquent of being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted
and for which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made;
(3) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
(4) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment
of borrowed money);
(5) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of us or
any of our Restricted Subsidiaries;
(6) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Existing High Yield Closing Date;
provided that
(A) such Lien is created solely for the purpose of securing
Indebtedness Incurred, in accordance with the "Limitation on
Indebtedness" covenant, to finance the cost (including the cost of
design, development, acquisition, construction, installation,
improvement, transportation or integration and all transaction costs
related to the foregoing) of the item of property or assets subject
thereto and such Lien is created prior to, at the time of or within six
months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property;
(B) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost; and
(C) any such Lien shall not extend to or cover any property or
assets other than such item of property or assets and any improvements
on such item;
(7) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of us and our Restricted
Subsidiaries, taken as a whole;
(8) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of us or our Restricted
Subsidiaries relating to such property or assets;
(9) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
(10) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(11) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or
becomes a part of, any Restricted Subsidiary; provided that such Liens do
not extend to or cover any property or assets of, us or any Restricted
Subsidiary other than the property or assets acquired;
(12) Liens in favor of us or any Restricted Subsidiary;
(13) Liens arising from the rendering of a final judgment or order
against us or any Restricted Subsidiary that does not give rise to an Event
of Default;
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(14) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(15) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(16) Liens encumbering customary initial deposits and margin
deposits, and other Liens that are within the general parameters customary
in the industry and incurred in the ordinary course of business, in each
case, securing Indebtedness under Interest Rate Agreements and Currency
Agreements and forward contracts, options, future contracts, futures
options or similar agreements or arrangements designed solely to protect us
or any of our Restricted Subsidiaries from fluctuations in interest rates,
currencies or the price of commodities;
(17) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
us or any of our Restricted Subsidiaries in the ordinary course of business
in accordance with the past practices of us and our Restricted Subsidiaries
prior to the Existing High Yield Closing Date;
(18) Liens on or sales of receivables; and
(19) Liens that secure Indebtedness with an aggregate principal
amount not in excess of $5 million at any time outstanding.
"Person" means, an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Preferred Stock" means, with respect to any Person, Capital Stock issued
by such Person that is entitled to preference or priority over one or more
series or classes of other Capital Stock issued by such Person upon any
distribution of such Person's property and assets, whether by dividend or upon
liquidation.
"Related Person" means, as applied to any Person, any other Person directly
or indirectly owning
(1) 10% or more of the outstanding Common Stock of such Person (or,
in the case of a Person that is not a corporation, 10% or more of the
outstanding equity interest in such Person) or
(2) 10% or more of the combined outstanding voting power of the
Voting Stock of such Person, and all Affiliates of any such other Person.
"Restricted Subsidiary" means any of our Subsidiaries other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries,
(1) for our most recent fiscal year, accounted for more than 10% of
the consolidated revenue of us and our Restricted Subsidiaries; or
(2) as of the end of such fiscal year, was the owner of more than 10%
of our consolidated assets and those of our Restricted Subsidiaries, all as
set forth on the most recently available consolidated financial statements
for such fiscal year.
"SEC" means Securities and Exchange Commission.
"SandP" means Standard and Poor's Ratings Services, a division of The
McGraw-Hill Companies, and its successors.
"Specified Date" means any Redemption Date, any Payment Date for an Offer
to Purchase or any date on which any debt securities of a series under the
indenture first become due and payable after an Event of Default.
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"Stated Maturity" means:
(1) with respect to any debt security, the date specified in such
debt security as the fixed date on which the final installment of principal
of such debt security is due and payable; and
(2) with respect to any scheduled installment of principal of or
interest on any debt security as the fixed date on which such installment
is due and payable.
"Strategic Subordinated Indebtedness" means our Indebtedness Incurred to
finance the acquisition of a Person engaged in a business that is related,
ancillary or complementary to the business conducted by us or any of our
Restricted Subsidiaries, which Indebtedness by its terms, or by the terms of any
agreement or instrument pursuant to which such Indebtedness is Incurred:
(1) is expressly made subordinate in right of payment to any debt
securities under the indenture; and
(2) provides that no payment of principal, premium or interest on, or
any other payment with respect to, such Indebtedness may be made prior to
the payment in full of all of our obligations under such debt securities;
provided that such Indebtedness may provide for and be repaid at any time
from the proceeds of the sale of our Capital Stock (other than Disqualified
Stock) or other of our Indebtedness which by its terms, or by the terms of
any agreement or instrument pursuant to which such other Indebtedness is
Incurred, meets clauses (1) and (2) above after the Incurrence of such
Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Tax Amount" means, with respect to any period, without duplication, the
increase in the cumulative United States Federal, state and local tax liability
of holders of equity interests in us (or if such holder is a pass-through entity
for United States income tax purposes, holders of its equity interests) in
respect of their interests in us for such period plus any additional amounts
payable to such holders to cover taxes arising from the ownership of such equity
interests, but excluding any increase in tax liability or additional amounts
payable in respect of a gain realized by a holder of an equity interest in us
upon the sale or disposition by such holder of an equity interest, including
without limitation, any redemption thereof by us, in us.
"Temporary Cash Investment" means any of the following:
(1) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the United
States of America or any agency thereof;
(2) time deposit accounts, certificates of deposit and money market
deposits maturing within one year of the date of acquisition thereof issued
by a bank or trust company which is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $500 million (or the
foreign currency equivalent thereof) and has outstanding debt which is
rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above;
(4) commercial paper, maturing not more than one year after the date
of acquisition, issued by a corporation (other than our Affiliate)
organized and in existence under the laws of the United States of America,
any state thereof or any foreign country recognized by the United States of
America with a rating at the time as of which any Investment therein is
made of "P-1" (or higher) according to Moody's or "A-1" (or higher)
according to SandP;
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(5) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or Moody's;
(6) corporate debt securities with maturities of eighteen months or
less from the date of acquisition and with a rating at the time as of which
any Investment therein is made of "A3" (or higher) according to Moody's or
"A-" (or higher) according to SandP; and
(7) money market funds at least 95% of the assets of which are
invested in the foregoing.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by us or any of our Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of us that at the time of determination shall be
designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Restricted Subsidiary
(including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary owns any of our Capital
Stock, or owns or holds any Lien on any of our property or those of any
Restricted Subsidiary; provided that
(A) any Guarantee by us or any Restricted Subsidiary of any
Indebtedness of the Subsidiary being so designated shall be deemed an
"Incurrence" of such Indebtedness and an "Investment" by us or such
Restricted Subsidiary (or both, if applicable) at the time of such
designation;
(B) either (i) the Subsidiary to be so designated has total assets
of $1,000 or less or (ii) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on
Restricted Payments" covenant and
(C) if applicable, the Incurrence of Indebtedness and the
Investment referred to in clause (A) of this proviso would be permitted
under the "Limitation on Indebtedness" and "Limitation on Restricted
Payments" covenants.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that (1) no Default or Event of Default shall
have occurred and be continuing at the time of or after giving effect to such
designation and (2) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately after such designation would, if Incurred at such time,
have been permitted to be Incurred (and shall be deemed to have been Incurred)
for all purposes of the indenture. Any such designation by the Board of
Directors shall be evidenced to the Trustee by promptly filing with the Trustee
a copy of the board resolution giving effect to such designation and an
Officer's Certificate certifying that such designation complied with the
foregoing provisions.
"Voting Stock" means, with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for election of directors,
managers or other voting members of the governing body of such Persons.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by
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foreign nationals mandated by applicable law) by such Person or one or more
Wholly Owned Subsidiaries of such Person.
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not we are required to file reports with the SEC, we shall file
with the SEC all such reports and other information as we would be required to
file with the SEC by Sections 13(a) or 15(d) under the Securities Exchange Act
of 1934 if we were subject thereto. We shall supply the Trustee and each Holder
or apply to the Trustee for forwarding to each such Holder, without cost to such
Holder, copies of such reports and other information.
EVENTS OF DEFAULT AND REMEDIES
The following events are defined in the indenture as "Events of Default"
with respect to each series of debt securities:
(1) default in payment of principal or premium, if any, on the debt
securities of that series when due at maturity, upon acceleration,
redemption or otherwise;
(2) default for 30 days in payment of any interest installment on
that series when it becomes due and payable;
(3) default in the performance or breach of the provisions of the
indenture applicable to mergers, consolidations and transfers of all or
substantially all of our assets or the failure to make or consummate an
Offer to Purchase in accordance with the "Limitation on Asset Sales" or
"Repurchase of debt Securities upon a Change of Control" covenant;
(4) default for 30 consecutive days after we receive written notice
by the Trustee or Holders of 25% or more of the aggregate principal amount
of the debt securities of that series as provided in the indenture, in the
performance of any other covenant or agreement by us (other than a default
in (1) (2), (3) above);
(5) there occurs with respect to any issue or issues of our
Indebtedness (including any other series of debt securities) or that of our
Significant Subsidiaries with a principal amount (or in the case of
original issue discount securities, accreted value) of $12 million or more,
whether such Indebtedness now exists or shall hereafter be created, (A) an
event of default that has caused the holder thereof to declare such
Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not
been rescinded or annulled within 30 days of such acceleration and/or (B)
the failure to make a principal payment at the final (but not any interim)
fixed maturity and such defaulted payment shall not have been made, waived
or extended within 30 days of such payment default;
(6) any final judgment or order (not covered by insurance) for the
payment of money in excess of $12 million in the aggregate for all such
final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against us or any Significant Subsidiary and shall not be paid or
discharged, and there is a period of 30 consecutive days following entry of
such judgment or order that causes the aggregate amount for all such final
judgements or orders outstanding and not paid or discharged against all
such Persons to exceed $12 million during which a stay of enforcement by
such final judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect;
(7) a court having jurisdiction in the premises enters a decree or
order for
(A) relief in respect of us or any Significant Subsidiary in an
involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect;
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(B) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of us or any Significant
Subsidiary or for all or substantially all of our or any Significant
Subsidiary's property and assets; or
(C) the winding up or liquidation of our affairs or the affairs of
any Significant Subsidiary and, such decree of order shall remain
unstayed and in effect for a period of 30 consecutive days; or
(8) we or any Significant Subsidiary
(A) commence a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consent
to the entry of an order for relief in an involuntary case under and
such law;
(B) consent to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of us or any Significant Subsidiary for all or
substantially all of our or those of any Significant Subsidiary's
property and assets; or
(C) effect any general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in (7) and
(8) above that occurs with respect to us) occurs and is continuing under the
indenture with respect to a particular series, the Trustee or Holders of at
least 25% in aggregate principal amount at maturity of the debt securities of
that series then outstanding by written notice to us (and to the Trustee if such
notice is given by the Holders), may, and the Trustee shall at the request of
such Holders, declare the principal amount of (or, in the case of Original Issue
Discount Securities, the portion thereby specified in the terms thereof),
premium, if any, and accrued interest on the debt securities of that series to
be immediately due and payable. Upon a declaration of acceleration, such
principal amount, premium, if any, and accrued interest shall be immediately due
and payable.
In the event of a declaration of acceleration because an Event of Default
set forth in clause (5) above has occurred and is continuing, such declaration
of acceleration shall be automatically rescinded and annulled if the Event of
Default triggering such event of default pursuant to clause 5 shall be remedied
or cured by us or by the relevant Significant Subsidiary or waived by the
Holders of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto.
If an Event of Default specified in 7 or 8 above occurs with respect to us,
the principal amount of, premium, if any, and accrued interest on any debt
securities of that series then outstanding shall become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder.
The Holders of at least a majority in principal amount of the outstanding
debt securities of a series affected by written notice to us and to the Trustee,
may waive all past Defaults and rescind and annul a declaration of acceleration
and its consequences if (i) all existing Events of Default, other than the
nonpayment of the principal of, premium, if any, and interest on the debt
securities of that series that have become due solely by such declaration of
acceleration, have been cured or waived and (ii) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction. For
more information as to the waiver of defaults, see "--Modification of the
Indenture."
The Holders of at least a majority in aggregate principal amount of the
outstanding debt securities of that series may direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee. However, the Trustee may
refuse to follow any direction that conflicts with law or the indenture, that
may involve the Trustee in personal liability, or that the Trustee determines in
good faith may be unduly prejudicial to the rights of Holders of debt securities
not joining in the giving of such direction and may take any other action it
deems proper that is not inconsistent with any such direction received from
Holders of such debt securities.
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A Holder may not pursue any remedy with respect to the indenture or the
debt securities of that series unless:
(1) the Holder gives the Trustee written notice of a continuing Event
of Default;
(2) the Holders of at least 25% in aggregate principal amount of
outstanding debt securities of that series make a written request to the
Trustee to pursue the remedy;
(3) such Holder or Holders offer the Trustee indemnity satisfactory
to the Trustee against any costs, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period, the Holders of a majority in aggregate
principal amount of the outstanding debt securities of that series do not
give the Trustee a direction that is inconsistent with the request.
However, such limitations do not apply to the right of any Holder of debt
securities of a series under the indenture to receive payment of the principal
amount of, premium, if any, or interest on, such debt securities of a series or
to bring suit for the enforcement of any such payment, on or after the due date
expressed in the debt securities of a series, which right shall not be impaired
or affected without the consent of the holder.
The indenture will require certain of our officers to certify, on or before
a date not more than 90 days after the end of each fiscal year, that a review
has been conducted of our and our Restricted Subsidiaries' activities and
performance under the indenture and that we have fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. We
will also be obligated to notify the Trustee of any default or defaults in the
performance of any covenants or agreements under the indenture.
MODIFICATION OF THE INDENTURE
With Consent of Holders
Modifications and amendments of the indenture may be made by us and the
Trustee with the consent of the Holders of not less than a majority in aggregate
principal amount of the debt securities of all series outstanding affected by
the modification or amendment, voting as a single class; provided, however, that
no such modification or amendment may, without the consent of each Holder
affected thereby:
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any debt securities of a series under the
indenture;
(2) reduce the principal amount of, or premium, if any, or interest
on, any debt securities of a series under the indenture;
(3) change the place or currency of payment of principal of, or
premium, if any, or interest on, any debt securities of a series under the
indenture;
(4) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption,
on or after the redemption date) of any debt securities of a series under
the indenture;
(5) reduce the above-stated percentage of outstanding debt
securities, the consent of whose Holders is necessary to modify or amend
the indenture;
(6) waive a default in payment of principal of, premium, if any, or
interest on the debt securities of a series or modify any provisions of the
indenture relating to modification or amendment thereof; or
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(7) reduce the percentage or aggregate principal amount of
outstanding debt securities, the consent of whose Holders is necessary for
waiver of compliance with certain provisions of the indenture or for waiver
of certain defaults.
For purposes of this paragraph, if any debt securities of a series are
Original Issue Discount Securities, then for the purposes of determining whether
the Holders of the requisite principal amount of debt securities of a series
have taken any action herein described, the principal amount of such debt
securities shall be deemed to be the amount of the principal thereof that would
be due and payable at the date of the taking of such action upon a declaration
of acceleration of maturity thereof.
Without Consent of the Holders
We, when authorized by a resolution of our Board of Directors (as evidenced
by board resolutions), and the Trustee may amend or supplement this indenture or
the debt securities without notice to or the consent of any holder:
(1) to cure any ambiguity, defect or inconsistency in this indenture;
provided that such amendments or supplements shall not, in the good faith
opinion of the Board of Directors as evidenced by a board resolution,
adversely affect the interests of the Holders in any material respect;
(2) to comply with the provisions concerning consolidation, merger
and sale of assets;
(3) to comply with any requirements of the SEC in connection with the
qualification of this indenture under the Trust Indenture Act;
(4) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee;
(5) to provide for uncertificated debt securities in addition to or
in place of certificated debt securities;
(6) to add one or more Subsidiary Guarantees on the terms required by
this indenture;
(7) to establish the form or terms of any series of debt securities;
and
(8) to make any change that, in the good faith opinion of the Board
of Directors as evidenced by a board resolution, does not materially and
adversely affect the rights of any holder.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The following restrictions on consolidations, mergers and asset sales will
apply to any non-convertible indebtedness issued under the indenture:
We will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of our property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into us unless:
(1) we shall be the continuing Person, or the Person (if other than
us) formed by such consolidation or into which we are merged or that
acquired or leased our property and assets shall be a corporation organized
and validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, all of our obligations on
all of the debt securities and under the indenture;
(2) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction on a pro
forma basis, we or any Person becoming the successor obligor of the debt
securities shall have a Consolidated Net Worth equal to or greater than our
Consolidated Net Worth immediately prior to such transaction;
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provided that this paragraph (3) shall only apply to a sale of
substantially all, but less than all, of our assets;
(4) immediately after giving effect to such transaction on a pro
forma basis we, or any Person becoming the successor obligor of the debt
securities, as the case may be, could Incur at least $1.00 of Indebtedness
under (A) of the "Limitation on Indebtedness" covenant; provided that this
clause (4) shall not apply to:
(A) a consolidation, merger or sale of all (but not less than all)
of our assets if all of our Liens and Indebtedness or of any Person
becoming the successor obligor on the debt securities, as the case may
be and its Restricted Subsidiaries outstanding immediately after such
transaction would, if Incurred at such time, have been permitted to be
Incurred (and all such Liens and Indebtedness, other than our Liens and
Indebtedness and those of our Restricted Subsidiaries outstanding
immediately prior to the transaction, shall be deemed to have been
Incurred) for all purposes of the indenture or
(B) a consolidation, merger or sale of all or substantially all of
our assets if immediately after giving effect to such transaction on a
pro forma basis, we or any Person becoming the successor obligor of the
debt securities shall have a Consolidated Leverage Ratio equal to or
less than our Consolidated Leverage Ratio immediately prior to such
transaction; and
(5) we deliver to the Trustee an Officer's Certificate (attaching the
arithmetic computations to demonstrate compliance with paragraphs (3) and
(4) above) and opinion of counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture complies
with this provision and that all conditions precedent provided for herein
relating to such transaction have been complied with;
provided, however, that paragraphs (3) and (4) above do not apply if, in the
good faith determination of our Board of Directors, whose determination shall be
evidenced by a board resolution, the principal purpose of such transaction is to
change our state of incorporation; and provided further that any such
transaction shall not have as one of its purposes the evasion of the foregoing
limitations.
DEFEASANCE
The following defeasance provisions will apply to any non-convertible
indebtedness issued under the indenture:
Defeasance and Discharge
The indenture will provide that we will be deemed to have paid and will be
discharged from any and all obligations in respect of the debt securities of
that series on the 123rd day after the deposit referred to below, and the
provisions of the indenture will no longer be in effect with respect to the debt
securities of that series (except for, among other matters, certain obligations
to register the transfer or exchange of the debt securities of such series, to
replace stolen, lost or mutilated debt securities of such series, to maintain
paying agencies and to hold monies for payment in trust) if, among other things:
(1) we have deposited with the Trustee, in trust, money and/or U.S.
Government Obligations that through the payment of interest and principal
in respect thereof in accordance with their terms will provide money in an
amount sufficient to pay the principal of, premium, if any, and accrued
interest on the debt securities of that series on the Stated Maturity of
such payments in accordance with the terms of the indenture and the debt
securities of that series;
(2) we have delivered to the Trustee
(A) either (i) an opinion of counsel to the effect that Holders
will not recognize income, gain or loss for federal income tax purposes
as a result of our exercise of our option under this "Defeasance"
provision and will be subject to federal income tax on the same amount
and in the
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same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred, which opinion of
counsel must be based upon (and accompanied by a copy of) a ruling of
the Internal Revenue Service to the same effect unless there has been a
change in applicable federal income tax law after the date the debt
securities of that series are issued under the indenture such that a
ruling is no longer required or (ii) a ruling directed to the Trustee
received from the Internal Revenue Service to the same effect as the
aforementioned opinion of counsel; and
(B) an opinion of counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and
after the passage of 123 days following the deposit, the trust fund will
not be subject to the effect of Section 547 of the United States
Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law;
(3) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending
on the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which we or any of our Subsidiaries is a
party or by which we or any of our Subsidiaries is bound; and
(4) if at such time such debt securities are listed on a national
securities exchange, we have delivered to the Trustee an opinion of counsel
to the effect that such debt securities will not be delisted as a result of
such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default
The indenture further will provide that the provisions of the indenture
will no longer be in effect with respect to paragraphs (3) and (4) under
"Consolidation, Merger and Sale of Assets" and all the covenants described
herein under "Covenants," paragraph (3) under "Events of Default" with respect
to such paragraphs (3) and (4) under "Consolidation, Merger and Sale of Assets,"
paragraph (4) under "Events of Default" with respect to such other covenants and
paragraphs (5) and (6) under "Events of Default" shall be deemed not to be
Events of Default upon, among other things, the deposit with the Trustee, in
trust, of money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the debt securities of that series on the Stated
Maturity of such payments in accordance with the terms of the indenture and the
debt securities of that series, the satisfaction of the provisions described in
paragraphs (2)(B), (3) and (4) of the preceding paragraph and the delivery by us
to the Trustee of an opinion of counsel to the effect that, among other things,
the Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default
In the event we exercise the option to omit compliance with certain
covenants and provisions of the indenture with respect to the debt securities of
that series as described in the immediately preceding paragraph and such debt
securities of that series are declared due and payable because of the occurrence
of an Event of Default that remains applicable, the amount of money and/or U.S.
Government Obligations on deposit with the Trustee will be sufficient to pay
amounts due on such debt securities at the time of their Stated Maturity but may
not be sufficient to pay amounts due on such debt securities at the time of the
acceleration resulting from such Event of Default. However, we will remain
liable for such payments.
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REPURCHASE OF DEBT SECURITIES UPON A CHANGE OF CONTROL
The following will apply to any non-convertible indebtedness issued under
the indenture:
We must commence, within 30 days of the later of (1) the occurrence of a
Change of Control and (2) the end of the Change of Control Period with respect
to a Change of Control, and consummate an Offer to Purchase for all the debt
securities then outstanding, at a purchase price equal to 101% of the principal
amount thereof on the relevant Payment Date, plus accrued interest (if any) to
the Payment Date; provided that, we shall not be required to commence and
consummate an Offer to Purchase if, at the time specified above for the
commencement of an Offer to Purchase the debt securities of a series shall be
rated Investment Grade.
There can be no assurance that we will have sufficient funds available at
the time of any Change of Control to make any debt payment (including
repurchases of the debt securities of a series) required by the foregoing
covenant (as well as may be contained in our other securities which might be
outstanding at the time).
The above covenant requiring us to repurchase the debt securities will,
unless consents are obtained, require us to repay all indebtedness then
outstanding which by its terms would prohibit such debt security repurchase,
either prior to or concurrently with such debt security repurchase.
NO PERSONAL LIABILITY OF INCORPORATORS STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the debt securities or for any claim
based thereon or otherwise in respect thereof, and no recourse under or upon any
of our obligations, covenant or agreement or because of the creation of any
Indebtedness represented thereby, shall be had against any of our or our
successors, incorporator, stockholder, officer, director, employee or
controlling person. Each Holder, by accepting the debt securities, waives and
releases all such liability.
CONCERNING THE TRUSTEE
The indenture provides that, except during the continuance of a Default,
the Trustee will perform only such duties as are specifically set forth in the
indenture. If an Event of Default has occurred and is continuing, the Trustee
will use the same degree of care and skill in its exercise of the rights and
powers vested in it under the indenture as a prudent person would exercise under
the circumstances in the conduct of such person's own affairs.
The indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become our creditor, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided that if it acquires any conflicting interest, it
must eliminate such conflict or resign.
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DESCRIPTION OF CAPITAL STOCK
Our restated certificate of incorporation provides for authorized capital
stock of 459.8 million shares, including 277.3 million shares of Class A common
stock, $.01 par value per share, 162.5 million shares of Class B common stock,
$.01 par value per share, and 20 million shares of preferred stock, $.01 par
value per share. No preferred stock is outstanding and the Class B stockholders
are owners of record of all the outstanding shares of Class B common stock.
COMMON STOCK
The relative rights of the Class A common stock and Class B common stock
are substantially identical in all respects, except for voting rights and
conversion rights.
Voting Rights
Each share of Class A common stock entitles the holder to one vote and each
share of Class B common stock entitles the holder to 10 votes on each matter to
be voted upon by the holders of the common stock. The holders of the shares of
Class A common stock and Class B common stock vote as one class on all matters
to be voted on by stockholders, including, without limitation, the election of
directors and any proposed amendment to our restated certificate of
incorporation that would increase the authorized number of shares of common
stock or any class thereof or any other class or series of stock or decrease the
number of authorized shares of any class or series of stock (but not below the
number then outstanding), except as required by the Delaware General Corporation
Law and except that,
(1) as long as the outstanding Class B common stock represents at
least 50% of the aggregate voting power of both classes of common stock
outstanding, the approval of 100% of the Class B Stockholders is required:
(A) to amend, alter or repeal any provision of the restated
certificate of incorporation, other than in connection with certain
ministerial actions; or
(B) for any direct or indirect disposition by us of capital stock
of subsidiaries or assets that in either case represent substantially
all of our assets and those of our subsidiaries on a consolidated basis.
(2) the approval of 100% of the Class B Stockholders is required for
the issuance of any additional shares of Class B common stock or any
capital stock having more than one vote per share; and
(3) without a majority vote of the holders of the Class A common
stock, certain provisions of the restated certificate of incorporation
relating to the termination of, and vote required to waive, the limitations
on business purposes described in the next sentence may not be amended,
altered or repealed.
Under the restated certificate of incorporation, we may not directly or
indirectly, through a subsidiary or affiliate of ours,
(1) engage in the business of providing, offering, packaging,
marketing, promoting or branding (alone or jointly with or as an agent for
other parties) any wireline telecommunications services or other services,
including data services, to residences (collectively, "residential
services"); or
(2) engage in the business of producing, packaging, distributing,
marketing, hosting, offering, promoting, branding or otherwise providing
entertainment, information or any other content services, whether fixed or
interactive, or any services incidental thereto, but excluding acting
solely as a carrier of video, audio or data of unaffiliated parties by
providing transport services, so long as we have no other direct or
indirect pecuniary interest in the transmitted information or content
(collectively, "content services"), in each case until the earlier of (A)
the date that is five years after the date of the filing of the restated
certificate of incorporation and (B) the date on which the holders of Class
B common stock no longer represent at least 50% of the voting power of our
outstanding common stock.
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Neither the holders of Class A common stock nor the holders of Class B
common stock have cumulative voting rights.
Dividends
Each share of common stock is entitled to receive dividends from funds
legally available therefor if, as and when declared by our board of directors.
Class A common stock and Class B common stock share equally, on a
share-for-share basis, in any dividends declared by our board of directors. If
at any time a distribution of the Class A common stock or Class B common stock
is to be paid in shares of Class A common stock, Class B common stock or any
other of our securities or any other person, such dividends may be declared and
paid only as follows:
(1) a share distribution consisting of Class A common stock to
holders of Class A common stock and Class B common stock, on an equal per
share basis; or to holders of Class A common stock only, but in such event
there shall also be a simultaneous share distribution to holders of Class B
common stock consisting of shares of Class B common stock on an equal per
share basis;
(2) a share distribution consisting of Class B common stock to
holders of Class B common stock and Class A common stock, on an equal per
share basis; or to holders of Class B common stock only, but in such event
there shall also be a simultaneous share distribution to holders of Class A
common stock consisting of shares of Class A common stock on an equal per
share basis; and
(3) a share distribution of shares of any class of our securities or
any other person other than the common stock, either on the basis of a
distribution of identical securities, on an equal per share basis to the
holders of Class A common stock and Class B common stock, or on the basis
of a distribution of one class of securities to the holders of Class A
common stock and another class of securities to holders of Class B common
stock, provided that the securities so distributed do not differ in any
respect other than relative voting rights and related differences in
designations, conversion and share distribution provisions, with the
holders of Class B common stock receiving the class having the higher
relative voting rights, provided that if the securities so distributed
constitute capital stock of our subsidiary, such rights shall not differ to
a greater extent than the corresponding differences in voting rights,
designations, conversion and distribution provisions between Class A common
stock and Class B common stock.
If we shall in any manner subdivide or combine the outstanding shares of
Class A common stock or Class B common stock, the outstanding shares of the
other class of common stock shall be proportionally subdivided or combined in
the same manner and on the same basis as the outstanding shares of Class A
common stock or Class B common stock, as the case may be, that have been
subdivided or combined.
Conversion
Under our restated certificate of incorporation, each share of Class B
common stock is convertible at any time and from time to time at the option of
the holder thereof into one share of Class A common stock. The Class A common
stock has no conversion rights.
Equivalent Consideration in Certain Transactions
In the event of any merger, consolidation, acquisition of all or
substantially all of our assets or other reorganization to which we are a party,
in which any consideration is to be received by the holders of Class A common
stock and Class B common stock, those holders must receive the Equivalent
Consideration (as defined below) on a per share basis. Under our restated
certificate of incorporation, "Equivalent Consideration" is defined as
consideration of substantially equivalent economic value as determined by our
board of directors at the time of execution of the definitive agreement relating
to the applicable merger, consolidation, acquisition or reorganization,
provided, that (1) the holders of Class A common stock can receive consideration
of a different form from the consideration to be received by the holders of
Class B common stock and (2) if the holders of Class A common stock and Class B
common stock are to receive securities of any other person, such securities
(and, if applicable, the securities into which the received securities are
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convertible, or for which they are exchangeable, or which they evidence the
right to purchase) can differ with respect to their relative voting rights and
related differences in conversion and share distribution provisions, with the
holders of shares of Class B common stock receiving the class or series having
the higher relative voting rights, and the differences permitted by this clause
(2) are not taken into account in the determination of equivalent economic
value.
Other
Our stockholders have no preemptive or other rights to subscribe for
additional shares. All holders of common stock, regardless of class, are
entitled to share equally on a share-for-share basis in any assets available for
distribution to stockholders on our liquidation, dissolution or winding up. All
outstanding shares are, and all shares offered by this prospectus will be, when
sold, validly issued, fully paid and nonassessable. We may not subdivide or
combine shares of common stock without at the same time proportionally
subdividing or combining shares of the other classes.
In April 1999, we issued 307,550 shares of Class A common stock in
connection with our acquisition of Internet Connect, Inc. in a private placement
under Section 4(2) of the Securities Act of 1933. The former stockholders of
Internet Connect may require us to include their shares in certain registered
offerings of our Class A common stock under the Securities Act of 1933, subject
to certain conditions. If we sell any of our securities in such an offering, we
must pay all expenses (other than underwriting discounts, commissions and fees
and expenses of counsel attributable to the sale of the shares) relating to the
filing and effectiveness of a registration statement. If we do not sell any of
our securities, the selling stockholders will pay their share of the
registration expenses.
During the second quarter of 1999, we issued 2,190,308 shares of Class A
common stock to the former partners of MetroComm, Inc. in a private placement
under Section 4(2) of the Securities Act of 1933 in connection with the
acquisition of the remaining 50% of MetroComm that we did not own. The former
stockholders of MetroComm have one demand registration right collectively for
shares of Class A common stock if they wish to register Class A common stock
constituting at least 50% of the aggregate number of shares of Class A common
stock issued in the merger. Once we have registered shares of Class A common
stock as a result of any other registration statement, we are not required to
register shares pursuant to this demand until six months after the other
registration statement is effective. In addition, each former stockholder of
MetroComm may require us to include its shares in certain other registered
offerings under the Securities Act of 1933, subject to certain conditions. Each
former stockholder of MetroComm must pay all underwriting discounts and
commissions attributable to the sale of its shares. We will pay all expenses
relating to the filing and effectiveness of a registration statement, the legal
fees of one counsel representing the former stockholders of MetroComm and the
auditors' fees and expenses.
PREFERRED STOCK
Our board of directors is authorized to provide for the issuance of
preferred stock in one or more series and to fix the designation, preferences,
powers and relative, participating, optional and other rights, qualifications,
limitations and restrictions thereof, including the dividend rate, conversion
rights, voting rights, redemption price and liquidation preference and to fix
the number of shares to be included in any such series. Any preferred stock so
issued may rank senior to the Class A common stock with respect to the payment
of dividends or amounts upon liquidation, dissolution or winding up, or both. In
addition, any such shares of preferred stock may have class or series voting
rights.
If we offer preferred stock, the terms of that series of preferred stock,
will be set forth in the prospectus supplement relating to that series.
CORPORATE OPPORTUNITIES
Our restated certificate of incorporation provides that the Class B
Stockholders are not restricted from engaging directly or indirectly in the same
or similar business activities or lines of business as us. In the event that any
of the Class B Stockholders acquires knowledge of a potential transaction or
matter that may be a
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corporate opportunity for any of the Class B Stockholders and us, such corporate
opportunity shall be allocated to the Class B Stockholder if offered to any
person who is an officer, employee or director of the Class B Stockholder and/or
us, unless such opportunity is expressly offered to such person primarily in his
or her capacity as an officer, employee or director of us. Other than under
these circumstances, the Class B Stockholders shall have no duty to communicate
or present such corporate opportunity to us.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Our restated certificate of incorporation expressly states that we have
elected not to be governed by Section 203 of the Delaware General Corporation
Law, which prohibits a publicly held Delaware corporation from engaging in a
"business combination," as defined in clause (c)(3) of that section, with an
"interested stockholder," as defined in clause (c)(5) of that section, for a
period of three years after the date of the transaction in which the stockholder
became an interested stockholder.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our restated certificate of incorporation limits the liability of directors
to the fullest extent permitted by the Delaware General Corporation Law. In
addition, our restated certificate of incorporation provides that we shall
indemnify our directors and officers to the fullest extent permitted by that
law. We have entered into separate indemnification agreements with our current
directors and executive officers which have the effect of providing such persons
indemnification protection in the event the restated certificate of
incorporation is subsequently amended.
NASDAQ TRADING
The Class A common stock is listed on the NASDAQ Stock Market's National
Market under the symbol "TWTC."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A common stock is Wells
Fargo Bank, Minnesota N.A.
PLAN OF DISTRIBUTION
The distribution of the securities may be effected from time to time in one
or more transactions at a fixed price or prices (which may be changed from time
to time), at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices. Each prospectus
supplement will describe the method of distribution of the securities offered
therein.
We may sell securities directly, through agents designated from time to
time, through underwriting syndicates led by one or more managing underwriters
or through one or more underwriters acting alone. Each prospectus supplement
will describe the terms of the securities to which such prospectus supplement
relates, the name or names of any underwriters or agents with whom we have
entered into arrangements with respect to the sale of such securities, the
public offering or purchase price of such securities and the net proceeds we
will receive from such sale. In addition, each prospectus supplement will
describe any underwriting discounts and other items constituting underwriters'
compensation, any discounts and commissions allowed or paid to dealers, if any,
any commissions allowed or paid to agents, and the securities exchange or
exchanges, if any, on which such securities will be listed. Dealer trading may
take place in certain of the securities, including securities not listed on any
securities exchange.
Any underwriter or agent participating in the distribution of the
securities may be deemed to be an underwriter, as that term is defined in the
Securities Act, of the securities so offered and sold and any discounts or
commissions received by them, and any profit realized by them on the same or
resale of the securities may be deemed to be underwriting discounts and
commissions under the Securities Act.
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Certain of any such underwriters and agents, including their associates,
may be customers of, engage in transactions with and perform services for us and
our subsidiaries in the ordinary course of business. One or more of our
affiliates may from time to time act as an agent or underwriter in connection
with the sale of the securities to the extent permitted by applicable law. The
participation of any such affiliate in the offer and sale of the securities will
comply with Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers, Inc. regarding the offer and sale of securities of an
affiliate.
Except as indicated in the applicable prospectus supplement, the securities
are not expected to be listed on a securities exchange, except for the Class A
common stock, which is listed on The NASDAQ Stock Market's National Market, and
any underwriters or dealers will not be obligated to make a market in
securities. We cannot predict the activity or liquidity of any trading in the
securities.
VALIDITY OF SECURITIES
The validity of the securities offered hereby will be passed upon for us by
Cravath, Swaine & Moore, New York, New York and for the underwriters or agents,
if any, by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated and combined financial statements of Time Warner Telecom
Inc. appearing in Time Warner Telecom Inc.'s Annual Report (Form 10-K) for the
year ended December 31, 1999, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated and combined financial
statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
The consolidated balance sheets of GST Telecommunications, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' deficit and cash flows for each of the
years in the two-year period ended December 31, 1999, the three month period
ended December 31, 1997 and for the year ended September 30, 1997 have been
incorporated by reference herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing. The report of KPMG LLP covering the December 31,
1999, financial statements contains an explanatory paragraph that states that
the accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in note 16(c) and (d)
to the consolidated financial statements, on May 17, 2000, the Company filed for
protection from its creditors under Chapter 11 of the U.S. Bankruptcy Laws.
Subsequent to this filing, the Company conducted an auction under the
supervision of the U.S. District Court for the District of Delaware that has
resulted in a definitive agreement to sell a substantial portion of the
Company's assets to Time Warner Telecom Inc. These actions raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
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[TIME WARNER LOGO BLUE]
[TIME WARNER LOGO GREY]
