<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended September 30, 1998 or
------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the transition period from __________ to
______________
Registration Number 333-53553
TIME WARNER TELECOM LLC
(Exact name of registrant as specified in its charter)
Delaware 84-1465464
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
5700 S. Quebec Street
Greenwood Village, CO 80111
(303) 566-1000
(Address, including zip code, and telephone number, including
area code, of each registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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INDEX TO FORM 10-Q
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PART I. FINANCIAL INFORMATION
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Management's Discussion and Analysis of Financial Condition and Results 1
of Operations
Combined Balance Sheets at September 30, 1998 and December 31, 1997 12
Combined Statements of Operations for the Three Months and Nine Months 13
Ended September 30, 1998 and 1997
Combined Statements of Cash Flows for the Nine Months Ended 14
September 30, 1998 and 1997
Combined Statements of Changes in Members' Equity 15
Notes to Combined Financial Statements 16
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
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TIME WARNER TELECOM LLC
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Time Warner Telecom LLC is a leading facilities-based competitive local
exchange carrier ("CLEC") in selected metropolitan markets across the United
States, offering a wide range of business telephony services, primarily to
medium- and large-sized business customers.
The term "Company" refers to Time Warner Telecom LLC, its consolidated and
unconsolidated subsidiaries, including Time Warner Telecom Inc. ("TWT") and all
operations of the Company that were historically conducted by the Members (as
defined herein). The term "Members" refers to Time Warner Inc. and certain of
its subsidiaries (collectively, "Time Warner"), MediaOne Group, Inc. and certain
of its subsidiaries (collectively, "MediaOne"), and Advance/Newhouse Partnership
("Newhouse"). Time Warner and MediaOne, through certain subsidiaries, are
partners in Time Warner Entertainment Company, L.P. ("TWE"). TWE and Newhouse
are partners in Time Warner Entertainment-Advance/Newhouse Partnership
("TWEAN"). The term "TW Cable" refers collectively to the cable systems owned
by subsidiaries and divisions of TWE, TWEAN and Time Warner.
The business of the Company was commenced in 1993 by TW Cable and reflects
the combined commercial telecommunication operations under the ownership or
management control of TW Cable. These operations consist of the commercial
telecommunication operations of Time Warner and TWEAN that were each acquired or
formed in 1995, as well as the pre-existing commercial telecommunication
operations of TWE. All intercompany accounts and transactions between the
combined entities have been eliminated.
The Company was recently formed in connection with a reorganization (the
"Reorganization") of the assets and liabilities of its business, which were
previously owned by subsidiaries and divisions of TWE, TWEAN and Time Warner
(together, the "Parent Companies"). The Reorganization was consummated on July
14, 1998. In connection with the Reorganization, the assets and liabilities of
the Company's business were contributed to the Company by the Parent Companies
and in connection therewith, Time Warner, MediaOne and Newhouse received 61.95%,
18.88% and 19.17%, respectively, of the limited liability company interests in
the Company (all in the form of Class B limited liability company interests).
The Company accounted for the Reorganization at each of the Members' historical
cost basis of accounting and accordingly, the Reorganization had no effect on
the Company's total members' equity which has been presented on a consistent
basis.
In connection with the Reorganization, the Company's Management Committee
approved an option plan that provides for the granting of options to purchase
Class A limited liability company interests in the Company representing
approximately 10% of the equity in the Company, in the aggregate on a fully
diluted basis. Generally, options issued under such an option plan will become
exercisable over a four-year vesting period and will expire ten years from the
date of the grant. In addition, the purchase price of the Class A limited
liability company interests in the Company covered by each option will not be
less than the fair market value of such interests on the date of grant. As of
September 30, 1998, the Management Committee authorized for issuance grants to
employees of approximately 8% of the equity in the Company.
The Company's customers are principally telecommunications-intensive
business end-users, long distance carriers ("IXCs"), internet service providers
("ISPs"), wireless communications companies and governmental entities. Such
customers are offered a wide range of integrated telecommunications products and
services, including dedicated transmission, local switched, data and video
transmission services and Internet services. In addition, the Company benefits
from its strategic relationship with TW Cable both through network facilities
access and cost-sharing. As a result, the Company's networks have been
constructed primarily through the
1
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TIME WARNER TELECOM LLC
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
use of fiber capacity licensed from TW Cable. As of September 30, 1998, the
Company operated networks in 19 metropolitan service areas that spanned 6,500
route miles, contained 252,503 fiber glass miles and offered service to 3,463
buildings. The Company's 19 service areas include 18 networks that are wholly
owned and one that is owned through a 50% joint venture and is not consolidated
with the Company's financial results. The Company's consolidated revenues were
$55.4 million for the year ended December 31, 1997 and $81.8 million for the
nine months ended September 30, 1998. As of September 30, 1998, the Parent
Companies invested $555.8 million in equity and $171.6 million in debt in the
Company.
The Company's revenues have been derived primarily from end-user to end-
user private line connections and from a variety of services including: (i)
access between IXCs, (ii) access between end-users and IXCs, (iii) collocated
special access, (iv) collocated points of presence ("POP") to local exchange
carriers ("LECs") switched access transport and (v) local switched services.
Since its inception in 1993, the Company has experienced significant growth in
revenues and in the geographic scope of its operations. Management believes an
increasing portion of the Company's future growth will come from the provision
of local switched services as a result of the 16 switches deployed as of
September 30, 1998. The Company believes that switched services provide the
opportunity for higher profit margins and better utilization of capital
investment than those expected from transport services. The shift of the
revenue growth to switched services may cause the Company's revenues to become
less predictable since a portion of such services is billed to customers on a
usage basis. Dedicated transport customers are typically billed a flat monthly
rate which produces a less variable stream of revenues for the Company.
Furthermore, it is expected that the growth in the switched service offerings
will expand the Company's customer base by making more services available to
customers that are generally smaller than those who purchase dedicated transport
services. These smaller customers are also expected to be the principal users
of the Company's long distance service, which was launched in the third quarter.
The Company expects to experience a higher churn rate for these customers than
it has traditionally experienced with transport services. The Company intends
to minimize this churn for long distance services to smaller customers by
offering such service under minimum one-year contracts.
The Company plans to expand its revenue base by fully utilizing available
network capacity in its existing markets and by continuing to develop and
selectively tailor new services in competitively-priced packages to meet the
needs of its medium- and large-sized business customers. The Company plans on
selectively entering new markets and intends to have networks under construction
or operational in several additional cities by the end of 1999.
Operating expenses consist of costs directly related to the operation and
maintenance of the networks and the provision of the Company's services. This
includes the salaries and related expenses of operations and engineering
personnel as well as costs from the incumbent local exchange carrier ("ILECs")
and other competitors for facility leases and interconnection. These costs have
increased over time as the Company has increased its operations and revenues.
It is expected that these costs will continue to increase, but at a slower rate
than revenue growth.
Selling, general and administrative expenses consist of salaries and
related costs for employees other than those involved in operations and
engineering. Such expenses also include costs related to non-technical
facilities, sales and marketing, regulatory, billing and legal costs. These
costs have increased over time as the Company has increased its operations and
revenues. The Company expects these costs to continue to increase as the
Company's revenue growth continues, but at a slower rate than revenue growth.
In the normal course of conducting its businesses, the Company has various
transactions with the Parent Companies, generally on terms resulting from
negotiation between the affected
2
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TIME WARNER TELECOM LLC
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
units that, in management's view, result in reasonable allocations. In
connection with the Reorganization, the Company entered into several contracts
with the Parent Companies in respect of certain of these transactions. The
Company's selling, general and administrative expenses include charges allocated
from the Parent Companies for certain general and administrative expenses,
primarily including office rent and overhead charges for various administrative
functions performed by TW Cable. These charges are required to reflect all costs
of doing business and are based on various methods, which management believes
results in reasonable allocations of such costs that are necessary to present
the Company's operations as if they are operated on a stand alone basis. In
addition, the Company licenses the right to use the majority of its fiber optic
cable capacity from TW Cable and reimburses it for facility maintenance and pole
rental costs. These costs are included in the Company's operating expense.
Finally, effective July 1, 1997 through July 14, 1998, all of the Company's
financing requirements were funded with loans from the Parent Companies. These
loans are subordinated in right of payment to the Notes described below and bear
interest (payable in kind) at an annual rate equal to The Chase Manhattan Bank's
prime lending rate as in effect from time-to-time, which was 8.5% throughout the
period from July 1, 1997 through September 29, 1998 and mature on August 15,
2008. The prime rate was 8.0% on September 30, 1998. The Company believes that
this rate is comparable to rates that could have been obtained from unrelated
third parties. The Parent Companies do not have any obligation to make
additional equity investments in or loans to the Company. On July 21, 1998, the
Company issued $400 million of 9 3/4% Senior Notes due 2008 ("Notes") (see
"Financing" Section) which, together with internally generated funds, is
expected to provide sufficient funds for the Company to expand its business as
currently planned, pay interest on the Notes and fund its currently expected
losses through the second quarter of 2000. Thereafter, the Company expects to
require additional financing.
The Company has not historically, and does not currently, generate positive
operating cash flow. However, for the nine months ended September 30, 1998, 16
of the Company's 19 service areas generated positive operating cash flow and the
Company, as a whole, expects to begin generating positive operating cash flow
within the next 9 months. The following comparative discussion of the results
of financial condition and results of operations of the Company includes an
analysis of changes in revenues and operating income (loss) before depreciation
and amortization ("EBITDA"). Industry analysts generally consider EBITDA to be
an important measure of comparative operating performance for the
telecommunications industry, and when used in comparison to debt levels or the
coverage of interest expense, as a measure of liquidity. However, EBITDA should
be considered in addition to, not as a substitute for, operating income, net
income, cash flow and other measures of financial performance and liquidity
reported in accordance with generally accepted accounting principles. EBITDA as
defined herein may not be comparable to similarly titled measures reported by
other companies.
The Company has had and will continue to have significant capital
expenditures. These expenditures pertain to the historical construction and
expansion of the networks and to the future expansion of the existing networks
as well as the construction of new networks.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data of the Company, in thousands of dollars and expressed as a
percentage of net revenues for each of the periods presented. This table should
be read in conjunction with the Company's financial statements, including the
notes thereto, appearing elsewhere in this report.
3
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TIME WARNER TELECOM LLC
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in Thousands
(Unaudited)
Statements of Operations Data:
Revenues:
Dedicated transport services $ 21,898 67% $ 11,603 82% $ 57,871 71% $ 29,742 81%
Switched services 10,788 33% 2,471 18% 23,910 29% 7,015 19%
--------- --- --------- ---- --------- --- --------- ----
Total revenues 32,686 100% 14,074 100% 81,781 100% 36,757 100%
Costs and expenses:
Operating (1) 16,615 51% 10,636 76% 46,341 56% 28,050 76%
Selling, general and
Administrative (1) 21,124 65% 14,239 101% 55,294 68% 39,000 106%
Depreciation & amortization (1) 12,479 38% 9,986 71% 36,804 45% 27,866 76%
--------- --- --------- ---- --------- --- --------- ----
Total costs & expenses 50,218 154% 34,861 248% 138,439 169% 94,916 258%
Operating loss (17,532) (54%) (20,787) (148%) (56,658) (69%) (58,159) (158%)
Gain on disposition of 0 0% 11,018 78% 0 0 11,018 30%
Investment
Equity in losses of
Unconsolidated affiliates 71 0% (368) (3%) (16) (0) (1,722) (5%)
Interest Income 4,069 13% 0 0 4,069 5% 0 0
Interest and other, net (1) (11,098) (34%) (359) (2%) (15,808) (20%) (359) (1%)
--------- --- --------- ---- --------- --- --------- ----
Net loss (2) ($24,490) (75%) ($10,496) (75%) ($68,413) (84%) ($49,222) (134%)
========= === ========= ==== ========= === ========= ====
EBITDA ($ 5,053) (15%) ($10,801) (77%) ($19,854) (24%) ($30,293) (82%)
========= === ========= ==== ========= === ========= ====
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(1) Includes expenses resulting from transactions with affiliates of $7.4
million and $4.5 million in the three months ended September 30, 1998 and
1997 respectively, and $20.3 million and $12.4 million in the nine months
ended September 30, 1998 and 1997 respectively.
(2) The Company is a limited liability company that operated as a partnership
for tax purposes during the periods presented herein. Accordingly, the Company
is not subject to Federal and state income taxation.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Revenues. Revenue increased $18.6 million, or 132%, to $32.7 million for
the three months ended September 30, 1998, from $14.1 million for the same
period in 1997. Revenues from the provision of dedicated transport services
increased $10.3 million, or 89%, to $21.9 million in the third quarter of 1998,
from $11.6 million in the third quarter of 1997. Revenues from dedicated
transport service increased 88% in those markets in which dedicated transport
services were offered as of September 30, 1997. Switched service revenue
increased $8.3 million, or 337%, to $10.8 million in the third quarter of 1998,
from $2.5 million in the third quarter of 1997. Switched service revenue
increased 245% in those markets in which switched services were offered as of
September 30, 1997. The increase in revenues from dedicated transport services
primarily reflects growth of services and new products offered in existing
markets. The increase in switched services resulted from the offering of
services in new markets and the growth of services in existing markets. At
September 30, 1998 the Company offered dedicated transport services in 19
metropolitan areas, 16 of which offered switched services, as compared to
September 30, 1997 where the Company offered dedicated transport services in 18
metropolitan areas, 10 of which offered switched services.
4
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TIME WARNER TELECOM LLC
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Operating Expenses. Operating expenses increased $6.0 million, or 56%, to
$16.6 million for the three months ended September 30, 1998, from $10.6 million
for the same period in 1997. The increase in operating expenses was primarily
attributable to the Company's expansion of its business, principally switched
services, and the ongoing development of existing markets resulting in higher
LEC charges for circuit leases and interconnection, higher technical personnel
costs, and higher data processing costs. As a percentage of revenues, operating
expenses decreased to 51% in the third quarter of 1998 from 76% for the same
period in 1997.
Selling, General and Administrative. Selling, general and administrative
expenses increased $6.9 million, or 48%, to $21.1 million for the three months
ended September 30, 1998, from $14.2 million for the same period in 1997. The
increase in selling, general and administrative expenses was primarily
attributable to higher direct sales costs associated with the increase in
revenues, an increase in consulting expenses relating to local regulatory
matters, implementing new billing and system software and higher property taxes.
As a percentage of revenues, selling, general and administrative expenses
decreased to 65% in the third quarter of 1998, from 101% for the same period in
1997.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $2.5 million, or 25%, to $12.5 million for the three months ended
September 30, 1998, from $10.0 million for the same period in 1997. The
increase in depreciation and amortization expense was primarily attributable to
higher capital expenditures related to the ongoing construction and expansion of
the Company's telecommunication networks in both 1997 and 1998. As a percentage
of revenues, depreciation and amortization expenses decreased to 38% in the
third quarter of 1998, from 71% for the same period in 1997.
EBITDA. The EBITDA loss for the three months ended September 30, 1998
decreased $5.7 million, or 53%, to $5.1 million in 1998, from a loss of $10.8
million for the same period in 1997. This improvement was primarily the result
of increased revenue due to the Company's expansion of local telecommunications
networks in new and existing markets and growth of the Company's customer base,
partially offset by higher operating expenses in support of the larger customer
base, and higher selling, general and administrative expenses required to
support the expansion.
Interest Expense. Effective July 1, 1997 through July 14, 1998, all of the
Company's financing requirements were funded with loans from the Parent
Companies. On July 21, 1998 the Company issued $400 million in Notes. Interest
expense relating to these loans and Notes totaled $11.1 million for the three
months ended September 30, 1998 an increase of $10.7 million compared to the
same period in 1997.
Net Loss. Net loss increased $14.0 million, or 133%, to $24.5 million for the
three months ended September 30, 1998, from a net loss of $10.5 million for the
same period in 1997. This increase resulted from higher depreciation and
amortization expenses relating to the Company's expansion of telecommunications
networks in new and existing markets, as well as interest expense on the loans
payable to the Parent Companies and the Notes.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues. Revenues increased $45.0 million, or 122%, to $81.8 million for the
nine months ended September 30, 1998, from $36.8 million for the same period in
1997. Revenues from the provision of dedicated transport services increased
$28.2 million, or 95%, to $57.9 million for the nine months ended September 30,
1998, from $29.7 million for the same period in 1997. Revenues from dedicated
transport service increased 94% in those markets in which
5
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TIME WARNER TELECOM LLC
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
dedicated transport services were offered as of September 30, 1997. Switched
service revenue increased $16.9 million, or 241%, to $23.9 million for the nine
months ended September 30, 1998, from $7.0 million for the same period in 1997.
Switched service revenue increased 191% in those markets in which switched
services were offered as of September 30, 1997. The increase in revenues from
dedicated transport services primarily reflects growth of services and new
products offered in existing markets. The increase in switched services resulted
from the offering of services in new markets and the growth of services in
existing markets. At September 30, 1998 the Company offered dedicated transport
services in 19 metropolitan areas, 16 of which offered switched services, as
compared to September 30, 1997 where the Company offered dedicated transport
services in 18 metropolitan areas, 10 of which offered switched services.
Operating Expenses. Operating expenses increased $18.2 million, or 65%, to
$46.3 million for the nine months ended September 30, 1998, from $28.1 million
for the same period in 1997. The increase in operating expenses was primarily
attributable to the Company's expansion of its business, principally switched
services, and the ongoing development of existing markets resulting in higher
LEC charges for circuit leases and interconnection, higher technical personnel
costs, and higher data processing costs. As a percentage of revenues, operating
expenses decreased to 56% in 1998 from 76% for the same period in 1997.
Selling, General and Administrative. Selling, general and administrative
expenses increased $16.3 million, or 42%, to $55.3 million for the nine months
ended September 30, 1998, from $39.0 million for the same period in 1997. The
increase in selling, general and administrative expenses was primarily
attributable to higher direct sales costs associated with the increase in
revenues, an increase in consulting expenses relating to local regulatory
matters, implementing new billing and system software, higher property taxes,
and moving costs related to consolidating the corporate office into one
building. As a percentage of revenues, selling, general and administrative
expenses decreased to 68% in 1998, from 106% for the same period in 1997.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $8.9 million, or 32%, to $36.8 million for the nine months ended
September 30, 1998, from $27.9 million for the same period in 1997. The
increase in depreciation and amortization expense was primarily attributable to
higher capital expenditures related to the ongoing construction and expansion of
the Company's telecommunication networks in both 1997 and 1998. As a percentage
of revenues, depreciation and amortization expenses decreased to 45% in 1998,
from 76% for the same period in 1997.
EBITDA. The EBITDA loss for the nine months ended September 30, 1998
decreased $10.4 million, or 34%, to $19.9 million in 1998, from a loss of $30.3
million for the same period in 1997. This improvement was primarily the result
of increased revenue due to the Company's expansion of local telecommunications
networks in new and existing markets and growth of the Company's customer base,
partially offset by higher operating expenses in support of the larger customer
base, and higher selling, general and administrative expenses required to
support the expansion.
Interest Expense. Effective July 1, 1997 through July 14, 1998 all of the
Company's financing requirements were funded with loans from the Parent
Companies. On July 21, 1998 the Company issued $400 million in Notes. Interest
expense relating to these loans and Notes totaled $15.8 million for the nine
months ended September 30, 1998, an increase of $15.4 million compared to the
same period in 1997.
Net Loss. Net loss increased $19.2 million, or 39%, to $68.4 million for
the nine months ended September 30, 1998, from a net loss of $49.2 million for
the same period in 1997. This increase resulted from higher depreciation and
amortization expenses relating to the Company's
6
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TIME WARNER TELECOM LLC
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
expansion of telecommunications networks in new and existing markets, as well as
interest expense on the loans payable to the Parent Companies and the Notes.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. For the first nine months of 1998, the Company's cash provided
by operations was $3.3 million as compared to cash used in operations of $(39.2)
million for the first nine months of 1997. This increase in cash provided by
operations of $42.5 million principally resulted from lower EBITDA losses and
working capital requirements in the first nine months of 1998.
Cash used in investing activities increased $21.2 million, to $87.1 million
for the first nine months of 1998, as compared to $65.9 million for the first
nine months of 1997. The increase was due to an increase of $14.2 million in
capital expenditures, and lower investment proceeds of $7.0 million.
For the first nine months of 1998, cash provided by financing activities
reflects the receipt of interest bearing subordinated loans from the Parent
Companies amounting to $88.0 million and net proceeds from the offering of the
Notes ("Debt Offering") of $387.5 million. For the first nine months of 1997,
cash provided by financing activities reflects the receipt of interest bearing
loans from the Parent Companies, of $27.5 million and, net capital contributions
from the Parent Companies of $77.7 million. The total increase in cash provided
by financing activities of $370.3 million was primarily due to the proceeds from
the Debt Offering.
Cash provided by financing activities reflects the receipt of non-interest-
bearing capital contributions from the Parent Companies to fund the Company's
cash flow deficiencies through June 30, 1997. Effective July 1, 1997 through
July 14, 1998, all of the Company's financing requirements were funded with
interest-bearing loans from the Parent Companies. Currently the Company's
financing requirements are funded by the proceeds from the Debt Offering, (see
Financing).
FINANCING
Historically, the Company did not maintain cash balances since all the
Company's funding requirements were provided by the Parent Companies. The
proceeds from the issuance of the Notes, which are currently invested in cash
and short-term investments, in addition to cash flow from operations, are
expected to fund the Company's future cash requirements through the second
quarter of 2000. The Parent Companies and the Members are not under any
obligation to make any additional equity investments in or loans to the Company.
At a future date, the Company may negotiate a bank credit facility to provide it
with working capital and enhance its financial flexibility. There can be no
assurance that such financing will be available on terms acceptable to the
Company or at all.
The development of the Company's business and the installation and
expansion of the Company's communications networks, combined with the
development and operation of the Company's network operations center ("NOC"),
have resulted in substantial capital expenditures. These capital expenditures,
as well as the Company's historical operating losses, have resulted in
substantial negative cash flow for the Company since inception in 1993. Funding
of this historical cash flow deficiency has been primarily accomplished through
the receipt of capital contributions from the Parent Companies through June 30,
1997. From July 1, 1997 through July 14,1998, the deficiency has been funded
through interest bearing loans from the Parent Companies. Thereafter, the
Company expects cash flow deficiencies to be funded with the proceeds from the
Debt Offering and future financing as described above. This indebtedness to
7
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TIME WARNER TELECOM LLC
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
the Parent Companies is subordinated in right of payment to the Notes and bears
interest (payable in kind) at an annual rate equal to The Chase Manhattan Bank's
prime lending rate as in effect from time-to-time, which was 8.5% throughout the
period from July 1, 1997 through September 29, 1998, and matures on August 15,
2008, one month after the maturity of the Notes. The prime rate was 8.0% on
September 30, 1998. The amounts due to the Parent Companies, including interest
accrued thereon, under this funding arrangement was $171.6 million and $75.5
million as of September 30, 1998 and December 31, 1997, respectively.
On July 21, 1998, the Company issued $400 million in Notes. The Notes are
unsecured, unsubordinated obligations of the Company and TWT, who are jointly
and severally liable, fully and unconditionally, with respect to the Notes.
Interest on the Notes is payable semiannually on January 15 and July 15,
beginning on January 15, 1999. The net proceeds of approximately $387.5 million
are expected to be used to expand and develop existing and new networks and for
general corporate and working capital purposes through the second quarter of
2000. The proceeds of the Debt Offering were immediately invested in short-term
investments. While the primary use of such proceeds will be to fund ongoing
business operations of the Company's subsidiaries which own and operate its
networks, the Company intends to continue to evaluate potential acquisitions and
joint ventures. The Company has no definitive agreement with respect to any
acquisition or new joint venture, although from time to time it may discuss and
assess opportunities with other companies, including affiliates of the Members.
The Company expects that its future cash requirements principally will be
for working capital, capital expenditures and to fund its operating losses. The
Company expects that the net proceeds of the Debt Offering, together with
internally generated funds, will provide sufficient funds to meet the Company's
expected capital and liquidity needs to expand its business as currently
planned, pay interest on the Notes and fund its currently expected losses
through the second quarter of 2000. Thereafter, the Company expects to require
additional financing. However, in the event that the Company's plans or
assumptions change or prove to be inaccurate, or the foregoing sources of funds
prove to be insufficient to fund the Company's growth and operations, or if the
Company consummates acquisitions or joint ventures, the Company may be required
to seek additional capital sooner than currently anticipated. The Company's
revenues and costs are dependent upon factors that are not within the Company's
control, such as regulatory changes, changes in technology and increased
competition. Due to the uncertainty of these and other factors, actual revenues
and costs may vary from expected amounts, possibly to a material degree, and
such variations are likely to affect the level of the Company's future capital
expenditures and expansion plans. Sources of financing may include public or
private debt or equity financing by the Company or its subsidiaries or other
financing arrangements.
CAPITAL EXPENDITURES
The facilities-based telecommunications service business is a capital
intensive business. The Company's operations have required and will continue to
require substantial capital investment for: (i) the purchase and installation of
switches, electronics, fiber and other technologies in existing networks and in
additional networks to be constructed in new service areas; and (ii) the
acquisition and expansion of networks currently owned and operated by other
companies. The Company's expected capital expenditures for general corporate
and working capital purposes include (i) expenditures with respect to the
Company's management information system and corporate service support
infrastructure and (ii) operating and administrative expenses with respect to
new networks and debt service. The Company plans to make substantial capital
investments in connection with the deployment of switches in all of its existing
networks, and plans to construct and develop new networks. Expansion of the
Company's networks will include the geographic expansion of the Company's
existing operations and will
8
<PAGE>
TIME WARNER TELECOM LLC
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
consider the development of new markets. In addition, the Company may acquire
existing networks in the future.
During the first nine months of 1998, capital expenditures were $87.1
million, an increase of $14.2 million from the first nine months in 1997. The
largest commitment of capital was related to the installation of transport and
switch related electronics to support the increase in sales activity. Based on
historic capital requirements for network construction in relation to sales
volumes and network expansion plans, the Company anticipates it will require
approximately $125 million in 1998 and $175 million in 1999 to fund its capital
expenditures.
YEAR 2000
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of time-sensitive information by its computerized
information systems. Year 2000 issues may arise if computer programs have been
written using two digits (rather than four) to define the applicable year. In
such case, programs that have time-sensitive logic may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. The Company utilizes a number of computer
programs across its entire operation. Year 2000 issues could impact the
Company's information systems as well as computer hardware and equipment that is
part of its telephony network such as switches, termination devices and SONET
rings that contain embedded software or "firmware."
The Company's exposure to potential Year 2000 problems exists in two
general areas: technological operations in the sole control of the Company, and
technological operations dependent in some way on one or more third parties.
The majority of the Company's exposure to potential Year 2000 problems is in the
latter area, where the situation is much less within the Company's ability to
predict or control. The Company's business is heavily dependent on third
parties, many of whom are themselves heavily dependent on technology. For
example, like all other telecommunications providers, the Company must
interconnect its networks with other carriers and service providers in order to
provide end-to-end service to customers. The Company cannot control the Year
2000 readiness of those parties but does plan to test its interfaces with them
and to work with those parties to resolve any difficulties. In some cases, the
Company's third party dependence is on vendors of technology who are themselves
working towards solutions to Year 2000 problems, such as suppliers of software
systems for billing, ordering and other key business operations.
The Company has developed a Year 2000 action plan to address identification
and assessment of potential Year 2000 issues and remediation. The Company has
completed the first phase of such action plan which involved making the
Company's internal organizations aware of Year 2000 issues and assigning
responsibility internally for the Year 2000 readiness program. Most of the
Company's efforts in carrying out its Year 2000 action plan are now being
devoted to the assessment phase of its plan which involves an inventory and
review of software and equipment used in the Company's operations in order to
determine the Year 2000 readiness of that software and equipment. To the extent
practicable, the Company plans to assess its interfaces with interconnecting
carriers and service providers for Year 2000 readiness. To that end, the
Company has sent out information requests to those parties and is awaiting their
responses. The assessment process includes the identification of remediation
measures that could be taken on a timely basis to alter, validate or replace
time-sensitive and date-sensitive software and equipment. The inventory and
assessment of the equipment and systems that the Company views as most critical
has been completed and the Company expects to complete the balance of the
assessment phase of its plan by the end of 1998.
9
<PAGE>
TIME WARNER TELECOM LLC
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
In the course of the assessment process the Company has determined that
approximately 90% of the equipment comprising its telephony networks depends on
software or firmware that is already represented by its vendor to be Year 2000
ready. The Company intends to conduct its own validation testing of that
equipment to verify the vendor's representations. The failure of this equipment
to perform as represented could result in delays in the Company's Year 2000
readiness program. The Company is currently developing test plans and equipping
its lab for testing and intends to commence the validation testing of telephony
network equipment during the fourth quarter of 1998. The Company intends to
complete validation testing of its telephony switches and transport network
equipment by the end of the first quarter of 1999.
Concurrently with the foregoing assessment work, the Company has already
begun implementing certain remedial measures and intends to complete its
remediation efforts with respect to technological operations within its sole
control prior to any anticipated material impact on its computerized information
systems. In the normal course of business, the Company is in the process of
replacing many of the computer programs used by key business operations and its
financial systems. The new programs are expected to be in place and operational
by the end of 1999. The specifications for these new systems are all Year 2000
compliant. The Company will conduct validation testing of those systems as they
are delivered to verify the Year 2000 readiness of those systems. As a
contingency plan, in case the new systems are not fully operational when
planned, the Company plans to remediate certain existing systems so that they
will be Year 2000 ready.
Costs of addressing potential Year 2000 problems have not been material to
date and, based on preliminary information gathered to date from the Company,
its customers and vendors, are not currently expected to have a material adverse
impact on the Company's financial position, results of operations or cash flows
in future periods. Based on the Company's current Year 2000 action plan, the
Company expects that total 1998 costs incurred with respect to Year 2000 issues
will be approximately $115,000 and that 1999 costs will be approximately
$1,500,000. The majority of the estimated 1999 costs represent the costs of
personnel who will conduct verification testing of equipment and software and
costs for replacement of certain personal computers. These costs do not include
the cost of replacing systems, the replacement of which is not being
accelerated due to Year 2000 issues, or the costs of software maintenance
contracts that the Company would have entered into in the normal course of
business. In some cases Year 2000 compliant upgrades to third party software
systems licensed to the Company are being supplied under these maintenance
agreements. However, the Company's Year 2000 costs could exceed these estimates
if third party equipment or software do not perform as represented, additional
unanticipated Year 2000 issues arise or planned remediation efforts are
unsuccessful.
Management believes that it has established a sound program to resolve
significant Year 2000 issues within its sole control in a timely manner and that
the Company has made satisfactory progress in addressing issues dependent on
third parties. However, the Company's Year 2000 program is not yet complete.
The Company's failure to correctly identify and remediate all Year 2000 issues
within its control or the failure of suppliers or other third parties with which
the Company interconnects to address their Year 2000 could pose various risks to
the Company. Those risks may include the possibility of interruptions to the
Company's basic services and difficulties in passing traffic to or receiving
traffic from other carriers, detecting and resolving trouble in the networks,
provisioning new service to customers, billing customers and other carriers and
collecting revenues. These impacts as well as disruptions experienced by other
parties could result in material adverse consequences to the Company, including
loss of revenue and substantial unanticipated costs, the amounts of which cannot
reasonably be estimated at this time.
10
<PAGE>
TIME WARNER TELECOM LLC
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
CAUTIONS CONCERNING FORWARD LOOKING STATEMENTS
Certain information included in this report contains forward-looking
statements, including statements regarding the Company's expected financial
position, business and financing plans. These forward-looking statements
reflect the Company's views with respect to future events and financial
performance. The words "believe", "expect", "plans", "intends" and "anticipate"
and similar expressions identify forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results
to differ materially from such expectations include the Company's limited
history of operations, the Company's negative cash flow and operating losses,
the significant capital requirements required for the development and expansion
of the Company's business, the Company's substantial leverage and insufficiency
of its earnings to cover its fixed charges, the risks associated with the
expansion of the Company's business and the possible inability of the Company to
manage its growth, the dependence of the Company on its relationship and
agreements with TW Cable, risks related to the Company's expansion into the
provision of long distance services, the Company's dependence upon
interconnection with and use of ILEC networks, the competitive nature of the
telecommunications business, the Company's dependence on its information billing
systems, risks related to failure of Year 2000 remediations, the Company's
dependence on its significant customers, regulatory developments and the
Company's dependence on governmental and other authorizations. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligations to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
11
<PAGE>
TIME WARNER TELECOM LLC
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
ASSETS (Unaudited)
(thousands)
<S> <C> <C>
Current assets
Cash and short-term investments $ 391,688 $ -
Receivables, less allowances of $1,644 and $776 25,885 8,882
Prepaid expenses 1,727 1,192
-------------- --------------
Total current assets 419,300 10,074
Investments in unconsolidated affiliates 5,564 4,376
Property, plant and equipment 570,149 484,206
Less: accumulated depreciation (105,160) (69,048)
-------------- --------------
464,989 415,158
Intangible assets, net 20,340 8,469
-------------- --------------
Total assets $ 910,193 $ 438,077
============== ==============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities
Accounts payable $ 50,677 $ 32,908
Other current liabilities 55,942 29,304
-------------- --------------
Total current liabilities 106,619 62,212
Long Term debt 400,000 -
Subordinated loans payable to the Parent Companies (including
$8,146 and $1,544 of accrued interest, respectively) 171,597 75,475
Members' equity
Class A interests having an aggregate participation percentage of 0% - -
Class B interests having an aggregate participation percentage of 100%
Contributed capital 555,807 555,807
Accumulated deficit prior to Reorganization (299,340) -
-------------- --------------
Total Class B Interests 256,467 555,807
Accumulated deficit (24,490) (255,417)
-------------- --------------
Total members' equity 231,977 300,390
-------------- --------------
Total liabilities and members' equity $ 910,193 $ 438,077
============== ==============
</TABLE>
See accompanying notes.
12
<PAGE>
TIME WARNER TELECOM LLC
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------------------------------------------
Ended September 30, Ended September 30,
1998 1997 1998 1997
--------- --------- --------- ---------
(Unaudited)
(thousands)
<S> <C> <C> <C> <C>
Revenues:
Dedicated transport services $ 21,898 $ 11,603 $ 57,871 $ 29,742
Switched services 10,788 2,471 23,910 7,015
--------- --------- --------- ---------
Total revenues 32,686 14,074 81,781 36,757
--------- --------- --------- ---------
Costs and expenses:
Operating (a) 16,615 10,636 46,341 28,050
Selling, general and administrative (a) 21,124 14,239 55,294 39,000
Depreciation and amortization (a) 12,479 9,986 36,804 27,866
--------- --------- --------- ---------
Total costs and expenses 50,218 34,861 138,439 94,916
--------- --------- --------- ---------
Operating loss (17,532) (20,787) (56,658) (58,159)
Gain on disposition of investments - 11,018 - 11,018
Equity in gain (losses) of unconsolidated affiliates 71 (368) (16) (1,722)
Interest income 4,069 - 4,069 -
Interest expense, net (a) (11,098) (359) (15,808) (359)
--------- --------- --------- ---------
Net loss $ (24,490) $ (10,496) $ (68,413) $ (49,222)
========= ========= ========= =========
(a) Includes expenses resulting from transactions
with affiliates (Note 4) :
Operating expenses $ 508 $ 433 $ 1,534 $ 1,299
========= ========= ========= =========
Selling, general and administrative $ 1,298 $ 1,842 $ 3,882 $ 5,615
========= ========= ========= =========
Depreciation and amortization $ 2,252 $ 1,880 $ 6,705 $ 5,216
========= ========= ========= =========
Interest expense, net $ 3,375 $ 302 $ 8,146 $ 302
========= ========= ========= =========
</TABLE>
See accompanying notes.
13
<PAGE>
TIME WARNER TELECOM LLC
COMBINED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
-------- --------
(Unaudited)
(thousands)
<S> <C> <C>
OPERATIONS
Net loss $(68,413) $(49,222)
Adjustments for noncash and nonoperating items:
Gain on disposition of investments - (11,018)
Depreciation and amortization 36,805 27,866
Equity in loss of unconsolidated affiliates 16 1,722
Changes in operating assets and liabilities:
Accounts receivable and other current assets (17,538) (3,749)
Accounts payable and other current liabilities 52,551 (3,228)
Other balance sheet changes (94) (1,607)
-------- --------
Cash provided/(used) by operations 3,327 (39,236)
-------- --------
INVESTING ACTIVITIES
Capital expenditures (87,116) (72,964)
Proceeds from sale of investment - 7,028
-------- --------
Cash used in investing activities (87,116) (65,936)
-------- --------
FINANCING ACTIVITIES
Net proceeds from loans from the Parent Companies 87,977 27,503
Net capital contributions from the Parent Companies - 77,669
Net proceeds from Debt Offering 387,500 -
-------- --------
Cash provided by financing activities 475,477 105,172
-------- --------
INCREASE IN CASH AND EQUIVALENTS 391,688 -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD - -
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $391,688 $ -
======== ========
</TABLE>
See accompanying notes.
14
<PAGE>
TIME WARNER TELECOM LLC
COMBINED STATEMENTS OF CHANGES ON MEMBERS' EQUITY
<TABLE>
<CAPTION>
Total
Class B Accumulated Members'
Interests Deficit Equity
--------- ------- ------
<S> <C> <C> <C>
(Unaudited)
(thousands)
BALANCE AT DECEMBER 31, 1997 $ 555,807 $ (255,417) $ 300,390
Net loss prior to Reorganization - (43,923) (43,923)
--------- ---------- ----------
555,807 (299,340) 256,467
Effect of Reorganization (299,340) 299,340 -
Net loss after Reorganization - (24,490) (24,490)
--------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1998 $ 256,467 $ (24,490) $ 231,977
========= ========== ==========
</TABLE>
See accompanying notes.
15
<PAGE>
TIME WARNER TELECOM LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Time Warner Telecom LLC, a Delaware limited liability company (the
"Company"), is a facilities-based competitive local telecommunications
services provider ("CLEC") in selected metropolitan markets across the
United States, offering a wide range of business telephony services,
primarily to medium- and large-sized business customers. The business of
the Company was commenced in 1993 by Time Warner Cable ("TW Cable"), a
division of Time Warner Entertainment Company, L.P. ("TWE"), and reflects
the combined commercial telecommunication operations under the ownership or
management control of TW Cable. These operations consist of the commercial
telecommunication operations of Time Warner Inc. and certain of its
subsidiaries (collectively, "Time Warner") and the Time Warner
Entertainment-Advance/Newhouse Partnership ("TWEAN") that were acquired or
formed in 1995, as well as the pre-existing commercial telecommunication
operations of TWE (collectively, TWE, TWEAN and Time Warner are referred to
herein as the "Parent Companies").
To date, the majority of the Company's revenues have been derived from
the provision of "private line" or "direct access" telecommunications
services. Because the Company has deployed switches in 16 of its 19
markets, management expects that a growing portion of the Company's
revenues will be derived from providing switched services. The Company's
customers are principally telecommunications-intensive business end-users,
long distance carriers ("IXCs"), internet service providers ("ISPs"),
wireless communications companies and governmental entities. Such
customers are offered a wide range of integrated telecommunications
products and services, including dedicated transmission, local switched,
data and video transmission services and internet services. In addition,
the Company benefits from its strategic relationship with TW Cable both
through access rights and cost-sharing. As a result, the Company's
networks have been constructed primarily through the use of fiber capacity
licensed from TW Cable.
BASIS OF PRESENTATION
The combined financial statements of the Company reflect the "carved
out" historical financial position, results of operations, cash flows and
changes in members' equity of the commercial telecommunication operations
of the Parent Companies as if they had been operating as a separate
company. The combined statements of operations have been adjusted to
retroactively reflect an allocation of certain expenses pursuant to the
final terms of the related agreements, primarily relating to office rent,
overhead charges for various administrative functions performed by TW Cable
and certain facility maintenance and pole rental costs. These allocations
were required to reflect all costs of doing business and have been based on
various methods (Note 4), which management believes result in reasonable
allocation of such costs.
The accompanying financial statements are unaudited but, in the
opinion of management, contain all the adjustments (consisting of those of
a normal recurring nature) considered necessary to present fairly the
financial position and the results of operations and cash flows for the
periods presented in conformity with generally accepted accounting
principles applicable to interim periods. The accompanying financial
statements should be read in conjunction with the audited combined
financial statements of the Company for the year ended December 31,
1997.
16
<PAGE>
TIME WARNER TELECOM LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
During fiscal 1997, the Financial Accounting Standard Board ("FASB")
issued Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131"). FAS 131 requires disclosure of financial
and descriptive information about an entity's reportable operating segments
under the "management approach" as defined in the statement. The Company
will adopt FAS 131 as of December 31, 1998. The impact of adoption of this
standard on the Company's financial statements is not expected to be
material.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"), effective for
years beginning after June 15, 1999, with early application encouraged.
The new rules establish standards requiring that all derivative financial
instruments, such as interest rate swap contracts and foreign exchange
contracts, be recognized and measured at fair market value regardless of
the purpose or intent for holding them. The Company does not hold any
derivative financial instruments.
CASH AND SHORT-TERM INVESTMENTS
The Company did not historically maintain any cash balances since all
funding of the Company's operating, investing and financing activities were
provided by the Parent Companies or by subordinated loans payable to the
Parent Companies (Note 3). This funding consisted of non-interest-bearing
capital contributions through June 30, 1997 and subordinated loans during
the period from July 1, 1997 through July 14, 1998. The non-interest-
bearing capital contributions have been included in paid-in capital. The
average net capital contributions from the Parent Companies were $517.8
million for the nine months ended September 30, 1997. The subordinated
loans, including accrued interest, have been reflected as long-term
liabilities in the accompanying balance sheets. Cash and short-term
investments totaling $392 million at September 30, 1998 are a result of the
Company's offering of 9 3/4% Senior Notes due 2008 (see Note 5).
2. MEMBER'S EQUITY
In July 1998, the Company completed a reorganization (the
"Reorganization"), under which the Company's capitalization was authorized
to include two classes of interests, Class A Interests and Class B
Interests. In connection with the Reorganization, the Parent Companies
contributed their respective assets and liabilities of the Company's
business to the Company and in connection therewith, Time Warner, MediaOne
Group, Inc. and certain of its subsidiaries ("MediaOne"), and
Advance/Newhouse Partnership ("Newhouse") received Class B Interests having
an aggregate participation percentage of 100%. Following the
Reorganization, Time Warner, MediaOne and Newhouse held Class B interests
having participation percentages equaling 61.95%, 18.88% and 19.17%,
respectively. Time Warner, MediaOne and Newhouse are collectively referred
to herein as the "Members". Accordingly, the accompanying combined
financial statements have been adjusted to retroactively reflect the
authorization of Class A Interests and the authorization and issuance of
Class B Interests having an aggregate participation percentage of 100% for
all periods. The Reorganization has been reflected as of July 1, 1998 for
accounting purposes.
The Class A Interests and Class B Interests are substantially
identical in all respects, except that the Class A Interests have no voting
rights, provided, however, that the approval of the holders of a majority
(in participation percentage) of the Class A Interests, voting as a
separate class, is required for any amendment to the Company's Limited
Liability Company Agreement that would have an adverse effect on the rights
of the holders of such class. The business and affairs of the Company are
managed by a
17
<PAGE>
TIME WARNER TELECOM LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
management committee (the "Management Committee"), except for certain
matters which require the unanimous vote of the holders of Class B
Interests. Representatives of the Management Committee are appointed by
the Members.
In connection with the Reorganization, the Management Committee
approved an option plan that provides for the granting of options to
purchase Class A Interests representing approximately 10% of the equity in
the Company, in the aggregate on a fully diluted basis. Generally, options
issued under such option plan will become exercisable over a four-year
vesting period and expire ten years from the date of the grant. In
addition, the purchase price of the Class A Interests covered by each
option will not be less than the fair market value of the Class A Interests
on the date of the grant. As of September 30, 1998, the Management
Committee authorized for issuance grants to employees of approximately 8%
of the equity in the Company.
3. SUBORDINATED LOANS PAYABLE TO THE PARENT COMPANIES
Effective July 1, 1997 through July 14, 1998, all of the Company's
financing requirements began to be funded with subordinated loans from the
Parent Companies. These loans bear interest (payable in kind) at The Chase
Manhattan Bank's prime rate which was 8.5% throughout the period from July
1, 1997 through September 29, 1998 and mature on August 15, 2008. The
prime rate was 8.0% on September 30, 1998. The Parent Companies do not
have any obligation to make additional equity investments in or loans to
the Company. Interest expense relating to these loans totaled
approximately $3.4 million and $8.1 million for the three and nine months
ended September 30, 1998, respectively.
4. RELATED PARTY TRANSACTIONS
In the normal course of conducting its businesses, the Company has
various transactions with the Parent Companies, generally on terms
resulting from negotiation between the affected units that, in management's
view, results in reasonable allocations.
The Company's operations, which in certain cases are co-located with
TW Cable divisions, are allocated a charge for various overhead expenses
for services provided by TW Cable. These allocations are based on direct
labor, total expenses, or headcount relative to each division. The Company
is also allocated rent based on the square footage of space occupied by the
Company at TW Cable facilities. The aggregate of these charges totaled
approximately $565,000 and $1.3 million for the three months ended
September 30, 1998 and 1997, respectively, and $1.7 million and $3.8
million for the nine months ended September 30, 1998 and 1997,
respectively.
The Company participates in the Time Warner Cable Pension Plan (the
"Pension Plan"), a noncontributory defined benefit pension plan which
covers approximately 90% of all employees. The remaining 10% of employees
are participating in a pension plan under the administration of MediaOne,
their previous employer. The Company also participates in the Time Warner
Cable Employees Savings Plan (the "Savings Plan"), a defined contribution
plan. Both the Pension Plan and Savings Plan are administered by a
committee appointed by the Board of Representatives of TWE and cover
substantially all employees.
Benefits under the Pension Plan are determined based on formulas which
reflect employees' years of service and compensation levels during their
employment period. Total pension costs relating to the Pension Plan were
$328,000 and $247,000 for the three months ended September 30, 1998 and
1997, respectively, and $973,000 and
18
<PAGE>
TIME WARNER TELECOM LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
$825,000 for the nine months ended September 30, 1998 and 1997,
respectively. Relating to the MediaOne pension plan, pension costs were
approximately $148,000 and $140,000 for the three months ended September
30, 1998 and 1997, respectively, and $484,000 and $447,000 for the nine
months ended September 30, 1998 and 1997, respectively.
The Company's contributions to the Savings Plan can represent up to
6.67% of the employees' compensation during the plan year. TWE's Board of
Representatives has the right in any year to set the maximum amount of the
Company's annual contribution. Defined contribution plan expense was
$257,000 and $183,000 for the three months ended September 30, 1998 and
1997, respectively, and $699,000 and $526,000 for the nine months ended
September 30, 1998 and 1997, respectively.
As of January 1, 1999, the Company will not participate in the Time
Warner Cable Pension Plan, the MediaOne Pension Plan or the Time Warner
Cable Employee Savings Plan, as the Company intends to adopt its own
benefit plans.
The Company licenses the right to use the majority of its fiber optic
cable from TW Cable. The Company paid TW Cable approximately $6.1 million
and $1.8 million for the three months ended September 30, 1998 and 1997,
respectively, under this arrangement, and $9.3 million and $12.0 million in
the nine months ended September 30, 1998 and 1997, respectively and such
costs have been capitalized by the Company. The amortization of these
costs and fiber previously capitalized in the amount of approximately $2.3
million and $1.9 million for the three months ended September 30, 1998 and
1997, respectively, and $6.7 million and $5.2 million for the nine months
ended September 30, 1998 and 1997, respectively, has been classified as a
component of depreciation and amortization in the accompanying combined
statements of operations. In addition, under this licensing arrangement,
the Company reimburses TW Cable for facility maintenance and pole rental
costs, which costs amounted to $508,000 and $433,000 for the three months
ended September 30, 1998 and 1997, respectively, and $1.5 million and $1.3
for the nine months ended September 30, 1998 and 1997, respectively.
Effective July 1, 1997 through July 14, 1998, all of the Company's
financing requirements began to be funded with loans from the Parent
Companies. Interest expense relating to these loans totaled approximately
$3.4 million and $8.1 million for the three and nine months ended September
30, 1998, respectively.
5. LONG TERM DEBT
On July 21, 1998, the Company issued $400 million of 9 3/4% Senior
Notes ("Notes") due July 15, 2008. The Notes are unsecured, unsubordinated
obligations of the Company and Time Warner Telecom Inc., a wholly owned
subsidiary of the Company, who are jointly and severally liable, fully and
unconditionally, with respect to the Notes. Interest on the Notes is
payable semiannually on January 15 and July 15, beginning January 15, 1999.
The net proceeds of approximately $387.5 million are expected to be used to
expand and develop existing and new networks and for general corporate and
working capital purposes through the second quarter of 2000. The proceeds
were immediately invested in short-term investments. Interest expense
relating to the Notes totaled approximately $7.6 million for the three and
nine months ended September 30, 1998. Interest income earned on the short
term investments totaled $4.1 million for the three and nine months ended
September 30, 1998.
19
<PAGE>
TIME WARNER TELECOM LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
6. Commitments and Contingencies
Pending legal proceedings are 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 effect on the
Company's financial statements.
20
<PAGE>
TIME WARNER TELECOM LLC
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On July 13, 1998, TWE, which was then the sole member of the Company,
elected the following persons to serve as Representatives on the Company's
Management Committee:
Richard J. Bressler
Glenn A. Britt
Larissa L. Herda
Stephen A. McPhie
Robert J. Miron
Carl U.J. Rosetti
Audley Webster
Pearre A. Williams
Pursuant to the terms of the Limited Liability Agreement of the Company
among the Parent Companies, the Time Warner affiliates that hold Class B limited
liability interests in the Company designated Richard J. Davies to replace Carl
U.J. Rosetti as their designated Representative on the Management Committee,
effective October 7, 1998.
As of July 14, 1998, all of holders of Class B limited liability
interests of the Company executed consents to the Company's provision of long
distance telecommunications services through resale to the employees of the
Company and Time Warner Cable. The Company's Limited Liability Company Agreement
otherwise restricts the Company from offering telecommunications services to
residences.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as a part of this report and such Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K.
No Current Report on Form 8-K was filed by the Company during the
quarter ended September 30, 1998.
21
<PAGE>
TIME WARNER TELECOM LLC
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIME WARNER TELECOM LLC
(Registrant)
By: ______________________
Name: Jill R. Stuart
Title: Vice President and Chief Accounting Officer
Dated: November 13, 1998
22
<PAGE>
TIME WARNER TELECOM LLC
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2.1 Reorganization Agreement, dated as of July 14, 1998 among Time
Warner Companies, Inc., MediaOne Group, Inc., Advance/Newhouse
Partnership, Time Warner Entertainment Company, L.P., and Time Warner
Entertainment-Advance/Newhouse Partnership. (Incorporated by
reference to the Company's Form 10-Q for the quarterly period ended
June 30, 1998.)
3.1 Amended and Restated LLC Agreement dated as of July 14, 1998 by and
among Time Warner Entertainment Company, L.P., Time Warner
Entertainment-Advance/Newhouse Partnership, FibrCom Holdings, L.P.,
Time Warner Companies, Inc., American Television and Communications
Corporation, Warner Communications Inc., TW/TAE, Inc., Paragon
Communications, MediaOne Group, Inc. and Advance Newhouse Partnership
(Incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 (Registration No. 333-53553))
3.2 Certificate of Formation of the Company (Incorporated by reference to
Exhibit 3.4 of the Company's Registration Statement on Form S-1
(Registration No. 333-53553))
3.3 Certificate of Amendment to Certificate of Formation of the Company
(Incorporated by reference to Exhibit 3.5 of the Company's
Registration Statement on Form S-1 (Registration No. 333-53553))
4.1 Indenture, dated as of July 21, 1998 among the Company, Time Warner
Telecom, Inc. and The Chase Manhattan Bank, as Trustee (Incorporated
by reference to the Company's Form 10-Q for the quarterly period ended
June 30, 1998.)
10.1 Underwriting Agreement, dated as of July 14, 1998 among the Company,
Time Warner Telecom Inc. and Morgan Stanley & Co. Incorporated and
Lehman Brothers Inc. (Incorporated by reference to the Company's Form
10-Q for the quarterly period ended June 30, 1998.)
10.2 Time Warner Telecom LLC 1998 Option Plan as amended as of August 5,
1998 (Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 1998.)
10.3 Capacity License Agreement, dated as of July 1, 1998 (Incorporated by
reference to the Company's Form 10-Q for the quarterly period ended
June 30, 1998.)
10.4 Trade Name License, dated as of July 14, 1998 between the Company,
Time Warner Telecom Inc. and Time Warner Inc. (Incorporated by
reference to the Company's Form 10-Q for the quarterly period ended
June 30, 1998.)
10.5 Employment Agreement between Time Warner Telecom LLC and Paul B. Jones
(Incorporated by reference to Exhibit 10.5 of the Company's
Registration Statement on Form S-1 (Registration No. 333-53553))
<PAGE>
TIME WARNER TELECOM LLC
10.6 Employment Agreement between Time Warner Telecom LLC and Larissa L.
Herda (Incorporated by reference to Exhibit 10.6 of the Company's
Registration Statement on Form S-1 (Registration No. 333-53553))
10.7 Employment Agreement between Time Warner Telecom LLC and A. Graham
Powers (Incorporated by reference to Exhibit 10.7 of the Company's
Registration Statement on Form S-1 (Registration No. 333-53553))
10.8 Employment Agreement between Time Warner Telecom LLC and David J.
Rayner (Incorporated by reference to Exhibit 10.8 of the Company's
Registration Statement on Form S-1 (Registration No. 333-53553))
10.9 Employment Agreement between Time Warner Telecom LLC and John T.
Blount (Incorporated by reference to Exhibit 10.10 of the Company's
Registration Statement on Form S-1 (Registration No. 333-53553))
27 Financial Data Schedule
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<PAGE>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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