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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission file number 0-30218
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TIME WARNER TELECOM INC.
(Exact name of Registrant as specified in its charter)
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Delaware 84-1500624
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10475 Park Meadows Drive
Littleton, CO 80124
(Address of Principal Executive Offices)
(303) 566-1000
(Registrant's telephone Number, Including Area Code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
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 [_]
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of February 28, 2001, the aggregate market value of the Registrant's
voting stock held by non-affiliates of the Registrant was approximately $2.7
billion, based on the closing price of the Company's Class A common stock on
the Nasdaq National Market on February 28, 2001 of $64 11/16 per share.
The number of shares outstanding of Time Warner Telecom Inc.'s common stock
as of February 28, 2001 was:
Time Warner Telecom Inc. Class A common stock--41,815,319 shares
Time Warner Telecom Inc. Class B common stock--72,226,500 shares
Documents Incorporated by Reference:
The information called for by Part III is incorporated by reference to
specified portions of the definitive Proxy Statement for the Registrant's 2001
Annual Meeting of Stockholders, which is expected to be filed not later than
120 days after the Registrant's fiscal year ended December 31, 2000.
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CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This document contains certain "forward-looking statements," within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements regarding, among other items, the expected financial position,
business, and financing plans. These forward-looking statements are based on
management's current expectations and are naturally subject to risks,
uncertainties, and changes in circumstances, certain of which are beyond the
Company's control. Actual results may differ materially from those expressed
or implied by such forward-looking statements.
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 those expectations will prove to
have been correct. Important factors that could cause actual results to differ
materially from the expectations described in this report are set forth under
"Risk Factors" in Item 1 and elsewhere in this report. 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.
TELEPHONY DEFINITIONS
In order to assist the reader in understanding certain terms relating to
the telephony business that are used and explained in this report, a glossary
is included following Part III.
PART I
Item 1. Business
Overview
Time Warner Telecom Inc. (the "Company") 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. The Company's customers are principally
telecommunications-intensive business end-users, long distance carriers,
Internet service providers ("ISPs"), wireless communications companies, and
governmental entities. As of December 31, 2000, the Company operated networks
in 24 metropolitan markets in the United States. On January 10, 2001, the
Company substantially expanded its geographic coverage by acquiring
substantially all of the assets of GST Telecommunications, Inc. ("GST") out of
bankruptcy. As a result of this acquisition, the Company added 15 markets in
the western United States. The Company expects to activate networks currently
under construction in five additional markets by the end of 2001. As of
December 31, 2000, the Company's networks covered 9,799 route miles, contained
366,990 fiber miles, and offered service to 7,797 on-net and off-net
buildings. The acquisition of the GST assets added to the Company's network
4,210 route miles, 227,674 fiber miles, and service to 345 on-net buildings.
The Company's principal executive offices are located at 10475 Park Meadows
Drive, Littleton, Colorado 80124, and the telephone number is (303) 566-1000.
Time Warner Cable began the Company's business in 1993. During the last few
years, the Company's 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, the Company was reorganized into a limited liability
company and on July 21, 1998 the Company conducted an offering of $400 million
principal amount of 9 3/4% Senior Notes due July 2008. In the transaction,
referred to as the "Reorganization," Time Warner Inc. (now wholly owned by AOL
Time Warner Inc.), MediaOne Group, Inc. (now AT&T Corp.), and Advance/Newhouse
Partnership (collectively, the "Class B Stockholders"), either directly or
through subsidiaries, became the owners of all the limited liability company
interests in Time Warner Telecom LLC ("TWT LLC").
On May 10, 1999, in preparation for the Company's initial public offering,
TWT LLC was reconstituted as a Delaware corporation under the name Time Warner
Telecom Inc. This transaction is referred to as the "Reconstitution." The
outstanding limited liability company interests were converted into common
stock of the newly formed corporation, Time Warner Telecom Inc.
On May 14, 1999, in conjunction with the Reconstitution, the Company
completed an initial public offering ("IPO") of 20,700,000 shares of Class A
common stock at a price of $14 per share.
Business Strategy
The Company'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 the Company's business strategy include the following:
Leverage Existing Fiber Optic Networks. The Company 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
December 31, 2000, the Company operated networks that spanned over 9,799 route
miles and contained over 366,990 fiber miles. In addition, during 1999, the
Company deployed a fully managed, fiber-based nationwide Internet protocol
("IP") infrastructure to ensure that its Internet products provide the
capacity and high quality level of service increasingly demanded by its
customers. The Company's IP backbone includes long
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haul circuits leased from other carriers. Management believes that the
Company'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 extend its services both locally
and regionally; and
. provide better customer service because the Company can exert greater
control over its services than its competitors that depend on off-net
facilities.
The Company continues to extend its network in its present markets in order
to reach additional commercial buildings directly with its fiber facilities.
In addition, the Company has deployed new technologies such as dense wave
division multiplexing ("DWDM") to provide additional bandwidth and higher
speed without the need to add additional fiber capacity.
Enter New Geographic Areas. The Company's strategy is to target
metropolitan areas possessing demographic, economic and telecommunications
demand profiles that it believes provide it with the potential to generate an
attractive economic return. As of December 31, 2000, the Company operated
networks in a total of 24 metropolitan areas. The acquisition of the GST
assets accelerated the Company's geographic expansion by adding to its network
15 markets in the western United States. The Company expects to activate
networks in five additional markets by the end of 2001 and continuously
evaluates other expansion opportunities.
Expand Switched Services. The Company provided a broad range of switched
services in all of its 24 service areas as of December 31, 2000. For 2000,
revenue from switched services grew by 92% as compared to 1999. The Company
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 IP and local area network infrastructure, the Company
is integrating this "softswitch" technology into its infrastructure. The
Company selected Sonus Networks as the initial supplier of this technology and
has begun deployment to serve a variety of applications including primary rate
interface services and voice over IP. In January 2001, the Company announced
an agreement with Unisphere Networks as another supplier to supply the Company
with IP-based voice switching equipment.
Expand Data Services. Data services are becoming increasingly more
important to the Company's target end-user and carrier customer base. In
particular, the Company 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. The Company will continue to deliver high-speed traditional
transport services (e.g., DS1, DS3, and 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. The Company
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. The Company 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 the Company serves can rely on it to
manage the network 24 hours-a-day, 7 days-a-week.
Target Business Customers. The Company 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 the
Company's. Historically, the Company has focused its sales and marketing
efforts on such businesses, as they are potentially high volume users of the
Company's services. To drive revenue growth in these markets, the Company
continually expands its direct sales force to focus on such business customers
while it develops managed service offerings to meet the voice, data, and
Internet needs of those customers. In addition, in order to achieve further
economies of
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scale and network utilization, the Company is targeting smaller business
customers in buildings the Company already serves where it can offer a package
of network services that may not otherwise be available to those customers.
Interconnect Service Areas. The Company groups the service areas in which
it operates into geographic clusters across the United States. The Company 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 the Company's revenue
potential and increase margins by addressing customers' regional long
distance, voice, data, and video requirements. The Company began
interconnecting its service areas in 1998. The GST asset acquisition includes
regional fiber networks in the western United States. The Company may sell or
swap for other fiber or conduit some of the fiber or conduit in those networks
that are not needed for operations.
Utilize Strategic Relationships with Time Warner Cable. The Company has
benefited 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 the Company to benefit from Time Warner Cable's access to
rights-of-way, easements, poles, ducts, and conduits. See "Capacity License
Agreements with Time Warner Cable." By leveraging its existing relationship
with Time Warner Cable, the Company 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. The Company 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.
Services
The Company 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. The Company's dedicated services, which include
private line and special access services, use high-capacity digital circuits
to carry voice, data, and video transmissions from point to point in multiple
configurations. Switched voice services offered by the Company use high-
capacity digital switches to route voice transmissions anywhere on the public
switched telephone network. In offering its dedicated transmission and
switched services, the Company also provides private network management and
systems integration services for businesses that require combinations of
various dedicated and switched telecommunications services. Data services
provided by the Company allow customers to create their own internal computer
networks and access external computer networks and the Internet. The Company
provides advanced video transport services such as point-to-point, broadcast-
quality video to major television networks as well as to advertising agencies
and other customers. Internet services provided by the Company include
dedicated Internet access, website and e-mail hosting, transport, and e-
commerce services for business customers and local Internet service providers.
Dedicated Transport Services
The Company currently provides a complete range of dedicated transport
services with transmission speeds from 1.544 megabits 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.
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The Company 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.
. 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 ("LEC") central offices and customer designated
points of presence of a long distance carrier for transport of LEC-
provided switched access or LEC-provided special access. This point-to-
point service is available at DS1 or DS3 interfaces at both ends. DS1
and DS3 interfaces are standard North American telecommunications
industry digital signal formats that are distinguishable by the number
of binary digits transmitted per second, or bit rate. DS1 has a bit rate
of 1.544 megabits per second and DS3 has a bit rate of 44.736 megabits
per second.
The Company provides the following services that use high-capacity digital
circuits to carry voice, data, and video transmissions from point to point in
flexible configurations involving different standardized transmission speeds
and circuit capacities:
. broadcast video TV-1, which is the dedicated transport of broadcast
quality video signals;
. STS-1, which is the full duplex transmission of digital data on
synchronous optical network ("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 always available.
The transmission speeds and circuit capacities used for these services
include DS1, DS3, and OC-n.
Switched Services
The Company's switched services provide business customers with local
calling capabilities and connections to their long distance carriers. The
Company owns, houses, manages, and maintains the switches used to provide the
services. The Company's switched services include the following:
. Business Access Line Service. This service provides voice and data
customers quality analog voice grade telephone lines for use at any
time. Business access line service provides customers with flexibility
in network configurations because lines can be added, deleted, and moved
as needed.
. 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 the Company's
telephone numbers or their incumbent local exchange carrier ("ILEC")-
assigned telephone numbers. Customer access to the Company's local
exchange services is accomplished by a DS1 digital connection or DS0
analog trunks between the customer's private branch exchange port and
the Company's switching centers.
. Local Toll Service. This service provides customers with a competitive
alternative to ILEC service for intraLATA toll calls. It is a
customized, high-quality local calling plan available to business access
line and access trunk customers. The Company works with customers to
devise cost-saving programs based on actual usage and calling patterns.
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. 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.
. 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 LEC are referred to as switched access
services. These services provide long distance carriers with a switched
connection to their customers for the origination and termination of
long distance telephone calls.
. Other Services. Other services offered by the Company include telephone
numbers, listings, customized calling features, voice messaging,
hunting, blocking services and two-way, simultaneous voice and data
transmission in digital formats over the same transmission line, which
is an international standard referred to as integrated services digital
network or ISDN.
Data Transmission Services
The Company offers its customers a broad array of data transmission
services that enable customers to create their own internal computer networks
and access external computer networks and the Internet. Its transparent local
area network inter-networking data service is used to connect workstations and
personal computer users at two or more locations. Transparent local area
network services avoid the bottleneck problems that are frequently encountered
with customary DS1 connections by providing the customer with a circuit that
matches the transmission speeds of its local area network. The Company's
transparent local area network service provides dedicated circuits, guaranteed
transmission capacity, and guaranteed bandwidth for virtually all metropolitan
area network applications. Users can share files and databases as if they are
all working on the same server, or within the same metropolitan area network.
As companies and communications become more sophisticated, there is an
increased need for customer access to superior traffic management of sensitive
data, video, and voice transmission within a single metropolitan area, or
between various company operations. The Company's switched data services offer
sophisticated switching technology and provide high standards in reliability
and flexibility while enabling users to reduce the costs associated with
interconnecting architecturally diverse information systems. The Company's
data service offerings support evolving high-speed applications, such as
multimedia, desktop video conferencing, and medical imaging. The Company
offers native speed connections to end-users as well as interexchange data
carriers. The Company's services allow users to interconnect both high-speed
and low-speed transparent local area network environments and to benefit from
flexible billing, as well as detailed usage reports.
In 2000, the Company extended its current base of transparent 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.
Internet Services
The Company has deployed a fiber-based IP backbone connecting the Company's
hub cities, including 21 asynchronous transfer mode data switches through
which it provides dedicated Internet connectivity. This deployment was
accomplished in part through the acquisition of Internet Connect, Inc., a
regional ISP that became a wholly owned subsidiary of the Company in April
1999. Although data and Internet revenue represented only 7% of total 2000
revenue, the Company expects an increasing portion of its future total revenue
to be contributed by these services.
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Long Distance Services
The Company began to offer basic long distance services in 1998, including
toll free, calling card, and international calling. The Company 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-sized business customers. Generally, large businesses tend
to obtain their long distance needs directly from the major long distance
carriers. The Company offers long distance services in a bundled product
because it believes medium- and small-size businesses may prefer to obtain
their long distance, local and Internet services from a single provider
instead of working with multiple carriers.
Limitation on Residential and Content Services
The Company's Restated Certificate of Incorporation prohibits the Company
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, but a similar restriction in the fiber
license agreements with Time Warner Cable continues until 2028. See "Capacity
License Agreements with Time Warner Cable". Although management does not
believe that these restrictions will materially affect the Company's business
and operations in the immediate future, the Company cannot predict the effect
of such restrictions in the rapidly changing telecommunications industry.
Telecommunications Networks and Facilities
Overview. The Company 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. The
Company's basic transmission platform consists primarily of optical fiber
equipped with high-capacity SONET and DWDM equipment deployed in fully
redundant, self-healing rings. These SONET rings give the Company the
capability of routing customer traffic in both directions around the ring,
thereby eliminating loss of service in the event of a fiber cut. The Company's
networks are designed for remote automated provisioning, which allows it to
meet customers' real time service needs. The Company extends SONET rings or
point-to-point links from rings to each customer's premises over its own fiber
optic cable and unbundled facilities obtained from ILECs. The Company also
installs diverse building entry points where a customer's security needs
require such redundancy. The Company then places necessary customer-dedicated
or shared electronic equipment at a location near or in the customer's
premises to terminate the link.
The Company serves its customers from one or more central offices or hubs
strategically positioned throughout its networks. The central offices house
the transmission and switching equipment needed to interconnect customers with
each other, the long distance carriers, and other local exchange networks.
Redundant electronics and power supplies, with automatic switching to the
backup equipment in the event of failure, protects against signal
deterioration or outages. The Company continuously monitors system components
from its network operations center and proactively focuses on avoiding
problems rather than merely reacting to trouble.
The Company adds switched, dedicated, and data services to its basic fiber
optic transmission platform by installing sophisticated digital electronics at
its central offices and nodes and at customer locations. The Company's
advanced 5ESS digital telephone switches from Lucent and Nortel Networks DMS-
500 switches are connected to multiple ILECs and long distance carrier
switches to provide the Company's customers access to telephones in the local
market as well as the public switched telephone network. Similarly, in certain
markets, the Company provides asynchronous transfer mode switched and local
area network multiplexers at its customers' premises and in its central
offices to provide high-speed local area network interconnection services.
The Company's strategy for adding customers is designed to maximize the
speed and impact of its marketing efforts while maintaining attractive rates
of return on capital invested to connect customers directly to its
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networks. To initially serve a new customer, the Company may use various
transitional links, such as reselling a portion of an ILEC's network. Once the
new customer's communications volume and product needs are identified, the
Company may build its own fiber optic connection between the customer's
premises and the Company's network to accommodate: (i) the customer's needs;
and (ii) the Company's efforts to maximize return on network investment.
Telecommunications Networks. The following chart sets forth information
regarding each of the Company's telecommunications networks as of December 31,
2000, including overall market size of MSA switched and dedicated services
revenue:
Switched Total MSA
Network Services Switch & Ded.
Commercially Commercially Rev.
Metropolitan Service Area Available Available(1) (000's)(2)
- ------------------------- ------------ ------------ -------------
Albany, New York (3)..................... Jul-95 Sep-99 $ 267,380
Austin, Texas (3)........................ Sep-94 Apr-97 335,979
Binghamton, New York (3)................. Jan-95 Aug-00 72,726
Charlotte, North Carolina (3)............ Sep-94 Dec-97 464,254
Cincinnati, Ohio (3)..................... Jul-95 Nov-97 355,080
Columbus, Ohio (3)....................... Mar-91 Jul-97 305,953
Dallas, Texas............................ Sep-99 Sep-99 941,038
Dayton, Ohio (3)......................... Nov-00 Nov-00 173,666
Fayetteville, North Carolina (3)......... Apr-00 Apr-00 42,249
Greensboro, North Carolina (3)........... Jan-96 Sep-99 295,136
Honolulu, Hawaii (3)..................... Jun-94 Jan-98 193,977
Houston, Texas (3)....................... Jan-96 Sep-97 1,062,643
Indianapolis, Indiana (3)................ Sep-87 Dec-97 311,261
Jersey City, New Jersey.................. Jul-99 Jul-99 140,162
Manhattan, New York (3).................. Feb-96 Feb-98 2,396,091
Memphis, Tennessee (3)................... May-95 May-97 222,876
Milwaukee, Wisconsin (3)................. Feb-96 Sep-97 330,056
Orange County, California................ Dec-00 Dec-00 654,629
Orlando, Florida (3)..................... Jul-95 Jul-97 741,266
Raleigh, North Carolina (3).............. Oct-94 Sep-97 263,492
Rochester, New York (3).................. Dec-94 Feb-95 315,849
San Antonio, Texas (3)................... May-93 Nov-97 354,157
San Diego, California (3)................ Jun-95 Jul-97 556,694
Tampa, Florida (3)....................... Dec-97 Jan-98 863,010
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Subtotal............................... 11,659,624
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Under Construction (as of December 31,
2000)
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
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Subtotal............................... 4,024,147
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Time Warner Telecom Total Before
Acquisition......................... 15,683,771
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Switched Total MSA
Network Services Switch & Ded.
Commercially Commercially Rev.
Metropolitan Service Area Available Available(1) (000's)(2)
- ------------------------- ------------ ------------ -------------
Acquired Markets (4)
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 (5).............. Dec-96 Jul-97 3,121,749
Oakland, California (6).................. 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 Jun-98 82,682
Seattle, Washington (7).................. Dec-99 Jan-99 573,533
Spokane, Washington...................... Sep-96 Dec-97 102,589
Tucson, Arizona.......................... Sep-95 Sep-97 146,121
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Acquired Total......................... 7,969,388
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Total Time Warner Telecom (8)........ $21,935,887
===========
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(1) Date of "Switched Services Commercially Available" is the first date on
which switched services were provided to a customer of the Company, or
GST, as the case may be.
(2) Metropolitan statistical area business revenue data are modeled from
Statistics of Communications Common Carrier 1999 Business Data.
(3) Metropolitan statistical areas in which the Company obtains or expects to
obtain fiber capacity through licensing agreements with Time Warner Cable.
See "Capacity License Agreements with Time Warner Cable."
(4) Markets added through the asset acquisition of GST as of January 10, 2001.
(5) Includes Los Angeles, Riverside, and Ventura.
(6) Includes Oakland and Stockton MSAs.
(7) Does not include 75 miles of conduit in Seattle.
(8) Total adjusted to include Houston and Orange County only once to reflect
true MSA totals after both companies are combined.
Western Regional Network. As part of the GST asset acquisition, the Company
acquired a regional fiber-optic backbone network, extending from Seattle to
San Diego, with most segments complete or expected to be completed during
2001. The capacity of the network varies along the route, ranging from 12 to
144 fibers and six to eight two-inch conduits. This regional network
interconnects many of the Company's service areas in its Western Region and
will be used to provide regional long-haul long distance, voice, data, and
video transport services. The Company may sell or exchange fiber and conduit
routes not needed for its operations for other fiber and conduit routes. As
part of the GST transaction, the Company assumed certain agreements to provide
long-term rights to dark fiber and conduit to third parties. Dark fiber
consists of fiber strands contained within a fiber-optic cable that are not
connected to electronic equipment. A lease of dark fiber rights typically has
a term that approximates the economic life of a fiber-optic strand (generally
20 to 30 years). Purchasers and lessees of
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dark fiber rights usually install their own electrical and optical
transmission equipment. A purchaser of conduit rights pulls its own fiber
through the conduit, which may be either a spare conduit or one that already
contains the Company's fiber. In general, payment for dark fiber and conduit
rights is due at the time of delivery and acceptance of the fiber or conduit.
The Company expects that the routes subject to these agreements will be
completed in 2001 and that third party rights the Company agreed to grant
under these agreements will be granted and paid for in 2001.
Infrastructure Migration. The Company continually evaluates new
technologies and suppliers in order to achieve a balance between utilizing
best of breed technologies and suppliers and purchases equipment at the best
available price. Several distinct changes are occurring within the industry
that the Company may be able to take advantage of over the next 12 to 18
months. IP capabilities are proliferating throughout network components as is
evidenced by the rapid development and deployment of packet telephony systems
(e.g., media gateways and softswitches). In order to prepare to deliver the
next generation voice and data services, the Company is using these new
systems to augment legacy Class 5 circuit switched telephone systems such as
Lucent's 5ESS and is deploying them in the Company's new markets in lieu of
circuit switched systems. These switches will initially be used to provide
primary rate interface service to terminate Internet access service for ISP
customers. The Company plans to offer business voice services over this
platform in 2001.
Information Systems Infrastructure. The Company uses a centrally deployed
series of client server platforms and relational database servers to provide
cost effective computing support for its business functions. 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 the Company 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 the Company'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. The Company'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. The Company's information
technology teams have developed competencies in application integration using
the latest in enterprise application products and strategies. The Company has
implemented an enterprise resource system, which provides improved real-time
management information for the Company's financial, procurement and human
resource functions. The Company's information technology 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. The Company provides a single point of
contact for its customers and consolidates its systems support, expertise, and
technical training for the telephony network at its network operations center
in Greenwood Village, Colorado. With approximately 925 technicians and
customer service representatives dedicated to providing superior customer
service, the Company is able to quickly correct, and often anticipate,
problems that may arise in its networks. The Company provides 24 hours-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 the Company with a second telephony network operations center in
Vancouver, Washington. In order to avoid interruption in the ongoing business
being conducted with the GST assets, the Company will operate the former GST
network operations center in parallel with its Greenwood Village network
operations center to monitor the newly acquired local and intercity networks.
The Company expects to integrate the two network operations centers within the
next two to three years.
10
The Company also maintains an Internet network operations center in
Milwaukee, Wisconsin that handles all provisioning, call center, and
surveillance functions for the Company's IP backbone and services, including
Internet access and web hosting, provided over the Company's IP backbone.
Network Development and Application Laboratory. The Company's network
development and application laboratory is a comprehensive telecommunications
technology, applications and services development laboratory, equipped with
advanced systems and equipment, including those used by the Company in the
operation of its local digital networks. The center is designed to provide a
self-contained testing and integration environment, fully compatible with the
Company's digital networks, for the purposes of:
.verifying the technical and operational integrity of new equipment prior
to installation in the networks;
.developing new services and applications;
.providing a realistic training environment for technicians, engineers and
others; and
.providing a network simulation environment to assist in fault isolation
and recovery.
Technologies currently under evaluation in the laboratory include DWDM
equipment from new vendors, optical bandwidth management, IP telephony,
including components used to service next generation softswitches, media
gateway technologies, Signaling System 7 gateway systems, and related data
applications.
Billing Systems. The Company contracts with outside vendors for customer
billing. The Company has licensed a system for switched services billing that
it operates on its own equipment and has a service bureau arrangement with
another vendor for dedicated transport service and interconnection billing.
Since GST uses different billing systems than the Company, the Company 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
the Company's system. This conversion is planned for late 2001, after the
Company integrates all of the ordering systems. See "Risk Factors--We depend
on third party vendors for information systems."
Capacity License Agreements with Time Warner Cable
The Company currently licenses much of its fiber capacity from Time Warner
Cable. Each of the Company's 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 the Company with an
exclusive right to use all of the capacity of specified fiber-optic cable
owned by the Time Warner Cable operation. The Capacity License Agreements
expire in 2028. The Capacity License Agreements for networks that existed as
of July 1998 have been fully paid and do not require additional license fees.
However, the Company must pay certain maintenance fees and fees for splicing
and similar services. The Company may request that Time Warner Cable construct
and provide additional fiber-optic cable capacity to meet the Company's needs
after July 1998. Time Warner Cable is not obligated to provide such fiber
capacity and the Company is not obligated to take fiber capacity from Time
Warner Cable. As the Company expands its operations to markets not served by
Time Warner Cable, it will be required to obtain fiber capacity from other
sources. If Time Warner Cable provides additional capacity, the Company must
pay an allocable share of the cost of construction of the fiber upon which
capacity is to be provided, plus a permitting fee. The Company is responsible
for all taxes and franchise or similar fees arising out of its use of the
capacity, and a portion of other out-of-pocket expenses incurred by Time
Warner Cable for the cable used to provide the capacity. The Company is
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 the Company violates the limitations on business activities of
the Company contained in the Restated Certificate of Incorporation or the
Capacity License Agreements, Time Warner Cable may terminate the Capacity
License Agreements. Accordingly, the Capacity License Agreement restrictions
will apply after the restrictions in the Restated Certificate of Incorporation
have terminated. Although management does not believe that the restrictions in
the Capacity License Agreements will materially affect the Company's business
and operations in the immediate future, the Company cannot predict the effect
of such restrictions in the rapidly changing telecommunications industry.
11
The Capacity License Agreements do not restrict the Company from licensing
fiber-optic capacity from parties other than Time Warner Cable. Although Time
Warner Cable has agreed to negotiate renewal or alternative provisions in good
faith upon expiration of the Capacity License Agreements, the Company 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 the Company. If the Capacity License Agreements are not renewed
in 2028, the Company will have no further interest in the fiber capacity
covered by those Agreements and may need to build, lease, or otherwise obtain
transmission capacity to replace the capacity previously licensed under the
Agreements. The terms of such arrangements could have a material adverse
effect on the Company's business, financial condition, and results of
operations. The Company has the right to terminate a Capacity License
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 the Agreements. The
Capacity License Agreements include substantial limitations on liability for
service interruptions.
Customers and Sales and Marketing
The Company'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.
The Company has substantial business relationships with a few large
customers. For the twelve months ended December 31, 2000, the Company's top
ten customers accounted for approximately 48% of its total revenue. The
Company's largest customer for the twelve months ended December 31, 2000,
WorldCom, Inc. and its affiliates, accounted for more than 10% of the
Company's total revenue. However, a portion of that revenue results from
traffic that is directed to the Company 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.
The Company provides enhanced commissions to its sales force for executing
service contracts that have terms of two years or greater. Currently, more
than half of the Company's revenue from services subject to service
agreements, is provided under agreements with a duration of three years or
greater.
The Company's marketing emphasizes its:
. reliable, facilities-based networks;
. flexibly priced, bundled products and services;
. responsive customer service orientation; and
. integrated operations, customer support, network monitoring, and
management systems.
The Company's centrally managed customer support operations are designed to
facilitate the processing of orders for changes and upgrades in customer
services. To reduce the inherent risk in bringing new and untested
telecommunications products and services to a dynamically changing market, the
Company introduces its products and services once market demand develops and
offers them in diversified, competitively-priced bundles, thereby increasing
usage among its existing customers and attracting new customers. The services
offered by the Company are typically priced at a discount to the prices of the
ILECs.
With a direct sales force in each of its service areas along with regional
and national sales support, the Company targets medium- and large-sized
telecommunications-intensive businesses in the areas served by its networks.
Compensation for the Company's sales representatives is based primarily on
commissions that are tied to revenue from services installed. The Company's
customers include financial services firms, health care, media,
telecommunications services, high tech companies, and various governmental
institutions. In addition, the Company markets its services through
advertisements, trade journals, media relations, direct mail, and
participation in trade conferences.
12
The Company also targets long distance carriers, ISPs, large strategic
business accounts, and wireless telephone companies through its national sales
organization. The Company has master services agreements, which generally set
forth technical standards, ordering processes, pricing methodologies and
service grade requirements, but generally do not guarantee any specified level
of business, with a significant number of the long distance carriers,
including AT&T Corp., WorldCom, Inc., Sprint Corporation ("Sprint"), and Qwest
Communications. By providing long distance carriers with a local connection to
their customers, the Company enables them to avoid complete dependence on the
ILECs for access to customers and to obtain a high quality and reliable local
connection. The Company provides a variety of transport services and
arrangements that allow long distance carriers to connect their own switches
in both local areas, or intra-city, and in wide areas, or inter-city.
Additionally, long distance carriers may purchase the Company's transport
services that allow them to connect their switch to an ILEC switch and to end-
user locations directly. The Company's advanced networks allow it to offer
high volume business customers and long distance carriers uniformity of
services, pricing, quality standards, and customer service.
Customer Service
With approximately 925 expert technicians and customer service
representatives at December 31, 2000, the Company provides its customers with
continuous support and superior service. To serve its customers, account
representatives are assigned to the Company's customers to act as effective
liaisons with the Company. Technicians and other support personnel are
available in each of the Company's service areas to react to any network
failures or problems. In addition, the network operations center provides 24
hours-a-day, 7 days-a-week surveillance and monitoring of networks to maintain
the Company's network reliability and performance. See "Telecommunications
Networks and Facilities--Network Monitoring and Management."
Competition
The Company believes that the principal competitive factors affecting its
business are, and will continue to be:
. pricing;
. the availability of proven support systems for the Company's back office
systems, including provisioning and billing;
. competition for skilled, experienced personnel;
. regulatory decisions and policies that promote competition; and
. ability to introduce new products and services.
The Company believes that it competes favorably with other companies in the
industry or is impacted favorably with respect to each of these factors. The
technologies and systems which provide back office support for the competitive
local exchange carrier ("CLEC") industry are nascent and may not keep pace
with the growth of order volume, integration with other systems, and
production of required information for systems managers. The best personnel in
all areas of the Company's operations are in demand by the numerous
participants in the highly specialized CLEC industry. While the Company'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
the Company's market and economic opportunities and resulting investment
decisions. The Company believes it must continue monitoring regulatory
developments and remain active in its participation in regulatory issues.
Services substantially similar to those offered by the Company are also
offered by the ILECs, which include Verizon Corporation, BellSouth
Corporation, Qwest Communications, and SBC Communications, Inc. The Company
believes that many ILECs may have competitive advantages over the Company such
as their long-standing relationships with customers, greater technical and
financial resources, and the potential to subsidize services of the type
offered by the Company from service revenue in unrelated businesses. In
addition, in most
13
of the metropolitan areas in which the Company currently operates, at least
one, and sometimes many other competitive access providers or CLECs offer
substantially similar services at substantially similar prices to those of the
Company.
When several facilities-based carriers providing the same service in a
given market, price competition is likely and can be severe. As a result, the
Company has experienced price competition that is expected to continue. In
each of its service areas, additional competitors could build facilities. If
additional competitors build facilities in the Company's service areas, this
price competition may increase significantly.
The Company also faces competition from new entrants in the local services
business who may also be better established and have greater financial
resources. Other CLECs, competitive access providers, cable television
companies, electric utilities, long distance carriers, microwave carriers,
wireless telephone system operators and private networks built by large end-
users currently do, and may in the future, offer services similar to those
offered by the Company.
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 ILECs or
CLECs, and between major long distance carriers and CLECs, may create
significant new competitors for the Company and may result in competitors
favoring the use of their subsidiaries and division for services provided by
the Company. Several CLEC consolidations have been announced, including
WorldCom, Inc.'s acquisition of Intermedia Communications and McLeod USA's
acquisition of CapRock Communications.
In addition, the Telecommunications Act of 1996 (the "1996 Act") 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. 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. To date, two
Bell operating companies--Bell Atlantic (now Verizon Corporation) in New York,
and Southwestern Bell Telephone Company in Texas, Kansas, and Oklahoma--have
been granted authority under Section 271 to provide in-region interLATA
service. However, Verizon Corporation has applied to the Federal
Communications Commission ("FCC") for Section 271 Authority to provide
interLATA service in Massachusetts, and Pacific Telephone Company has applied
for that authority in California and it is expected that additional
applications for Section 271 authority will be submitted to the FCC in the
future.
Additional competition will arise from ISPs as they begin to deliver
advanced communications services, such as IP 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 IP 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 LECs.
The Company believes 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 ILEC, which may be
more cost effective for an interexchange carrier than using the Company's
services or another competitive access provider or CLEC.
To the extent the Company interconnects with and uses ILEC networks to
service its customers, the Company will be dependent upon the technology and
capabilities of the ILECs to meet certain telecommunications needs of the
Company's customers and to maintain its service standards. Although the 1996
14
Act imposes interconnection obligations on ILECs, there is no assurance that
the Company will be able to obtain the interconnection it requires at rates,
and on terms and conditions, that permit the Company to offer switched
services at rates that are both competitive and profitable. In the event that
the Company experiences difficulties in obtaining high quality, reliable, and
reasonably priced service from the ILECs, the attractiveness of the Company's
services to its customers could be impaired.
Government Regulation
Historically, interstate and foreign communication services were subject to
the regulatory jurisdiction of the FCC, and intrastate and local
telecommunications services were subject to regulation by state public service
commissions. With the enactment of the 1996 Act, competition in all
telecommunications market segments, including interstate and intrastate, local
and long distance, became matters of national policy. The Company believes
that the national policy fostered by the 1996 Act has contributed to
significant market opportunities for the Company. As federal and state
regulatory commissions have largely implemented the provisions of the 1996
Act, the Company believes that future regulation will focus largely on
enforcement of carrier-to-carrier requirements under the law and consumer
protection measures.
Telecommunications Act of 1996. The 1996 Act is intended to increase
competition in local telecommunications services by requiring ILECs to
interconnect their networks with CLECs. The 1996 Act imposes a number of
access and interconnection requirements on all LECs, including CLECs, with
additional requirements imposed on ILECs. CLECs and ILECs are required to
attempt to negotiate interconnection agreements for at least 135 days. During
these negotiations, the parties may submit disputes to state regulators for
mediation and, after the negotiation period has expired, the parties may
submit outstanding disputes to state regulators for arbitration. The Company
has executed interconnection agreements with the ILECs in each of the markets
in which it offers switched services and has negotiated, or is negotiating,
secondary interconnection arrangements with carriers whose territories are
adjacent to the Company's for intrastate intraLATA toll traffic and extended
area services. A few of these agreements expired in 1999 or 2000, and the
Company is in the process of negotiating new contracts. Typically, the expired
agreements allow the Company to continue to exchange traffic with the other
carrier pending execution of a new agreement. ILECs are seeking renegotiation
of certain terms and conditions, including reciprocal compensation for ISP-
bound traffic. The Company cannot predict the outcome of the negotiations,
especially in light of pending legal and regulatory actions pertaining to
reciprocal compensation, as described below.
In August 1996, the FCC promulgated rules to govern interconnection,
resale, unbundled network elements ("UNEs"), and the pricing of those
facilities and services, as well as rules to govern, among other things, the
dialing parity requirements of the 1996 Act. Certain ILECs and states
challenged the authority of the FCC to issue these rules.
On January 25, 1999, the Supreme Court upheld most of the FCC's rules with
respect to interconnection, resale, and the dialing parity rule and confirming
the FCC's jurisdiction to issue national pricing rules for interconnection,
UNEs, and resale. However, the Supreme Court did not address the lawfulness of
the specific pricing rules established by the FCC. In July 2000, the 8th
Circuit Court of Appeals addressed the merits of the FCC's pricing rules and
determined that the TELRIC standard is unlawful and vacated certain aspects of
the rules. The Supreme Court has agreed to hear the case during the October
2001 term. Elimination of the Total Element Long Run Incremental Cost
("TELRIC") pricing standard could increase costs to the Company of
interconnection and related services from ILECs.
The 1996 Act provides a detailed list of items that are subject to
interconnection negotiations, as well as a detailed set of duties for all
affected carriers. All LECs, including the Company, have a duty to:
. not unreasonably limit the resale of their services;
. provide number portability if technically feasible;
. provide dialing parity to competing telecommunications providers;
15
. provide access to poles, ducts, and conduits; and
. establish reciprocal compensation arrangements for the transport and
termination of telecommunications.
The Company has fully complied with these requirements.
Pursuant to the requirements of the 1996 Act and the FCC's rules under the
1996 Act, the Company is required to compensate other LECs for termination of
local exchange traffic originated by the Company. Conversely, the Company is
entitled to receipt of compensation from other LECs when it terminates local
exchange traffic originated by other LECs. This requirement is commonly
referred to as reciprocal compensation. The Company, like other CLECs,
receives reciprocal compensation from ILECs for local calls it terminates at
the premises of ISPs. ILECs have attempted to persuade state commissions and
the FCC that such traffic is interstate traffic rather than local traffic and
that such traffic should not be subject to reciprocal compensation. To date,
nearly every state commission which has considered the issue has concluded
that local traffic terminated at ISP locations is local traffic and is subject
to reciprocal compensation under state-approved interconnection agreements.
However, on February 26, 1999, the FCC released a declaratory ruling in which
it concluded that local traffic that terminates at an ISP location is largely
interstate traffic and that the reciprocal compensation provisions of the 1996
Act do not apply to ISP-bound traffic. The FCC held, however, that states
could nonetheless order the ILECs to pay reciprocal compensation for ISP-bound
traffic pursuant to interconnection agreements or state law. The FCC then
initiated a proceeding to establish rules governing the exchange of ISP-bound
traffic (e.g., whether it should be left to the states, or whether a federal
rate should be established to govern this traffic). On March 24, 2000, the
U.S. Court of Appeals for the District of Columbia Circuit vacated the FCC
ruling on the basis that the FCC had not adequately explained its conclusion
that such traffic was interstate or foreign. Presently, the FCC is
reconsidering its jurisdictional determination in light of the Court of
Appeals decision and is still considering whether to adopt a rule governing
reciprocal compensation for Internet-bound traffic. Pending completion of that
rulemaking, determinations of whether reciprocal compensation should be paid
on traffic terminated at ISP locations will be made by state commissions and
under the terms of approved interconnection agreements. ILECs have continued
attempts to persuade the FCC and state commissions that local traffic
delivered to ISPs should not be subject to reciprocal compensation. In
addition, legislation has been introduced in Congress which would prohibit
payment of reciprocal compensation on traffic routed to ISPs. The Company
cannot predict the outcome of those proceedings. In some cases the Company's
right to receive reciprocal compensation for traffic terminated to its ISP
customers is contractually dependent on the outcome of the FCC rulemaking and
pending state proceedings addressing reciprocal compensation for ISP traffic.
In some cases, decisions by state commissions that reciprocal compensation is
payable to the Company for ISP traffic are under appeal in federal courts.
Exclusion of such traffic from reciprocal compensation requirements will
reduce the revenue received by the Company for terminating traffic originated
by ILECs.
Federal Regulation. The 1996 Act obligates the FCC to establish mechanisms
for ensuring that consumers, including low income consumers and those located
in rural, insular, and high cost areas, have access to telecommunications and
information services at rates reasonably comparable to those charged for
similar services in urban areas. The 1996 Act also requires the FCC to
establish funding mechanisms to make available access to telecommunications
services, including advanced services, to schools, libraries, and rural health
care centers. These requirements are generally referred to as the "universal
service requirements" of the 1996 Act. Under applicable FCC rules, all
telecommunications carriers, including the Company, must contribute to support
universal service.
In December 1998 and August 2000, the FCC established rules to govern the
manner in which telecommunications carriers effectuate and verify selection by
consumers of preferred providers of local exchange and interexchange services.
The Company is subject to those rules and is required to comply with the
specific verification requirements established by the FCC. Violation of those
rules could subject the Company to sanctions imposed by the FCC.
In its August 1999 Order on Access Reform, the FCC established a framework
for the eventual deregulation of ILEC interstate access charges. Degrees of
increased pricing flexibility and ultimate price deregulation are
16
triggered by the extent of competitive development within MSAs. This will
exert greater downward pressure on the Company's interstate access prices as
the various conditions are met over the next few years. Some ILECs have
recently applied for and received pricing flexibility under these rules for
special access and transport services. In May 2000, the FCC ordered a
substantial reduction in ILEC per-minute access charges and an increase in the
flat monthly charge paid by local residential service subscribers for access
to interstate long distance service. In addition, the FCC increased the size
of the federal universal service fund by $650 million.
In a related access reform proceeding pending before the FCC, the FCC is
considering imposing regulation on CLEC access charges to restrict prices to
levels below an established "benchmark" price. Some parties have proposed
benchmarks that are no higher than individual ILEC prices, while others have
argued that the tariffed rates of the National Exchange Carrier Association
("NECA") are more representative of CLEC cost characteristics. The ILEC access
reform decision, along with a regulated price cap at ILEC rate levels are
resulting in reductions in the per-minute rates the Company receives for
switched access service.
Sprint is withholding payments from CLECs, including the Company, arguing
that CLEC access rates should be no higher than individual ILEC rates. The
Company does not believe that Sprint Corporation has a sustainable legal basis
for its position and has filed a complaint against Sprint with the FCC. All
legal briefs have been filed and the Company is awaiting a decision from the
FCC Enforcement Bureau.
State Regulation. The Company has acquired all state government authority
needed to conduct its business as currently contemplated. Most state public
service commissions require carriers that wish to provide local and other
jurisdictionally intrastate common carrier services to be authorized to
provide such services. The Company's operating subsidiaries and affiliates are
authorized as common carriers in 24 states. These certifications cover the
provision of switched services including local basic exchange service, point
to point private line, competitive access services, and long distance
services.
Local Government Authorizations. The Company may be required to obtain from
municipal authorities street opening and construction permits and other
rights-of-way to install and expand its networks in certain cities. In some
cities, the Company's affiliates or subcontractors may already possess the
requisite authorizations to construct or expand the Company's networks. Any
increase in the difficulty or cost of obtaining these authorizations and
permits could adversely affect the Company, particularly where it must compete
with companies that already have the necessary permits.
In some of the metropolitan areas where the Company provides network
services, the Company pays right-of-way or franchise fees based on a percent
of gross revenue or other metrics such as access lines. However,
municipalities that do not currently impose fees may seek to impose fees in
the future, and following the expiration of existing franchises, fees may be
increased. Under the 1996 Act, municipalities are required to impose such fees
on a competitively neutral and nondiscriminatory basis. However,
municipalities that currently favor the ILECs may or may not conform their
practices in a timely manner or without legal challenges by the Company or
another competitive access provider or CLEC. Moreover, there can be no
assurance that ILECs with whom the Company competes will not be excluded from
such local franchise fee requirements by previously-enacted legislation
allowing them to utilize rights-of-way throughout their states without being
required to pay franchise fees to local governments.
If any of the Company's existing franchise or license agreements for a
particular metropolitan area were terminated prior to its expiration date and
the Company were forced to remove its fiber optic cables from the streets or
abandon its network in place, even with compensation, such termination could
have a material adverse effect on the Company's operation in that metropolitan
area and could have a material adverse effect on the Company.
The Company is party to various regulatory and administrative proceedings,
however, subject to the discussion above, the Company does not believe that
any such proceedings will have a material adverse effect on its business.
17
Company Name
The Company's use of the "Time Warner" name is subject to a license
agreement with Time Warner Inc. The Company may change its name to "TW Telecom
Inc." and the Company will no longer have the right to use the "Time Warner"
name upon expiration of the initial term in July 2002 or any renewal term of
such agreement. The Company is also required to discontinue use of the "Time
Warner" name upon:
. Time Warner Inc. owning less than 30% of the Company's common stock;
. Time Warner Inc. having the right to nominate less than 3 nominees to
the Board of Directors of the Company;
. the Company's non-compliance with the restrictions in the Restated
Certificate of Incorporation regarding Residential Services and Content
Services; or
. the transfer by a Class B Stockholder of its Class B common stock
together with its rights to designate nominees to the Board of Directors
under the Stockholders' Agreement (however, this would not apply to a
conversion of Class B common stock to Class A common stock).
The Company believes that the "Time Warner" brand is valuable and its loss
could have an adverse effect on the Company's ability to conduct its business
and on its financial condition and results of operations.
Employees
As of December 31, 2000, the Company had 1,834 employees. Following the
acquisition of the GST assets, the Company hired approximately 600 former GST
employees. The Company believes that its relations with its employees are
good. By succession, our operation in New York City is a party to a collective
bargaining agreement. In connection with the construction and maintenance of
its networks and the conduct of its other business operations, the Company
uses third party contractors, some of whose employees may be represented by
unions or collective bargaining agreements. The Company believes that its
success will depend in part on its ability to attract and retain highly
qualified employees and maintain good working relations with its current
employees.
Risk Factors
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 of our
securities have limited historical financial information available to evaluate
our likely future performance. When making a decision to invest in our
securities, prospective purchasers should consider the risks, expenses, and
difficulties frequently encountered by companies that are rapidly expanding.
We may complete a significant business combination or other transaction that
could affect our leverage, resulting 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, 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
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.
18
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 acquisition of GST assets, 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.
In December 2000, we executed agreements replacing our $475 million senior
secured credit facility with a $1 billion amended and restated senior secured
credit facility and in January 2001 completed a private offering of $400
million principal amount of 10 1/8% Senior Notes. The acquisition of the GST
assets was initially financed in January 2001 with borrowings under an
unsecured bridge loan facility that was repaid in full with $533 million in
net proceeds from the Company's offering of Class A common stock and a portion
of the net proceeds from the sale of the 10 1/8% Senior Notes. 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.
The Company's senior secured credit facility and the indentures for the 9
3/4% Senior Notes and the 10 1/8% Senior Notes contain restrictive covenants
that may limit our flexibility.
The senior secured credit facility and 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 lenders under the
senior secured credit facility and the holders of the 9 3/4% and 10 1/8%
Senior Notes may accelerate our debt under the senior secured credit facility
and our debt under the 9 3/4% and 10 1/8% Senior Notes, respectively.
19
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 the GST assets. 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 December 31, 2000, we had approximately $579 million of consolidated
total long-term debt. After giving effect to the acquisition of the assets of
GST and associated financings, including the offering of $400 million in
principal amount of 10 1/8% Senior Notes in January 2001 and increasing our
borrowing under our senior secured credit facility to $250 million, we have
approximately $1.05 billion of consolidated long-term total debt.
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 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 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 LECs;
. expand, train, and manage our employee base;
20
. 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.
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.
Several customer account for a significant portion of our revenue.
We have substantial business relationships with a few large customers. For
the year ended December 31, 2000, our top ten customers accounted for
approximately 46% of our total revenue. Our largest customer for the year
ended December 31, 2000, 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 that such customers will 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 ILEC,
which may be more cost-effective for an interexchange carrier than using our
services or another competitive access provider or CLEC.
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 the Company may not be able to obtain all necessary permits,
licenses, or agreements from governmental authorities or private rights-of-way
providers necessary to effect future license transactions. This would hinder
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 asset 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.
21
If we do not adapt to rapid changes in the telecommunications industry, we
could lose customers or market share.
The telecommunications industry has experienced, and is expected to
continue to experience, rapid and significant changes in technology. While we
believe 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 our ability to acquire
necessary technologies, we cannot predict the effect of technological changes
on the Company's business and operations. We believe that our future success
will depend, in part, on our 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 we will obtain access to new
technologies on a timely basis or on satisfactory terms. Our failure to obtain
new technologies could have a material adverse effect on our business,
financial condition, and results of operations. In addition, our growth plans
depend in part upon our ability to obtain fiber capacity at rates that will
allow us to generate a reasonable rate of return. We cannot assure that we
will be successful in obtaining such fiber capacity.
We are controlled by the Class B Stockholders.
Time Warner Inc., AT&T Corp. (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 the Company's 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 the Company,
and may make us a less attractive takeover target.
Our board of directors consists of nine directors. Under the Stockholders'
Agreement, Time Warner Inc. has the right to designate four nominees for the
board of directors and the Advance/Newhouse stockholder group 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 the Company at a time
when they do not have a majority economic interest in the Company, and
exclude the holders of Class A common stock from participating in the sale.
The Stockholders' Agreement provides that, subject to the rights of first
refusal of the other holders of Class B common stock, the Class B Stockholders
may transfer their Class B common stock. If a holder sells all, but
22
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
Inc. of its Class B common stock. Accordingly, majority control of the Company
could be transferred by one or more holders of Class B common stock at a time
when such holder or holders of Class B common stock do not have a majority of
the economic interest in the Company and with no assurance that the holders of
Class A common stock would be given the opportunity to participate in the
transaction, or if they were permitted to participate in the transaction, to
receive the same amount and type of consideration for their stock in the
Company as the holders of Class B common stock.
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 diversified communications providers. 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 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 the Company under Delaware law, they may face
conflicts of interest. For example, conflicts of interest may arise with
respect to certain business opportunities available to, and certain
transactions involving, the Company. The 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 the Class B Stockholders and us.
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 greater than anticipated.
23
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 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;
. difficulties associated in assimilating GST's technology, including
billing and customer information systems;
. any significant loss of key former 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.
The Company cannot assure that it will be able to successfully overcome the
risks associated with integrating the assets it acquired from GST. There is a
risk that the costs of integration could have a material adverse effect on the
Company's operating results.
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 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 ILEC
interstate access charges, which will exert a downward pressure on our
interstate access rates. We cannot assure 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 1996 Act
permits municipalities to charge these fees only if they are competitively
neutral and nondiscriminatory, but certain municipalities may not conform
their practices to the requirements of the 1996 Act in a timely manner or
without legal challenge. 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.
24
Item 2. Properties
The Company 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 2000, 1999, and 1998, rental expense for
the Company's facilities and offices totaled approximately $15.2 million, $6.6
million, and $4.8 million, respectively. In January 2001, the Company executed
an agreement to purchase 24 acres in Douglas County, Colorado, contingent upon
the successful completion of feasibility studies, for construction of a campus
for its Denver headquarters. The Company also has options to purchase 28
adjoining acres. Management believes that its properties, taken as a whole,
are in good operating condition and are suitable and adequate for the
Company's business operations. The Company currently leases approximately
94,000 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.
Item 3. Legal Proceedings
The Company currently has no material legal proceedings pending.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2000.
25
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company'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 for the Class A common stock for the period from May
12, 1999 to June 30, 1999, the third and fourth quarters of 1999, and each of
the quarters of 2000 as reported on the Nasdaq National Market:
Period High Low
------ ------- -------
1999
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
Dividends
The Company 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 the Company's board of directors in
light of conditions then existing, including the Company's results of
operations, financial condition and requirements, business conditions,
covenants under loan agreements and other contractual arrangements, and other
factors. In addition, the indentures for the Company's 9 3/4% and 10 1/8%
Senior Notes and the credit agreement governing its senior secured credit
facility contain covenants that effectively prevent the Company from paying
dividends on the common stock for the foreseeable future.
Number of Stockholders
As of February 28, 2001, there were 186 holders of record of the Company's
Class A common stock and 9 holders of record of the Class B common stock. The
Company believes that there are in excess of 45,000 beneficial owners of the
Company's Class A common stock in addition to the record owners.
The Company did not sell any securities without registration under the
Securities Act of 1933 during 2000.
26
Item 6. Selected Financial Data
Selected Consolidated and Combined Financial and Other Operating Data
The following table is derived in part from the audited consolidated and
combined financial statements of the Company. The financial statements of the
Company 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 the Company, as if they had
been operating as a separate company. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited consolidated and combined financial
statements and the notes thereto.
Years Ended December 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
----------- --------- --------- --------- -------
(in thousands, except per share and operating
data amounts)
Statements of Operations
Data:
Revenue:
Dedicated transport
services.............. $ 263,913 152,468 84,024 44,529 20,362
Switched services(1)... 223,421 116,285 37,848 10,872 3,555
----------- --------- --------- --------- -------
Total revenue........ 487,334 268,753 121,872 55,401 23,917
----------- --------- --------- --------- -------
Costs and expenses(2):
Operating.............. 184,995 117,567 67,153 40,349 25,715
Selling, general, and
administrative........ 170,722 113,389 77,401 54,640 60,366
Depreciation and
amortization.......... 95,295 68,785 50,717 38,466 22,353
----------- --------- --------- --------- -------
Total costs and
expenses............ 451,012 299,741 195,271 133,455 108,434
----------- --------- --------- --------- -------
Operating income
(loss)................. 36,322 (30,988) (73,399) (78,054) (84,517)
Interest expense, net,
and other.............. (30,409) (28,473) (19,340) 7,398 (1,599)
----------- --------- --------- --------- -------
Net income (loss) before
income taxes........... 5,913 (59,461) (92,739) (70,656) (86,116)
Income tax expense(3)... 4,697 29,804 -- -- --
Net income (loss)....... $ 1,216 (89,265) (92,739) (70,656) (86,116)
=========== ========= ========= ========= =======
Basic and diluted
earnings (loss) per
share.................. $ 0.01 (0.93) (1.14) (0.87) (1.06)
=========== ========= ========= ========= =======
Other Operating Data:
EBITDA(1)(4)............ $ 131,617 37,797 (22,682) (39,588) (62,164)
EBITDA Margin(1)(5)..... 27% 14% (19)% (72)% (260)%
Net cash provided by
(used in) operating
activities............. $ 165,259 54,235 (343) (29,419) (52,274)
Capital expenditures.... 320,703 221,224 126,023 127,315 144,815
Operating Data(6)
Operating networks...... 24 21 19 19 18
Route miles............. 9,799 8,872 6,968 5,913 5,010
Fiber miles............. 366,990 332,263 272,390 233,488 198,490
DS-0 equivalents(7)..... 11,375,000 5,523,000 3,031,000 1,719,000 690,000
Digital telephone
switches............... 26 19 16 14 2
Employees............... 1,834 1,259 919 714 673
Balance Sheet Data:
Cash, cash equivalents,
and cash held in
escrow................. $ 250,739 90,586 105,140 -- --
Marketable debt
securities............. 3,496 173,985 250,857 -- --
Property, plant, and
equipment, net......... 912,172 677,106 494,158 415,158 323,161
Total assets............ 1,353,336 1,043,012 904,344 438,077 341,480
Long-term debt and
capital lease
obligations(6)......... 585,107 403,627 574,940 75,475 --
Total stockholders'
equity................. $ 471,767 422,916 207,651 300,390 294,937
- --------
(1) Includes favorable non-recurring reciprocal compensation settlements that
totaled $27.3 million in 2000 and $7.6 million in 1999.
27
(2) Includes expenses resulting from transactions with affiliates of $15.6
million, $20.0 million, $27.7 million, $17.1 million, and $12.4 million in
2000, 1999, 1998, 1997, and 1996, respectively. See note 5 to the
Company's financial statements appearing elsewhere in this report for an
explanation of these expenses.
(3) During 1999, the Company recorded a non-recurring $39.4 million charge to
earnings to record a net deferred tax liability associated with the change
from a limited liability company to a corporation. This change occurred
immediately prior to the Company'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 (loss), 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 the
Company's management to assess on-going operations and is a measure used
to test compliance with certain covenants of the 9 3/4% Senior Notes and
the Company's secured revolving credit facility. 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.
(7) Each DS-0 equivalent provides 64 kilobits per second of bandwidth.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a
company's future prospects and make informed investment decisions. This
document, together with management's public commentary related thereto,
contains such "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, particularly statements anticipating
future growth in revenue, EBITDA, and cash flow. Words such as "anticipate,"
"estimate," "expects," "projects," "intends," "plans," "believes," "target,"
and words and terms of similar substance used in connection with any
discussion of future operating or financial performance identify such forward-
looking statements. Those forward-looking statements are management's present
expectation of future events. As with any projection or forecast, they are
inherently susceptible to changes in circumstances, and the Company is under
no obligation to (and expressly disclaims any such obligation to) update or
alter its forward-looking statements despite such changes. The following
discussion and analysis should be read in conjunction with the Company's
financial statements, including the notes thereto, appearing elsewhere in this
report.
Overview
The Company is a leading fiber facilities-based integrated communications
provider offering local businesses "last-mile" broadband connections for data,
high-speed Internet access, local voice, and long-distance services. As of
December 31, 2000, the Company served customers in 24 metropolitan markets in
the United States. On January 10, 2001, the Company expanded its geographic
coverage by acquiring substantially all of the assets of GST out of
bankruptcy. See "Acquisitions" below. Additionally, the Company plans to
activate networks in Chicago, Illinois; Atlanta, Georgia; Minneapolis,
Minnesota; Denver, Colorado; and Columbia, South Carolina prior to the end of
2001.
28
Time Warner Cable began the Company's business in 1993. During the last few
years, the Company's 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, the Company was reorganized into a limited liability
company and on July 21, 1998 the Company conducted an offering of $400 million
principal amount 9 3/4% Senior Notes due July 2008. In the Reorganization,
Time Warner Inc. (now wholly-owned by AOL Time Warner Inc.), MediaOne Group,
Inc. (now AT&T Corp.), and Advance/Newhouse Partnership, either directly or
through subsidiaries, became the owners of all the limited liability company
interests in TWT LLC.
On May 10, 1999, in preparation for the Company's IPO, TWT LLC was
reconstituted as a Delaware corporation under the name Time Warner Telecom
Inc. The outstanding limited liability company interests were converted into
common stock of the newly formed corporation, Time Warner Telecom Inc.
On May 14, 1999, in conjunction with the Reconstitution, the Company
completed an IPO of 20,700,000 shares of Class A common stock at a price of
$14 per share.
As a result of the IPO, the Company has two classes of common stock
outstanding, Class A common stock and Class B common stock. In general,
holders of Class A common stock have one vote per share and holders of Class B
common stock have ten votes per share. Each share of Class B common stock is
convertible, at the option of the holder, into one share of Class A common
stock. Holders of Class A common stock and Class B common stock generally vote
together as a single class. However, some matters require the approval of 100%
of the holders of the Class B common stock voting separately as a class, and
some matters require the approval of a majority of the holders of the Class A
common stock, voting separately as a class. Upon completion of the IPO, the
Class B Stockholders owned all of the 81,250,000 shares of outstanding Class B
common stock. As of December 31, 2000, the Class B Stockholders had
approximately 95.5% of the combined voting power of the outstanding common
stock.
On January 25, 2001, the Company completed a public offering of 7,475,000
shares of Class A common stock at a price of $74 7/16 per share. The offering
generated approximately $533.1 million in proceeds, net of underwriting
discounts and expenses. All of the net proceeds from that offering and a
portion of the net proceeds from the Company's offering of 10 1/8% Senior
Notes due 2011 were used to repay a bridge loan that initially financed the
Company's acquisition of substantially all of the assets of GST. See
"Acquisitions" and "Liquidity and Capital Resources" below. After the offering
the Class B Stockholders, as a group, had approximately 94.6% of the combined
voting power of the outstanding common stock.
Acquisitions
During the second quarter of 1999, the Company acquired all of the
outstanding common stock of Internet Connect, Inc., an ISP, 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 that were placed in escrow and are being released
to the former Internet Connect, Inc. shareholders over a period of three years
beginning in April 2000.
During the second quarter of 1999, the Company acquired all of the
outstanding common stock of MetroComm, Inc. 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 Inc., the Company acquired the 50% interest of MetroComm AxS, L.P.,
a CLEC in Columbus, Ohio, not already owned by the Company.
On January 10, 2001, the Company 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
29
assumption of a $21 million obligation to complete certain fiber networks, for
a total purchase price of $690 million. The acquisition added to the Company's
network 4,210 route miles, 227,674 fiber miles, and service to 345 on-network
buildings. The Company will manage the 15 markets acquired from GST as part of
its Western Region.
The Company expects to complete the initial integration of former GST
personnel into the Company's organization within the next several months. The
Company expects that the integration of systems and network operations will
occur in phases over approximately two to three years. As required under the
Asset Purchase Agreement with GST, the Company entered into a services
agreement with GST to provide certain support services with respect to GST
assets that the Company did not purchase for a period of up to six months for
most services and up to a year for certain limited services.
Results of Operations
The following table sets forth certain consolidated and combined statements
of operations data of the Company, in thousands of dollars and expressed as a
percentage of total revenue, for each of the periods presented. This table
should be read together with the Company's financial statements, including the
notes thereto, appearing elsewhere in this report:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(amounts in thousands, except per
share amounts)
Statements of Operations Data:
Revenue:
Dedicated transport services... $263,913 54% 152,468 57 84,024 69
Switched services(1)........... 223,421 46 116,285 43 37,848 31
-------- --- -------- --- -------- ---
Total revenue................ 487,334 100 268,753 100 121,872 100
-------- --- -------- --- -------- ---
Costs and expenses(2):
Operating...................... 184,995 38 117,567 44 67,153 55
Selling, general and
administrative.................. 170,722 35 113,389 42 77,401 63
Depreciation and amortization.. 95,295 20 68,785 25 50,717 42
-------- --- -------- --- -------- ---
Total costs and expenses..... 451,012 93 299,741 111 195,271 160
-------- --- -------- --- -------- ---
Operating income (loss).......... 36,322 7 (30,988) (11) (73,399) (60)
Interest expense(2).............. (41,230) (8) (45,264) (17) (29,198) (24)
Interest income.................. 10,821 2 16,589 6 9,731 8
Equity in income (losses) of
unconsolidated affiliate........ -- -- 202 -- 127 --
-------- --- -------- --- -------- ---
Net income (loss) before income
taxes........................... 5,913 1 (59,461) (22) (92,739) (76)
Income tax expense(3)............ 4,697 1 29,804 11 -- --
-------- --- -------- --- -------- ---
Net income (loss)................ $ 1,216 -- % (89,265) (33) (92,739) (76)
======== === ======== === ======== ===
Basic and diluted earnings (loss)
per common share................ $ 0.01 (0.93) (1.14)
Earnings (loss) per share before
income taxes:
Basic............................ $ 0.06 (0.62) (1.14)
Diluted.......................... $ 0.05 (0.62) (1.14)
Weighted average shares
outstanding:
Basic............................ 105,391 95,898 81,250
Diluted.......................... 108,452 95,898 81,250
EBITDA(1)(4)..................... $131,617 27% 37,797 14 (22,682) 19
Net cash provided by (used in)
operating activities............ 165,259 54,235 (343)
Net cash used in investing
activities...................... (178,592) (146,917) (378,083)
Net cash provided by financing
activities...................... 173,486 78,128 483,566
- --------
(1) Includes favorable non-recurring reciprocal compensation settlements that
totaled $27.3 million in 2000 and $7.6 million in 1999.
30
(2) Includes expenses resulting from transactions with affiliates of $15.6
million, $20.0 million, and $27.7 million in 2000, 1999, and 1998,
respectively.
(3) During 1999, the Company recorded a non-recurring $39.4 million charge to
earnings to record a net deferred tax liability associated with the change
from a limited liability company to a corporation. This change occurred
immediately prior to the Company's IPO.
(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 (loss), 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 the
Company's management to assess on-going operations and is a measure used
to test compliance with certain covenants of the 9 3/4% Senior Notes and
the Company's secured revolving credit facility. However, EBITDA as used
in this report may not be comparable to similarly titled measures reported
by other companies due to differences in accounting policies.
General
The Company operates in metropolitan areas that have high concentrations of
medium- and large-sized businesses. Historically, the Company has focused its
sales and marketing efforts on such businesses, as they are potentially high
volume users of the Company's services. To drive revenue growth in these
markets, the Company 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. 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.
Through the acquisition of Internet Connect, Inc. in 1999, the Company has
deployed a national Internet backbone and has experienced growth in data and
high-speed Internet services. The Company believes that data services are
becoming increasingly more important to the Company's target customer base. In
particular, the Company 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.
The Company continues to expand its footprint within its existing markets
by expanding its network into new buildings. During 2000 the Company expanded
geographically into Dayton, Ohio; Fayetteville, North Carolina; and Orange
County/Los Angeles, California. Through the acquisition of the GST assets in
2001, the Company added 15 additional western metropolitan markets. The
Company plans to activate five additional markets in 2001. The Company 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 are becoming commercially available that enable the switching
of voice calls over an IP and local area network infrastructure, the Company
is integrating this soft switch technology into its infrastructure. There is
no assurance that the Company 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 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 those cases where
the revenue is under dispute or at risk. Under several of its contracts, the
LECs have disputed the payment of reciprocal compensation for traffic
terminating to ISP customers, contending that the traffic was not local. As a
result, the Company initiated the dispute resolution process under the
applicable contracts to collect these amounts when the disputes could not be
31
resolved with the LECs and filed complaints with various public utility
commissions. Several of these disputes with respect to prior periods were
resolved in favor of the Company and are no longer subject to appeal, but some
favorable decisions by public utility commissions 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 the final 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 2000 and 1999 includes the recognition of $27.3 million and $7.6
million of non-recurring reciprocal compensation, respectively. A significant
portion of the non-recurring reciprocal compensation revenue recognized was a
result of certain cases involving reciprocal compensation disputes that were
resolved. As of December 31, 2000, the Company had deferred recognition of
$41.0 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.
Switched access is the connection between a long distance carrier's point
of presence and an end-user's premises provided through the switching
facilities of a LEC. Historically, the FCC has regulated the access rates
imposed by the ILECs, while the CLEC access rates have been less regulated.
During the second quarter of 2000, the FCC adopted a proposal that
substantially reduces ILEC per-minute access charges while allowing for an
increase in the flat monthly charge paid by local residential service
subscribers. While the FCC decision does not specifically apply to the
switched access rates charged by non-dominant providers of access services, it
places significant downward market pressure on non-dominant providers' access
rates, including the Company's, which are expected to decline over time. For
the years ended December 31, 2000 and 1999, switched access revenue
represented 10% and 11% of total revenue, respectively. Management believes
that increased volume in services and markets served may partially offset the
impact of rate reduction. However, the degree and timing of the reductions in
the Company's access revenue cannot be predicted.
Reciprocal compensation 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 the Company's expired
agreements; and as a result, the rates under the new agreements, while
reasonable in light of the regulatory environment, are lower than the rates
under the expired agreements. As discussed below, reciprocal compensation
represented 6% and 7% of revenue, exclusive of the effects of the recognition
of $27.3 million and $7.6 million of non-recurring reciprocal compensation in
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 may partially mitigate the impact
of the rate reduction. The outcome of regulatory and judicial rulings on
reciprocal compensation for ISP traffic may have a further negative impact on
the Company'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. The
Company 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 the Company will be able to compensate for the reduction in reciprocal
compensation with increased volume of terminating local traffic.
The Company benefits from its strategic relationship with Time Warner Cable
both through access to local right-of-way and construction cost-sharing.
Except for networks acquired from GST, the Company's networks have been
constructed substantially through the use of fiber capacity licensed from Time
Warner Cable. As of December 31, 2000, the Company operated networks in 24
metropolitan areas that spanned 9,799 route miles, contained 366,990 fiber
miles, and offered service to 7,797 on-net and off-net buildings. The
acquisition of GST
32
assets in January 2001 added to the Company's network 4,210 route miles,
227,674 fiber miles, and service to 345 on-net buildings.
The Company plans to continue expanding its revenue base by fully utilizing
available network capacity in its existing markets, by adding networks in new
markets, and by continuing to develop and selectively tailor new services in
competitively-priced packages to meet the needs of its medium- and large-sized
business customers. The Company intends to expand its product offerings on a
continuous basis to achieve a diverse revenue base. As part of that process,
the Company is targeting the expansion of data and Internet products that can
be offered on the Company's existing network.
Operating expenses consist of costs directly related to the operation and
maintenance of the networks and the provision of the Company's services. This
includes the salaries and related expenses of operations and engineering
personnel, as well as costs incurred from the ILECs, other competitors, and
long distance providers for facility leases and interconnection. These costs
have increased over time as the Company has increased its operations and
revenue. The Company expects such costs to continue to increase as the
Company's revenue growth continues. The fact that a significant portion of the
Company'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. Such expenses include costs related to sales and marketing,
information technology, billing, regulatory, and legal costs. These costs have
increased over time as the Company has increased its operations and revenue.
The Company expects these costs to continue to increase as the Company's
revenue growth continues.
In the normal course of business, the Company engages in various
transactions with Time Warner Cable, generally on negotiated terms among the
affected units that, in management's view, result in reasonable allocations.
In connection with the Reorganization, the Company entered into several
contracts with Time Warner Cable with respect to certain of such transactions.
The Company's selling, general, and administrative expenses include charges
allocated from Time Warner Cable for office rent and overhead charges for
various administrative functions they perform for the Company. These charges
are required to reflect all costs of doing business and are based on various
methods, which management believes result in reasonable allocations of those
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 a significant portion of its local fiber capacity from Time Warner
Cable through prepaid right-to-use agreements and reimburses Time Warner Cable
for facility maintenance and pole rental costs. Such maintenance and pole
rental costs are included in the Company's operating expenses.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenue. Revenue increased $218.5 million, or 81%, to $487.3 million for
2000, from $268.8 million for 1999. 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 $111.4 million or 73%, to
$264.0 million for 2000, from $152.5 million for 1999. Switched service
revenue increased $107.1 million, or 92%, to $223.4 million for 2000, from
$116.3 million for 1999. Exclusive of the effects of acquisitions and the
effects of the recognition of $27.3 million and $7.6 million of non-recurring
reciprocal compensation in 2000 and 1999, respectively, dedicated transport
service and switched service revenue increased 69% and 70%, respectively. The
increase in revenue from dedicated transport services primarily reflects a 28%
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 70% increase in average switched service customers,
increased 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 6% and 7% of total revenue for 2000 and 1999, respectively,
excluding the effects of the
33
recognition of $27.3 million and $7.6 million of non-recurring reciprocal
compensation in 2000 and 1999, respectively. At December 31, 2000, the Company
offered dedicated transport services in 24 metropolitan areas, all of which
also offered switched services. At December 31, 1999, the Company offered
dedicated transport services in 21 metropolitan areas, 20 of which also
offered switched services.
Operating Expenses. Operating expenses increased $67.4 million or 57%, to
$185.0 million for 2000, from $117.6 million for 1999. Exclusive of the
effects of acquisitions, these expenses increased 52%. The increase in
operating expenses was primarily attributable to the Company's expansion of
its business, principally switched services, the ongoing development of
existing markets resulting in higher LEC charges for circuit leases and
interconnection, and higher headcount for technical personnel. As a percentage
of revenue, operating expenses decreased to 38% for 2000 from 44% for 1999.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased $57.3 million or 51%, to $170.7 million for
2000, from $113.4 million for 1999. Exclusive of the effects of acquisitions,
these expenses increased 49%. 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. As a percentage of revenue, selling, general, and
administrative expenses decreased to 35% for 2000 from 42% for 1999.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $26.5 million, or 39%, to $95.3 million for 2000, from $68.8
million for 1999. Exclusive of the effects of acquisitions, this expense
increased 7%. The increase in depreciation and amortization expense was
primarily attributable to increased capital expenditures and increased
goodwill generated from acquisitions.
EBITDA. EBITDA increased $93.8 million, to $131.6 million, for 2000 from
$37.8 million for 1999. Exclusive of the effects of acquisitions and the
effects of the recognition of $27.3 million and $7.6 million of non-recurring
reciprocal compensation in 2000 and 1999, respectively, such amount increased
$74.1 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 the Company's financing requirements were funded with loans from Time
Warner Inc., Time Warner Entertainment Company, L.P., and Time Warner
Entertainment-Advance/Newhouse Partnership (the "Former Parent Companies").
These loans remained outstanding, accruing interest, through May 14, 1999. On
July 21, 1998, the Company 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 the Former Parent
Companies from the IPO proceeds. Interest expense relating to the 9 3/4%
Senior Notes totaled $40.2 million for 2000 and interest expense relating to
the 9 3/4% Senior Notes and subordinated loans payable aggregated $45.3
million for 1999. The decrease of $5.1 million is primarily due to the lower
weighted average debt balance during 2000. Interest expense will increase in
future periods as a result of borrowings to finance the GST acquisition and
continued geographic expansion, as well as from amortization of deferred
financing costs.
Net Income (Loss). Earnings changed $90.5 million to $1.2 million for 2000,
from a net loss of $89.3 million for 1999. The earnings change is primarily
due to the improvement in EBITDA and a decrease in income tax expense, as
discussed above.
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
34
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, the Company
offered dedicated transport services in 21 metropolitan areas, 20 of which
also offered switched services. At December 31, 1998, the Company 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 the Company's expansion of its
business, principally switched services, the ongoing development of existing
markets resulting in higher LEC 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 the Company's financing requirements were funded with loans from the Former
Parent Companies. These loans remained outstanding, accruing interest, through
May 14, 1999. On July 21, 1998, the Company issued $400 million in 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
the Former Parent Companies 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.
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.
35
Liquidity and Capital Resources
Operations. For 2000, the Company's cash provided by operations was $165.3
million, as compared to cash provided by operations of $54.2 million for 1999.
This increase in cash provided by operations of $111.0 million principally
resulted from an increase in EBITDA of $93.8 million.
As the Company continues its expansion plan to enter into new markets, the
expenditures incurred, together with initial operating expenses, will
generally result in negative EBITDA and operating losses from a network until
an adequate customer base and revenue stream for the network have been
established. Accordingly, the Company expects that the network constructed in
each new market will generally produce negative EBITDA for at least two years
after operations commence in that market. Additionally, the Company currently
expects the operations related to the assets purchased from GST to generate
negative EBITDA until an adequate customer base and revenue stream for the
network have been established. Although overall the Company 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 the Company will sustain sufficient positive EBITDA to meet
its working capital requirements and to service its indebtedness.
Investing. Cash used in investing activities increased $31.7 million to
$178.6 million in 2000, as compared to $146.9 million in 1999. During 2000 and
1999, proceeds from the maturities of marketable debt securities and cash
provided by operating activities were primarily used to fund capital
expenditures.
During 2000, capital expenditures were $320.7 million (net of capital
leases incurred of $6.3 million), an increase of $99.5 million from 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 927 route miles of fiber since December 31, 1999. Based on
historic capital requirements for network construction in relation to sales
volume and network expansion plans, the Company anticipates it will commit
approximately $600 million in 2001 to fund its capital expenditures. This
target spending includes requirements for current operating markets, the
Company's expansion plans, including markets acquired from GST, and
integrating the GST acquisition.
The facilities-based telecommunications service business is a capital-
intensive business. The Company's operations have required and will continue
to require substantial capital investment for:
. the purchase and installation of switches, electronics, fiber and other
technologies in existing networks and in additional networks to be
constructed in new service areas; and
. the evolution of the network to support new products, services, and
technologies.
The Company's expected capital expenditures for general corporate and
working capital purposes include expenditures with respect to the Company's
management information system and corporate service support infrastructure.
The Company plans to make substantial capital investments in connection
with plans to construct and develop new networks, as well as for technology
upgrades. Expansion of the Company's networks will include the geographic
expansion of the Company's existing operations, and the Company will consider
the development of new markets. In addition, the Company may acquire existing
networks in the future.
The Company regularly evaluates potential acquisitions and joint ventures
that would extend its geographic markets, expand its products and services, or
enlarge the capacity of its networks. If the Company enters into a definitive
agreement with respect to any acquisition or joint venture, it may require
additional financing. If the Company enters into a definitive agreement with
respect to any material transaction, it could result in the Company increasing
its leverage or issuing additional common stock or both. There can be no
assurance, however, that the Company will enter into any transaction or, if it
does, on what terms. See "Risk Factors--We may complete a significant business
combination or other transaction that could affect our leverage, resulting in
a change in control or both" in Item 1 above.
36
While the Company intends to continue to leverage its relationship with
Time Warner Cable in pursuing expansion opportunities, to the extent the
Company seeks to expand into service areas where Time Warner Cable does not
conduct cable operations, the Company may incur additional costs in excess of
those it historically incurred when expanding into existing Time Warner Cable
service areas. In addition, Time Warner Cable is not obligated to construct or
provide additional fiber optic capacity in excess of what is already licensed
to the Company under the Capacity License Agreements. Accordingly, if the
Company is unable to lease additional capacity at the same rates as are
currently provided for under the Capacity License Agreements, the Company may
be required to obtain additional capacity on more expensive terms. See
"Capacity License Agreements with Time Warner Cable" in Item 1 above.
The development and expansion of the Company's existing and future networks
and services will require significant capital to fund these capital
expenditures. The Company expects that its future cash requirements will
principally be for funding future growth and capital expenditures.
In order to fund the GST asset acquisition, the development of those
assets, and its other capital expenditure needs, in December 2000 the Company
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. In December 2000, the Company was required
to draw and hold in escrow $179 million of the revolving credit facility until
the closing of the GST asset acquisition, at which time the draw increased to
$250 million. The obligations under the senior secured credit facility are
secured by substantially all of the assets of the Company's subsidiaries,
including the assets acquired from GST. In addition, the Company has pledged
its equity interests in its subsidiaries as collateral. Also, the senior
secured credit facility contains restrictive covenants, including conditions
on the ability of the Company to declare dividends and provides for customary
events of default, including cross default provisions.
In January 2001, the Company also issued $400 million principal amount of
10 1/8% Senior Notes due 2011 and 7,475,000 shares of Class A common stock in
a public offering at an offering price of $74 7/16 to repay a senior unsecured
bridge loan facility under which the Company borrowed $700 million to finance
the purchase of the GST assets and pay related fees and expenses. In
connection with the repayment of the senior unsecured bridge loan facility,
the Company will 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 Class A common stock, approximately $23.3 million of unamortized
deferred financing costs will be reclassified to additional paid-in capital in
the first quarter of 2001.
The Company expects that the $254.2 million in cash, cash equivalents, cash
held in escrow, and marketable debt securities at December 31, 2000,
borrowings under the $1 billion credit facility, the issuance of the 10 1/8%
Senior Notes, and the issuance of 7,475,000 shares of Class A common stock in
January 2001, along with internally generated funds, will provide sufficient
funds for the Company to meet its expected capital and liquidity needs to
expand its business as currently planned and pay interest on the 9 3/4% Senior
Notes, the 10 1/8% Senior Notes, and on current and future borrowings under
the secured revolving credit facility. In the event that the Company's plans
or assumptions change or prove to be inaccurate, or the foregoing sources of
funds prove to be insufficient to fund the Company's growth and operations, or
if the Company consummates acquisitions or joint ventures, the Company may be
required to seek additional capital sooner than currently anticipated. The
Company's revenue and costs are partially dependent upon factors that are not
within the Company's control, such as regulatory changes, changes in
technology, and increased competition. Due to the uncertainty of these and
other factors, actual revenue and costs may vary from expected amounts,
possibly to a material degree, and these variations are likely to affect the
level of the Company's future capital expenditures and expansion plans.
Sources of financing may include public or private debt, equity financing by
the Company or its subsidiaries, or other financing arrangements.
Financing. Net cash provided by financing activities for 2000 increased by
$95.4 million, as compared to 1999. 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 the Former Parent Companies of $180 million, as
well as acquired debt
37
and capital lease obligations. Net cash provided by financing activities for
2000 reflects debt proceeds placed in escrow until the consummation of the GST
asset acquisition, net proceeds from both the issuance of common stock upon
the 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 various debt financings.
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, and were repaid in full with the proceeds of the IPO.
The $400 million principal amount in 9 3/4% Senior Notes that the Company
issued in July 1998 are unsecured, unsubordinated obligations of the Company.
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.
The $400 million in principal amount of 10 1/8% Senior Notes that the
Company issued in January 2001 are unsecured, unsubordinated obligations of
the Company. Interest on the 10 1/8% Senior Notes is payable semiannually on
February 1 and August 1, beginning on August 1, 2001. Aggregate annual
interest payments on the 10 1/8% Senior Notes through 2011 are expected to be
approximately $41 million.
Interest on the $250 million drawn under the revolving credit facility is
computed utilizing a specified London Interbank Offered Rate plus 4%, which
was 9.9% on January 10, 2001. Interest is payable at least quarterly at the
end of each quarter, beginning in March 2001. Based on the rate in effect on
January 10, 2001, aggregate annual interest payments are expected to be
approximately $25 million through 2008. These anticipated payments will
fluctuate with changes in amounts borrowed and changes in the interest rate.
The 9 3/4% Senior Notes and the 10 1/8% Senior Notes are governed by
indentures that contain certain restrictive covenants. These restrictions
affect, and in many respects significantly limit or prohibit, among other
things, the ability of the Company to incur indebtedness, make prepayments of
certain indebtedness, pay dividends, make investments, engage in transactions
with shareholders and affiliates, issue capital stock of subsidiaries, create
liens, sell assets, and engage in mergers and consolidations.
The obligations under the amended and restated senior secured credit
facility are secured by substantially all of the assets of the Company,
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 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 senior secured credit facility are subject to various
covenants that limit the Company's ability to:
. borrow and incur liens on its property;
. pay dividends or make other distributions; and
. make capital expenditures.
The senior secured credit facility also contains 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, the Company is deemed to be in default
under the amended and restated facility if it has defaulted under any of the
other material outstanding obligations, such as the 9 3/4% Senior Notes or the
10 1/8% Senior Notes.
Effects of Inflation
Historically, inflation has not had a material effect on the Company.
38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company'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 the Company's cash equivalents and marketable debt
securities. To mitigate the impact of fluctuations in interest rates, the
Company generally enters into fixed rate investing arrangements.
The following table provides information at December 31, 2000, about the
Company'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, 2000, the fair value of the
Company's fixed rate 9 3/4% Senior Notes due 2008 was $368 million, as
compared to a carrying value of $400 million on the same date, based on market
prices at December 31, 2000.
2001 Maturities
---------------
(dollar amounts
in thousands)
Assets
Marketable debt securities:
Shares of money market mutual funds........................ $ 204
Average interest rate...................................... 5.4%
Corporate and municipal debt securities...................... $72,148
Average interest rate...................................... 6.4%
Item 8. Financial Statements and Supplementary Data
See "Index to Consolidated and Combined Financial Statements" at Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
39
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item appears under the heading "Proposal
1--Election of Directors" and "Executive Officers" in the Company's definitive
proxy statements for its 2001 Annual Meeting of Stockholders to be filed with
the Commission no later than April 30, 2001 pursuant to Regulation 14A of the
General Rules and Regulations under the Securities Exchange Act of 1934. This
portion of the Proxy Statement is incorporated by reference.
Item 11. Executive Compensation
The information required by this item appears under the heading "Executive
Compensation and Other Information" and "Compensation Committee Interlocks and
Insider Participation" in the Company's definitive proxy statement for its
2001 Annual Meeting of Stockholders to be filed with the Commission no later
than April 30, 2001 pursuant to Regulation 14A of the General Rules and
Regulations under the Securities Exchange Act of 1934. This portion of the
Proxy Statement is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item appears under the heading "Time
Warner Telecom Share Ownership" in the Company's definitive proxy statement
for its 2001 Annual Meeting of Stockholders to be filed with the Commission no
later than April 30, 2001 pursuant to Regulation 14A of the General Rules and
Regulations under the Securities Exchange Act of 1934. This portion of the
Proxy Statement is incorporated by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item appears under the heading "Certain
Relationships and Related Transactions" in the Company's definitive proxy
statement for its 2001 Annual Meeting of Stockholders to be filed with the
Commission no later than April 30, 2001 pursuant to Regulation 14A of the
General Rules and Regulations under the Securities Exchange Act of 1934. This
portion of the Proxy Statement is incorporated.
40
GLOSSARY
Access Charges. The fees paid by long distance carriers for the local
connections between the long distance carriers' networks and the long distance
carriers' customers.
BOC (Bell Operating Company). A telephone operating subsidiary of an RBOC;
an incumbent local exchange carrier.
Broadcast Video TV-1. This Company service provides dedicated transport of
broadcast quality video signals.
CAP (Competitive Access Provider). A company that provides dedicated
telecommunications services (private line, local transport, and special
access) as an alternative to the ILEC.
Central Offices. A telecommunications center where switches and other
telecommunications facilities are housed. CAPs may connect with ILEC networks
either at this location or through a remote location.
Collocation. The ability of a telecommunications carrier to interconnect
its network to the ILEC's network by extending its facilities to the ILEC's
central office. Physical collocation occurs when the interconnecting carrier
places its network equipment within the ILEC's central offices. Virtual
collocation is an alternative to physical collocation under which the ILEC
permits a carrier to interconnect its network to the ILEC's network in a
manner which is technically, operationally and economically comparable to
physical collocation, even though the interconnecting carrier's network
connection equipment is not physically located within the central offices.
CLEC (Competitive Local Exchange Carrier). A company that provides local
exchange services, including Dedicated service, in competition with the ILEC.
Dedicated. Telecommunications lines dedicated to, or reserved for use by, a
particular customer along predetermined routes (in contrast to links which are
temporarily established).
Dedicated Transmission. The sending of electronic signals carrying
information over a Dedicated Transport facility.
Dedicated Transport. A non-switched point-to-point telecommunications
facility leased from a telecommunications provider by an end user and used
exclusively by that end user.
Dense Wavelength Division Multiplexing (DWDM). A technology that multiplies
the capacity of single fiber to 8, 16, 32, or 80 new transmission channels.
Higher capacity multiples are under testing.
Digital. A means of storing, processing and transmitting information by
using distinct electronic or optical pulses that represent the binary digits 0
and 1. Digital transmission and switching technologies use a sequence of these
pulses to represent information as opposed to the continuously variable analog
signal. The precise digital numbers preclude distortion (such as graininess or
snow in the case of video transmission, or static or other background
distortion in the case of audio transmission).
DS0, DS1, DS3. Standard North American telecommunications industry digital
signal formats, which are distinguishable by bit rate (the number of binary
digits (0 and 1) transmitted per second). DS0 service has a bit rate of 64
kilobits per second. DS1 service has a bit rate of 1.544 megabits per second
and DS3 service has a bit rate of 44.736 megabits per second. A DS0 can
transmit a single uncompressed voice conversation.
FCC. Federal Communications Commission.
FDMA (Frequency Division Multiple Access). A form of wireless
communications technology.
41
Fiber Miles. The number of route miles of fiber optic cable installed
(excluding pending installations) along a telecommunications path multiplied
by the number of fibers in the cable. See the definition of "route mile"
below.
Fiber Optics. Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information. Fiber optic
cable is the medium of choice for the telecommunications and cable industries.
Fiber is immune to electrical interference and environmental factors that
effect copper wiring and satellite transmission.
Gbps (Gigabits per second). One billion bits of information. The
information-carrying capacity (i.e., bandwidth) of a circuit may be measured
in "billions of bits per second."
Hub. Collocation centers located centrally in an area where
telecommunications traffic can be aggregated for transport and distribution.
ILECs (Incumbent Local Exchange Carriers). The local phone companies,
either a BOC or an independent (such as Cincinnati Bell) which provides local
exchange services.
Internet. The name used to describe the global open network of computers
that permits a person with access to the Internet to exchange information with
any other computer connected to the network.
IntraLATA. A call that originates and terminates within the same LATA.
ISDN (Integrated Services Digital Network). ISDN is an internationally
agreed standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission
line. ISDN permits video conferencing over a single line, for example, and
also supports a multitude of value-added switched service applications such as
Incoming Calling Line Identification. ISDN's combined voice and data
networking capabilities reduce costs for end users and result in more
efficient use of available facilities. ISDN combines standards for highly
flexible customer to network signaling with both voice and data within a
common facility.
IXC (Interexchange Carrier). A long distance carrier.
Kbps (Kilobits per second). Kilobit means one thousand bits of information.
The information-carrying capacity (i.e., bandwidth) of a circuit may be
measured in "thousands of bits per second."
LANs (Local Area Networks). The interconnection of computers for the
purpose of sharing files, programs and peripheral devices such as printers and
high-speed modems. LANs may include dedicated computers or file servers that
provide a centralized source of shared files and programs. LANs are generally
confined to a single customer's premises and may be extended or interconnected
to other locations through the use of bridges and routers.
LATA (Local Access and Transport Area). The geographical areas within which
a local telephone company may offer telecommunications services, as defined in
the divestiture order known as the Modified Final Judgment ("MFP") unless and
until refined by the FCC pursuant to the Telecommunications Act of 1996.
Local Exchange. A geographic area defined by the appropriate state
regulatory authority in which telephone calls generally are transmitted
without toll charges to the calling or called party.
Local Exchange Service/Local Exchange Telephone Service. Basic local
telephone service, including the provision of telephone numbers, dial tone and
calling within the local exchange area.
Long Distance Carriers (Interexchange Carriers or IXC). Long distance
carriers providing services between LATAs, on an interstate or intrastate
basis. A long distance carrier may be facilities-based or offer service by
reselling the services of a facilities-based carrier.
42
Mbps (Megabits per second). Megabit means one million bits of information.
The information carrying capacity (i.e., bandwidth) of a circuit may be
measured in "millions of bits per second."
Multiplexing. An electronic or optical process that combines a number of
lower speed transmission signals into one higher speed signal. There are
various techniques for multiplexing, including frequency division (splitting
the total available frequency bandwidth into smaller frequency slices), time
division (slicing a channel into timeslots and placing each signal into its
assigned timeslot), and statistical (wherein multiplexed signals share the
same channel and each transmits only when it has data to send).
OC-n. Optical carrier levels ranging from OC-1 (51.84 Mbps) to OC-192 (9.9
Gbps).
Node. A point of connection into a fiber optic network.
POPs (Points of Presence). Locations where an IXC has installed
transmission equipment in a service area that serves as, or relays telephone
calls to, a network switching center of the same IXC.
Primary Rate Interface (PRI). A transport mechanism provided currently over
class 5 switches to terminate at managed modem pools. The primary application
is for dial-up Internet access.
Private Line. A private, dedicated telecommunications link between
different customer locations (excluding IXC POPs).
Private Network Transport Service. This service is a private, dedicated
high-capacity premium quality service over fully redundant, diverse routed,
SONET rings with band width that is dedicated and always available.
Public Switched Telephone Network. The switched network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
The local exchange telephone service networks operated by ILECs are the
largest and often the only public switched networks in a given locality.
RBOC (Regional Bell Operating Company). The holding company which owns a
BOC.
Reciprocal Compensation. An arrangement in which two local exchange
carriers agree to terminate traffic originating on each other's networks in
exchange for a negotiated level of compensation.
Redundant Electronics. A telecommunications facility that uses two separate
electronic devices to transmit a telecommunications signal so that if one
device malfunctions, the signal may continue without interruption.
Route Mile. The number of miles along which fiber optic cables are
installed.
SONET (Synchronous Optical Network). A set of standards for optical
communications transmission systems that define the optical rates and formats,
signal characteristics, performance, management and maintenance information to
be embedded within the signals and the multiplexing techniques to be employed
in optical communications transmission systems. SONET facilitates the
interoperability of dissimilar vendors equipment. SONET benefits business
customers by minimizing the equipment necessary for various telecommunications
applications and supports networking diagnostic and maintenance features.
Special Access Services. The lease of private, dedicated telecommunications
lines or circuits on an ILEC's or a CAP's network which run to or from the
IXC's POPs. Special access services do not require the use of switches.
Examples of special access services are telecommunications circuits running
between POPs of a single IXC, from one IXC's POP to another IXC's POP or from
an end user to its IXC's POP.
STS-1. This dedicated transmission service is carried over high-capacity
channels for full duplex, synchronous optical transmission of digital data on
SONET standards. This service eliminates the need to maintain and pay for
multiple dedicated lines.
43
Switch. A mechanical or electronic device that opens or closes circuits or
selects the paths or circuits to be used for the transmission of information.
Switching is a process of linking different circuits to create a temporary
transmission path between users. Within this document, switches generally
refer to voice grade telecommunications switches unless specifically stated
otherwise.
Switched Access Services. The connection between an IXC's POP and an end
user's premises through the switching facilities of a local exchange carrier.
Switched Services. Telecommunications services that support the connection
of one calling party with another calling party via use of a telephone switch
(i.e., an electronic device that opens or closes circuits, completes or breaks
an electrical path, or selects paths or circuits).
TDMA (Time Division Multiple Access). A form of wireless communications
technology.
Toll Services. Otherwise known as EAS or intra LATA toll services are those
calls that are beyond the free local calling area but originate and terminate
within the same LATA; such calls are usually priced on a measured basis.
Voice Grade Equivalent (VGE) Circuit. One DS0. One voice grade equivalent
circuit is equal to 64 kilobits of bandwidth.
44
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1), (2) The Financial Statements and Schedule II--Valuation and
Qualifying Accounts listed on the index on Page F-1 following are included
herein by reference. All other schedules are omitted, either because they are
not applicable or because the required information is shown in the financial
statements or the notes thereto.
(3) Exhibits:
Exhibit
Number Description of Exhibit
------- ----------------------
2.1 --Reorganization Agreement among Time Warner Companies, Inc., MediaOne
Group, Inc., Advance/Newhouse Partnership, Time Warner Entertainment
Company, L.P., and Time Warner Entertainment-Advance/Newhouse
Partnership (filed as Exhibit 2.1 to Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998)*
2.2 --Merger Agreement among the Company, Time Warner Telecom LLC and Time
Warner Telecom Inc. (filed as Exhibit 2.2 to the Company's
Registration Statement on Form S-1 (Registration No. 333-49439))*
2.3 --Asset Purchase Agreement dated as of September 11, 2000 among Time
Warner Telecom Inc., GST Telecommunications, Inc., GST USA, Inc. and
the other parties identified on Exhibit A thereto (filed as Exhibit
2.1 to the Company's Report on Form 8-K dated September 18, 2000 and
dated September 11, 2000).*
3.1 --Restated Certificate of Incorporation of the Company (filed as
Exhibit 3.1 to Company's Registration Statement on Form S-1
(Registration No. 333-49439))*
3.2 --Restated By-laws of the Company (filed as Exhibit 3.2 to Company's
Registration Statement on Form S-1 (Registration No. 333-49439))*
4.1 --Stockholders' Agreement, among the Company, Time Warner Companies,
Inc., American Television and Communications Corporation, Warner
Communications Inc., TW/TAE Inc., FibrCom Holdings, L.P., Paragon
Communications, MediaOne Group, Inc., Multimedia Communications, Inc.
and Advance/Newhouse Partnership (filed as Exhibit 4.1 to Company's
Registration Statement on Form S-1 (Registration No. 333-49439))*
4.2 --Amendment No. 1 to Stockholders' Agreement among Time Warner Telecom
Inc., Time Warner Companies Inc., American Television and
Communications Corporation, Warner Communications Inc., TW/TAI Inc.
FibrCom Holdings, L.P., MediaOne of Colorado, Inc. and
Advance/Newhouse Partnerships.
4.3 --Indenture between Time Warner Telecom LLC, TWT Inc. and The Chase
Manhattan Bank, as Trustee (filed as Exhibit 4.1 to Time Warner
Telecom LLC's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998)*
4.4 --Indenture between Time Warner Telecom Inc. and The Chase Manhattan
Bank, as Trustee (filed as Exhibit 4 to Amendment No. 1 to the
Company's Registration Statement on Form S-3 (Registration No. 333-
49818)) *
10.1 --Lease between Quebec Court Joint Venture No. 2, Landlord, and
Intelligent Advanced Systems, Inc., Tenant, dated June 3, 1994 (filed
as Exhibit 10.1 to Time Warner Telecom LLC's Registration Statement
on Form S-1 (Registration No. 333-53553))*
10.2 --Agreement for Assignment of Lease, dated September 12, 1997, between
Ingram Micro Inc. and Time Warner Communications Holdings Inc. (filed
as Exhibit 10.2 to Time Warner Telecom LLC's Registration Statement
on Form S-1 (Registration No. 333-53553))*
10.3 --First Amendment to Lease, dated October 15, 1997, by CarrAmerica
Realty, L.P. and Time Warner Communications Holdings Inc. (filed as
Exhibit 10.3 to Time Warner Telecom LLC's Registration Statement on
Form S-1 (Registration No. 333-53553))*
10.4 --Time Warner Telecom Inc. 1998 Stock Option Plan as amended December
8, 1999 (filed as Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (Registration No. 333-49439))*
45
10.5 --Employment Agreement between the Company and Larissa L. Herda (filed
as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999)*
10.6 --Employment Agreement between the Company and Paul B. Jones (filed as
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999)*
10.7 --Employment Agreement between the Company and A. Graham Powers (filed
as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999)*
10.8 --Employment Agreement between the Company and David Rayner (filed as
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999)*
10.9 --Employment Agreement between the Company and John T. Blount (filed as
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999)*
10.10 --Employment Agreement between the Company and Michael Rouleau (filed as
Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999)*
10.11 --Employment Agreement between the Company and Julie Rich (filed as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999)*
10.12 --Employment Agreement between the Company and Raymond Whinery (filed as
Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999)*
10.13 --Capacity License Agreement (filed as Exhibit 10.3 to Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998)*
10.14 --Trade Name License Agreement (filed as Exhibit 10.4 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998)*
10.15 --Master Capacity Agreement between MCImetro Access Transmission
Services, Inc. and Time Warner Communications dated September 9, 1994,
as amended on September 9, 1999 and August 28, 1997 (filed as Exhibit
10.12 to the Company's Registration Statement on Form S-1 (Registration
No. 333-49439))*
10.16 --Employment Agreement between the Company and Patricia Gorman
10.17 --Time Warner Telecom Inc. Employee Stock Plan (filed as Exhibit 4.3 to
the Company's Registration Statement on Form S-8, Registration No. 333-
48084)*
10.18 --Amended and Restated Credit Agreement among Time Warner Telecom Inc.,
Time Warner Telecom Holdings Inc., the several lenders from time to
time parties thereto, The Chase Manhattan Bank, Bank of America, N.A.,
Morgan Stanley Senior Funding, Inc. and ABN Amro Bank N.V.
21 --Subsidiaries of the Company
23 --Consent of Ernst & Young LLP, Independent Auditors
- --------
* Incorporated by reference.
(b) Reports on Form 8-K.
14.1 --Form 8-K filed September 18, 2000 reporting the execution of the Asset
Purchase Agreement dated September 11, 2000 among Time Warner Telecom
Inc., GST Telecommunications, Inc., GST USA Inc., and other parties
identified on Exhibit A thereto
14.2 --Form 8-K filed November 1, 2000 reporting the November 1, 2000
investor presentation including financial information
14.3 --Form 8-K (A) filed November 8, 2000 reporting supplemental information
regarding the GST acquisition including the historical financial
statements of GST and pro-forma financial statements that give effect
to the acquisition by Time Warner Telecom of substantially all of the
assets of GST
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, on
March 28, 2001.
TIME WARNER TELECOM INC.
/s/ David J. Rayner
By: _________________________________
David J. Rayner
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
(i) Principal Executive Officer
/s/ Larissa L. Herda President and Chief March 28, 2001
______________________________________ Executive Officer and
Larissa L. Herda Representative
(ii) Principal Financial Officer
/s/ David J. Rayner Senior Vice President and March 28, 2001
______________________________________ Chief Financial Officer
David J. Rayner
(iii) Principal Accounting Officer
/s/ Jill Stuart Vice President, Accounting March 28, 2001
______________________________________ and Finance and Chief
Jill Stuart Accounting Officer
(iv) Directors
/s/ Glenn A. Britt Director March 28, 2001
______________________________________
Glenn A. Britt
/s/ Bruce Claflin Director March 28, 2001
______________________________________
Bruce Claflin
/s/ Richard J. Davies Director March 28, 2001
______________________________________
Richard J. Davies
/s/ Spencer B. Hays Director March 28, 2001
______________________________________
Spencer B. Hays
47
/s/ Larissa L. Herda Director March 28, 2001
______________________________________
Larissa L. Herda
/s/ Lisa Hook Director March 28, 2001
______________________________________
Lisa Hook
/s/ Robert Miron Director March 28, 2001
______________________________________
Robert Miron
/s/ William T. Schleyer Director March 28, 2001
______________________________________
William T. Schleyer
/s/ Theodore H. Schell Director March 28, 2001
______________________________________
Theodore H. Schell
48
TIME WARNER TELECOM INC.
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Page
----
Audited Financial Statements:
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets at December 31, 2000 and 1999............... F-3
Consolidated and Combined Statements of Operations for the years ended
December 31, 2000, 1999, and 1998...................................... F-4
Consolidated and Combined Statements of Cash Flows for the years ended
December 31, 2000, 1999, and 1998...................................... F-5
Consolidated and Combined Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999, and 1998.................. F-6
Notes to Consolidated and Combined Financial Statements................. F-7
Schedule II--Valuation of Qualifying Accounts............................. F-24
F-1
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, 2000 and 1999, 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, 2000. Our audits also included the financial statement schedule listed on
the index at page F-1. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule 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, 2000 and 1999, 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, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Denver, Colorado
February 2, 2001
F-2
TIME WARNER TELECOM INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
---------- ---------
(amounts in
thousands, except
share amounts)
ASSETS
Current assets:
Cash and cash equivalents............................. $ 71,739 90,586
Cash held in escrow................................... 179,000 --
Marketable debt securities (note 3)................... 3,496 173,985
Receivables, less allowances of $17,610 and $7,857,
respectively......................................... 83,027 52,652
Prepaid expenses...................................... 2,505 2,938
---------- ---------
Total current assets................................ 339,767 320,161
---------- ---------
Property, plant and equipment........................... 1,195,744 868,770
Less accumulated depreciation......................... (283,572) (191,664)
---------- ---------
912,172 677,106
---------- ---------
Intangible and other assets, net of accumulated
amortization (notes 1 and 2)........................... 101,397 45,745
---------- ---------
Total assets........................................ $1,353,336 1,043,012
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 72,041 64,678
Deferred revenue...................................... 53,286 37,913
Accrued taxes, franchise and other fees............... 40,343 23,280
Accrued interest...................................... 19,904 17,983
Accrued payroll and benefits.......................... 23,651 13,945
Payable to Time Warner Cable (note 5)................. 4,161 5,085
Other current liabilities............................. 71,331 26,459
---------- ---------
Total current liabilities........................... 284,717 189,343
---------- ---------
Long-term debt and capital lease obligations (notes 4
and 8)................................................. 585,107 403,627
Deferred income taxes (note 6).......................... 11,745 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, 33,702,461 and 23,543,422 shares
issued and outstanding in 2000 and 1999,
respectively......................................... 337 235
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............................ 601,081 559,950
Accumulated other comprehensive income, net of taxes.. 6,492 --
Accumulated deficit................................... (136,865) (138,081)
---------- ---------
Total stockholders' equity.......................... 471,767 422,916
---------- ---------
Total liabilities and stockholders' equity.......... $1,353,336 1,043,012
========== =========
See accompanying notes.
F-3
TIME WARNER TELECOM INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
-------- ------- -------
(amounts in thousands,
except per share
amounts)
Revenue:
Dedicated transport services.................... $263,913 152,468 84,024
Switched services............................... 223,421 116,285 37,848
-------- ------- -------
Total revenue................................. 487,334 268,753 121,872
-------- ------- -------
Costs and expenses(a):
Operating....................................... 184,995 117,567 67,153
Selling, general and administrative............. 170,722 113,389 77,401
Depreciation and amortization................... 95,295 68,785 50,717
-------- ------- -------
Total costs and expenses...................... 451,012 299,741 195,271
-------- ------- -------
Operating income (loss)........................... 36,322 (30,988) (73,399)
Interest expense(a)............................... (41,230) (45,264) (29,198)
Interest income................................... 10,821 16,589 9,731
Equity in income of unconsolidated affiliate (note
2)............................................... -- 202 127
-------- ------- -------
Net income (loss) before income taxes............. 5,913 (59,461) (92,739)
Income tax expense (note 6)....................... 4,697 29,804 --
-------- ------- -------
Net income (loss)................................. $ 1,216 (89,265) (92,739)
======== ======= =======
Basic and diluted earnings (loss) per common
share............................................ $ 0.01 (0.93) (1.14)
======== ======= =======
Weighted average shares outstanding:
Basic........................................... 105,391 95,898 81,250
======== ======= =======
Diluted......................................... 108,452 95,898 81,250
======== ======= =======
(a) Includes expenses resulting from transactions
with affilitates (note 5):
Operating....................................... $ 2,727 2,513 2,041
======== ======= =======
Selling, general and administrative............. $ 1,550 1,579 5,063
======== ======= =======
Depreciation and amortization................... $ 11,343 10,792 9,010
======== ======= =======
Interest expense................................ $ -- 5,078 11,582
======== ======= =======
See accompanying notes.
F-4
TIME WARNER TELECOM INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
--------- --------- ---------
(amounts in thousands)
Cash flows from operating activities:
Net income (loss)............................ $ 1,216 (89,265) (92,739)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization............... 95,295 68,785 50,717
Amortization of deferred debt issue costs... 1,652 1,250 --
Equity in income of unconsolidated
affiliate................................... -- (202) (127)
Deferred income tax expense................. 3,338 29,804 --
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Receivables and prepaid expenses........... (29,942) (22,384) (17,808)
Accounts payable........................... 7,363 27,491 6,037
Accrued interest........................... 1,921 650 20,732
Payable to Time Warner Cable............... (924) (11,716) 16,801
Accrued payroll and benefits............... 9,706 5,124 2,488
Other current liabilities.................. 75,634 44,698 16,882
Other balance sheet changes................ -- -- (3,326)
--------- --------- ---------
Net cash provided by (used in) operating
activities................................ 165,259 54,235 (343)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures........................ (320,703) (221,224) (126,023)
Cash paid for acquisitions, net of cash
acquired.................................... (10,000) (2,565) (1,204)
Purchases of marketable debt securities..... (95,199) (290,811) (286,356)
Proceeds from maturities of marketable debt
securities.................................. 265,688 367,683 35,500
Other investing activities................... (18,378) -- --
--------- --------- ---------
Net cash used in investing activities..... (178,592) (146,917) (378,083)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of debt........... 179,000 -- 387,500
Deferred debt issue costs.................... (21,457) -- --
Net proceeds from issuance of common stock
upon exercise of stock options.............. 14,068 3,806 --
Net proceeds from issuance of common stock in
connection with the employee stock purchase
plan........................................ 3,992 -- --
Payment of capital lease obligations......... (2,117) (174) --
Net proceeds from initial public offering.... -- 270,182 --
Repayment of loans to Former Parent
Companies................................... -- (180,018) --
Repayment of acquired debt................... -- (15,668) --
Proceeds of loans from Former Parent
Companies................................... -- -- 96,066
--------- --------- ---------
Net cash provided by financing
activities................................ 173,486 78,128 483,566
--------- --------- ---------
Increase (decrease) in cash, cash
equivalents, and cash held in escrow...... 160,153 (14,554) 105,140
Cash, cash equivalents, and cash held in
escrow at beginning of year............... 90,586 105,140 --
--------- --------- ---------
Cash, cash equivalents, and cash held in
escrow at end of year..................... $ 250,739 90,586 105,140
--------- --------- ---------
Supplemental disclosures of cash flow
information:
Cash paid for interest.................... $ 41,785 47,011 --
--------- --------- ---------
Tax benefit related to exercise of non-
qualified stock options................... $ 23,083 2,678 --
--------- --------- ---------
Cash paid for income taxes................ $ 615 168 181
========= ========= =========
Supplemental schedule for noncash investing and financing activities:
In 1999, Time Warner Telecom Inc. (the "Company") issued Class A common
stock aggregating $27.9 million to purchase the common stock of Internet
Connect, Inc. and MetroComm, Inc.
In 2000 and 1999, the Company incurred capital lease obligations of $6.3
million and $3.7 million for the purchase of fiber, equipment, and furniture
leases.
See accompanying notes.
F-5
TIME WARNER TELECOM INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999, and 1998
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)
Balance at January 1,
1998................... -- $-- 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
Change in unrealized
holding gain
for available-for-sale
security, net
of taxes............... -- -- -- -- -- 6,492 -- 6,492
Net income.............. -- -- -- -- -- -- 1,216 1,216
-------
Comprehensive income... 7,708
-------
Shares issued for cash
in connection with the
exercise of stock
options................ 1,080 11 -- -- 37,140 -- -- 37,151
Shares issued for cash
in connection with the
employee stock purchase
plan................... 92 1 -- -- 3,991 -- -- 3,992
Conversion of shares by
related party (note
1)..................... 8,987 90 (8,987) (90) -- -- -- --
------ ---- ------ ---- -------- ----- -------- -------
Balance at December 31,
2000................... 33,702 $337 72,227 $722 601,081 6,492 (136,865) 471,767
====== ==== ====== ==== ======== ===== ======== =======
See accompanying notes.
F-6
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 MediaOne 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 "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. 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 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 proceeds were used primarily to repay indebtedness to the
Former Parent Companies (see note 5). The IPO proceeds remaining
F-7
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
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. As of December 31, 2000, the Class B
Stockholders had approximately 95.5% 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, 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 to 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. 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 25, 2001, the Company completed a secondary public offering of
7,475,000 shares of Class A common stock at a price of $74 7/16 per share (the
"Secondary Offering"). The Secondary Offering generated $533.1 million in
estimated proceeds for the Company, net of underwriting discounts and
expenses. After the Secondary Offering, the Class B Stockholders as a group
had approximately 94.6% of the combined voting power of the outstanding common
stock. Also on January 25, 2001, the Company completed a private placement of
$400 million principal amount of 10 1/8% Senior Notes due February 2011 (the
"10 1/8% Senior Notes"). The Company used all of the net proceeds from the
Secondary Offering and a portion of the net proceeds from the offering of the
10 1/8% Senior Notes to repay the $700 million senior unsecured bridge
facility, that initially financed the acquisition of substantially all of the
assets of GST Telecommunications, Inc. ("GST") (see note 2). The remaining net
proceeds from the offering of the 10 1/8% Senior Notes will be used for
capital expenditures, working capital, and general corporate purposes. On
February 14, 2001, the Company initiated an offer to the holders of the 10
1/8% Senior Notes to exchange their Senior Notes for new Senior Notes that
have been registered under the Securities Act of 1933 with the same financial
terms as the originally issued notes. The exchange offer expired March 23,
2001. The Company expects that most of the holders of the originally issued 10
1/8% Senior Notes exchanged their notes pursuant to the offer.
On January 11, 2001, Time Warner merged with America Online, Inc. ("AOL")
in a stock-for-stock transaction that created a new company called AOL Time
Warner Inc. As a result of the merger, both AOL and Time Warner became wholly-
owned subsidiaries of AOL Time Warner Inc. The Class B common stock
F-8
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
beneficially owned by Time Warner is now beneficially owned by AOL Time Warner
Inc. and its subsidiaries. However, the transaction did not affect the rights
of Time Warner subsidiaries as Class B Stockholders.
Basis of Presentation
Until July 14, 1998, the historical financial statements of the Company
reflected the "carved out" historical financial position, results of
operations, cash flows, and changes in stockholders' equity of the commercial
telecommunications operations of the Former Parent Companies, as if they had
been operating as a separate company. Although these financial statements are
presented as if the Company had operated as a corporation, the Company
operated as a partnership for tax purposes and continued to operate in a
partnership structure through May 10, 1999. The consolidated and combined
statements of operations have been adjusted to retroactively reflect an
allocation of certain expenses pursuant to the final terms of agreements
related to the Reorganization, primarily relating to office rent, overhead
charges for various administrative functions performed by 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.
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.
Cash and Cash Equivalents
Prior to July 14, 1998, the Company did not maintain any cash or cash
equivalents 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). 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.
Investments
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 marketable debt
securities at the time of purchase and reevaluates the designation as of each
balance sheet date. Marketable 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 and adjusted for amortization of premiums and accretion of discounts to
F-9
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
maturity. Amortization is included in interest income. Interest on marketable
securities classified as held-to-maturity is included in interest income.
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 December 31, 2000, the fair value of the Company's available-for-sale
security was $13.9 million. The unrealized holding gain on this marketable
equity security is reported as accumulated other comprehensive income, net of
taxes, in the accompanying consolidated financial statements. As of December
31, 2000, the unrealized holding gain on this security was $6.5 million, net
of taxes. There were no sales of marketable securities for the years ended
December 31, 2000, 1999, and 1998, 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 affiliates 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 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.
Receivables
The Company does not require significant 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 $16.0 million,
$6.7 million, and $2.0 million for 2000, 1999, and 1998, 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. Capitalized interest was $4.1 million for 2000.
During 1999 and 1998, 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
capacity from Time Warner Cable. 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
F-10
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
Company pays for the full cost of construction. Depreciation is provided on
the straight-line method over estimated useful lives as follows:
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
Property, plant, and equipment consist of:
December 31,
--------------------
2000 1999
---------- --------
(amounts in
thousands)
Buildings and improvements............................. $ 22,156 15,741
Communications networks................................ 816,651 556,054
Vehicles and other equipment........................... 110,167 91,666
Fiber optic right to use............................... 246,770 205,309
---------- --------
1,195,744 868,770
Less accumulated depreciation.......................... (283,572) (191,664)
---------- --------
Total................................................ $ 912,172 677,106
========== ========
Intangible Assets
Intangible assets primarily consist of goodwill, deferred debt issue costs,
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 $5.0 million, $2.7 million, and $2.3 million for 2000,
1999, and 1998, respectively. Accumulated amortization of intangible assets at
December 31, 2000 and 1999 amounted to $12.0 million and $7.0 million,
respectively.
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 the carrying amounts.
If an impairment adjustment is deemed necessary, the loss is measured by the
amount that the carrying value of the assets exceeds their fair value.
Considerable management judgment is necessary to estimate the fair value of
assets; accordingly, actual results could vary significantly from the
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 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 and dedicated Internet access 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
F-11
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
estimates are used to recognize revenue in the period earned. The fixed rate
elements are billed in advance and recognized over the period the services are
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 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, where it was unable to
resolve those disputes with the LEC, filed complaints with various public
utility commissions ("PUCs"). Several of these disputes were resolved in favor
of the Company and are no longer subject to appeal, but some favorable
decisions by these state PUCs 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. 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 2000 and 1999
includes the recognition of $27.3 million and $7.6 million, respectively, of
non-recurring reciprocal compensation. A significant portion of the non-
recurring reciprocal revenue recognized during 2000 was a result of the
resolution of certain cases involving reciprocal compensation disputes. As of
December 31, 2000, the Company had deferred recognition of $41.0 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 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 accompanying 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 both the years
ended December 31, 2000 and 1999, the Company's top 10 customers accounted for
and 48% of the Company's consolidated and combined revenue. WorldCom, Inc.
("WorldCom") accounted for more than 10% of the Company's total revenue, or
$55.0 million, in 2000; AT&T accounted for more than 10% of the Company's
total revenue, or $34.7 million, in 1999; and AT&T and WorldCom accounted for
more than 10% of the Company's total revenue, or $28.9 million, in 1998.
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
WorldCom as their long distance provider.
Segment Reporting
The Company operates in 24 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 24 service areas to
be aggregated, resulting in one reportable line of business.
F-12
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
Earnings (Loss) Per Common Share and Potential Common Share
The Company computes earnings (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.
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 earnings per share for the year ended December 31, 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.
The diluted loss per common share for the years ended December 31, 1999 and
1998 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.
Options to purchase 473,000, 8,174,000, and 5,811,000 shares of the
Company's common stock outstanding at December 31, 2000, 1999, and 1998 were
excluded from the computation of weighted average shares outstanding because
their inclusion would be anti-dilutive.
Set forth below is a reconciliation of the basic and diluted earnings
(loss) per share for each period:
Years Ended December 31,
-------------------------
2000 1999 1998
-------- ------- -------
(amounts in thousands,
except per share
amounts)
Net income (loss) for basic and diluted
earnings (loss) per share..................... $ 1,216 (89,265) (92,739)
======== ======= =======
Weighted-average number of shares--basic....... 105,391 95,898 81,250
Dilutive effect of stock options............... 3,061 -- --
-------- ------- -------
Weighted-average number of shares--diluted..... 108,452 95,898 81,250
======== ======= =======
Earnings (loss) per share:
Basic........................................ 0.01 (0.93) (1.14)
======== ======= =======
Diluted...................................... 0.01 (0.93) (1.14)
======== ======= =======
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 2000 presentation.
F-13
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
New Accounting Pronouncements
As of January 1, 2000, the Company adopted the provisions of Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). The adoption of SAB 101 did not have a material effect on the
Company's financial condition, results of operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), as amended by SFAS 138, which is required to be adopted by the Company
on January 1, 2001. SFAS 133 requires that all derivatives be recorded on the
balance sheet at fair value. Changes in derivatives that are not hedges are
adjusted to fair value through income. Changes in derivatives that meet SFAS
133's hedge criteria will either be offset through income or recognized in
other comprehensive income until the hedged item is recognized in earnings.
The Company has not historically invested in derivative instruments and the
adoption of SFAS 133 on January 1, 2001 is not expected to have a material
effect on the Company's financial condition, results of operations, or cash
flows.
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 that were placed in
escrow and are being released to the former Internet Connect, Inc.
shareholders over a period of three years, beginning in April 2000. 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 $690,000
and $462,000 for the years ended December 31, 2000 and 1999, respectively.
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, 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 $1.9 million and $1.1 million for the
years ended December 31, 2000 and 1999, respectively.
The two acquisitions completed during 1999 were summarized as follows
(amounts in thousands):
1999
--------
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
========
Since both 1999 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
F-14
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
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.
On January 10, 2001, the Company completed the acquisition of substantially
all of the assets of GST out of bankruptcy (the "GST Acquisition") for cash
consideration of $627 million, including a $10 million deposit paid in 2000,
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. As a result of this acquisition, the
Company added 15 markets, 4,210 route miles, 227,674 fiber miles, and service
to 345 on-net buildings in the western United States. This transaction will be
accounted for under the purchase method of accounting.
3. Marketable debt securities
The Company's marketable debt securities portfolio includes shares of money
market mutual funds and corporate debt securities. All of the Company's
marketable debt securities are categorized as "held-to-maturity" and carried
at amortized cost.
Marketable debt securities at December 31, 2000 and 1999 were as follows:
2000 1999
------- -------
(amounts in
thousands)
Cash equivalents:
Shares of money market mutual funds........................... $ 204 4,510
Corporate and municipal debt securities....................... 68,652 77,267
------- -------
68,856 81,777
------- -------
Marketable debt securities:
Certificates of deposit with banks............................ -- 54,797
Corporate and municipal debt securities....................... 3,496 119,188
------- -------
3,496 173,985
------- -------
Total marketable debt securities............................ $72,352 255,762
======= =======
The estimated fair value of the marketable debt securities is not
materially different from the amortized cost.
4. Long-Term Debt
The 9 3/4% Senior Notes are unsecured, unsubordinated obligations of the
Company. Interest on the 9 3/4% 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 9 3/4% Senior Notes
totaled approximately $40.2 million, $40.3 million, and $17.9 million for
2000, 1999, and 1998, respectively. At December 31, 2000, the fair market
value for the $400 million of 9 3/4% Senior Notes was $368 million, based on
market prices.
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 2.75%, depending on financial
metrics. It is anticipated that the Revolver will primarily be used for the
build-out of the Company's network and working capital needs. At December 31,
2000, the undrawn available commitment under the Revolver was $475 million.
F-15
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
In connection with the GST Acquisition and the Company's capital
expenditure plans, the Company obtained commitments for $1.225 billion of
additional financing to increase its total commitments to $1.7 billion. The
Company replaced its Revolver with an amended and restated senior secured
credit facility (the "Credit Facility") providing 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. The
Company also obtained $700 million in senior unsecured bridge financing that
it used to initially finance the GST Acquisition. The borrowings under the
senior unsecured bridge loan facility were made and repaid in full in January
2001 with the net proceeds from the Secondary Offering and a portion of the
net proceeds from the sale of the 10 1/8% Senior Notes. In December 2000, the
Company was required to draw and hold in escrow, $179 million of the Credit
Facility until the closing of the GST Acquisition, at which time the draw
increased to $250 million. The net interest expense for the funds held in
escrow in 2000 was not material.
The Company is required to pay commitment fees on a quarterly basis ranging
from 0.500% to 1.000% per annum on the undrawn available commitment of the
Credit Facility. Commitment fee expense was $3.0 million for 2000 and has been
classified as a component of interest expense in the accompanying consolidated
and combined statements of operations.
The 9 3/4% Senior Notes, the 10 1/8% Senior Notes, and the $250 million
drawn on the senior secured term loan facilities are governed by Indentures
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.
Borrowings under the Credit Facility are secured by substantially all of
the assets of the Company, including the assets acquired from GST, except for
certain assets with respect to which the grant of a security interest is
prohibited by governing agreements. The Credit Facility requires the Company
to prepay outstanding loans when its cash flow exceeds certain levels and with
the proceeds received from a number of specified events or transactions,
including certain asset sales and insurance recoveries for assets not
replaced. In addition, obligations under the Credit Facility are subject to
various covenants that limit the Company's ability to:
. borrow and incur liens on its property;
. pay dividends or make other distributions; and
. make capital expenditures.
The Credit Facility also contains 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 Credit Facility if the Company
has defaulted under any of the other material outstanding obligations, such as
the 9 3/4% Senior Notes or the 10 1/8% Senior Notes.
5. Related Party Transactions
In the normal course of business, the Company engages in various
transactions with Time Warner Cable, generally on negotiated terms among the
affected units that, in management's 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
F-16
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
the use of fiber capacity licensed from Time Warner Cable. Under this
licensing arrangement, the Company paid Time Warner Cable $2.2 million, $16.8
million, and $23.8 million for 2000, 1999, and 1998, respectively. These costs
have been capitalized by the Company. The amortization expense of these costs
and fiber previously capitalized in the amount of $11.3 million, $10.8
million, and $9.0 million for 2000, 1999, and 1998, respectively, has been
classified as a component of depreciation and amortization expense in the
accompanying consolidated and combined statements of operations. In addition,
under this licensing arrangement, the Company reimburses Time Warner Cable for
facility maintenance, conduit rental, and pole rental costs, which aggregated
$2.7 million, $2.5 million, and $2.0 million for 2000, 1999, and 1998,
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 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. These charges aggregated approximately $1.6 million, $1.6 million, and
$2.1 million for 2000, 1999, and 1998, 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 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 and $11.6 million for 1999 and 1998, 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.
During 1998, the Company participated in the Time Warner Cable Pension Plan
(the "TW Pension Plan"), a noncontributory defined benefit pension plan which
covered approximately 75% of all employees. The remaining 25% of employees
participated in a pension plan under the administration of MediaOne, their
previous employer (the "MediaOne Pension Plan"). The Company also participated
in the Time Warner Cable Employees Savings Plan (the "Savings Plan"), a
defined contribution plan. Both the TW Pension Plan and Savings Plan were
administered by a committee appointed by the Board of Representatives of TWE
and covered substantially all employees.
Benefits under the TW Pension Plan are determined based on formulas which
reflect employees' years of service and compensation levels during their
employment period. Total pension cost aggregated $1.1 million for 1998.
Benefit costs under the MediaOne Pension Plan for certain employees of the
Company aggregated $0.8 million for 1998.
The Company's contributions to the Savings Plan represented up to 6.67% of
the employees' compensation during the plan year. Defined contribution plan
expense aggregated $1.0 million for 1998.
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 9). The Company has no future
obligation to fund both the TW Pension Plan and the MediaOne Pension Plan.
6. 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
F-17
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
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
expense for 2000 and 1999, shown below, includes the effect of the
Reconstitution and the tax impact of operations from the date of the
Reconstitution through December 31, 2000.
Income tax expense for the years ended December 31, 2000 and 1999 is as
follows:
2000 1999
------ ------
(amounts in
thousands)
Current:
Federal...................................................... $ -- --
State........................................................ 1,359 --
------ ------
1,359 --
------ ------
Deferred:
Federal...................................................... 2,579 23,873
State........................................................ 759 5,931
------ ------
3,338 29,804
------ ------
$4,697 29,804
====== ======
Total income tax expense differed from the amounts computed by applying the
federal statutory income tax rate of 35% to earnings (loss) before income taxes
as a result of the following items for the years ended December 31, 2000 and
1999 are as follows:
2000 1999
---- -----
Federal statutory income tax expense (benefit)............. 35.0% (35.0)%
State income tax expense (benefit), net of federal income
tax expense (benefit)..................................... 23.2 (2.1)
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
Goodwill amortization...................................... 18.2 0.9
Other...................................................... 3.0 1.4
---- -----
Income tax expense......................................... 79.4% 50.1%
==== =====
F-18
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
components of the Company's deferred tax assets and liabilities at December
31, 2000 and 1999 are as follows:
2000 1999
-------- -------
(amounts in
thousands)
Deferred tax assets:
Net operating loss carryforwards........................ $ 27,816 5,869
Deferred revenue........................................ 16,486 --
Accrued liabilities..................................... 9,155 4,933
Allowance for doubtful accounts......................... 8,730 3,159
Other................................................... 47 --
-------- -------
Total deferred tax assets............................. $ 62,234 13,961
-------- -------
Deferred tax liabilities:
Depreciation and amortization........................... (69,615) (41,087)
Unrealized gains........................................ (4,364) --
-------- -------
Total deferred tax liabilities........................ (73,979) (41,087)
-------- -------
Net deferred tax liability............................ $(11,745) (27,126)
======== =======
At December 31, 2000, the Company had net operating loss carryforwards,
since the Reconstitution, for federal income tax purposes, of approximately
$69.4 million. These net operating loss carryforwards, if not utilized to
reduce taxable income in future periods, will expire in various amounts
beginning in 2019 and ending in 2020.
The Company has analyzed the sources and expected reversal periods of its
deferred tax assets. The Company believes that the tax benefits attributable
to deductible temporary differences will be realized by recognition of future
taxable amounts.
7. Option Plans--Common Stock and Stock Options
Time Warner Telecom 1998 Employee Stock Option Plan
The Company maintains an employee stock option plan that reserved 9,027,000
shares of Class A common stock to be issued to officers and eligible 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. These 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 this option plan.
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 is being amortized on a straight-line basis over the four-year vesting
period. In 2000 and 1999, stock compensation expense of approximately $525,000
and $88,000, respectively, 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.
Time Warner Telecom 2000 Employee Stock Plan
The Company adopted an employee stock plan effective June 16, 2000,
reserving 12,000,000 shares of Class A common stock to be issued pursuant to
stock options and stock awards granted to officers, directors, and
F-19
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
eligible employees under terms and conditions to be set by the Company's Board
of Directors. The plan is subject to stockholder approval at the Company's
2001 Annual Meeting. The Board of Directors in 2000 only authorized the
issuance of non-qualified stock options under the plan. Generally, the options
vest over periods of up to four years and expire ten years from the date of
issuance. These 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 this option
plan.
Valuation of the Time Warner Telecom 1998 Stock Option Plan and the Time
Warner Telecom 2000 Employee Stock Plan
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 2000 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 0.80 and
0.74 for 2000 and 1999, respectively; 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 2000, 1999, and,
1998 was $39.83, $19.98, and $3.33, 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 $42.3 million and $103.1 million and a loss per share of $0.40 and $1.07
for the years ended December 31, 2000 and 1999, respectively. The Company's
shares were not publicly traded and no shares were exercisable as of December
31, 1998.
F-20
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
A summary of the Company's stock option activity, and related information
for the years ended December 31, 2000, 1999, and 1998 are as follows:
2000 1999 1998
------------------------ ----------------------- -----------------------
Weighted Weighted Weighted
Avg Exercise Avg Exercise Avg Exercise
Options Price Options Price Options Price
---------- ------------ --------- ------------ --------- ------------
Options outstanding at
beginning of year...... 8,174,057 $18.44 5,810,750 $12.00 -- --
Granted................. 3,822,111 60.26 2,950,750 29.9 6,115,250 $12.00
Exercised............... (1,079,719) 12.51 (309,849) 12.00 -- --
Forfeited............... (471,045) 26.19 (277,594) 12.63 (304,500) $12.00
Options outstanding at
end of year............ 10,445,404 34.03 8,174,057 18.44 5,810,750 $12.00
Exercisable at end of
year................... 2,304,582 $12.66 1,784,036 $12.00 -- $12.00
Exercise prices for options outstanding and exercisable as of December 31,
2000, are as follows:
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding as of Remaining Average Exercisable as of Average
Prices December 31, 2000 Contractual Life Exercise Price December 31, 2000 Exercise Price
-------- ----------------- ---------------- -------------- ----------------- --------------
$12.00-12.00 4,213,571 7.65 $12.00 2,171,669 $12.00
14.00-34.50 2,483,973 8.81 32.10 123,697 21.89
35.75-56.62 919,274 9.69 53.05 9,216 43.79
56.63-61.00 2,315,936 9.59 60.84 -- 0.00
61.25-87.00 512,650 9.46 69.19 -- 0.00
---------- ---------
$12.00-87.00 10,445,404 8.62 $34.03 2,304,582 $12.66
========== =========
F-21
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
8. 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, 2000, commitments under capital and non-cancelable
operating leases with terms in excess of one year were as follows:
Capital Operating
Leases Leases
------- ---------
(amounts in
thousands)
Year ended December 31:
2001................................................... $ 3,140 15,662
2002................................................... 2,910 14,321
2003................................................... 1,001 13,077
2004................................................... 390 12,066
2005................................................... 368 9,805
Thereafter............................................. 5,051 63,468
------- -------
Total minimum lease payments......................... 12,860 128,399
=======
Less amount representing interest........................ 4,343
-------
Present value of obligations under capital leases........ 8,517
Less current portion of obligations under capital
leases.................................................. 2,410
-------
Obligations under capital leases, excluding current
portion................................................. $ 6,107
=======
The obligations under capital leases have been discounted at an imputed
interest rate of 9.75%. Rental expense under operating leases aggregated $17.5
million, $9.4 million, and $7.0 million for 2000, 1999, and 1998,
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.
9. 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 $4.4 million and $3.3 million for
2000 and 1999, respectively.
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. 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. For
F-22
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
the year ended December 31, 2000, the Company issued 90,937 shares of Class A
common stock under the Stock Purchase Plan for net proceeds of $4.0 million.
10. Quarterly Results of Operations (Unaudited)
The following summarizes the Company's unaudited quarterly results of
operations for 2000 and 1999:
Three Months Ended
-------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars in thousands, except per share
amounts)
Year Ended December 31, 2000
Total revenue (1)................ $100,138 131,773 121,156 134,267
Operating income................. 1,594 24,783 4,388 5,557
Net income (loss)................ (2,860) 9,767 (2,325) (3,366)
Basic and diluted income (loss)
per common share................ (0.03) 0.09 (0.02) (0.03)
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)
- --------
(1) Total revenue for the quarters ended March 31, 2000, June 30, 2000, and
December 31, 1999 include the recognition of non-recurring settlements of
reciprocal compensation of $3.9 million, $23.4 million, and $7.6 million,
respectively.
The total net income (loss) per share for the 2000 and 1999 quarters do not
equal net income (loss) per share for the respective years as the per share
amounts for each quarter and for each year are computed based on their
respective discrete periods.
F-23
TIME WARNER TELECOM INC.
SCHEDULE II--VALUATION OF QUALIFYING ACCOUNTS
Years Ended December 31, 2000, 1999, and 1998
Additions/
Balance at Charges to Balance at
Beginning Costs and End of
Of Period Expenses Deductions Period
---------- ---------- ---------- ----------
(amounts in thousands)
For the Year ended December 31,
2000:
Allowance for doubtful accounts
receivable...................... $7,857 15,974 (6,221) 17,610
====== ====== ====== ======
For the Year ended December 31,
1999:
Allowance for doubtful accounts
receivable...................... 2,692 6,735 (1,570) 7,857
====== ====== ====== ======
For the Year ended December 31,
1998:
Allowance for doubtful accounts
receivable...................... $ 776 2,020 (104) 2,692
====== ====== ====== ======
F-24