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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

OR

Commission File Number 0-30218

TIME WARNER TELECOM INC.
(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (303) 566-1000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

The number of shares outstanding of Time Warner Telecom Inc.’s common stock as of October 31, 2002 was:

Time Warner Telecom Inc. Class A common stock — 48,890,771 shares
Time Warner Telecom Inc. Class B common stock — 65,936,658 shares

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INDEX TO FORM 10-Q

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CONSOLIDATED AND CONDENSED BALANCE SHEETS

See accompanying notes.

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CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

(a) Includes revenue and expenses resulting from transactions with affiliates (note 4):

See accompanying notes.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes.

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2002
(Unaudited)

See accompanying notes.

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NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

September 30, 2002
(unaudited)

1.       Organization and Summary of Significant Accounting Policies

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2.       Acquisition

3.       Long-Term Debt and Capital Lease Obligations

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4.       Related Party Transactions

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5.       Restructure Charge

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6.       Stock Options

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7.       Commitments and Contingencies

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Management’s Discussion and Analysis of Financial Condition and
Results of Operations

         The following discussion and analysis provides information concerning the results of operations and financial condition of Time Warner Telecom Inc. (the “Company”) and should be read in conjunction with the accompanying financial statements and notes thereto. Additionally, the following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements included in Part II of Time Warner Telecom Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001.

Cautions Concerning 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 Company’s 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,” “plan,” “target,” “expect,” “intend,” and “anticipate,” and expressions of similar substance 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 be 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 and 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 obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

         The Company is a leading fiber, facilities-based provider of metropolitan and regional optical broadband networks and services to business customers. The Company delivers broadband data, dedicated Internet access, and local and long distance voice services. As of September 30, 2002, the Company served customers in 44 metropolitan markets in the United States.

         Time Warner Cable (now a unit of AOL Time Warner Inc.) began the Company’s business in 1993. Since 1997, the Company’s business has changed substantially into an exclusive focus on business customers, including carriers and governmental entities, and a rapid expansion into switched and data services and geographic areas beyond the Time Warner Cable footprint.

         In July 1998, the Company was reorganized into a limited liability company called Time Warner Telecom LLC (“TWT LLC”) and conducted an offering of $400 million principal amount of 9 ³/4% Senior Notes due July 2008 (the “9 ³/4% Senior Notes”). In the transaction, Time Warner Inc. (now wholly owned by AOL Time Warner Inc.), MediaOne Group, Inc. (now wholly owned by AT&T Corp.), and Advance/Newhouse Partnership, either directly or through subsidiaries, became the owners of all of the limited liability company interests in TWT LLC.

         In May 1999, in preparation for the Company’s initial public offering (“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. In May 1999, the Company completed its IPO of 20,700,000 shares of Class A common stock at a price of $14 per share.

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         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. The Class B common stock is collectively owned by subsidiaries of AOL Time Warner Inc. (“AOL Time Warner”) and Advance Telecom Holdings Corporation and Newhouse Telecom Holdings Corporation (“Advance/Newhouse”). 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 September 30, 2002, the Class B stockholders had approximately 93.1% 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”). The Offering generated $532 million in proceeds for the Company, net of underwriting discounts and expenses. 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 “Old Notes”). Pursuant to an exchange offer in March 2001, all of the holders of the Old Notes exchanged their Old Notes for new 10 ¹/8% Senior Notes due February 2011 (the “10 ¹/8% Senior Notes”) with the same financial terms that were registered under the Securities Act of 1933. The Company used all of the net proceeds from the Offering and a portion of the net proceeds from the offering of the Old 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”).

         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. The Company’s revenue has been derived primarily from business communications services, including dedicated transport, local switched, long distance, data, and high-speed Internet access services.

         On January 10, 2001, the Company expanded its geographic coverage by acquiring substantially all of the assets of GST out of bankruptcy. See “Acquisition” below. Additionally, during 2001 the Company activated networks in Chicago, Illinois; Atlanta, Georgia; Minneapolis, Minnesota; Denver, Colorado; and Columbia, South Carolina. As of September 30, 2002, the Company’s networks spanned 17,384 route miles, contained 804,884 fiber miles in 21 states, and offered service to 11,788 buildings served either entirely by the Company’s facilities (“on-net”) or through the use of facilities of another carrier to provide a portion of the link (“off-net”). The Company continues to expand its footprint within its existing markets by expanding its network into new buildings. The Company has selectively interconnected its service areas within regional clusters with owned or leased fiber optic facilities and has launched on-net inter-city switched services that provide customers the ability to offer a virtual presence in a remote city.

         As of December 31, 2001, the Company completed its previously announced plan to launch service in five new markets in 2001, in addition to the geographic expansion that resulted from the GST asset acquisition. As a result of the slowing economy, the Company plans to focus on its existing strategy for expanding its revenue base by increasing penetration and utilization of available network capacity in its existing markets rather than through geographic expansion. The Company’s goal is to broaden its revenue base by expanding service to additional buildings in existing markets, and by continuing to develop and selectively tailor new services in competitively-priced packages to meet the needs of its medium- and large-sized business customers. The Company intends to expand its service offerings on a continuous basis to achieve a diverse revenue base, and to deploy new services and technologies when technically proven and when customer demand is evident. As new technologies that enable the switching of voice calls over an Internet protocol (“IP”) and local area network infrastructure are becoming commercially viable, the Company is integrating these technologies into its infrastructure. There is no assurance that the Company will bring all or any of these services to market successfully or profitably.

         In light of the current economic conditions and the weakness in the carrier sector, the Company is also seeking to broaden its revenue base by an increased focus on end-user (non-carrier) customers. However,

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despite carrier bankruptcies and business contractions, carrier customers remain an important part of the Company’s business.

         As part of the process of diversifying its revenue base, the Company is targeting the expansion of data and Internet services offered on the Company’s existing network. These services include high-speed dedicated Internet access and a broad array of data transmission services that enable customers to create their own internal computer networks and access external networks. The Company’s revenue from data and Internet services for the nine months ended September 30, 2002 grew 43% over the comparable period in 2001 and represented 13% of the Company’s total revenue for the nine months ended September 30, 2002. The Company expects an increasing portion of its future revenue to be contributed by data and Internet services.

         The impact of a slowing economy and downturn in the telecommunications sector has resulted in customers going out of business, filing bankruptcy, or looking for opportunities to cut costs. Since the beginning of 2001, the Company has experienced a significant increase in customers disconnecting service that has resulted in downward pressure on the Company’s revenue performance. During the nine months ended September 30, 2002, the Company lost monthly recurring revenue of approximately $10.3 million due to customer disconnects and bankruptcies. “Recurring revenue” refers to the Company’s total revenue less non-recurring reciprocal compensation settlements of $13.9 million and $37.0 million recognized in the second quarter of 2002 and 2001, respectively. Approximately 16% of the Company’s monthly recurring revenue at September 30, 2002 was represented by customers in bankruptcy proceedings, comprised of 12% for WorldCom, Inc. (“WorldCom”) and its affiliates and 4% for other customers in bankruptcy. WorldCom, which filed for Chapter 11 bankruptcy protection in July 2002, is the Company’s largest customer. Subsequent to September 30, the Company received notice from WorldCom to disconnect certain services representing approximately 0.7% of the Company’s recurring revenue. The Company expects further disconnection of WorldCom services. While the revenue impact of further WorldCom service disconnection is not currently known, the amount could be significant. The Company cannot predict the total amount of revenue from WorldCom and other customers in bankruptcy that will eventually be lost to disconnections or the timing of such disconnections. The Company anticipates further disconnections by other customers due to network optimization, cost cutting efforts, and additional customer bankruptcies or other customer financial difficulties. There is no assurance that the Company will be able to replace revenue lost to customer disconnections.

         The Company’s allowance for doubtful accounts represented 29% of accounts receivable at September 30, 2002, compared to 28% and 17% of accounts receivable as of December 31, 2001 and 2000, respectively. During 2001, the Company began increasing its reserve for doubtful accounts due to credit deterioration among telecommunications carriers and an increase in the number of customers filing for bankruptcy protection. The Company monitors the status of significant customers and increases its allowance for doubtful accounts when there is evidence that a customer may not meet its obligations to the Company. As of September 30, 2002, the Company’s total receivables were $90.6 million compared to $101.8 million as of June 30, 2002. The decrease in receivables primarily reflects the write-off of WorldCom pre-petition receivables. The Company believes that it has adequately reserved for its doubtful accounts as of September 30, 2002. The Company continues to provide services to WorldCom and several other customers that are in bankruptcy as they restructure their businesses. The Company’s policy is to write off receivables from these customers for services provided prior to their bankruptcy filing. However, due to the higher priority accorded to post-petition claims under the bankruptcy laws, the Company continues to carry post-filing receivable balances when the customers continue service following their bankruptcy filings. While many of these customers continue to pay following bankruptcy, the Company assigns a higher risk of collectability to these accounts and provides for an allowance for doubtful accounts for a large percentage of the outstanding post-bankruptcy receivables, resulting in an increase in the allowance for doubtful accounts. The Company has put in place additional controls to improve the collectability of accounts receivable, such as more thorough credit checks on all new and existing customers, discontinuing sales of new services to high risk customers, and, in some instances, requiring deposits on new services. While the Company believes these efforts will result in improved collectability of receivables, there is no assurance that these efforts will result in improved financial results.

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         In response to the impact of the downturn in the telecommunications sector and revenue performance, the Company has undertaken several cost containment efforts. These efforts include the consolidation of the Company’s network operations centers in October 2001, which resulted in the elimination of approximately 200 job positions, and further workforce reductions in April 2002 and August 2002 that eliminated approximately 360 job positions. Additional spending controls have resulted in reductions in travel costs, advertising, and consulting expenses. The Company has also limited its capital spending during 2002 primarily to expenditures related to specific revenue opportunities in existing markets, capital items for infrastructure maintenance, and upgrades to certain back office systems. In addition, the Company is emphasizing the re-use of equipment recovered when customers disconnect service.

         Factors that could negatively impact the Company’s margins in a slowing economy include below-cost pricing by some competitors to increase short-term revenue and competitive pressure on long distance rates. In addition, pricing pressure from long haul providers could impact pricing of inter-city point-to-point services, and the Company has seen intense price competition in common POP (point of presence) to POP locations in central business districts in certain cities.

         While bankruptcies in the telecommunications and Internet service provider (“ISP”) sectors present a threat to revenue growth, the contraction in the number of providers may benefit the Company if their customers seek to purchase services from the Company. There is no assurance that the Company will realize any benefits from the downturn in these sectors or that the Company will not continue to be adversely affected by conditions in its market sectors or the economy in general.

         Reciprocal compensation is an element of intercarrier compensation revenue that represents compensation from local exchange carriers (“LECs”) for local exchange traffic originated on another LEC’s facilities and terminated on the Company’s facilities. Reciprocal compensation rates are established by interconnection agreements between the parties based on federal and state regulatory and judicial rulings. Several of the Company’s significant agreements expired in 2001 and have been renegotiated, or are expiring in 2002 and are under renegotiation. In most states, regulatory bodies have established lower traffic termination rates than the rates provided under the Company’s expired agreements. As a result, the rates under the new agreements, while believed to be reasonable by the Company in light of a regulatory environment that is placing downward pressure on rates, are lower than the rates under the expired agreements. A 2001 Federal Communications Commission (“FCC”) ruling on reciprocal compensation for ISP-bound traffic has reduced rates and will further reduce rates in June 2003. The ruling also capped the number of minutes for which ISP-bound traffic can be compensated and eliminates reciprocal compensation for ISP-bound traffic as carriers enter new markets after the date of the order. The Company and several other competitive local exchange carriers (“CLECs”) filed legal challenges to the FCC’s order in federal court. The United States Court of Appeals for the D.C. Circuit ruled in May 2002 that the FCC’s stated statutory basis for the reciprocal compensation order was precluded and remanded the matter to the FCC for further action. However, the court did not vacate the FCC’s order. As a result, the order remains in effect pending further FCC action. The outcome of the remand is uncertain. Reciprocal compensation, exclusive of the effects of non-recurring reciprocal compensation of $13.9 million and $37.0 million, represented 5% and 6% of total revenue for the nine months ended September 30, 2002 and 2001, respectively. The non-recurring amounts reflect recognition of reciprocal compensation revenue, previously deferred under the Company’s revenue recognition policy, resulting from resolution of disputed reciprocal compensation billings with other LECs. As of September 30, 2002, the Company had deferred recognition of $16.4 million in reciprocal compensation revenue for payments received associated with pending disputes and amounts that are subject to adjustments based on regulatory rulings. As a result of a settlement of a dispute regarding reciprocal compensation, the Company expects to recognize between $5.0 million and $7.0 million of this deferred revenue as non-recurring reciprocal compensation revenue in the fourth quarter of 2002.

         Switched access is also an element of intercarrier compensation revenue and represents the connection between a long distance carrier’s POP and an end-user’s premises provided through the Company’s switching facilities. Historically, the FCC has regulated the access rates imposed by the incumbent local exchange carriers (“ILECs”), while the access rates of CLECs have been less regulated. The FCC released an order effective in June 2001 that subjects CLECs’ interstate switched access charges to regulation. Effective with that order, the Company’s rates were reduced and will continue to decline, through June 2004, to parity with

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the ILEC rates competing in each area. In addition, when a CLEC enters a new market, its access charges may be no higher than the ILEC’s. This order does not affect the rates stipulated in contracts between the Company and certain long distance carriers. The Company and several other CLECs have filed petitions with the FCC for reconsideration of the provisions of the order relating to new markets, and other carriers have challenged the order in federal appeals court. There is no assurance that any legal challenge will be successful or that a successful challenge will change the trend toward lower access charges. The CLEC access charge regulation and related regulatory developments resulted in reductions in the per-minute rates the Company receives for switched access service and will result in further reductions through June 2004. In addition, the Company has contracts with certain carriers that have access rate reductions in relationship to volume commitments. The Company expects that switched access revenue will continue to decline as a percentage of revenue due to mandated rate reductions and contracted rate reductions. There is no assurance that the Company will be able to compensate for reductions in switched access revenue with revenue from other sources. Switched access revenue represented 5% and 7% of total revenue, exclusive of the effects of non-recurring reciprocal compensation of $13.9 million and $37.0 million, during the nine months ended September 30, 2002 and 2001, respectively.

         The Company benefits from its strategic relationship with Time Warner Cable both through access to local rights-of-way and construction cost-sharing. In the normal course of business, the Company engages in various transactions with AOL Time Warner and its affiliates, generally on negotiated terms among the affected units that, in management’s view, result in reasonable arms-length terms. The Company has constructed 23 of its 44 metropolitan networks substantially through the use of fiber capacity licensed from Time Warner Cable. As of September 30, 2002, the Company’s property, plant, and equipment included $181.0 million in licenses of fiber capacity pursuant to the licensing agreement. The Company reimburses Time Warner Cable for facility maintenance and pole rental costs on an ongoing basis. The cost of fiber under the license agreements is capitalized and included in property, plant, and equipment and amortized over the useful life to depreciation and amortization expense. The maintenance and pole rental costs are included in the Company’s operating expenses. The Company believes that as a result of certain regulatory decisions regarding the pole rental rates that Time Warner Cable passes through to the Company, there is a risk that the Company’s expenses for these items could increase over time. The Company’s revenue includes services provided to AOL Time Warner and its affiliates. Revenue from these services was $21.8 million and $18.1 million for the nine months ended September 30, 2002 and 2001, respectively. The Company’s selling, general, and administrative expenses include charges from affiliates of AOL Time Warner for office rent and overhead charges for limited administrative functions they perform for the Company. The Company also benefits from discounts available to AOL Time Warner and its affiliates by aggregating its purchases of long distance services, car rental services, overnight delivery services, and wireless usage with those of AOL Time Warner.

         The transactions described above include capacity license agreements and leases with the Time Warner Entertainment-Advance/Newhouse Partnership (“TWE-A/N”), a partnership between affiliates of AOL Time Warner and Advance/Newhouse that owns or has interests in cable television systems that have been managed by the AOL Time Warner affiliates. On August 1, 2002, the partnership agreement governing TWE-A/N was modified so that, upon the closing of the restructuring transaction contemplated by the amendment (which is expected to occur at year end 2002), the capacity license agreements and leases with the Company covering certain TWE-A/N markets, including Tampa, Orlando, and Indianapolis, will be assigned to a new subsidiary of TWE-A/N to be managed by the affiliates of Advance/Newhouse.

         Both AOL Time Warner and Advance/Newhouse are diversified communications providers. They are not restricted from competing with the Company and may, now or in the future, provide services in competition with the Company’s services. The Company is aware that an affiliate of AOL Time Warner offers Internet access and data services for business customers that are functionally, but not technologically, similar to services that the Company offers. The Company, on the other hand, is currently precluded by its Restated Certificate of Incorporation from offering any residential services or providing any entertainment, information, or content services without the consent of the Class B Stockholders until May 2004 or earlier if the Class B Stockholders no longer hold 50% of total voting power for the Board of Directors. A similar provision in the capacity license agreements with Time Warner Cable continues until 2028. There is no assurance that the Company would not be adversely affected if the Class B Stockholders chose to offer competing services.

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Acquisition

         On January 10, 2001, the Company completed the acquisition of substantially all of the assets of GST out of bankruptcy for a contractual purchase price of $690 million. The $690 million included payments to GST or third parties on behalf of GST totaling approximately $662 million, the assumption of approximately $21 million in obligations to complete certain fiber networks, and a liability to provide transitional services to GST of approximately $7 million. In addition to the $690 million contractual purchase price, the Company paid approximately $6 million in transaction expenses and assumed approximately $17 million in liabilities primarily related to capital leases. Through this acquisition, the Company added 15 markets, approximately 4,210 route miles, and approximately 227,674 fiber miles in the western United States.

         A portion of the purchase price paid by the Company was deposited in various escrow accounts established to discharge certain liabilities that were contingent or undetermined at the closing date, including certain tax liabilities arising prior to closing or in connection with the transaction, and to provide for the completion of certain fiber routes that were delayed prior to closing. Some of these escrow accounts have been closed out, but others, including the tax escrow account, remain outstanding pending the resolution of certain proceedings between GST and taxing authorities. The cash held in escrow in these accounts is not included in the accompanying consolidated and condensed balance sheets, as these funds will either be paid to GST or other third parties.

         The Company has completed the integration of GST assets with the exception of certain back office systems and network optimization. The Company activated a regional fiber network covering approximately 4,100 miles that was under construction at the time of the GST asset acquisition and expanded the metropolitan networks in several of the acquired markets.

         The Company’s acquisition of the GST assets increased its geographic presence, expanded its service offerings, and enlarged the capacity of its networks. This transaction is considerably larger than the transactions the Company has completed in the past and therefore presented greater risks. The Company completed the acquisition with the expectation that the asset purchase would result in certain efficiencies. Achieving the benefits of the asset purchase will depend upon the successful completion of network optimization efforts and the generation of new revenue from the acquired markets. The networks purchased in most of the markets are less extensive than those in many of the Company’s previously existing markets. There is no assurance that the Company will be successful in generating significant additional revenue from those assets or achieving the expected operating efficiencies, and failure to do so could result in an impairment of the acquired assets.

Critical Accounting Policies

         The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions. The Company believes that of its significant accounting policies, the following involve a higher degree of judgment and/or complexity, and are therefore considered critical.

         Revenue Recognition. Revenue for dedicated transport, data, Internet, and the majority of switched services is generally billed in advance on a fixed rate basis and recognized over the period the services are provided. Switched access, a component of intercarrier compensation revenue, and long distance are generally billed on a transactional basis determined by customer usage with some fixed rate elements. The transactional elements of switched services are billed in arrears and estimates are used to recognize revenue in the period earned.

         Reciprocal compensation, a component of intercarrier compensation revenue, is based on contracts between the Company and other LECs. The Company recognizes reciprocal compensation revenue primarily on a cash basis, except in those cases where the payment is under dispute or at risk, in which case the Company defers recognition of the revenue until the outstanding issues are resolved. The Company utilizes

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the cash basis because changes in, and interpretations of, regulatory rulings create disputes and often result in significant delays in payments. As of September 30, 2002, the Company had deferred recognition of $16.4 million in reciprocal compensation revenue for payments received associated with pending disputes and amounts that are subject to adjustments based on regulatory rulings. As a result of a settlement of a dispute regarding reciprocal compensation, the Company expects to recognize between $5.0 million and $7.0 million of this deferred revenue as non-recurring reciprocal compensation revenue in the fourth quarter of 2002. 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.

         Receivables. 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 receivables. A higher risk of collectability is assigned to certain customers with deteriorating financial conditions and customers in bankruptcy that continue service subsequent to filing bankruptcy, resulting in greater allowance for doubtful accounts. Considerable management judgment is required in evaluating the collectability of receivables and establishing the related allowance for doubtful accounts. If the financial condition of the Company’s customers continues to deteriorate, the Company’s bad debt expense and cash collections will be negatively impacted. The allowance for doubtful accounts was $26.3 million and $29.8 million at September 30, 2002 and December 31, 2001, respectively.

         Impairment of Long-Lived Assets. The Company periodically reviews the carrying amounts of property, plant, and equipment and intangible assets to determine whether current events or circumstances warrant adjustments to the carrying amounts. As part of this review, management analyzes the budgeted undiscounted cash flows associated with its property, plant, and equipment and intangible assets. Considerable management judgment is necessary to complete this analysis. Although management believes these estimates to be reasonable, actual results could vary significantly from these estimates and the Company’s estimates could change based on market conditions. Variances in results or estimates could result in changes to the carrying value of the Company’s assets including, but not limited to, recording an impairment for some of these assets in future periods. During the nine months ended September 30, 2001, the Company recorded a $9.6 million impairment charge when it abandoned a software system it was developing for use in its back office operations. In the third quarter of 2002, the Company recorded impairment charges totaling $3.5 million for obsolete assets taken out of service. These charges were included as a component of depreciation and amortization expense.

         Deferred Taxes. As of September 30, 2002, the Company has recorded a net deferred tax asset of $59.1 million, net of a valuation allowance of $46.1 million that the Company established in the first nine months of 2002. The Company has concluded that it is more likely than not that the net deferred tax asset of $59.1 million will be realized because the Company could utilize tax-planning strategies to realize this amount. However, the Company believes there may be risks in realizing amounts in excess of the $59.1 million through utilization of available tax planning strategies. Accordingly, the Company has established a valuation allowance for amounts in excess of $59.1 million. The Company’s treatment of its deferred taxes and its tax planning strategies are based on certain assumptions that the Company believes are reasonable. However, actual results could vary significantly from current assumptions and could result in changes to the accounting treatment of these items, including, but not limited to, the necessity to record a greater valuation allowance.

Results of Operations

         The following table sets forth certain data from the Company’s unaudited consolidated and condensed financial statements presented in thousands of dollars and expressed as a percentage of total revenue. This table should be read together with the Company’s consolidated and condensed financial statements, including the notes thereto, appearing elsewhere in this report:

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Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001

         Revenue. In the first quarter of 2002, the Company began separately disclosing data and Internet services revenue. This revenue, which had previously been reported as components of dedicated transport and switched services revenue, has become an increasingly important component of the Company’s total revenue

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base. For a description of data and Internet services provided by the Company, see “Item 1 – Business” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. Also in the first quarter of 2002, the Company began separately disclosing intercarrier compensation revenue, which includes reciprocal compensation and switched access revenue. These items had previously been reported as components of switched services revenue.

         Total revenue decreased $5.6 million, or 3%, to $167.2 million for the three months ended September 30, 2002, from $172.7 million for the comparable period in 2001. Revenue from the provision of dedicated transport services decreased $5.6 million, or 6%, to $92.6 million for the three months ended September 30, 2002, from $98.2 million for the comparable period of 2001. Switched services revenue decreased $2.9 million, or 7%, to $36.1 million for the three months ended September 30, 2002, from $39.0 million for the comparable period in 2001. The decreases in dedicated transport and switched services revenue resulted primarily from the impacts of the slowing economy, and in particular continued customer disconnections. In addition, dedicated transport and switched services revenue for the three months ended September 30, 2001 included $1.6 million in non-recurring revenue for services provided to the GST bankruptcy estate and transitional customers.

         Data and Internet services revenue increased $7.9 million, or 51%, to $23.4 million for the three months ended September 30, 2002, from $15.5 million for the comparable period in 2001. The increase primarily resulted from an increase in demand for Internet services. In addition, during 2001, the Company upgraded its IP backbone to increase its capacity to provide Internet services and the Company benefited from this upgrade in 2002.

         Intercarrier compensation revenue, including reciprocal compensation and switched access services, decreased $5.0 million, or 25%, to $15.1 million for the three months ended September 30, 2002, from $20.1 million for the comparable period in 2001. The decrease in intercarrier compensation revenue reflects a reduction in rates resulting from FCC orders and contractual decreases as well as a reduction in the total minutes terminating to the Company’s customers due to disconnection of service by dial-up ISP customers. The Company expects that intercarrier compensation revenue will continue to decline as mandated rate decreases are phased in through mid-2004.

         Operating Expenses. The Company’s operating expenses consist of costs directly related to the operation and maintenance of its networks and the provision of the Company’s services. These costs include the salaries and related expenses of operations and engineering personnel, as well as costs paid to the ILECs, other competitors, and long distance carriers for facility leases and interconnection. The Company carries a significant portion of its traffic on its own fiber infrastructure, which enhances the Company’s ability to control its costs. Operating expenses decreased $6.7 million, or 9%, to $70.8 million for the three months ended September 30, 2002, from $77.5 million for the comparable period in 2001. The decrease in operating expenses is primarily due to a decrease in employee costs, including the cost reductions from the consolidation of the Company’s network operations centers in the fourth quarter of 2001 and the workforce realignments in the second quarter of 2002, decreases in right-of-way fees, and efficiencies gained from integrating the acquired GST assets. The impact of the Company’s workforce reduction in August 2002 is not yet reflected in operating expenses due to the payment of separation costs in the third quarter. Operating expenses represented 42% and 45% of total revenue for the three months ended September 30, 2002 and 2001, respectively.

         Selling, General, and Administrative Expenses. Selling, general, and administrative expenses include costs related to sales and marketing, information technology, billing, regulatory, accounting, finance, and legal functions. Selling, general, and administrative expenses decreased $1.9 million, or 3%, to $56.3 million for the three months ended September 30, 2002, from $58.2 million for the comparable period in 2001. Selling, general, and administrative expenses were 34% of revenue in each of the three-month periods ended September 30, 2002 and 2001. The decrease in the dollar amount of selling, general, and administrative expenses primarily results from a decrease in employee costs, travel expenses, advertising, and consulting expenses. These decreases were partially offset by an increase in bad debt expense resulting from an increase in customer bankruptcies and other customer financial difficulties. Bad debt expense represented 5% and 4% of total revenue for the three months ended September 30, 2002 and 2001, respectively. Previously, the

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Company expected the dollar amount of bad debt expense to fluctuate proportionally with revenue. However, as a result of an increase in customer bankruptcies beginning in 2001 and adverse economic conditions generally, bad debt expense as a percentage of revenue has increased.

         EBITDA. EBITDA increased $3.1 million, or 8%, to $40.1 million for the three months ended September 30, 2002, from $37.0 million for the comparable period in 2001. EBITDA was 24% of total revenue for the three months ended September 30, 2002 compared to 21% of total revenue for the comparable period in 2001. The improvement in EBITDA margin is the result of certain operating efficiencies realized as the Company has integrated the GST asset acquisition over the past year and has implemented cost reduction measures, including reductions in headcount and reductions in spending on advertising, consulting, and travel costs. The Company’s EBITDA is calculated by excluding the non-cash impacts of depreciation and amortization from operating income or loss. The Company believes that EBITDA trends are a valuable indication of whether the Company’s operations are able to produce operating cash flows to fund working capital needs, to service debt obligations, and to fund capital expenditures. The funds depicted by EBITDA are currently used for these purposes. EBITDA is not a measure of performance under accounting principles generally accepted in the United States (“GAAP”) and should not be considered a substitute for a measure of performance prepared in accordance with GAAP.

         Depreciation and Amortization Expense. Depreciation and amortization expense increased $9.8 million, or 19%, to $61.8 million for the three months ended September 30, 2002, from $52.0 million for the comparable period in 2001. The increase is primarily the result of capital expenditures and assets placed in service between September 30, 2001 and September 30, 2002. In addition, in the third quarter of 2002, the Company recorded a $3.5 million charge for impairment of obsolete assets taken out of service.

         Interest Expense. Interest expense decreased $220,000 to $26.8 million in the three months ended September 30, 2002, from $27.0 million for the comparable period in 2001. The decrease in interest expense primarily reflects a decline in the variable interest rate applicable to the $250 million outstanding balance under the Company’s credit facility. The rate, which varies based on a specific Eurodollar rate, was 5.8% as of September 30, 2002, compared to 8.7% at September 30, 2001. The interest rate decrease was partially offset by a decrease in the amount of interest capitalized due to a reduction in capital spending.

         Interest Income. Interest income decreased $2.3 million to $1.5 million for the three months ended September 30, 2002, from $3.8 million for the comparable period in 2001. The decrease reflects the decrease in cash, cash equivalents, and marketable debt securities between the third quarters of 2001 and 2002, as well as an overall decrease in interest rates earned on those assets.

         Investment Losses. During the three months ended September 30, 2002, the Company recognized a loss of $1.3 million when it determined that losses on certain investments were not temporary in nature, compared to a $1.5 million loss on investments during the three months ended September 30, 2001.

         Income Taxes. Income tax expense increased to $150,000 for the three months ended September 30, 2002, from a tax benefit of $15.3 million for the comparable period in 2001. For the three months ended September 30, 2002, the Company increased the valuation allowance for deferred taxes by $18.3 million. As of September 30, 2002, net deferred tax assets totaled $59.1 million. The Company believes that its net deferred tax assets will be realized through future taxable income. The $59.1 million in net deferred tax assets represents the Company’s best estimate of the assets that would be realizable utilizing tax planning strategies in the event that loss carryforwards were due to expire.

         Net Loss. Net loss increased $24.1 million to a loss of $48.4 million for the three months ended September 30, 2002, from a net loss of $24.3 million for the comparable period in 2001. The change primarily resulted from a $6.7 million increase in operating losses due to increased depreciation expense, and the recognition of $150,000 in income tax expense in 2002 compared to an income tax benefit of $15.3 million in 2001.

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Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

         Revenue. Total revenue decreased $43.3 million, or 8%, to $520.5 million for the nine months ended September 30, 2002, from $563.7 million for the comparable period in 2001. Excluding the impact of non-recurring reciprocal compensation of $13.9 million and $37.0 million in the nine months ended September 30, 2002 and 2001, respectively, total revenue decreased $20.2 million. Revenue from the provision of dedicated transport services decreased $13.5 million, or 5%, to $280.2 million for the nine months ended September 30, 2002, from $293.7 million for the comparable period in 2001. Switched services revenue decreased $4.6 million to $110.0 million for the nine months ended September 30, 2002, from $114.6 million for the comparable period in 2001. Transport and switched services revenue for the nine months ended September 30, 2001, included $8.0 million in non-recurring revenue related to service provided to the GST bankruptcy estate and transitional customers. The remaining decrease in transport and switched services resulted primarily from the impact of a slowing economy, and in particular, continued customer disconnections.

         Data and Internet services revenue increased $19.8 million, or 43%, to $65.8 million for the nine months ended September 30, 2002, from $46.0 million for the comparable period in 2001. The increase primarily resulted from an increase in demand for Internet services and the Company’s upgrade of its IP backbone during 2001, which benefited the Company in 2002.

         Intercarrier compensation revenue, including reciprocal compensation and switched access, decreased $44.9 million, or 41%, to $64.5 million for the nine months ended September 30, 2002, from $109.4 million for the comparable period in 2001. Excluding the impact of non-recurring reciprocal compensation of $13.9 million and $37.0 million in the nine months ended September 30, 2002 and 2001, respectively, intercarrier compensation revenue decreased $21.8 million. The decrease in intercarrier compensation revenue reflects a reduction in rates resulting from FCC orders and contractual decreases, as well as a reduction in the total minutes terminating to the Company’s customers due to disconnection of service by dial-up ISP customers.

         Operating Expenses. Operating expenses decreased $20.9 million, or 9%, to $217.0 million for the nine months ended September 30, 2002, from $237.9 million for the comparable period in 2001. The decrease in operating expenses is primarily due to a decrease in employee costs, including the cost reductions from the consolidation of the Company’s network operations centers in the fourth quarter of 2001 and the workforce realignment in the second quarter of 2002, decreases in rights-of-way fees, and efficiencies gained in integrating the acquired GST assets. The impact of the Company’s workforce reduction in August 2002 is not yet reflected in operating expenses due to the payment of separation costs in the third quarter. Operating expenses represented 42% and 45% of revenue, excluding the impact of non-recurring revenue, for the nine months ended September 30, 2002 and 2001, respectively.

         Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased $8.5 million, or 5%, to $171.7 million for the nine months ended September 30, 2002, from $180.2 million for the comparable period in 2001. Selling, general, and administrative expenses were 34% of revenue, excluding the impact of non-recurring revenue, for each of the nine-month periods ended September 30, 2002 and 2001. The decrease in the dollar amount of selling, general, and administrative expenses primarily results from a decrease in employee costs, advertising, consulting expenses, and travel costs. These decreases were partially offset by an increase in bad debt expense resulting from an increase in customer bankruptcies and other customer financial difficulties. Bad debt expense represented 5% and 4% of total revenue for the nine months ended September 30, 2002 and 2001, respectively.

         EBITDA. EBITDA decreased $13.9 million, or 10%, to $131.8 million for the nine months ended September 30, 2002, from $145.7 million for the comparable period in 2001. Excluding the impact of non-recurring reciprocal compensation, EBITDA improved $9.2 million during the nine months ended September 30, 2002, compared to the same period of 2001. EBITDA was 23% of total revenue, excluding the impact of non-recurring reciprocal compensation revenue, during the nine months ended September 30, 2002, compared to 21% for the nine months ended September 30, 2001. The improvement in EBITDA margin is the result of certain operating efficiencies realized as the Company has integrated the GST asset acquisition over the past

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year and has implemented cost reduction measures, including reductions in headcount and reductions in spending on advertising, consulting, and travel costs.

         Depreciation and Amortization Expense. Depreciation and amortization expense increased $25.4 million, or 17%, to $176.3 million for the nine months ended September 30, 2002, from $150.8 million for the comparable period in 2001. Excluding the impact of a $3.5 million and $9.6 million impairment of certain non-revenue generating assets in the third quarter of 2002 and the first quarter of 2001, respectively, depreciation expense increased $31.6 million, or 22%. The increase in depreciation and amortization expense was primarily attributable to capital expenditures made between September 30, 2001 and September 30, 2002. In addition, in the third quarter of 2002, the Company recorded a $3.5 million charge for impairment of obsolete assets taken out of service.

         Interest Expense. Interest expense decreased $9.6 million to $78.4 million in the nine months ended September 30, 2002, from $88.1 million for the comparable period in 2001. In the first quarter of 2001, the Company incurred a one-time charge to write off $5.8 million in costs related to a $700 million senior unsecured bridge facility used to initially finance the acquisition of the GST assets. The decrease in interest expense also reflects a decline in the variable interest rate applicable to the $250 million outstanding balance under the Company’s credit facility. The rate, which varies based on a specific Eurodollar rate, was 5.8% at September 30, 2002, as compared to 8.7% at September 30, 2001. The interest rate decrease was partially offset by a decrease in the amount of interest capitalized due to a reduction in capital spending.

         Interest Income. Interest income decreased $12.1 million to $4.3 million for the nine months ended September 30, 2002, from $16.4 million in the comparable period in 2001. The decrease reflects the decrease in cash, cash equivalents, and marketable debt securities between September 30, 2001 and 2002, as well as an overall decrease in interest rates earned on those assets.

         Investment Losses. During the nine months ended September 30, 2002, the Company recognized losses of $3.2 million when it determined that losses on certain investments were not temporary in nature. The Company recognized losses of $1.5 million on investments during the comparable period in 2001.

         Income Taxes. Income tax expense increased to $450,000 for the nine months ended September 30, 2002, from a benefit of $29.6 million for the comparable period in 2001. During 2002, the Company established a valuation allowance for deferred taxes of $46.1 million that reduced its net deferred tax asset. In the same period of 2001, the Company had recorded the full deferred tax benefit on its pre-tax loss. As of September 30, 2002, net deferred tax assets totaled $59.1 million. The Company believes that its net deferred tax assets will be realized through future taxable income. The $59.1 million in net deferred tax assets represents the Company’s best estimate of the assets that would be realizable utilizing tax planning strategies in the event that loss carryforwards were due to expire.

         Net Loss. Net loss increased $73.6 million to a loss of $122.3 million for the nine months ended September 30, 2002, from a net loss of $48.6 million for the comparable period in 2001. The change primarily resulted from a $44.9 million decrease in intercarrier compensation revenue, including a $23.1 million decrease in non-recurring reciprocal compensation, and the $46.1 million valuation allowance provided against deferred tax assets for the nine months ended September 30, 2002, partially offset by decreased operating and selling, general, and administrative expenses.

Liquidity and Capital Resources

         Historically, the Company has generated cash flow from operations, which consisted primarily of payments received from customers for the provision of business communications services offset by payments to other telecommunications carriers, payments to employees, and payments for other operating, selling, general, and administrative costs. The Company has also generated cash from debt and equity financing activities, and has used funds to service its debt obligations, fund acquisitions, and make capital expenditures to expand the Company’s networks.

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         Operations. Cash provided by operating activities was $20.1 million for the nine months ended September 30, 2002, compared to $107.0 million for the comparable period in 2001. This decrease in cash provided by operating activities primarily relates to changes in working capital liability accounts, including accounts payable and accrued interest. During the first nine months of 2002, the Company’s accounts payable, deferred revenue, and other current liablities decreased by $48.4 million compared to an increase of $26.8 million in the comparable period of 2001.

         The expenditures incurred by the Company to enter new markets, together with initial operating expenses, will generally result in negative EBITDA and operating losses for the new market until an adequate customer base and revenue stream for the market has been established. Historically, networks constructed in the Company’s new markets have produced negative EBITDA for at least two years after commencing operations. However, given the downturn in the telecommunications sector that began in early 2001, the Company anticipates that the new networks it constructed in 2001 may take longer than two years to generate positive EBITDA. 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 networks have been established. Although overall the Company expects to continue to generate positive EBITDA in the future as it reduces its expansion into new markets, expands its business in existing markets, and completes cost saving initiatives relating to the assets acquired from GST, there is no assurance that the Company will sustain the current level of EBITDA or sufficient positive EBITDA to meet its working capital requirements, comply with its debt covenants, and service its indebtedness. The Company’s EBITDA is calculated by excluding the non-cash impacts of depreciation and amortization from operating income or loss. The Company believes that EBITDA trends are a valuable indicator of whether the Company’s operations are able to produce operating cash flow to fund working capital needs, to service debt obligations, and to fund capital expenditures. The results depicted by EBITDA are currently used for these purposes.

         Investing. Cash used in investing activities was $77.7 million for the nine months ended September 30, 2002, compared to $997.9 million for the comparable period in 2001. During the nine months ended September 30, 2001, cash used in investing included $651.7 million used to complete the GST asset acquisition and $337.1 million in capital expenditures. The Company’s 2001 capital expenditures included expansion into five additional markets and additional capital investment required for the assets purchased from GST. Capital expenditures in the nine months ended September 30, 2002, totaled $92.1 million. The Company anticipates that its 2002 capital expenditures will be less than $150 million because it does not plan to expand into additional markets and because revenue growth has slowed over the past year. In 2002, the Company’s capital expenditures have been limited to building entries, electronics, and distribution rings based on specific revenue opportunities in existing markets, capital items related to infrastructure maintenance, and upgrades and enhancements to its back office systems. The Company has increased its operational efficiencies by pursuing a disciplined approach to capital expenditures. The Company’s 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.

         While the Company intends to continue to leverage its relationship with AOL Time Warner 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 costs in excess of those 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 existing capacity license agreements. Accordingly, if the Company is unable to lease additional capacity at the same rates as currently provided for under certain operating agreements, the Company may be required to obtain additional capacity on more expensive terms. The Company continually explores other business opportunities with AOL Time Warner.

         Financing. Net cash used in financing activities for the nine months ended September 30, 2002, was $3.0 million and was primarily related to the payment of capital lease obligations. For the nine months ended September 30, 2001, net cash provided by financing activities totaled $1.0 billion and included the debt and equity transactions discussed below.

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         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 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. In addition, the Company has pledged its equity interests in its subsidiaries as collateral.

         Effective October 29, 2002, the Company and its lenders amended the credit facility and reduced the total commitments of the lenders from $1 billion to $800 million. Significant terms of the components of the amended credit facility are as follows:

         In conjunction with the amendment, the Company increased its borrowings under the credit facility to a total of $420 million by drawing down the $220 million in senior delayed draw loan facilities that would have expired January 10, 2003 and repaying $50 million of the $250 million term loan B.

         In January 2001, the Company 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 per share. The proceeds from the issuance of Class A common stock and a portion of the proceeds from the issuance of the 10 ¹/8% Senior Notes were used to repay a senior unsecured bridge loan facility under which the Company borrowed $700 million to initially 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 recorded $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 were recorded in additional paid-in capital in the first quarter of 2001.

         The $400 million principal amount of 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. Aggregate annual interest payments on the 9 ³/4% Senior Notes 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 principal amount of 10 ¹/8% Senior Notes that the Company issued in the first quarter of 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. Aggregate annual interest payments on the

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10 ¹/8% Senior Notes are expected to be approximately $41 million. The 10 ¹/8% Senior Notes are required to be repaid on February 1, 2011.

         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 following diagram summarizes the corporate structure of the Company in relation to its outstanding indebtedness and Credit Facility as of October 31, 2002. The diagram does not depict all aspects of ownership structure among the operating and holding entities, but rather summarizes the significant elements relative to the Company’s debt in order to provide the reader a basic overview.

         The Company is aware that its outstanding 9 ³/4% Senior Notes and 10 ¹/8% Senior Notes are currently trading at substantial discounts to their respective face amounts. In order to reduce future cash interest payments, as well as future amounts due at maturity or mandatory redemption, the Company or its affiliates may, from time to time, purchase such securities for cash in open market or privately negotiated transactions or engage in other transactions to reduce the amount of outstanding Senior Notes. The Company will evaluate any such transactions in light of market conditions, taking into account its liquidity and prospects for future access to capital, and contractual constraints.

         The Company expects that the $309.0 million in cash, cash equivalents, and marketable debt securities at September 30, 2002, and borrowings under the amended $800 million credit facility, along with internally generated funds, will provide sufficient funds for the Company to meet its expected capital expenditures and liquidity needs to operate its business as currently planned and to service its current and future debt. In the amendment to the credit facility the Company agreed not to access the revolving facility until January 2004. For the twelve months thereafter, the Company agreed to limit borrowings under the revolving facility to no more than $200 million and to limit such borrowings in that year to no more than $100 million in any three-month period. The Company does not anticipate that those limitations will adversely affect its liquidity. The Company’s ability to draw down upon the available commitments under its credit facility is subject to compliance with all of the covenants contained in the credit agreement and the continued ability to make certain representations and warranties. These representations include the absence of liens on the Company’s properties other than certain permitted liens, the absence of litigation or other developments that have or could reasonably be expected to have a material adverse effect on the Company and its subsidiaries as a whole, and continued effectiveness of the documents granting security for the loans. Although the Company believes that it presently meets all of the conditions to making further draws under the

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Credit Facility, factors beyond the Company’s control could cause the Company to fail to meet these conditions in the future.

         The Company’s credit facility contains certain financial covenants, including leverage and interest coverage ratios. These ratios are primarily derived from EBITDA and debt levels, and are summarized in the table below. The table reflects the changes provided for in the amendment effective October 29, 2002. As of September 30, 2002, the Company was in compliance with all of its covenants under its debt agreements.