UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-30218
TIME WARNER TELECOM INC.
------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1500624
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10475 Park Meadows Drive
Littleton, Colorado 80124
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 566-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of Time Warner Telecom Inc.'s common stock as
of April 30, 2001 was:
Time Warner Telecom Inc. Class A common stock -- 41,962,633 shares
Time Warner Telecom Inc. Class B common stock -- 72,226,500 shares
TIME WARNER TELECOM INC.
INDEX TO FORM 10-Q
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Page
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Part I. Financial Information
---------------------
Item 1. Financial Statements:
---------------------
Consolidated and Condensed Balance Sheets at March 31,
2001 and December 31, 2000 1
Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 3
Consolidated Statement of Changes in Stockholders' Equity
for the three months ended March 31, 2001 4
Notes to Consolidated and Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Part II. Other Information
-----------------
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 6. Exhibits and Reports on Form 8-K 24
TIME WARNER TELECOM INC.
CONSOLIDATED AND CONDENSED BALANCE SHEETS
March 31 December 31,
2001 2000
----------- -------------
(unaudited)
(amounts in thousands,
except share amounts)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 513,049 71,739
Cash held in escrow................................................................. - 179,000
Marketable debt securities.......................................................... 36,762 3,496
Receivables, less allowances of $26,677 and $17,610, respectively................... 86,064 83,027
Prepaid expenses.................................................................... 4,552 2,505
Deferred income taxes............................................................... 37,475 34,418
----------- -------------
Total current assets............................................................. 677,902 374,185
----------- -------------
Property, plant and equipment......................................................... 1,981,644 1,195,744
Less accumulated depreciation....................................................... (325,564) (283,572)
----------- -------------
1,656,080 912,172
----------- -------------
Intangible and other assets, net of accumulated amortization (notes 1 and 2).......... 90,281 101,397
----------- -------------
Total assets..................................................................... $ 2,424,263 1,387,754
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 65,947 72,041
Deferred revenue.................................................................... 64,987 53,286
Other current liabilities........................................................... 213,460 159,390
----------- -------------
Total current liabilities........................................................ 344,394 284,717
----------- -------------
Long-term debt and capital lease obligations (note 3)................................. 1,066,913 585,107
Deferred income taxes................................................................. 12,121 46,163
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,
41,932,631 and 33,702,461 shares issued and outstanding in 2001
and 2000, respectively............................................................ 419 337
Class B common stock, $0.01 par value, 162,500,000 shares authorized,
72,226,500 shares issued and outstanding in 2000 and 2001......................... 722 722
Additional paid-in capital.......................................................... 1,160,512 601,081
Accumulated other comprehensive income, net of taxes................................ 4,754 6,492
Accumulated deficit................................................................. (165,572) (136,865)
----------- -------------
Total stockholders' equity....................................................... 1,000,835 471,767
----------- -------------
Total liabilities and stockholders' equity....................................... $ 2,424,263 1,387,754
=========== =============
See accompanying notes.
1
TIME WARNER TELECOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
--------------------------
2001 2000
---------- ----------
(amounts in thousands,
except per share amounts)
Revenue:
Dedicated transport services..................................... $ 106,586 51,938
Switched services................................................ 66,541 48,200
---------- ----------
Total revenue................................................. 173,127 100,138
---------- ----------
Costs and expenses (a):
Operating........................................................ 78,705 38,989
Selling, general and administrative.............................. 60,570 37,691
Depreciation and amortization.................................... 52,675 21,864
---------- ----------
Total costs and expenses...................................... 191,950 98,544
---------- ----------
Operating income (loss)............................................... (18,823) 1,594
Interest expense...................................................... (34,736) (9,727)
Interest income....................................................... 6,660 3,520
---------- ----------
Net loss before income taxes.......................................... (46,899) (4,613)
Income tax benefit.................................................... (18,192) (1,753)
---------- ----------
Net loss.............................................................. $ (28,707) (2,860)
========== ==========
Basic and diluted loss per common share $ (0.26) (0.03)
========== ==========
Weighted average shares outstanding 111,813 104,975
========== ==========
(a) Includes expenses resulting from transactions with affilitates (note 4):
Operating..................................................... $ 679 636
========== ==========
Selling, general and administrative........................... $ 384 303
========== ==========
Depreciation and amortization................................. $ 3,025 2,772
========== ==========
See accompanying notes.
2
TIME WARNER TELECOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------------
2001 2000
---------- ----------
(amounts in thousands)
Cash flows from operating activities:
Net loss................................................................................. $ (28,707) (2,860)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization......................................................... 52,675 21,864
Impairment of deferred debt issue costs............................................... 5,814 -
Amortization of deferred debt issue costs............................................. 1,014 60
Deferred income tax benefit........................................................... (18,416) (1,753)
Changes in operating assets and liabilities, net of the effect of an acquisition:
Receivables and prepaid expenses................................................... 9,797 (7,353)
Accounts payable, deferred revenue and other current liabilities................... 17,833 6,881
---------- ----------
Net cash provided by operating activities....................................... 40,010 16,839
---------- ----------
Cash flows from investing activities:
Capital expenditures..................................................................... (95,608) (62,329)
Cash paid for an acquisition............................................................. (651,689) -
Purchases of marketable securities....................................................... (36,766) (66,315)
Proceeds from maturities of marketable securities........................................ 3,500 100,775
Other investing activities............................................................... 1,074 (3,000)
---------- ----------
Net cash used in investing activities............................................ (779,489) (30,869)
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock............................................... 532,178 -
Net proceeds from issuance of debt....................................................... 1,159,582 -
Repayments of debt....................................................................... (700,000) -
Net proceeds from issuance of common stock upon exercise of stock options................ 9,822 5,549
Payment of capital lease obligations..................................................... (871) (91)
Net rebate of deferred debt issue costs.................................................. 1,078 -
---------- ----------
Net cash provided by financing activities........................................ 1,001,789 5,458
---------- ----------
Increase (decrease) in cash, cash equivalents, and cash held in escrow........... 262,310 (8,572)
Cash, cash equivalents, and cash held in escrow at beginning of period........... 250,739 90,586
---------- ----------
Cash, cash equivalents, and cash held in escrow at end of period................. $ 513,049 82,014
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 29,852 19,164
========== ==========
Tax benefit related to exercise of non-qualified stock options.................... $ 17,513 3,959
========== ==========
Cash paid for income taxes........................................................ $ 75 -
========== ==========
See accompanying notes.
3
TIME WARNER TELECOM INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2001
(Unaudited)
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, 2001................ 33,702 $ 337 72,227 $ 722 601,081 6,492 (136,865) 471,767
Issance of common stock, net of
offering expenses of $24,243
(note 1) 7,475 75 - - 532,103 - - 532,178
Shares issued for cash in connection
with the exercise of stock options.. 756 7 - - 27,328 - - 27,335
Change in unrealized holding gain for
available-for-sale security, net
of taxes............................ - - - - - (1,738) - (1,738)
Net loss............................... - - - - - - (28,707) (28,707)
------ ------ ------ ------ ---------- ------------- ----------- -------------
Balance at March 31, 2001................. 41,933 $ 419 72,227 $ 722 1,160,512 4,754 (165,572) 1,000,835
====== ====== ====== ====== ========== ============= =========== =============
See accompanying notes.
4
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
March 31, 2001
(unaudited)
1. Organization and Summary of Significant Accounting Policies
Description of Business and Capital Structure
Time Warner Telecom Inc. (the "Company"), a Delaware corporation, is a
leading fiber facilities-based provider of integrated communications
services and solutions to medium and large-sized 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.
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 Time Warner Inc., a wholly owned
subsidiary of AOL Time Warner Inc. ("Time Warner"), AT&T Corp., Advance
Telecom Holdings Corporation, and Newhouse Telecom Holdings Corporation.
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 March 31,
2001, the Class B Stockholders had approximately 94.5% 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"). The Offering generated $532.2 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") (see note 2). The
remaining net proceeds from the offering of the Old Notes will be used for
capital expenditures, working capital, and general corporate purposes.
Basis of Presentation
The accompanying interim consolidated and condensed financial
statements are unaudited, but in the opinion of management, reflect all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of operations for
any interim period are not necessarily indicative of results for the full
year. The accompanying financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto for
the year ended December 31, 2000.
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.
5
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS--continued
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 are disclosed as related party transactions.
Investments
Marketable equity securities held by the Company are classified as
available-for-sale. Accordingly, these securities are included in other
assets at fair value. Unrealized holding gains and losses on securities
classified as available-for-sale are carried net of taxes as a component of
accumulated other comprehensive income in stockholders' equity. Other
investments which are not considered marketable securities and in which
ownership interest is less than 20% are generally carried at the lower of
cost or net realizable value. Realized gains and losses are determined on
a specific identification basis.
At March 31, 2001, the fair value of the Company's available-for-sale
security was $10.9 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
March 31, 2001, the unrealized holding gain on this security was $4.8
million, net of taxes. There were no sales of marketable securities for the
three months ended March 31, 2001 and 2000, respectively.
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 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 represented 6% and 8% of
revenue for the three months ended March 31, 2001 and 2000, respectively,
excluding the effects of the recognition of $3.9 million of non-recurring
reciprocal compensation during the three months ended March 31, 2000.
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. 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. 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.
6
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS--continued
As of March 31, 2001, the Company had deferred recognition of $44.9
million in reciprocal compensation revenue for payments received associated
with pending disputes and agreements that are subject to future reciprocal
compensation adjustments. Subsequent to March 31, 2001, the Company
resolved some of these disputes and accordingly, expects to recognize a
portion of such deferred revenue as non-recurring reciprocal compensation
during the second quarter of 2001.
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 incumbent local exchange carriers ("ILECs"), while the
competitive local exchange carriers' ("CLEC") access rates have been less
regulated. However, on April 27, 2001, the FCC released an order in its
ongoing Access Reform proceeding that subjects CLECs' interstate switched
access charges to regulation. Effective with that order, the Company's
rates will be reduced over a three-year period to parity with the ILEC
rates competing in each area. The FCC made it clear that long distance
carriers cannot withhold payment for CLEC access services at the prescribed
rates, as they have in the past with the Company's and other CLECs'
tariffed rates. This order also does not affect rates subject to contracts
that the Company has entered into with certain long distance carriers.
Switched access revenue represented 8% and 12% of total revenue for the
three months ended March 31, 2001 and 2000, respectively, excluding the
effects of the recognition of $3.9 million of non-recurring reciprocal
compensation during the three months ended March 31, 2000. The Company
expects, as it previously anticipated, that switched access revenue
7
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS--continued
will decline as a percentage of the Company's total revenue. There is no
assurance that the Company will be able to compensate for reductions in
switched access revenue resulting from the FCC order with revenue from
other sources.
Segment Reporting
The Company operates in 39 service areas and the Company's management
makes decisions on resource allocation and assesses performance based on
total revenue, EBITDA, and capital spending of these operating locations.
Each of the service areas offers the same products and services, has
similar customers and networks, is regulated by the same type of
authorities, and is managed directly by the Company's executives, allowing
the 39 service areas to be aggregated, resulting in one reportable line of
business.
Loss Per Common Share
The basic and diluted loss per common share for all periods presented
herein was computed by dividing the net loss attributable to common shares
by the weighted average outstanding common shares for the period.
Potential common shares were not included in the computation of weighted
average shares outstanding because their inclusion would be anti-dilutive.
Reclassifications
Certain prior period amounts have been reclassified for comparability
with the 2001 presentation.
Recent Accounting Pronouncement
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 was 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 are either offset through
income or recognized in other comprehensive income until the hedged item is
recognized in earnings. The adoption of SFAS 133 on January 1, 2001 did not
have a material effect on the Company's financial condition, results of
operations, or cash flows because the Company does not own any derivative
instruments.
2. Acquisition
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 approximately $627 million,
including a $10 million deposit paid in 2000, plus the payment of certain
liabilities and fees of approximately $42 million, and the assumption of an
approximate $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, approximately 4,210 route miles, and
approximately 227,674 fiber miles in the western United States. This
transaction will be accounted for under the purchase method of accounting.
8
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS--continued
The acquisition is summarized as follows (amounts in thousands):
2001
--------
Recorded value of fixed assets acquired $699,331
Receivables, prepaids, and other assets 15,244
Deposit paid in 2000 (10,000)
Assumed liabilities (52,886)
--------
Cash paid for acquisition in 2001 $651,689
========
The allocation of the purchase price is preliminary, and is subject to
further evaluation of the assets purchased and liabilities assumed. Since
this acquisition is accounted for as a purchase, the results of operations
are consolidated with the Company's results of operations from the
acquisition date. Had this acquisition occurred on January 1, 2000, total
revenue, net loss, and basic and diluted loss per common share for the
three months ended March 31, 2000 would have been approximately $130
million, $43 million, and $(0.38), respectively.
3. Long-Term Debt
Long-term debt is summarized as follows:
March 31, December 31,
2001 2000
---------- ------------
(amounts in thousands)
9 3/4% Senior Notes $ 400,000 400,000
10 1/8% Senior Notes 400,000 --
Credit Facility 250,000 179,000
---------- ------------
$1,050,000 579,000
========== ============
The $400 million principal amount 9 3/4% Senior Notes due July 2008
(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 $10.1 million for both the three months
ended March 31, 2001 and 2000, respectively. At March 31, 2001, the fair
market value of the $400 million of 9 3/4% Senior Notes was $395 million,
based on market prices.
The $400 million in principal amount of 10 1/8% Senior Notes are
unsecured, subordinated 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. Interest expense, including amortization of debt
discount, relating to the 10 1/8% Senior Notes totaled approximately $7.7
million for the three months ended March 31, 2001. At March 31, 2001, the
fair market value of the $400 million of 10 1/8% Senior Notes was $400
million, based on market prices.
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.
9
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS--continued
On April 10, 2000, the Company executed a $475 million Senior Secured
Revolving Credit Facility (the "Revolver"). The Revolver had a final
maturity of December 31, 2007, with annual reductions in the principal
amount available under the Revolver commencing on December 31, 2004.
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 Credit Facility has a final maturity of December 31, 2007,
with annual reductions in the principal amount available under the $475
million senior secured revolving credit facility commencing on December 31,
2004. 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, including closing the senior unsecured
bridge loan facility, with the net proceeds from the Offering and a portion
of the net proceeds from the sale of the Old Notes. 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, as well as $3.5 million in interest expense in the first quarter
of 2001. 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. Interest
expense on the $250 million drawn under the revolving credit facility is
computed utilizing a specific Eurodollar Rate plus 4.0%, which totaled 9.0%
as of March 31, 2001. Interest is payable at least quarterly. Interest
expense, including amortization of debt discount, relating to the $250
million draw was $6.3 million for the three months ended March 31, 2001.
At March 31, 2001, the undrawn available commitment under the Credit
Facility was $750 million. 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
$1.8 million for the three months ended March 31, 2001 and has been
classified as a component of interest expense in the accompanying
consolidated statements of operations.
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.
10
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS--continued
4. Related Party Transactions
In the normal course of business, the Company engages in various
transactions with Time Warner, 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
both through access to local right-of-way and construction cost-sharing.
The Company's networks have been constructed primarily through the use of
fiber capacity licensed from Time Warner. Under this licensing
arrangement, the Company paid Time Warner $263,000 and $42,000 for the
three months ended March 31, 2001 and 2000, respectively. These costs have
been capitalized by the Company. The amortization expense of these costs
and fiber previously capitalized in the amount of $3.0 million and $2.8
million for the three months ended March 31, 2001 and 2000, respectively,
has been classified as a component of depreciation and amortization expense
in the accompanying consolidated statements of operations. In addition,
under this licensing arrangement, the Company reimburses Time Warner for
facility maintenance and pole rental costs, which aggregated $679,000 and
$636,000 for the three months ended March 31, 2001 and 2000, respectively.
The Company's operations, which in certain cases are co-located with
Time Warner's divisions, are allocated a charge for various overhead
expenses for services provided by these divisions. The Company is also
allocated rent based on the square footage of space occupied by the Company
at Time Warner's facilities. These costs are based on contracts with Time
Warner. These charges aggregated $384,000 and $303,000 for the three
months ended March 31, 2001 and 2000, respectively.
5. Commitments and Contingencies
Pending legal proceedings are substantially limited to litigation
incidental to the business of the Company. In the opinion of management,
the ultimate resolution of these matters will not have a material adverse
effect on the Company's financial statements.
11
TIME WARNER TELECOM INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautions Concerning Forward Looking Statements
The following discussion and analysis provides information concerning the
results of operations and financial condition of Time Warner Telecom Inc. (the
"Company") and should be read in conjunction with the accompanying financial
statements and notes thereto. Additionally, the following discussion and
analysis should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations and the consolidated financial
statements included in Part II of Time Warner Telecom Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2000.
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,
expansion plans, product plans, business, financing plans, and the impacts of
regulatory developments. These forward-looking statements are based on
management's current expectations and are naturally subject to risks,
uncertainties, and changes in circumstances, many 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 in the
Company's previous filings with the Securities and Exchange Commission,
especially those set forth under "Risk Factors" in Item 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2000 and elsewhere in
that report and this report. Other factors could also cause actual results to
differ from those contained in the forward-looking statements, including
increased customer financial difficulties or bankruptcies, adverse regulatory
decisions or unfavorable legislation, further economic slowdown, increased
interest rates, failure to meet cash flow expectations, and changes to the
Company's plans or strategies. 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.
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. On
January 10, 2001, the Company expanded its geographic coverage by acquiring
substantially all of the assets of GST Telecommunications, Inc. ("GST") out of
bankruptcy. See "Acquisition" below. The Company serves customers in 39
metropolitan markets in the United States and plans to activate networks in
Chicago, Illinois; Atlanta, Georgia; Minneapolis, Minnesota; Denver, Colorado;
and Columbia, South Carolina prior to the end of 2001.
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. The Class B common stock is
collectively owned by Time Warner Inc., a wholly owned subsidiary of the AOL
Time Warner Inc. ("Time Warner"), AT&T Corp., Advance Telecom Holdings
Corporation, and Newhouse Telecom Holdings Corporation. 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
12
TIME WARNER TELECOM INC.
as a class. As of March 31, 2001, the Class B Stockholders had approximately
94.5% 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"). The Offering generated $532.2 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 the GST assets. The remaining net proceeds from the offering
of the Old Notes will be used for capital expenditures, working capital, and
general corporate purposes.
Acquisition
On January 10, 2001, the Company completed the acquisition of substantially
all of the assets of GST for cash consideration of approximately $627 million,
plus the payment of certain liabilities and fees of approximately $42 million,
and the assumption of an approximate $21 million obligation to complete certain
fiber networks, for a total purchase price of $690 million. The acquisition
added to the Company's network approximately 4,210 route miles, and
approximately 227,674 fiber miles in the western United States.
The Company has completed the initial integration of former GST personnel
into the Company's organization and has implemented its corporate-wide financial
reporting system for the acquired operations. 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.
The Company's acquisition of the GST assets increases its geographic
presence, expands its products and services, and enlarges the capacity of its
networks. This transaction is considerably larger than the transactions the
Company has completed in the past and therefore presents risks related to the
successful integration of the acquired assets into the Company's business
including costs related to integration and diversion of resources away from the
Company's existing operations. In addition, the Company 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 the Company
already serves and increasing its operational efficiencies. Achieving the
benefits of the asset purchase will depend upon the successful integration of
the acquired businesses into the Company's existing operations. There is no
assurance that the Company will be successful in integrating the acquired GST
assets into its current businesses. In addition, there is a risk that the costs
of integration could have a material adverse effect on the Company's operating
results.
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TIME WARNER TELECOM INC.
Results of Operations
The following table sets forth certain consolidated statements of
operations data of the Company, in thousands of dollars and expressed as a
percentage of total revenue, for each of the periods presented. This table
should be read together with the Company's financial statements, including the
notes thereto, appearing elsewhere in this report:
Three Months Ended March 31,
--------------------------------------------------------
2001 2000
--------------------- ----------------------
(amounts in thousands, except per share amounts)
Statements of Operations Data:
Revenue:
Dedicated transport services $ 106,586 62 % 51,938 52 %
Switched services (1) 66,541 38 48,200 48
---------- ---- ---------- ----
173,127 100 100,138 100
---------- ---- ---------- ----
Costs and expenses (2):
Operating 78,705 46 38,989 39
Selling, general and administrative 60,570 35 37,691 37
Depreciation and amortization 52,675 30 21,864 22
---------- ---- ---------- ----
Total costs and expenses 191,950 111 98,544 98
---------- ---- ---------- ----
Operating income (loss) (18,823) (11) 1,594 2
Interest expense (34,736) (20) (9,727) (10)
Interest income 6,660 4 3,520 3
---------- ---- ---------- ----
Net loss before income taxes (46,899) (27) (4,613) (5)
Income tax benefit (18,192) (10) (1,753) (2)
---------- ---- ---------- ----
Net loss $ (28,707) (17)% (2,860) (3)%
========== ==== ========== ====
Basic and diluted loss per common share $ (0.26) (0.03)
Weighted average shares outstanding 111,813 104,975
EBITDA (1) (3) $ 33,852 20 % 23,458 23 %
Net cash provided by operating activities 40,010 16,839
Net cash used in investing activities (779,489) (30,869)
Net cash provided by financing activities 1,001,789 5,458
(1) Includes the recognition of $3.9 million of non-recurring reciprocal
compensation in the first quarter of 2000.
(2) Includes expenses resulting from transactions with affiliates of $4.1
million and $3.7 million for the three months ended March 31, 2001 and
2000, respectively.
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TIME WARNER TELECOM INC.
(3) "EBITDA" is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provision for income taxes. Accordingly, EBITDA is not intended to replace
operating income (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 these measures. Management believes that EBITDA is a standard measure
of operating performance and liquidity that is commonly reported and widely
used by analysts, investors, and other interested parties in the
telecommunications industry because it eliminates many differences in
financial, capitalization, and tax structures, as well as non-operating
one-time charges to earnings. EBITDA is used internally by the Company's
management to assess ongoing operations and is a component of a covenant of
the 9 3/4% Senior Notes and the 10 1/8% Senior Notes that limits the
Company's ability to incur certain additional future indebtedness. However,
EBITDA as used in this report may not be comparable to similarly titled
measures reported by other companies due to differences in accounting
policies.
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. 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 time.
The Company continues to expand its footprint within its existing markets
by expanding its network into new buildings. Through the acquisition of the GST
assets in the first quarter of 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 Internet Protocol 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.
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.
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 represented 6% and 8% of revenue for the three
months ended March 31, 2001 and 2000, respectively, excluding the effects of the
recognition of $3.9 million of non-recurring reciprocal compensation during the
three months ended March 31, 2000. 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. 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
15
TIME WARNER TELECOM INC.
generic rulings with respect to reciprocal compensation for ISP traffic. 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.
On April 27, 2001, the Federal Communications Commission ("FCC") released
an order addressing a prior ruling of the U.S. Court of Appeals for the District
of Columbia Circuit in which the FCC reaffirmed its jurisdiction over dial-up
Internet-bound traffic, and adopted an interim carrier-to-carrier cost recovery
scheme for such traffic. The new scheme will reduce the maximum compensation
rate for dial-up Internet-bound traffic in phases over a three-year period.
Simultaneously the FCC initiated a rulemaking to consider whether it should
replace all existing intercarrier compensation schemes with some form of "bill
and keep." Additionally, the ruling, once effective, will require "bill and
keep" payment arrangements for Internet-bound traffic as carriers enter new
markets. "Bill and keep" means that the carrier would neither pay reciprocal
compensation to other carriers nor receive reciprocal compensation from other
carriers for Internet-bound traffic in those markets. The Company expects the
ruling to be effective by the end of the second quarter of 2001. Historically,
the Company has not relied on generation of reciprocal compensation revenue to
achieve payback when entering new markets and therefore does not expect the
ruling to impact its ability to achieve its financial objective for its new
markets. Effective with the new rules, state commissions will no longer have
authority over matters pertaining to the compensation of Internet-bound traffic.
However, state commission decisions regarding this traffic for prior periods are
not affected by the order. The Company expects that there will be legal
challenges to the FCC's order. There is no assurance, however, that any legal
challenge will be successful or that a successful challenge will change the
trend toward reduced reciprocal compensation.
The Company expects that the ruling, if it stands, will result in
reciprocal compensation revenue decreasing as a percentage of total revenue.
However, total revenue from reciprocal compensation is not expected to
significantly decline since the Company's policy has historically been to defer
a portion of reciprocal compensation revenue that was subject to future
adjustment. Because the ruling is only interim in nature, is subject to further
interpretation or could be replaced with a different regulatory scheme, there is
no assurance that the Company's reciprocal compensation revenue will not be
further decreased or eliminated completely.
As of March 31, 2001, the Company had deferred recognition of $44.9 million
in reciprocal compensation revenue for payments received associated with pending
disputes and agreements that are subject to future reciprocal compensation
adjustments. Subsequent to March 31, 2001, the Company resolved some of these
disputes and accordingly, expects to recognize a portion of such deferred
revenue as non-recurring reciprocal compensation during the second quarter of
2001.
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
incumbent local exchange carriers ("ILECs"), while the competitive local
exchange carriers' ("CLEC") access rates have been less regulated. However, on
April 27, 2001, the FCC released an order in its ongoing Access Reform
proceeding that subjects CLECs' interstate switched access charges to
regulation. Effective with that order, the Company's rates will be reduced over
a three-year period to parity with the ILEC rates competing in each area. The
FCC made it clear that long distance carriers cannot withhold payment for CLEC
access services at the prescribed rates, as they have in the past with the
Company's and other CLECs' tariffed rates. This order also does not affect
rates subject to contracts that the Company has entered into with certain long
distance carriers. Switched access revenue represented 8% and 12% of total
revenue for the three months ended March 31, 2001 and 2000, respectively,
excluding the effects of the recognition of $3.9 million of non-recurring
reciprocal compensation during the three months ended March 31, 2000. The
Company expects, as it previously anticipated, that switched access revenue will
decline as a percentage of the Company's total revenue. There is no assurance
that the Company will be able to compensate for reductions in switched access
revenue resulting from the FCC order with revenue from other sources.
16
TIME WARNER TELECOM INC.
The Company benefits from its strategic relationship with Time Warner 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
primarily through the use of fiber capacity licensed from Time Warner. As of
March 31, 2001, the Company operated networks in 39 metropolitan areas that
spanned 14,680 route miles, contained 620,963 fiber miles, and offered service
to 9,637 on-net and off-net buildings.
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 these 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. These expenses include costs related to sales and marketing,
including bad debt expense, 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, generally on negotiated terms among the affected
units that, in management's view, result in reasonable allocations. The Company
entered into several contracts with Time Warner with respect to certain of these
transactions. The Company's selling, general, and administrative expenses
include charges allocated from Time Warner 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
through prepaid right-to-use agreements and reimburses Time Warner for facility
maintenance and pole rental costs. The maintenance and pole rental costs are
included in the Company's operating expenses.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Revenue. Total revenue increased $73.0 million, or 73%, to $173.1 million
for the three months ended March 31, 2001, from $100.1 million for the
comparable period in 2000. Revenue from the provision of dedicated transport
services increased $54.6 million, or 105%, to $106.6 million for the three
months ended March 31, 2001, from $51.9 million for the comparable period in
2000. Switched service revenue increased $18.3 million, or 38%, to $66.5
million for the three months ended March 31, 2001, from $48.2 million for the
comparable period in 2000. Included in total revenue for the three months ended
March 31, 2001 is $4.6 million in services provided to the GST bankruptcy estate
and to transitional customers, which is not expected to continue. Reciprocal
compensation represented 6% and 8% of total revenue for the three months ended
March 31, 2001 and 2000, respectively, excluding the effects of the recognition
of $3.9 million of non-recurring reciprocal compensation during the three months
ended March 31, 2000. At March 31, 2001 the Company offered dedicated transport
services in 39 metropolitan areas, all of which also offered switched services.
At March 31, 2000, the Company offered dedicated transport services in 21
consolidated metropolitan areas, 20 of which also offered switched services.
Exclusive of the effects of the GST asset acquisition during the three
months ended March 31, 2001 and the effects of the recognition of $3.9 million
of non-recurring reciprocal compensation during the three months ended March 31,
2000, total revenue increased $50.9 million, or 53% to $147.2 million, from
$96.2 million for the comparable period in 2000. Exclusive of the effects of
the GST asset acquisition during the three months ended March 31, 2001 and the
effects of the recognition of $3.9 million of non-recurring reciprocal
compensation during the three months ended March 31, 2000, dedicated transport
service and switched service revenue increased 77% and 25%, respectively. The
increase in revenue from dedicated
17
TIME WARNER TELECOM INC.
transport services primarily reflects a 22% 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 58%
increase in average switched service customers, increased revenue from switched
access services and reciprocal compensation, and a broader array of products and
services offered in existing markets.
Due to the impacts of a slowing economy, customers going out of business,
customers cutting costs, and customer bankruptcies, the Company has been
experiencing pressure on revenue growth. Management believes that if these
trends continue, the Company may not achieve the same rate of revenue growth as
it achieved previously. However, the dislocation in the telecommunications and
Internet service provider sectors may benefit the Company in the following
respects:
. as some emerging providers go out of business, their customers may seek
to purchase services from the Company;
. the failure of some emerging telecommunications providers may reduce
some of the artificially low pricing of services that exists in the
market for certain telecommunications services; and
. the availability of experienced telecommunications personnel may
improve.
There is no assurance that the Company will realize any benefits from the
downturn in these sectors or that the Company will not be adversely affected by
conditions in its market sectors or the economy in general.
Since the GST assets were purchased out of bankruptcy and require
considerable integration work before they perform to the standards of the
Company's other markets, the Company does not expect significant revenue growth
from the GST assets during 2001.
Operating Expenses. Operating expenses increased $39.7 million, or 102%,
to $78.7 million for the three months ended March 31, 2001, from $39.0 million
for the comparable period in 2000. Exclusive of the effects of the GST asset
acquisition, these expenses increased 51%. 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 total revenue,
operating expenses increased to 46% for the three months ended March 31, 2001
from 39% for the comparable period in 2000, primarily as a result of the
acquired assets and development of new markets.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased $22.9 million, or 61%, to $60.6 million for
the three months ended March 31, 2001, from $37.7 million for the comparable
period in 2000. Exclusive of the effects of the GST asset acquisition, these
expenses increased 34%. The increase in selling, general, and administrative
expenses was primarily attributable to an increase in employee headcount and
higher direct sales costs associated with the increase in revenue, higher
property tax expense, and an increase in the provision for doubtful accounts
related to the increase in revenue. As a percentage of total revenue, selling,
general, and administrative expenses decreased to 35% for the three months ended
March 31, 2001 from 37% for the comparable period in 2000.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $30.8 million, or 141%, to $52.7 million for the three months
ended March 31, 2001, from $21.9 million for the comparable period in 2000.
Exclusive of the effects of the GST asset acquisition, this expense increased
76%. The increase in depreciation and amortization expense was primarily
attributable to an impairment of certain non-revenue generating assets and
increased capital expenditures.
EBITDA. EBITDA for the three months ended March 31, 2001 increased $10.4
million to $33.9 million, from $23.5 million in 2000. The increase was $14.2
million, exclusive of the effects of the GST asset acquisition. 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.
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TIME WARNER TELECOM INC.
Interest Expense. On July 21, 1998, the Company issued $400 million in
9 3/4% Senior Notes in a public offering. During the first quarter of 2001, the
Company issued $400 million in 10 1/8% Senior Notes and drew $250 million on its
Credit Facility. Interest expense relating to the 9 3/4% Senior Notes, the
10 1/8% Senior Notes, and the Credit Facility was $25.9 million for the three
months ended March 31, 2001. Additionally, 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 as well as $3.5 million in
interest expense in the first quarter of 2001. Interest expense relating to the
9 3/4% Senior Notes was $10.1 million for the three months ended March 31, 2000.
Net Loss. Net loss increased $25.8 million to a loss of $28.7 million for
the three months ended March 31, 2001, from a net loss of $2.9 million for the
comparable period in 2000. The earnings change is primarily due to an increase
in depreciation expense and net interest expense, partially offset by an
increase in the deferred tax benefit and an increase in EBITDA.
Liquidity and Capital Resources
Operations. The Company's cash provided by operating activities was $40.0
million for the three months ended March 31, 2001, as compared to $16.8 million
for the comparable period in 2000. This increase in cash provided by operating
activities of $23.2 million principally resulted from an increase in EBITDA and
a decrease in working capital.
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 the new market until an
adequate customer base and revenue stream for the new market has been
established. Accordingly, the Company expects that the network constructed in
each new market will generally produce negative EBITDA from the new market 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 was $779.5 million for the
three months ended March 31, 2001, as compared to $30.9 million for the
comparable period in 2000. During the three months ended March 31, 2001, the
Company used its proceeds from the issuance of common stock and a portion of the
proceeds from the issuance of debt to fund the GST acquisition, capital
expenditures, and net purchases of marketable securities. During the three
months ended March 31, 2000, proceeds from the maturities of marketable
securities and cash flow from operating activities were primarily used to fund
capital expenditures.
During the three months ended March 31, 2001, capital expenditures were
$95.6 million, an increase of $33.3 million from the comparable period in 2000.
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 671 route miles of fiber since December 31, 2000, which is exclusive
of 4,210 route miles of fiber acquired in connection with the GST asset
acquisition. Based on historic capital requirements for network construction in
relation to sales volumes 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. However, if revenue growth slows, the Company
may reduce its capital spending as the Company's capital spending is
largely success-based.
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:
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TIME WARNER TELECOM INC.
. 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 development and expansion of the Company's existing
and future networks and services will require significant capital expenditures.
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.
While the Company intends to continue to leverage its relationship with
Time Warner in pursuing expansion opportunities, to the extent the Company seeks
to expand into service areas where Time Warner does not conduct cable
operations, the Company may incur additional costs in excess of those
historically incurred when expanding into existing Time Warner service areas. In
addition, Time Warner is not obligated to construct or provide additional fiber
optic capacity in excess of what is already licensed to the Company under
certain operating agreements. Accordingly, if the Company is unable to lease
additional capacity at the same rates as are currently provided for under
certain operating agreements, the Company may be required to obtain additional
capacity on more expensive terms.
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. The Credit Facility has a final maturity of
December 31, 2007, with annual reductions in the principal amount available
under the $475 million senior secured credit facility commencing on December 31,
2004. 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. See "Financing"
below.
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, in part 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 recorded $5.8 million of deferred financing costs as a non-recurring
expense as well as $3.5 million in interest expense in the first quarter of
2001. In connection with the issuance of Class A common stock, approximately
$24.2 million of unamortized deferred financing costs was reclassified to
additional paid-in capital in the first quarter of 2001.
The Company expects that the $550 million in cash, cash equivalents, and
marketable debt securities at March 31, 2001, borrowings under the $1 billion
credit facility, along with internally generated funds, will provide sufficient
funds for the Company to meet its expected capital and liquidity needs to expand
its
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TIME WARNER TELECOM INC.
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. 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 any future financing may include public or private debt,
equity financing by the Company or its subsidiaries, or other financing
arrangements.
Financing. Net cash provided by financing activities for the three months
ended March 31, 2001 was $1.0 billion and was primarily due to the net proceeds
from both the issuance of common stock and debt.
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 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, 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.
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.
Interest on the $250 million drawn under the revolving credit facility is
computed utilizing a specified Eurodollar Rate plus 4.0%, which totaled 9.0% on
March 31, 2001. Interest is payable at least quarterly at the end of each
quarter, beginning in March 2001. Based on the rate in effect on March 31, 2001,
aggregate annual interest payments are expected to be approximately $23 million
through 2008. These anticipated payments will fluctuate with changes in amounts
borrowed and changes in the interest rate.
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 acquired from 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.
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TIME WARNER TELECOM INC.
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.
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TIME WARNER TELECOM INC.
Part II
Other Information
Item 1. Legal Proceedings
The Company has no material legal proceedings pending.
Item 2. Changes in Securities and Use of Proceeds
On January 24, 2001, the Company completed a private placement to qualified
institutional buyers under Rule 144A and outside the United States in compliance
with Regulation S of $400,000,000 principal amount 10 1/8% Senior Notes due 2011
(the "Old Notes"). The Old Notes offering was underwritten through a placement
agreement with Morgan Stanley & Co. Incorporated, Lehman Brothers Inc., Chase
Securities Inc., Bear, Sterns & Co. Inc., and ABN Amro Incorporated. The
aggregate offering price of the Old Notes was $400,000,000 and the aggregate
underwriting discounts, commissions, and expenses were $11,418,000. On
February 14, 2001, the Company initiated an offer to the holders of the Old
Notes to exchange their Old Notes for new 10 1/8% Senior Notes due 2011 that
have been registered under the Securities Act of 1933 with the same financial
terms as the Old Notes. The exchange offer expired March 23, 2001. All of the
holders of the Old Notes exchanged their notes pursuant to the offer.
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TIME WARNER TELECOM INC.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as part of this report and the Exhibit Index
is incorporated herein by reference.
(b) Reports on Form 8-K
(i) 8-K dated January 20, 2001 reporting the completion of the
Company's acquisition of substantially all of the assets of
GST Telecommunications, Inc., the effectiveness of the
Company's Amended and Restated Credit Agreement and
borrowings under a bridge loan facility, together with
financial statements of GST and pro forma financial
statements of the Company giving effect to the acquisition
of substantially all of the assets of GST.
(ii) 8-K dated January 18, 2001 furnishing a press release.
(iii) 8-K dated January 18, 2001 furnishing a press release with
respect to the Company's public offering of common stock.
(iv) 8-K dated January 25, 2001 furnishing a press release
regarding the pricing of its private offering of Senior
Notes.
(v) 8-K dated January 29, 2001 furnishing a press release
reporting the completion of the Company's private placement
of Senior Notes.
(vi) 8-K dated January 29, 2001 furnishing a press release
announcing the completion of the Company's public offering
of common stock.
(vii) 8-K dated February 7, 2001 furnishing a press release
announcing the Company's 2000 year end results.
(viii) 8-K dated March 13, 2001 furnishing investor presentation
materials.
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TIME WARNER TELECOM INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
2.1 -- Reorganization Agreement among Time Warner Companies, Inc.,
MediaOne Group, Inc., Advance/Newhouse Partnership, Time Warner
Entertainment Company, L.P., and Time Warner Entertainment-
Advance/Newhouse Partnership (filed as Exhibit 2.1 to Time Warner
Telecom ("TWT") LLC's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998. *
2.2 -- Merger Agreement among the Company, TWT LLC, and TWT Inc. (filed as
Exhibit 2.2 to the Company's Registration Statement on Form S-1
(Registration No. 333-49439)). *
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 2.2 to Company's Registration Statement on Form S-1
(Registration No. 333-49439)). *
3.2 -- Restated By-Laws of the Company (filed as Exhibit 3.2 to Company's
Registration Statement on Form S-1 (Registration No. 333-49439)). *
4.1 -- Stockholders' Agreement, among the Company, Time Warner Companies,
Inc., American Television and Communications Corporation, Warner
Communications Inc., TW/TAE Inc., FibrCOM Holdings, L.P., Paragon
Communications, MediaOne Group, Inc., Multimedia Communications,
Inc. and Advance/Newhouse Partnership (filed as Exhibit 4.1 to
Company's Registration Statement on Form S-1 (Registration No. 333-
49439)). *
4.2 -- Indenture, between TWT LLC, TWT Inc. and The Chase Manhattan Bank,
as Trustee (filed as Exhibit 4.1 to TWT LLC's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998). *
4.3 -- 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)). *
* Incorporated by reference.
25
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIME WARNER TELECOM INC.
Date: May 14, 2001 By: /s/ Jill R. Stuart
-------------------------------------------------
Jill R. Stuart
Vice President, Accounting and Finance and
Chief Accounting Officer