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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 2001
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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TIME WARNER TELECOM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 84-1500624
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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PARK RIDGE ONE
10475 PARK MEADOWS DRIVE
LITTLETON, COLORADO 80124
(303) 566-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
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PAUL B. JONES
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
TIME WARNER TELECOM INC.
PARK RIDGE ONE
10475 PARK MEADOWS DRIVE
LITTLETON, COLORADO 80124
(303) 566-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING PHONE NUMBER, OF AGENT FOR SERVICE)
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COPY TO:
WILLIAM P. ROGERS, JR
CRAVATH, SWAINE & MOORE
WORLDWIDE PLAZA, 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10019
(212) 474-1270
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As seen as
practicable after the effective date of this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1)
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10 1/8% Senior Notes Due 2011........ $400,000,000 100% $400,000,000
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TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
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10 1/8% Senior Notes Due 2011........ $100,000
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities Act of 1933.
(2) Calculated pursuant to Rule 457 under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED February 9, 2001
PROSPECTUS
[TIME WARNER LOGO BLUE]
[TIME WARNER LOGO GREY]
Time Warner Telecom Inc.
OFFER TO EXCHANGE
ALL OUTSTANDING 10 1/8% SENIOR NOTES DUE 2011 ($400,000,000 PRINCIPAL AMOUNT)
FOR
10 1/8% SENIOR NOTES DUE 2011 ($400,000,000 PRINCIPAL AMOUNT)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
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The exchange offer will expire at 5:00 p.m., New York City time, on
, 2001, unless extended.
We do not intend to list the new notes on any national securities
exchange, and no established trading market for the new notes is anticipated.
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SEE "RISK FACTORS" BEGINNING ON PAGE FOR A DISCUSSION OF FACTORS THAT
YOU SHOULD CONSIDER BEFORE TENDERING YOUR OLD NOTES.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is , 2001.
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TABLE OF CONTENTS
PAGE
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Summary............................... 5
Risk Factors.......................... 13
Use of Proceeds....................... 34
Recent Developments................... 34
Time Warner Telecom Voting
Structure........................... 35
Capitalization........................ 36
Unaudited Pro Forma Condensed Combined
Financial Statements................ 37
Selected Consolidated, Combined and
Condensed Financial and Other
Operating Data...................... 45
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 47
PAGE
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Business.............................. 60
Management............................ 80
Certain Relationships and Related
Transactions........................ 90
Principal Stockholders................ 94
Description of Certain Indebtedness... 96
Description of the New Notes.......... 99
Certain United States Federal Tax
Consequences........................ 136
Plan of Distribution.................. 140
Legal Matters......................... 141
Experts............................... 141
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FORWARD LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended, regarding, among other things, our plans, strategies and
prospects, both business and financial. Although we believe that our plans,
intentions and expectations reflected in or suggested by these forward-looking
statements are reasonable, we cannot assure you that we will achieve or realize
these plans, intentions or expectations. Forward-looking statements are
inherently subject to risks, uncertainties and assumptions. Many of the
forward-looking statements contained in this prospectus may be identified by the
use of forward-looking words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential," among others. Important
factors that could cause actual results to differ materially from the
forward-looking statements we make in this prospectus are set forth in this
prospectus and include, but are not limited to:
-- our plans to achieve growth by offering new products and services;
-- our anticipated capital expenditures for our planned upgrades and the
ability to fund these expenditures;
-- our beliefs regarding the effects of governmental regulation on our
business; and
-- our ability to effectively compete in a highly competitive environment.
All forward-looking statements attributed to us or a person acting on our behalf
are expressly qualified in their entirety by the cautionary statement.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act of 1933 relating to the exchange
offer that incorporates important business and financial information about us
that is not included in or delivered with this prospectus. This prospectus does
not contain all of the information included in the registration statement. This
information is available from us without charge to holders of the notes as
specified below. If we have made references in this prospectus to any contracts,
agreements or other documents and also filed any of those contracts, agreements
or documents as exhibits to the registration statement, you should read the
relevant exhibit for a more complete understanding of the document or matter
involved.
Following the exchange offer, we will be required to file periodic reports and
other information with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. Information that we file
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with the Securities and Exchange Commission after the date of this prospectus
will automatically supersede the information in this prospectus and any earlier
filed incorporated information. We are also incorporating any future filings
made with the Securities and Exchange Commission under sections 13(a), 13(e),
14, or 15(d) of the Securities Exchange Act of 1934 until the termination of the
exchange offer.
You may read and copy the registration statement, including the attached
exhibits, and any report, statements or other information that we file at the
Securities and Exchange Commission's public reference room at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the public reference room. Our Securities and Exchange
Commission filings will also be available to the public from commercial document
retrieval services and at the Securities and Exchange Commission's Internet site
at http://www.sec.gov.
You may request a copy of any of our filings with the Securities and Exchange
Commission, or any of the agreements or other documents that constitute exhibits
to those filings, at no cost, by writing or telephoning us at the following
address or phone number:
Time Warner Telecom Inc.
10475 Park Meadows Drive
Littleton, Colorado 80124
Attention: Corporate Secretary
Telephone: (303) 566-1000
TO OBTAIN TIMELY DELIVERY OF ANY OF OUR FILINGS, AGREEMENTS OR OTHER DOCUMENTS,
YOU MUST MAKE YOUR REQUEST TO US NO LATER THAN FIVE BUSINESS DAYS BEFORE THE
EXPIRATION DATE OF THE EXCHANGE OFFER. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME ON , 2001. THE EXCHANGE OFFER CAN BE
EXTENDED BY US IN OUR SOLE DISCRETION. SEE THE CAPTION "THE EXCHANGE OFFER" FOR
MORE DETAILED INFORMATION.
You should rely only on the information provided in this prospectus. No person
has been authorized to provide you with different information. The information
in this prospectus is accurate as of the date on the front cover. You should not
assume that the information contained in this prospectus is accurate as of any
other date.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them, which means:
- incorporated documents are considered part of this prospectus;
- we can disclose important information to you by referring you to those
documents; and
- information that we file with the SEC will automatically update and
supersede this incorporated information.
We incorporate by reference the documents listed below:
(1) Our Annual Report on Form 10-K for the year ended on December 31,
1999.
(2) Our Quarterly Reports on Form 10-Q for the quarters ended on March
31, 2000, June 30, 2000 and September 30, 2000.
(3) The description of our common stock contained in the Registration
Statement on Form S-1, as amended (file No. 333-33166), filed April 26,
2000.
(4) Our Registration Statement on Form S-3, as amended (file No.
333-49818), filed November 13, 2000.
(5) Our Current Reports on Form 8-K dated September 18, 2000, November
1, 2000, January 12, 2001, January 22, 2001, January 26, 2001, January 30,
2001, February 9, 2001 and on Form 8-K/A dated November 8, 2000.
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All documents and reports subsequently filed by us pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this prospectus
and prior to the termination of the exchange offer shall be deemed to be
incorporated herein by reference and to be a part hereof from the date of filing
of such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this prospectus to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus.
- Reports filed under Section 13(a) and (c) of the Exchange Act;
- Definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any subsequent stockholders meeting; and
- Any reports filed under Section 15(d) of the Exchange Act.
You can obtain any of the filings incorporated by reference in this
document through us, or from the SEC through the SEC's web site or at the
addresses listed above. Documents incorporated by reference are available from
us without charge, excluding any exhibits to those documents unless the exhibit
is specifically incorporated by reference as an exhibit in this prospectus. You
can obtain documents incorporated by reference in this prospectus by requesting
them in writing or by telephone from us at the following address:
Time Warner Telecom Inc.
10475 Park Meadows Drive
Littleton, CO 80124
Telephone: (303) 566-1000
If you request any incorporated documents from us, we will mail them to you
by first class mail, or another equally prompt means, within one business day
after we receive your request.
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SUMMARY
The following summary contains some of the information described in greater
detail in other parts of this prospectus and may not contain all of the
information that is important to you. You should carefully read the following
summary together with the more detailed information regarding Time Warner
Telecom, the new notes and our financial statements and the notes to these
financial statements appearing elsewhere in this prospectus.
For simplicity, we use the terms "we" and "Time Warner Telecom" throughout this
prospectus to refer to the business that is owned and conducted by the
corporation that became Time Warner Telecom Inc. shortly prior to the initial
public offering of the Class A common stock, to the business that was owned and
conducted by its predecessors prior to that time and, unless otherwise
indicated, not to the business related to the assets we acquired from GST
Telecommunications, Inc. on January 10, 2001.
Unless the context otherwise requires, the term "notes" refers to the old notes
and the new notes collectively.
TIME WARNER TELECOM INC.
Time Warner Telecom is a leading fiber facilities-based integrated
communications provider offering local businesses "last mile" broadband
connections for data, high-speed internet access, local voice and long distance
services. We offer a wide range of business telephony services, primarily to
medium- and large-sized telecommunications-intensive business end-users, long
distance carriers, internet service providers, wireless communications companies
and governmental entities. These business telephony services include dedicated
transmission, local switched, long distance, data and video transmission
services and high-speed dedicated internet access.
As of January 9, 2001, we operated networks in 24 metropolitan markets in the
United States. On January 10, 2001, we substantially expanded our geographic
coverage by acquiring substantially all of the assets of GST Telecommunications,
Inc. out of bankruptcy. As a result of this acquisition, we added 15 markets in
the western United States. We expect to activate networks in five additional
markets by the end of 2001. As of September 30, 2000, our networks covered 9,457
route miles, contained 363,644 fiber miles and offered service to 7,228 on-net
and off-net buildings. The acquisition of the GST assets added to our network
4,210 route miles, 227,674 fiber miles and service to 345 on-net buildings.
Our principal executive offices are located at 10475 Park Meadows Drive,
Littleton, Colorado 80124, and our telephone number is (303) 566-1000.
BUSINESS STRATEGY
The following is a summary of our business strategy:
Leverage Existing Fiber Optic Networks. We own local and regional fiber networks
to serve geographic locations where we believe there are large numbers of
potential customers. These highly concentrated networks have not yet been fully
exploited and provide the capacity to serve a substantially larger base of
customers with a larger array of products.
Enter New Geographic Areas. Our acquisition of substantially all of the GST
assets accelerated our geographic expansion by adding to our network 15 markets
in eight western states. We expect to activate networks in five additional
markets by the end of 2001, increasing our presence to a total of 44 markets. We
will also continuously evaluate other expansion opportunities.
Expand Switched Services. We provide a broad range of switched services in 38 of
our 39 markets, including the markets we recently acquired from GST. In
addition, we are currently integrating into our infrastructure new "softswitch"
technology, which is technology that allows switching of voice calls over an
internet protocol and local area network infrastructure.
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Expand Data Services. We will continue to deliver high-speed transport services
through our fiber optic networks and will also focus on the delivery of next
generation data networking and converged network services.
Target Business Customers. We have historically targeted
telecommunications-intensive medium- and large-sized business customers who
require the high quality networks that we operate. In order to achieve further
economies of scale and network utilization, we are targeting smaller business
customers in buildings we already serve where we can offer a package of network
services that may not otherwise be available to them.
Interconnect Service Areas. We are in the process of interconnecting certain of
our 39 existing markets, including the markets we recently acquired from GST,
within regional clusters with owned or licensed fiber optic facilities. This is
expected to increase our revenue potential and increase margins by addressing
customers' regional long distance voice, data and video requirements.
Utilize Strategic Relationships with Time Warner Cable. We have benefitted from
and continue to leverage our relationships with Time Warner Cable, one of the
largest multiple system cable operators in the U.S., by licensing and sharing
the cost of fiber optic facilities. We have agreements with Time Warner Cable
that allow us access to rights-of-way, easements, poles, ducts and conduits. We
may also benefit from positive awareness of the "Time Warner" name, which we
license from Time Warner Inc.
Continue Disciplined Expenditure Program. We increase operating efficiencies by
pursuing a capital expenditure program that focuses on projects that meet
stringent financial criteria. We evaluate capital expenditures on the basis of
whether or not they meet several minimum requirements, including minimum
recurring revenue, cash flow margin and rate of return.
RECENT DEVELOPMENTS
On January 10, 2001, Time Warner Telecom completed the acquisition of
substantially all of the assets of GST Telecommunications, Inc. out of
bankruptcy for cash consideration of $627 million, plus the payment of certain
liabilities and fees of $42 million and the assumption of a $21 million
obligation to complete certain fiber networks, for a total purchase price of
$690 million.
The acquisition of the GST assets expanded Time Warner Telecom's operations into
15 additional markets in the western United States, including intercity
networks. The GST acquisition accelerates Time Warner Telecom's geographic
expansion and allows Time Warner Telecom to offer its products and services in
areas formerly served by GST. Time Warner Telecom's acquisition of the GST
assets did not include certain assets relating to products and services that do
not fit with Time Warner Telecom's core businesses. As required in the asset
purchase agreement, Time Warner Telecom entered into a services agreement with
GST to provide certain support services with respect to the GST assets that GST
is retaining for a period of up to six months for most services and up to a year
for certain limited services.
Time Warner Telecom will manage the 15 markets acquired from GST as part of its
Western Region. Time Warner Telecom expects to complete the initial integration
of former GST personnel into Time Warner Telecom's organization within the next
several months. Time Warner Telecom expects that the integration of systems and
network operations will occur in phases over approximately two years.
In connection with the acquisition and Time Warner Telecom's capital expenditure
plans, Time Warner Telecom obtained commitments for $1.23 billion of additional
financing to increase the total commitments to $1.7 billion. Time Warner Telecom
Holdings' amended and restated senior secured credit facility provides for an
aggregate of $1 billion in borrowings, comprised of $525 million of senior
secured term loan facilities and a $475 million senior secured revolving credit
facility available to subsidiaries of Time Warner Telecom. Time Warner Telecom
also obtained $700 million in senior unsecured bridge financing available to
Time Warner Telecom. The acquisition was initially financed with borrowings
under the senior unsecured bridge loan facility. Those borrowings were repaid
with the net proceeds from our offering of Class A common stock and a portion of
the net proceeds from our sale of the old notes.
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THE EXCHANGE OFFER
The Exchange Offer......... With this exchange offer, we are offering to
exchange an aggregate principal amount of up to
$400,000,000 of the new notes for a like principal
amount of the old notes.
We intend to satisfy our obligations to complete an
exchange offer under the registration rights
agreement with the issuance of the new notes on or
promptly after the exchange date. The new notes
will have terms substantially identical to the
terms of the old notes. The new notes will not
contain terms with respect to transfer restrictions
and will not require us to consummate a registered
exchange offer. See "The Exchange Offer."
Expiration Date............ The exchange offer will expire at 5:00 p.m., New
York City time on , 2001, unless we,
in our sole discretion, extend it. See "The
Exchange Offer--Expiration Date, Extensions;
Amendments."
Exchange Date.............. We will exchange the old notes on the first
business day following the expiration date. See
"The Exchange Offer--Terms of the Exchange--Tender
and Acceptance."
Procedures for Tendering
Old Notes.................. For information on procedures for tendering old
notes and the action required to make a formal
offering of your old notes, see "The Exchange
Offer--Procedures for Tendering."
Taxation................... The exchange of the old notes for the new notes in
the exchange offer will not result in any income,
gain or loss to holders who participate in the
exchange offer or to us for U.S. Federal income tax
purposes. See "Certain United States Federal Tax
Consequences."
Resale..................... Based upon the position of the staff of the
Securities and Exchange Commission as described in
previous no-action letters, we believe that a
holder who exchanges the old notes for the new
notes in the exchange offer and satisfies certain
other conditions generally may offer for resale,
sell and otherwise transfer the new notes without
further registration under the Securities Act of
1933 and without delivery of a prospectus that
satisfies the requirements of section 10 of the
Securities Act of 1933.
Any holder of the old notes using the exchange
offer to participate in a distribution of the new
notes cannot rely on the no-action letters referred
to above. See "The Exchange Offer--Purpose of the
Exchange Offer."
Remaining Old Notes........ If you do not tender your old notes in the exchange
offer or if we do not accept your old notes for
exchange as described under "The Exchange
Offer--Terms of Exchange--Tender and Acceptance"
you will continue to hold these old notes, and they
will continue to bear legends restricting their
transfer.
Exchange Agent............. will act as exchange agent for the
exchange offer. See "The Exchange Offer--Exchange
Agent" for the exchange agent's address and
telephone number.
Use of Proceeds............ We will receive no proceeds from the exchange
offer. See "Use of Proceeds."
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THE EXCHANGE NOTES
Other than the obligation to conduct an exchange offer, the new notes will
have the same financial terms and covenants as the old notes, which are as
follows:
Issuer..................... Time Warner Telecom Inc.
Securities Offered......... $400,000,000 aggregate principal amount of 10 1/8%
Senior Notes due 2011.
Maturity................... February 1, 2011.
Interest................... 10 1/8% per annum, payable in cash on February 1
and August 1 of each year, beginning on August 1,
2001.
Optional Redemption........ We may redeem any of the notes beginning on
February 1, 2006. The initial redemption price is
105.063% of their principal amount, plus accrued
interest. The redemption price will decline each
year after 2006 and will be 100% of their principal
amount, plus accrued interest, beginning on
February 1, 2009.
In addition, before February 1, 2004, we may redeem
up to 35% of the aggregate principal amount of
outstanding notes with the proceeds from sales of
certain kinds of our capital stock or equivalent
interests at a redemption price equal to 110.125%
of their principal amount, plus accrued interest to
the redemption date. We may make such redemption
only if, after any such redemption, at least 65% of
the aggregate principal amount of notes originally
issued under the indenture remains outstanding.
Change of Control.......... Upon a change of control (as defined under
"Description of the New Notes") we will be required
to make an offer to purchase the notes. The
purchase price will equal 101% of the principal
amount of the notes on the date of purchase, plus
accrued interest. We may not have sufficient funds
available at the time of a change of control to
make any required debt payment (including
repurchases of the notes).
Ranking.................... The notes are senior unsecured obligations. The
notes rank equally in right of payment with our
existing and future senior unsecured debt,
including our outstanding $400 million of 9 3/4%
Senior Notes due 2008. The notes will rank senior
to all of our future subordinated debt, if any. The
notes are subordinated in right of payment to all
of our existing and future senior secured debt,
including borrowings under our $1 billion senior
secured credit facility. The notes are also
effectively subordinated to all of the liabilities
of our subsidiaries. As of September 30, 2000,
after giving effect to the acquisition of the
assets of GST, the borrowings under the senior
secured credit facility and the senior unsecured
bridge loan facility and this offering and our
concurrent offering of our Class A common stock and
the application of the net proceeds therefrom, we
would have had $848 million of indebtedness
outstanding (other than the notes), $448 million of
which would have been senior to the notes and $400
million of which would rank equally with the notes.
Additionally, we would have had $750 million of
borrowing availability under our senior secured
credit facility, subject to certain conditions.
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Certain Covenants.......... The terms of the notes will limit our ability and
the ability of our restricted subsidiaries to:
-- incur additional debt;
-- pay dividends;
-- make investments or certain other restricted
payments;
-- engage in sale-leaseback transactions;
-- enter into transactions with stockholders or
affiliates;
-- guarantee debts;
-- sell assets;
-- create liens;
-- issue or sell stock of subsidiaries; and
-- engage in a merger, sale or consolidation.
These covenants are subject to important exceptions
and qualifications, which are described under the
heading "Description of the New Notes--Certain
Covenants" in this prospectus.
Registration Rights........ We agreed to exchange the old notes no later than
six months after the issuance of the issuance of
the old notes for a new issue of substantially
identical debt securities registered under the
Securities Act of 1933 as evidence of the same
underlying obligation. This exchange offer is in
satisfaction of that agreement.
RISK FACTORS
You should consider all of the information contained in this prospectus before
tendering your old notes. In particular, you should consider the factors
described under "Risk Factors," beginning on page 11.
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SUMMARY CONSOLIDATED AND COMBINED FINANCIAL
AND OTHER OPERATING DATA
The summary statements of operations data for the years ended December 31, 1997,
1998 and 1999 and the selected balance sheet data as of December 31, 1998 and
1999 are derived from the audited consolidated and combined financial statements
of Time Warner Telecom, including the notes, appearing elsewhere in this
prospectus. The summary statements of operations data for the years ended
December 31, 1995 and 1996 and the selected balance sheet data as of December
31, 1995, 1996 and 1997 have been derived from audited financial statements of
Time Warner Telecom not included in this prospectus. The summary financial data
for the nine months ended September 30, 1999 and 2000 are derived from the
unaudited consolidated financial statements of Time Warner Telecom, including
the notes. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which, in the opinion of Time Warner
Telecom, are necessary for a fair presentation of the financial position and
results of operations for these periods. Operating results for the nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 2000. The financial
statements of Time Warner Telecom for all periods prior to the Reorganization
that occurred on July 14, 1998 reflect the "carved out" historical financial
position, results of operations, cash flows and changes in stockholders' equity
of the commercial telecommunications operations of predecessors of Time Warner
Telecom, as if they had been operating as a separate company. The summary
financial and other operating data set forth below should be read together with
the information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Time Warner Telecom's financial
statements, including the notes, appearing elsewhere in this prospectus.
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Revenue:
Dedicated transport services............. $ 6,505 $ 20,362 $ 44,529 $ 84,024 $ 152,468 $ 105,727 $ 183,759
Switched services(1)..................... 350 3,555 10,872 37,848 116,285 71,558 169,308
-------- -------- ---------- ---------- ---------- ---------- ----------
Total revenue...................... 6,855 23,917 55,401 121,872 268,753 177,285 353,067
-------- -------- ---------- ---------- ---------- ---------- ----------
Costs and expenses(2):
Operating................................ 15,106 25,715 40,349 67,153 117,567 81,949 130,846
Selling, general and administrative...... 34,222 60,366 54,640 77,401 113,389 80,501 122,663
Depreciation and amortization............ 7,216 22,353 38,466 50,717 68,785 50,272 68,793
-------- -------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses........... 56,544 108,434 133,455 195,271 299,741 212,722 322,302
-------- -------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)................... (49,689) (84,517) (78,054) (73,399) (30,988) (35,437) 30,765
Interest expense, net and other(2)........ (1,416) (1,599) 7,398 (19,340) (28,473) (22,026) (21,641)
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before income taxes..... (51,105) (86,116) (70,656) (92,739) (59,461) (57,463) 9,124
Income tax expense(3)..................... -- -- -- -- 29,804 29,473 4,542
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $(51,105) $(86,116) $ (70,656) $ (92,739) $ (89,265) $ (86,936) $ 4,582
======== ======== ========== ========== ========== ========== ==========
Basic and diluted earnings (loss) per
share.................................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.93) $ (0.94) $ 0.04
======== ======== ========== ========== ========== ========== ==========
Earnings (loss) per share before income
taxes:
Basic.................................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.62) $ (0.62) $ 0.09
======== ======== ========== ========== ========== ========== ==========
Diluted.................................. $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.62) $ (0.62) $ 0.08
======== ======== ========== ========== ========== ========== ==========
Weighted average shares outstanding:
Basic.................................... 81,250 81,250 81,250 81,250 95,898 92,957 105,262
Diluted.................................. 81,250 81,250 81,250 81,250 95,898 92,957 108,427
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NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA AMOUNTS)
OTHER OPERATING DATA:
EBITDA(1)(4).............................. $(42,473) $(62,164) $ (39,588) $ (22,682) $ 37,797 $ 14,835 $ 99,558
EBITDA Margin(1)(5)....................... (620)% (260)% (72)% (19)% 14% 8% 28%
Net cash provided by (used in) operating
activities............................... (35,605) (52,274) (29,419) (343) 54,235 (13,194) 71,238
Capital expenditures...................... 141,479 144,815 127,315 126,023 221,224 138,305 213,246
Deficiency of earnings to cover fixed
charges(7)............................... 51,105 86,116 70,656 92,957 59,714 57,716 --
OPERATING DATA(6):
Operating Networks........................ 15 18 19 19 21 20 22
Route miles............................... 3,207 5,010 5,913 6,968 8,872 7,704 9,457
Fiber miles............................... 116,286 198,490 233,488 272,390 332,263 313,549 363,644
DS-0 equivalents.......................... 159,000 690,000 1,719,000 3,031,000 5,523,000 4,555,000 9,806,000
Digital telephone switches................ 1 2 14 16 19 20 26
Employees................................. 508 673 714 919 1,259 1,181 1,697
BALANCE SHEET DATA:
Cash and cash equivalents................. $ -- $ -- $ -- $ 105,140 $ 90,586 $ 42,394 $ 74,091
Marketable debt securities................ -- -- -- 250,857 173,985 229,793 28,578
Property, plant and equipment, net........ 199,005 323,161 415,158 494,158 677,106 613,137 824,135
Total assets.............................. 214,963 341,480 438,077 904,344 1,043,012 976,375 1,104,535
Long-term debt and capital lease
obligations(6)........................... -- -- 75,475 574,940 403,627 403,342 403,311
Total stockholders' equity................ $179,589 $294,937 $ 300,390 $ 207,651 $ 422,916 $ 419,650 $ 470,511
- ------------
(1) Includes the recognition of non-recurring $7.6 million and $27.3 million
settlements of reciprocal compensation in the fourth quarter of 1999 and for
the nine months ended September 30, 2000, respectively.
(2) Includes expenses resulting from transactions with affiliates of $6.5
million, $12.4 million, $17.1 million, $27.7 million, $20.0 million, $15.9
million, and $11.4 million for the years ended December 31, 1995, 1996,
1997, 1998 and 1999, and for the nine months ended September 30, 1999 and
2000, respectively. See Time Warner Telecom's financial statements appearing
elsewhere in this prospectus for an explanation of these expenses.
(3) During 1999, Time Warner Telecom recorded a non-recurring $39.4 million
charge to earnings to record a net deferred tax liability associated with
the Reconstitution. This change occurred immediately prior to Time Warner
Telecom's initial public offering.
(4) "EBITDA" is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provision for income taxes. Accordingly, EBITDA is not intended to replace
operating income, net income (loss), cash flow and other measures of
financial performance and liquidity reported in accordance with generally
accepted accounting principles. Rather, EBITDA is a measure of operating
performance and liquidity that investors may consider in addition to such
measures. Management believes that EBITDA is a standard measure of operating
performance and liquidity that is commonly reported and widely used by
analysts, investors and other interested parties in the telecommunications
industry because it eliminates many differences in financial, capitalization
and tax structures, as well as non-cash and non-operating charges to
earnings. EBITDA is used internally by Time Warner Telecom's management to
assess on-going operations and is a component of a covenant of the 9 3/4%
Senior Notes that limits Time Warner Telecom's ability to incur additional
future indebtedness. However, EBITDA as used in this report may not be
comparable to similarly titled measures reported by other companies due to
differences in accounting policies.
(5) EBITDA Margin represents EBITDA as a percentage of revenue.
(6) Includes all managed properties including unconsolidated affiliates,
MetroComm AxS, L.P. in Columbus, Ohio and the Albany and Binghamton, New
York networks. Albany and Binghamton were wholly owned at December 31, 1997
and MetroComm AxS, L.P. was wholly owned at December 31, 1999.
(7) For purposes of computing the deficiency of earnings to cover fixed charges,
earnings were calculated by adding (i) net income (loss) before income taxes
and (ii) interest expense, including the portion of rents representative of
an interest factor. Fixed charges consist of interest expense, capitalized
interest and the portion of rents representative of an interest factor.
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UNAUDITED SUMMARY PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
You should read the following unaudited summary pro forma financial data of
Time Warner Telecom in conjunction with the historical financial statements and
other financial information appearing elsewhere in this prospectus, including
"Capitalization," "Unaudited Pro Forma Condensed Combined Financial Statements"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PRO FORMA AS ADJUSTED
---------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
STATEMENTS OF OPERATIONS DATA:
Revenue(1)................................................. $ 354,139 $ 440,468
--------- ---------
Costs and expenses:(2)
Operating................................................ 178,179 186,799
Selling, general and administrative...................... 179,577 181,520
Depreciation and amortization............................ 90,163 107,515
--------- ---------
Total costs and expenses......................... 447,919 475,834
--------- ---------
Operating loss............................................. (93,780) (35,366)
Interest expense, net and other(2)......................... (103,611) (73,311)
--------- ---------
Net loss................................................... $(197,391) $(108,677)
========= =========
Basic and diluted earnings (loss) per share................ $ (1.91) $ (0.96)
========= =========
Weighted average shares outstanding
-- basic and diluted..................................... 103,373 112,737
========= =========
OTHER OPERATING DATA:
EBITDA(1)(3)............................................... $ (3,617) $ 72,149
EBITDA Margin(1)(4)........................................ (1)% 16%
OPERATING DATA:
Operating Networks......................................... 39
Route miles................................................ 13,667
Fiber miles................................................ 591,318
PRO FORMA
AS ADJUSTED
------------------
SEPTEMBER 30, 2000
------------------
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 573,180
Marketable debt securities.................................. 28,578
Property, plant and equipment, net.......................... 1,455,609
Total assets................................................ 2,312,506
Long-term debt and capital lease obligations................ 1,053,311
Total stockholders' equity.................................. 997,410
- ------------
(1) Includes the recognition of non-recurring $7.6 million and $27.3 million
settlements of reciprocal compensation in 1999 and for the nine months ended
September 30, 2000, respectively.
(2) Includes expenses resulting from transactions with affiliates of $20.0
million and $11.4 million for the year ended December 31, 1999 and for the
nine months ended September 30, 2000, respectively. See Time Warner
Telecom's financial statements appearing elsewhere in this prospectus for an
explanation of these expenses.
(3) "EBITDA" is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provision for income taxes. Accordingly, EBITDA is not intended to replace
operating income, net income (loss), cash flow and other measures of
financial performance and liquidity reported in accordance with generally
accepted accounting principles. Rather, EBITDA is a measure of operating
performance and liquidity that investors may consider in addition to such
measures. Management believes that EBITDA is a standard measure of operating
performance and liquidity that is commonly reported and widely used by
analysts, investors and other interested parties in the telecommunications
industry because it eliminates many differences in financial, capitalization
and tax structures, as well as non-cash and non-operating charges to
earnings. EBITDA is used internally by Time Warner Telecom's management to
assess on-going operations and is a component of a covenant of the 9 3/4%
Senior Notes that limits Time Warner Telecom's ability to incur additional
future indebtedness. However, EBITDA as used in this report may not be
comparable to similarly titled measures reported by other companies due to
differences in accounting policies.
(4) EBITDA Margin represents EBITDA as a percentage of revenue.
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RISK FACTORS
An investment in the notes is risky. You should carefully consider the
following risks, as well as the other information contained in this prospectus,
before deciding to exchange your old notes for the new notes. If any of the
following risks actually occurs, our business could be harmed. The risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties not presently known to us, or that we currently see as
immaterial, may also harm our business.
RISKS RELATING TO US AND OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAY NOT BE A RELIABLE BASIS FOR EVALUATING
OUR PROSPECTS.
Time Warner Cable began our business in 1993. Subsequently, we spun-off to
become an independent company in July 1998. During the last few years, our
business has changed substantially as it has rapidly expanded into switched,
data and Internet services. As a result, prospective purchasers have limited
historical financial information available to evaluate our likely future
performance. When making a decision to invest in the notes, prospective
purchasers should consider the risks, expenses and difficulties frequently
encountered by companies that are in their development stage.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO EXPERIENCE OPERATING
LOSSES FOR THE FORESEEABLE FUTURE.
We have incurred operating losses for most of our history, net of the
effect of non-recurring reciprocal compensation settlements. For the year ended
December 31, 1999 and the nine months ended September 30, 2000, we had operating
losses of $38.6 million and operating income of $3.5 million, net of the effect
of non-recurring reciprocal settlements of $7.6 million and $27.3 million,
respectively. After giving effect to the acquisition of assets of GST, the
borrowings under the senior secured credit facility and the senior unsecured
bridge loan facility and this offering and our concurrent offering of our Class
A common stock and the application of the net proceeds therefrom, we would have
had operating losses of $101.4 million and $62.7 million, net of the effect of
non-recurring reciprocal compensation settlements of $7.6 million and $27.3
million, for the year ended December 31, 1999 and the nine months ended
September 30, 2000, respectively. We expect to continue to incur, and perhaps
increase, operating losses as we build our networks, expand our customer base
and as we integrate the acquired assets of GST. Operating losses will reduce our
ability to meet working capital needs and increase our need for external
financing.
The development of our business requires substantial capital expenditures.
As described below, we plan to increase our annual capital expenditures during
2001 and subsequent periods to expand our operations. We expect to incur a
substantial part of these expenditures in new markets before we realize any
related revenue. We also expect that capital expenditures and other operating
expenditures will result in negative cash flow and operating losses for our new
markets until and unless we develop an adequate customer base and revenue stream
from those markets. We expect that each network will produce negative cash flow
for at least two and a half years after it begins operations. Moreover, we may
never develop an adequate customer base, sustain profitability, or generate
sufficient cash flow.
WE MAY COMPLETE A SIGNIFICANT BUSINESS COMBINATION OR OTHER TRANSACTION
THAT COULD AFFECT OUR LEVERAGE, RESULT IN A CHANGE IN CONTROL OR BOTH.
We continually evaluate potential business combinations, joint ventures and
other transactions that would extend our geographic markets, expand our products
and services and/or enlarge the capacity of our networks. To that end, we have
had exploratory discussions with several other companies in our industry
regarding potentially material transactions. If we enter into a definitive
agreement with respect to any material transaction, it could result in an
increase in our leverage or issuing additional common stock or both, or it could
result in a change of control. We cannot assure you, however, that we will enter
into any transaction or, if we do, on what terms.
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A change of control could result in a requirement that we offer to purchase
certain indebtedness including the notes offered under this prospectus and the
acceleration of other indebtedness. We cannot assure you that we will have
sufficient funds available to make that repurchase and repay any accelerated
indebtedness.
THE SENIOR SECURED CREDIT FACILITY AND THE INDENTURES FOR THE 9 3/4% SENIOR
NOTES AND FOR THE NOTES OFFERED UNDER THIS PROSPECTUS, CONTAIN RESTRICTIVE
COVENANTS THAT MAY LIMIT OUR FLEXIBILITY.
The senior secured credit facility and indentures limit, and in some
circumstances prohibit, our ability to:
-- incur additional debt;
-- pay dividends;
-- make investments or other restricted payments;
-- engage in transactions with stockholders and affiliates;
-- create liens;
-- sell assets;
-- issue or sell capital stock of subsidiaries; and
-- engage in mergers and acquisitions.
These covenants may limit our financial and operating flexibility. In
addition, if we do not comply with these covenants, the lenders under the senior
secured credit facility, the holders of the 9 3/4% Senior Notes and the holders
of the notes offered under this prospectus may accelerate our debt under the
senior secured credit facility, our debt under the 9 3/4% Senior Notes and our
debt under the notes, respectively.
WE WILL REQUIRE SUBSTANTIAL CAPITAL TO EXPAND OUR OPERATIONS.
The development and expansion of our networks requires substantial capital
investment. If funding of this capital investment is not available when needed,
our business will be adversely affected. Including the effects of the GST
acquisition, we expect our principal capital requirements for 2001 to be:
-- approximately $550 million to purchase and install switches,
electronics, fiber and other technologies in existing, acquired and
future networks; and
-- approximately $50 million for capital expenditures for our management
information system infrastructure.
We also expect to have substantial capital expenditures in subsequent
periods.
We recently executed agreements with various financial institutions for
$1.23 billion of additional financing, including $525 million of senior secured
term loan facilities, which together with our $475 million senior secured
revolving credit facility, is available to our subsidiaries, and $700 million
unsecured bridge financing available to us. The GST acquisition was initially
financed with borrowings under the unsecured bridge loan facility, which was
subsequently repaid in full with the net proceeds from our offering of Class A
common stock and a portion of the net proceeds from our sale of the old notes.
We may be required to seek additional financing if:
-- our business plans and cost estimates prove to be inaccurate;
-- we decide to further accelerate the expansion of our business and
existing networks;
-- we consummate further acquisitions or joint ventures that require
capital; or
-- we are not able to generate sufficient cash flow from operations.
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When we seek additional financing, the terms offered may place significant
limits on our financial and operating flexibility, or may not be acceptable to
us. The failure to raise sufficient funds when needed and on reasonable terms
may require us to modify or significantly curtail our business expansion plans.
This could have a material adverse impact on our growth, ability to compete, and
ability to service our existing debt.
OUR SUBSTANTIAL INDEBTEDNESS, AND SERVICING OUR INDEBTEDNESS, MAY IMPAIR
OUR FINANCIAL AND OPERATING FLEXIBILITY.
We have a substantial amount of debt outstanding and we incurred
substantial additional debt to acquire GST. This substantial indebtedness may
have an adverse impact on us. For example:
-- our ability to obtain additional financing may be limited;
-- a substantial portion of our cash flow will be dedicated to pay
interest and principal on our debt;
-- our ability to satisfy our debt obligations may be diminished
including obligations under the debt securities;
-- we may be more vulnerable to economic downturns; and
-- our ability to withstand competitive pressure may decrease.
As of September 30, 2000, we had approximately $400 million of consolidated
total long-term debt and after giving effect to the acquisition of the assets of
GST, the borrowings under the senior secured credit facility and the senior
unsecured bridge loan facility and this offering and our concurrent offering of
our Class A common stock and the application of the net proceeds therefrom, we
would have had approximately $1.05 billion of consolidated total long-term debt
as of that date.
TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH,
AND OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR
CONTROL.
Our ability to make payments on our indebtedness, including the notes, and
to fund planned capital expenditures will depend on our ability to generate cash
in the future.
Our historical financial results have been, and our future financial
results might be, subject to substantial fluctuations. We cannot assure you that
our business will generate sufficient cash flow from operations, that currently
anticipated cost savings and operating improvements will be realized on schedule
or that future borrowings will be available to us in an amount sufficient to
enable us to pay our indebtedness, including the notes, or to fund our other
liquidity needs. If we are unable to pay our debts, we will be required to
pursue one or more alternative strategies, such as selling assets, refinancing
or restructuring our indebtedness or selling equity capital. However, we cannot
assure you that any alternative strategies will be feasible at the time due to
market conditions or other factors or prove adequate. Also, certain alternative
strategies will require the consent of our senior secured lenders before we
engage in any such strategy.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE DO NOT SUCCESSFULLY MANAGE OUR
EXPANSION INTO NEW MARKETS AND SERVICES.
We plan to offer new communications services, expand service in our
existing markets, interconnect our existing markets and enter new markets. If we
are not successful in implementing these changes on-time and on-budget, our
results of operations will likely be adversely affected.
Our ability to manage this expansion depends on many factors, including the
ability to:
-- attract new customers and sell new services to existing customers;
-- design, acquire and install transmission and switching facilities;
-- employ new technologies;
-- obtain any required governmental permits and rights-of-way;
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-- implement interconnection with local exchange carriers;
-- expand, train and manage our employee base;
-- enhance our financial, operating and information systems to
effectively manage our growth; and
-- accurately predict and manage the cost and timing of our capital
expenditure programs.
Even if we are successful in completing the infrastructure to support our
expanded business, that business may not be profitable and may not generate
positive cash flow for us.
OUR BUSINESS MAY BE LIMITED IF THE CAPACITY LICENSE WITH TIME WARNER CABLE
EXPIRES OR IS TERMINATED.
If the capacity license with Time Warner Cable is not renewed on expiration
in 2028 or is terminated prior to that time, we may need to build, lease or
otherwise obtain fiber optic capacity. The terms of those arrangements may be
materially less favorable to us than the terms of our existing capacity license.
At expiration of the capacity license, Time Warner Cable is obligated to
negotiate a renewal in good faith, but we may be unable to reach agreement with
Time Warner Cable on acceptable terms. In addition, Time Warner Cable may
terminate the capacity license before expiration upon:
-- a material impairment of Time Warner Cable's ability to provide the
license by law;
-- a material breach of the capacity license by us; or
-- the institution of any proceedings to impose any public utility or
common carrier status or obligations on Time Warner Cable, or any
other proceedings challenging Time Warner Cable's operating authority
as a result of the services provided to us under the capacity
license.
The capacity license prohibits us from offering residential services or
content services with the capacity licensed from Time Warner Cable.
WE MAY LOSE THE RIGHT TO USE THE "TIME WARNER" NAME.
We believe the "Time Warner" brand name is valuable and its loss could have
an adverse effect on us. Under a license agreement with Time Warner, we are
required to discontinue use of the "Time Warner" name in the following
circumstances:
-- the license agreement expires after an initial term ending July 2002
or any permitted renewal;
-- Time Warner no longer owns at least 30% of our common stock;
-- Time Warner no longer has the right to nominate at least three
members of our board of directors;
-- we violate covenants in the capacity license with Time Warner Cable
relating to residential services and content services; or
-- a Class B Stockholder transfers its Class B common stock and its
rights to designate nominees to the board of directors to a third
party.
Under these circumstances, we may change our name to "TW Telecom Inc." or
some other name. Such name change, and the inability to use the "Time Warner"
name, could have an adverse effect on our ability to conduct our business and on
our financial condition and results of operations.
SEVERAL CUSTOMERS ACCOUNT FOR A SIGNIFICANT AMOUNT OF OUR REVENUE.
We have substantial business relationships with a few large customers. For
the nine months ended September 30, 2000, our top ten customers accounted for
approximately 46% of our total revenue. Our largest customer for the nine months
ended September 30, 2000, MCI Worldcom, Inc. and its affiliates, accounted for
more than 10% of our total revenue. However, a portion of that revenue results
from traffic that is directed
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to us by customers that have selected that long distance carrier. No other
customer, including customers who direct their business through long distance
carriers, accounted for 10% or more of revenue in 2000.
SOME OF OUR CUSTOMER AGREEMENTS MAY NOT CONTINUE.
Some of our customer agreements are subject to termination on short notice
and do not require the customer to maintain its agreements at current levels,
and we cannot assure you that such customers will continue to purchase the same
services or level of services. We believe that certain interexchange carriers
are pursuing alternatives to their current practices with regard to obtaining
local telecommunications services, including acquisition or construction of
their own facilities. In addition, interexchange carriers may be able to provide
local service by reselling the facilities or services of an incumbent local
exchange carrier, which may be more cost-effective for an interexchange carrier
than using our services or another competitive access provider or competitive
local exchange carrier.
WE ARE DEPENDENT ON TIME WARNER CABLE'S PERMITS, LICENSES AND
RIGHTS-OF-WAY.
We currently license a significant portion of our fiber optic capacity from
Time Warner Cable. Municipalities that regulate Time Warner Cable may or may not
seek to impose additional franchise fees or otherwise charge Time Warner Cable.
We must reimburse Time Warner Cable for any new fees or increases. Time Warner
Cable or Time Warner Telecom may not be able to obtain all necessary permits,
licenses or agreements from governmental authorities or private rights-of-way
providers necessary to effect future license transactions. This would hinder our
ability to expand our existing networks or develop new networks successfully in
locations served by Time Warner Cable.
OUR QUARTERLY OPERATING RESULTS WILL FLUCTUATE.
As a result of the limited revenue and significant expenses associated with
the expansion and development of our networks and services, as well as those
related to the GST acquisition, we anticipate that our operating results could
vary significantly from quarter to quarter. In fact, we expect our recurring
EBITDA margins to decrease in 2001 as compared to 2000 due to the acquisition
and expected commencement of services in five additional markets. Changes in the
usage or payment patterns of significant customers may also cause operating
results to vary.
WE DEPEND ON THIRD PARTY VENDORS FOR INFORMATION SYSTEMS.
We have entered into agreements with vendors that provide for the
development and operation of back office systems, such as ordering, provisioning
and billing systems. The failure of those vendors to perform their services in a
timely and effective manner at acceptable costs could have a material adverse
effect on our growth and our ability to monitor costs, bill customers, provision
customer orders and achieve operating efficiencies.
IF WE DO NOT ADAPT TO RAPID CHANGES IN THE TELECOMMUNICATIONS INDUSTRY, WE
COULD LOSE CUSTOMERS OR MARKET SHARE.
The telecommunications industry will continue to experience rapid changes
in technology. Our future success may depend on our ability to adapt to any
changes in the industry. Our failure to adopt new technology, or our choice of
one technological innovation over another, may have an adverse impact on our
ability to compete or meet customer demands.
WE ARE CONTROLLED BY THE CLASS B STOCKHOLDERS.
AOL Time Warner Inc. (as successor by merger to Time Warner Inc.), AT&T
Corporation (as successor by merger to MediaOne Group, Inc.), Advance Telecom
Holdings Corporation (by transfer from Advance/Newhouse Partnership) and
Newhouse Telecom Holdings Corporation (by transfer from Advance/ Newhouse
Partnership), the Class B Stockholders, hold all the outstanding shares of Class
B common stock. The Class B Stockholders generally have the collective ability
to control all matters requiring stockholder
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approval, including the nomination and election of directors. The Class B common
stock is not subject to any mandatory conversion provisions other than pursuant
to certain transfer restrictions. The disproportionate voting rights of the
Class B common stock relative to the Class A common stock may delay or prevent a
change in control of Time Warner Telecom, and may make us a less attractive
takeover target.
Our board of directors consists of nine directors. Under the Stockholders
Agreement with the Class B Stockholders, Time Warner has the right to designate
four nominees for the board of directors and the Advance/Newhouse stockholder
group has the right to designate one nominee. Under the Stockholders Agreement,
Class B Stockholders agree to vote in favor of all nominees selected by the
Class B Stockholders. Class B Stockholders will also have the power to elect the
other members of our board of directors.
EACH OF THE CLASS B STOCKHOLDERS HAS VETO RIGHTS OVER CERTAIN ACTIONS.
Under our restated certificate of incorporation, as long as the outstanding
Class B common stock represents at least 50% of the aggregate voting power of
both classes of common stock outstanding, the approval of 100% of the Class B
Stockholders is required:
-- to permit us to provide residential services or content services
prior to May 2004;
-- to amend our restated certificate of incorporation, other than in
connection with certain ministerial actions; or
-- for any direct or indirect disposition by us of capital stock of
subsidiaries or assets that in either case represents substantially
all our assets on a consolidated basis.
The approval of 100% of the Class B Stockholders is also required for the
issuance of any additional shares of Class B common stock or any capital stock
having more than one vote per share.
THE HOLDERS OF CLASS B COMMON STOCK CAN SELL CONTROL OF TIME WARNER TELECOM
AT A TIME WHEN THEY DO NOT HAVE A MAJORITY ECONOMIC INTEREST IN TIME WARNER
TELECOM, AND EXCLUDE THE HOLDERS OF CLASS A COMMON STOCK FROM PARTICIPATING
IN THE SALE.
The Stockholders Agreement provides that, subject to the rights of first
refusal of the other holders of Class B common stock, the Class B Stockholders
may transfer their Class B common stock. If a holder sells all, but not less
than all, of its Class B common stock as shares of Class B common stock, such
holder may transfer its right to nominate Class B nominees for election to the
board of directors. In addition, all of the holders of Class B common stock have
the right to participate in certain sales by Time Warner of its Class B common
stock. Accordingly, majority control of Time Warner Telecom could be transferred
by one or more holders of Class B common stock at a time when such holder or
holders of Class B common stock do not have a majority of the economic interest
in Time Warner Telecom and with no assurance that the holders of Class A common
stock would be given the opportunity to participate in the transaction or, if
they were permitted to participate in the transaction, to receive the same
amount and type of consideration for their stock in Time Warner Telecom as the
holders of Class B common stock.
In addition, we have elected not to be subject to Section 203 of the
Delaware General Corporation Law, which would otherwise provide certain
restrictions on "business combinations" between us and any person acquiring a
significant, 15% or greater, interest in us other than in a transaction approved
by our board of directors and in certain cases by our stockholders.
THE CLASS B STOCKHOLDERS MAY COMPETE WITH US.
The Class B Stockholders are in the cable television business. There is no
restriction on the Class B Stockholders' ability to compete with us. They may,
now or in the future, provide the same or similar services to those that we
provide.
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SOME OF OUR BUSINESS ACTIVITIES ARE RESTRICTED.
Our restated certificate of incorporation restricts our business
activities. These restrictions limit our ability to expand our business and
could deprive us of valuable future opportunities. Under the restated
certificate of incorporation, we may not, directly or through a subsidiary or
affiliate:
-- provide residential services; or
-- produce or otherwise provide entertainment, information, or any other
content services, with certain limited exceptions.
We may engage in these activities with the affirmative vote of all the
holders of the Class B common stock or on the earlier of:
-- five years from the date of our restated certificate of
incorporation, which is May 2004; or
-- the date the Class B common stock represents less than 50% of our
voting power (as of September 30, 2000, Class B common stock
represented approximately 95.6% of our voting power).
We are subject to the same restrictions under the capacity license with
Time Warner Cable, except that those restrictions apply only to our use of the
leased capacity but last until the capacity license expires in 2028 or is
terminated. We believe these restrictions will not materially affect our ability
to operate our business as currently planned.
SOME OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST.
Some of our directors are also directors, officers or employees of the
Class B Stockholders or their affiliates. Although these directors have
fiduciary obligations to Time Warner Telecom under Delaware law, they may face
conflicts of interest. For example, conflicts of interest may arise with respect
to certain business opportunities available to, and certain transactions
involving, Time Warner Telecom. The Class B Stockholders have not adopted any
special voting procedures to deal with such conflicts of interest. The
resolution of these conflicts may be unfavorable to us. Our restated certificate
of incorporation provides for the allocation of corporate opportunities between
us and the Class B Stockholders.
RISKS RELATING TO OUR ACQUISITION OF THE ASSETS OF GST
OUR ACQUISITION OF THE GST ASSETS INCREASES OUR LEVERAGE AND POSES OTHER
RISKS.
Our acquisition of the GST assets increases our geographic presence,
expands our products and services and enlarges the capacity of our networks.
This transaction is considerably larger than the transactions we have completed
in the past.
This transaction involves the following operating risks to us:
-- the difficulty of assimilating the acquired operations and personnel;
-- the potential disruption of our ongoing business;
-- the diversion of resources;
-- the possible inability of management to maintain uniform standards,
controls, procedures and policies;
-- the possible difficulty of managing our growth and information
systems;
-- the risks of entering markets in which we have little or no
experience;
-- the potential impairment of relationships with employees or
customers; and
-- the possibility that the liabilities we assumed to complete
performance under GST contracts may prove to be more burdensome than
anticipated.
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WE MAY HAVE DIFFICULTY INTEGRATING THE ACQUIRED ASSETS AND BUSINESSES OF
GST.
We purchased substantially all of the assets of GST with the expectation
that the asset purchase would result in certain benefits, including expansion of
the markets we serve and increasing our operational efficiencies. Achieving the
benefits of the asset purchase will depend upon the successful integration of
the acquired businesses into our existing operations. We cannot assure you that
we will be successful in integrating the acquired GST assets into our current
businesses. The integration risks associated with the acquisition include but
are not limited to:
-- the diversion of our management's attention as integrating the GST
operations and assets will require a substantial amount of our
management's attention;
-- difficulties associated in assimilating GST's technology, including
billing and customer information systems;
-- any significant loss of key GST personnel could lead to interruptions
in our billing, accounting, information technologies and engineering
capabilities; and
-- the requirement that we provide transition services to GST could tax
our management resources, although we have hired employees not needed
for the core business to carry out those functions.
We cannot assure you that we will be able to successfully overcome the
risks associated with integrating the assets we acquired from GST. There is a
risk that the costs of integration could have a material adverse effect on our
operating results.
RISKS RELATING TO OUR INDUSTRY
WE DEPEND ON INTERCONNECTION WITH INCUMBENT LOCAL EXCHANGE CARRIERS.
Our services may be less attractive if we cannot obtain high quality,
reliable and reasonably priced interconnection from incumbent local exchange
carriers. The Telecommunications Act of 1996 requires incumbent local exchange
carriers to allow us to connect to their networks, thereby connecting to end
users not on our networks, which is commonly referred to as "interconnection"
within our industry. However, negotiating interconnection agreements with the
incumbent local exchange carriers takes considerable time, effort and expense.
The agreements are also subject to state regulation. We may be unable to obtain
interconnection at rates that are both competitive and profitable.
THE LOCAL SERVICES MARKET IS HIGHLY COMPETITIVE, AND MANY OF OUR
COMPETITORS HAVE SIGNIFICANT ADVANTAGES THAT MAY ADVERSELY AFFECT OUR
ABILITY TO COMPETE WITH THEM.
We operate in an increasingly competitive environment and some companies
may have competitive advantages over us. Most incumbent local exchange carriers
offer substantially the same services as we offer. Incumbent local exchange
carriers benefit from:
-- longstanding relationships with their customers;
-- greater financial and technical resources;
-- the ability to subsidize local services from revenue in unrelated
businesses; and
-- recent regulations that relax price restrictions and decrease
regulatory oversight of incumbent local exchange carriers.
We also face competition from new entrants into the local services business
who may also be better established and have greater financial resources. These
advantages may impair our ability to compete in price and service offerings or
require us to sustain prolonged periods of operating losses in order to retain
customers. The current trend of consolidation of telecommunications companies
and strategic alliances within the industry could give rise to significant new
or stronger competitors for us. Some long distance carriers who are our
customers are pursuing alternative ways to obtain local telecommunications
services, including by acquiring local exchange carriers or constructing their
own facilities.
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WE EXPECT DECLINING PRICES AND INCREASING COMPETITION.
Many communications services can be provided without incurring significant
incremental expense for an additional unit of service. For example, there is
very low marginal cost for a carrier to transmit a call over its own network. As
a result, once several facilities-based carriers provide communications services
in a market, price competition is likely and can be severe. As a result, we have
experienced price competition, which we expect to continue. Additional
competitors could build facilities in each of our service areas. If additional
competitors build facilities in our service areas, this price competition may
increase significantly
COMPETITION IN LOCAL SERVICES HAS ALSO INCREASED AS A RESULT OF CHANGING
GOVERNMENT REGULATIONS.
The Telecommunications Act of 1996 has increased competition in the local
telecommunications business. The Telecommunications Act of 1996:
-- requires incumbent local exchange carriers to interconnect their
networks with those of requesting telecommunications carriers and to
allow requesting carriers to collocate equipment at the premises of
the incumbent local exchange carriers;
-- requires all local exchange providers to offer their services for
resale;
-- allows long distance carriers to resell local services;
-- requires incumbent local exchange carriers to offer to requesting
telecommunications carriers network elements on an unbundled basis;
and
-- requires incumbent local exchange carriers to offer to requesting
telecommunications carriers the services they provide to end-users to
other carriers at wholesale rates.
However, under the Telecommunications Act of 1996, the FCC and some state
regulatory authorities may provide incumbent local exchange carriers with
increased flexibility to reprice their services as competition develops and as
incumbent local exchange carriers allow competitors to interconnect to their
networks. In addition, some new entrants in the local market may price certain
services to particular customers or for particular routes below the prices we
charge for services to those customers or for those routes. If the incumbent
local exchange carriers and other competitors lower their rates and can sustain
significantly lower prices over time, this may adversely affect our revenue if
we are required by market pressure to price at or below the incumbent local
exchange carriers' prices.
Competition may also increase as a result of a recent World Trade
Organization agreement on telecommunications services. As a result of the
agreement, the FCC has made it easier for foreign companies to enter the U.S.
telecommunications market.
WE MAY SUFFER A DECREASE OF REVENUE IF DEMAND FOR OUR SERVICES DECLINES.
Recently, a number of competitive local carriers have filed for bankruptcy
protection, due to high leverage, substantial price competition, technical
difficulties and other problems faced by new market entrants.
A portion of our revenue stream is derived from carriers who purchase
backbone services from us to service their customers. In the event their
anticipated demand declines, we could suffer a corresponding decline in revenue.
WE ARE SUBJECT TO SIGNIFICANT FEDERAL AND STATE REGULATIONS THAT CAN
SIGNIFICANTLY AFFECT PRICING AND PROFITABILITY.
Existing federal and state regulations, or new regulations, could have a
material impact on our prices and revenue. Certain rates that we charge to our
customers must be filed with the FCC and/or state regulators, which provides
price transparency to customers and competitors.
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In addition, when we provide local exchange services in a market, the
Telecommunications Act of 1996 and FCC rules require us to:
-- not unreasonably limit the resale of our services;
-- provide telephone number portability if technically feasible;
-- provide dialing parity to competing providers;
-- provide access to poles, ducts and conduits that we own; and
-- establish reciprocal compensation arrangements for the transport and
termination of telecommunications.
WE MAY RECEIVE LESS REVENUE IF INCUMBENT LOCAL EXCHANGE CARRIERS
SUCCESSFULLY CHALLENGE RECIPROCAL COMPENSATION.
We currently receive compensation from incumbent local exchange carriers
for terminating local calls at the premises of internet service providers. Some
companies have challenged our right and the right of others to receive this
compensation. Determinations by the FCC or by state utility commissions that
such traffic should not be subject to termination compensation could adversely
affect our revenue. The FCC may issue rules or an order that may have the effect
of reducing reciprocal compensation revenue.
WE MAY EXPERIENCE A REDUCTION IN SWITCHED ACCESS REVENUE AS A RESULT OF
REGULATORY RATE REFORM.
The FCC has established a framework for the eventual deregulation of
incumbent local exchange carrier interstate access charges, which will exert a
downward pressure on our interstate access rates. We cannot assure you that we
will be able to compensate for the reduction in switched access revenue from
regulatory rate reform with other revenue sources or increased volume.
WE DEPEND ON GOVERNMENTAL AND OTHER AUTHORIZATIONS.
The development, expansion and maintenance of our networks will depend on,
among other things, our ability to obtain rights-of-way and other required
governmental authorizations and permits. Any increase in the difficulty or cost
of obtaining these authorizations and permits could adversely affect us,
particularly where we must compete with companies that already have the
necessary permits. In order to compete effectively, we must obtain these
authorizations in a timely manner, at reasonable costs and on satisfactory terms
and conditions. In certain of the cities or municipalities where we provide
network services, we pay license or franchise fees. The Telecommunications Act
of 1996 permits municipalities to charge these fees only if they are
competitively neutral and nondiscriminatory, but certain municipalities may not
conform their practices to the requirements of the Telecommunications Act of
1996 in a timely manner or without legal challenge. We also face the risks that
other cities may start imposing fees, fees will be raised or franchises will not
be renewed. Some of our franchise agreements also provide for increases or
renegotiation of fees at certain intervals. Any increases in these fees may have
a negative impact on our financial condition.
RISKS RELATING TO AN INVESTMENT IN THE NOTES
BECAUSE THE NOTES RANK BELOW OUR SENIOR SECURED DEBT, YOU MAY NOT RECEIVE
FULL PAYMENT ON YOUR NOTES.
As of September 30, 2000, after giving effect to the acquisition of the
assets of GST, the borrowings under the senior secured credit facility and the
senior unsecured bridge loan facility and this offering and our concurrent
offering of our Class A common stock and the application of the net proceeds
therefrom, we would have had approximately $250 million of senior secured
indebtedness and $400 million of senior unsecured indebtedness (other than the
notes). In addition, we would have the ability to incur $750 million of
additional debt under the senior secured credit facility, subject to certain
conditions.
Our obligations under the senior secured credit facility are secured by
substantially all of our assets. If we are unable to repay amounts due on our
secured debt, the lenders could proceed against the collateral securing
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the debt and we may not have enough assets left to pay you. This facility
prohibits us from purchasing, redeeming or otherwise acquiring the notes, if a
default exists under our senior secured debt.
The notes are not secured by any of our assets. If we become insolvent or
are liquidated, or if our debt under the senior secured credit facility is
accelerated as a result of a cross-default provision in our outstanding debt or
otherwise, the lenders under this facility would be entitled to exercise the
remedies available to secured lenders under applicable law. Accordingly there
may be no assets or sufficient assets to pay you in full.
THE NOTES ARE EFFECTIVELY SUBORDINATED TO ALL DEBT OF OUR SUBSIDIARIES.
None of our subsidiaries are guaranteeing the debt under the notes. As a
result, the notes are effectively subordinated in right of payment to all other
debt and other liabilities, including trade payables and guarantees, of our
subsidiaries. In addition, our subsidiary Time Warner Telecom Holdings is the
borrower under the senior secured credit facility. Furthermore, all of our
direct and indirect subsidiaries have guaranteed our obligations under the
senior secured credit facility. As of September 30, 2000, after giving effect to
the acquisition of assets of GST, the borrowings under the senior secured credit
facility and the senior unsecured bridge loan facility and this offering and our
concurrent offering of our Class A common stock and the application of the net
proceeds therefrom, our subsidiaries would have had approximately $198 million
in liabilities other than the $250 million outstanding under the senior secured
credit facility. Substantially all of our consolidated assets are held by our
subsidiaries. Any right we may have to receive assets of our subsidiaries upon
their liquidation or reorganization, and your resulting rights to participate in
those assets, would be effectively subordinated to the claims of our
subsidiaries' creditors and to our senior secured creditors.
WE DEPEND UPON OUR SUBSIDIARIES FOR THE CASH FLOW NECESSARY TO SERVICE OUR
DEBT OBLIGATIONS, INCLUDING THE NOTES.
The notes are obligations exclusively of Time Warner Telecom, which is a
holding company. We derive substantially all of our revenue from our operating
subsidiaries and do not have significant operations of our own. As a result, we
are depending upon the ability of our subsidiaries to provide us with cash, in
the form of dividends, intercompany credits, loans or otherwise, to meet our
debt service obligations, including our obligations under the debt securities.
These subsidiaries are separate and distinct legal entities and have no
obligations to pay any amounts due on the debt securities or to make any funds
available. In addition, dividends, loans or other distributions to us from our
subsidiaries may be subject to contractual or other restrictions, will depend
upon the results of operations of such subsidiaries and may be subject to other
business considerations.
YOUR RIGHTS TO BE REPAID WOULD BE ADVERSELY AFFECTED IF A COURT DETERMINED
THAT WE ISSUED THE NOTES FOR INADEQUATE CONSIDERATION OR WITH INTENT TO
DEFRAUD OUR CREDITORS.
Our ability to repay the notes may be adversely affected if it is
determined in a bankruptcy, insolvency or similar proceeding that:
-- we issued the notes with intent to delay or defraud any creditor;
-- we contemplated insolvency with a design to prefer some creditors to
the exclusion of others; or
-- we issued the notes for less than reasonably equivalent value and
were insolvent at the time the notes were originally issued.
In such event, a court could, among other things, void all or a portion of
our obligations to you. In this case, you may not be repaid in full. A court may
also subordinate our obligations to you to our other debt to a greater extent
than would otherwise be the case. In this case, other creditors would be
entitled to be paid in full before any payment could be made on the notes. We
cannot assure you that, after providing for all prior claims, there would be
sufficient assets to satisfy your claims.
THERE IS NO ESTABLISHED TRADING MARKET FOR THE NOTES, AND ANY MARKET FOR
THE NOTES MAY BE ILLIQUID.
The notes are a new issue of securities with no established trading market.
We cannot assure you that a liquid market will develop for the notes, that you
will be able to sell your notes at a particular time or that the
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prices that you receive when you sell will be favorable. Moreover, we do not
intend to apply for the notes to be listed on any securities exchange or to
arrange for quotation on any automated dealer quotation system, and the initial
purchasers of the old notes are not obligated to make a market in the new notes.
This offer to exchange the new notes for the old notes does not depend upon any
minimum amount of old notes being tendered for exchange.
IF YOU DO NOT EXCHANGE YOUR OLD NOTES THEY MAY BE DIFFICULT TO RESELL.
It may be difficult for you to sell old notes that are not exchanged in the
exchange offer, since any old notes not exchanged may remain subject to the
restrictions on transfer provided for in Rule 144 under the Securities Act of
1933. These restrictions on transfer of your old notes exist because we issued
the old notes pursuant to an exemption from the registration requirements of the
Securities Act of 1933 and applicable state securities laws. In general, absent
registration under or exemption from the Securities Act of 1933, if you are,
were or acquired old notes from an affiliate of ours, your transfer of old notes
will continue to be restricted by the resale limitations of Rule 144 and
applicable state securities laws. If you are a non-affiliate, any transfer of
your old notes must still comply with applicable state securities laws. We do
not intend to register the old notes under the Securities Act of 1933.
Unless you are an affiliate of us within the meaning of Rule 405 under the
Securities Act of 1933, you may offer for resale, resell or otherwise transfer
new notes without compliance with the registration and prospectus delivery
provisions of the Securities Act of 1933, so long as you acquired the new notes
in the ordinary course of business and have no arrangement or understanding with
respect to the distribution of the new notes to be acquired in the exchange
offer. If you tender your old notes for the purpose of participating in a
distribution of the new notes, you must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933 in connection
with a secondary resale transaction.
To the extent any old notes are tendered and accepted in the exchange
offer, the trading market, if any, for the old notes that remain outstanding
after the exchange offer would be adversely affected due to a reduction in
market liquidity.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The exchange offer will give holders of old notes the opportunity exchange
the old notes, which were issued on January 29, 2001, for new notes that have
been registered under the Securities Act. The new notes will be identical in all
material respects to the old notes. As a consequence of the registration of the
new notes, we will become subject to the informational requirements the Exchange
Act. To satisfy those requirements, we will file reports and other information
with the SEC that will be made available to the holders of the old notes, if any
are outstanding after the exchange offer, and the new notes and the general
public. We are not obligated by any agreement to effect the exchange offer.
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of old notes in any jurisdiction in which the exchange
offer of the acceptance of it would not be in compliance with the securities or
blue sky laws of the jurisdiction.
RESALE OF NEW NOTES
We believe that new notes issued under the exchange in offer exchange for
old notes may be offered for resale, resold and otherwise transferred by any new
note holder without further registration under the Securities Act and without
delivery of a prospectus that satisfies the requirements of Section 10 of the
Securities Act if:
-- the holder is not our "affiliate" within the meaning of Rule 405
under the Securities Act;
-- the new notes are acquired in the ordinary course of the holder's
business; and
-- the holder does not intend to participate in a distribution of the
new notes.
Any holder who exchanges old notes in the exchange offer with the intention
of participating in any manner in a distribution of the new notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction.
This prospectus may be used for an offer to resell, resale or other
retransfer of new notes. With regard to broker-dealers, only broker-dealers that
acquired the old notes as a result of market-making activities or other trading
activities may participate in the exchange offer. Each broker-dealer that
receives new notes for its own account in exchange for old notes, where the old
notes were acquired by the broker-dealer as a result of market-making activities
or other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of the new notes. Please read the caption "Plan of
Distribution" for more details regarding the transfer of new notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any old notes
properly tendered and not withdrawn before expiration of the exchange offer. The
date of acceptance for exchange of the old notes and completion of the exchange
offer, is the exchange date, which will be the first business day following the
expiration date unless we extend the date as described in this prospectus. We
will issue $1,000 principal amount of new notes in exchange for each $1,000
principal amount of old notes surrendered under the exchange offer. Old notes
may be tendered only in integral multiples of $1,000. The new notes will be
delivered on the earliest practicable date following the exchange date.
The form and terms of the new notes will be substantially identical to the
form and terms of the old notes, except the new notes:
-- will be registered under the Securities Act; and
-- will not bear legends restricting their transfer.
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The new notes will evidence the same debt as the old notes. The new notes
will be issued under and entitled to the benefits of the same indenture that
authorized the issuance of the old notes. Consequently, both the old notes and
the new notes will be treated as a single series of debt securities under that
indenture. For a description of the indenture, see the caption "Description of
the New Notes."
The exchange offer is not conditioned upon any minimum aggregate principal
amount of old notes being tendered for exchange.
As of the date of this prospectus, $400 million aggregate principal amount
of the old notes are outstanding. This prospectus and the letter of transmittal
are being sent to all registered holders of old notes. There will be no fixed
record date for determining registered holders of old notes entitled to
participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the applicable
requirement of the Securities Act, the Exchange Act, and the rules and
regulations of the SEC. Old notes that are not exchanged in the exchange offer
will remain outstanding and continue to accrue interest and will be entitled to
the rights and benefits their holders have under the indenture relating to the
old notes and the new notes.
We will be deemed to have accepted for exchange properly tendered old notes
when we have given oral or written notice of the acceptance to the exchange
agent. The exchange agent will act as agent for the holders of old notes who
surrender them in the exchange offer for the purposes of receiving the new notes
from us and delivering the new notes to their holders. The exchange agent will
make the exchange promptly on the date of acceptance for exchange of the old
notes. This exchange date will be the first business day following the
expiration date unless it is extended as described in this prospectus. We
expressly reserve the right to amend or terminate the exchange offer, and not to
accept for exchange any old notes not previously accepted for exchange, upon the
occurrence of any of the conditions specified below under the caption
"--Conditions."
Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes. We
will pay all charges and expenses, other than applicable taxes described below,
in connection with the exchange offer. It is important that you read the caption
"--Fees and Expenses" for more details regarding fees and expenses incurred in
the exchange offer.
EXPIRATION OF THE EXCHANGE OFFER; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
, 2001. The exchange offer can be extended by us in our sole
discretion, in which case the term "expiration date" shall mean the latest date
and time to which the exchange offer is extended.
In order to extend the exchange offer, we will notify the exchange agent
orally, confirmed in writing, or in writing of any extension. We will notify the
registered holders of old notes by public announcement of the extension no later
than 9:00 a.m., New York City time, on the business day after the previously
scheduled expiration of the exchange offer.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the exchange offer, we will have no obligation to publish, advertise, or
otherwise communicate any public announcement, other than by making a timely
release to a financial news service.
CONDITIONS
Despite any other term of the exchange offer, we will not be required to
accept for exchange any old notes and we may terminate or amend the exchange
offer as provided in this prospectus before accepting any old notes for exchange
if in our reasonable judgment:
-- the new notes to be received will not be tradeable by the holder,
without restriction under the Securities Act, the Exchange Act and
without material restrictions under the blue sky or securities laws
of substantially all of the states of the United States;
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-- the exchange offer, or the making of any exchange by a holder of old
notes, would violate applicable law or any applicable interpretation
of the staff of the SEC; or
-- any action or proceeding has been instituted or threatened in any
court or by or before any governmental agency with respect to the
exchange offer that would reasonably be expected to impair our
ability to proceed with the exchange offer.
We will not be obligated to accept for exchange the old notes of any holder
that has not made to us:
-- the representations described under the captions "--Purpose and
Effect of the Exchange Offer," "--Procedures for Tendering" and "Plan
of Distribution"; and
-- any other representations that may be reasonably necessary under
applicable SEC rules, regulations or interpretations to make
available to us an appropriate form for registration of the new notes
under the Securities Act.
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. Consequently, we may
delay acceptance of any old notes by giving oral or written notice of an
extension to their holders. During an extension, all old notes previously
tendered will remain subject to the exchange offer, and we may accept them for
exchange. We will return any old notes that we do not accept for exchange for
any reason without expense to their tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
We expressly reserve the right to amend or terminate the exchange offer and
to reject for exchange any old notes not previously accepted for exchange, upon
the occurrence of any of the conditions of the exchange offer specified above.
By public announcement we will give oral or written notice of any extension,
amendment, non-acceptance or termination to the holders of the old notes as
promptly as practicable. If we amend the exchange offer in a manner that we
consider material, we will disclose the amendment by means of a prospectus
supplement.
These conditions are solely for our benefit and we may assert them
regardless of the circumstances that may give rise to them or waive them in
whole or in part at any time or at various times in our sole discretion. If we
fail at any time to exercise any of the foregoing rights, this failure will not
constitute a waiver of that right. Each of these rights will be deemed an
ongoing right that we may assert at any time or at various times.
We will not accept for exchange any old notes tendered, and will not issue
new notes in exchange for any old notes, if at that time a stop order is
threatened or in effect with respect to the registration statement of which this
prospectus constitutes a part or the qualification of the indenture under the
Trust Indenture Act of 1939.
PROCEDURES FOR TENDERING
Only a holder of record of old notes may tender old notes in the exchange
offer. To tender in the exchange offer, a holder must:
-- complete, sign and date the letter of transmittal, or a facsimile of
the letter of transmittal; have the signature on the letter of
transmittal guaranteed if the letter of transmittal so requires: and
deliver the letter of transmittal or facsimile to the exchange agent
prior to the expiration date; or
-- comply with DTC's Automated Tender Offer Program procedures described
below.
In addition, either:
-- the exchange agent must receive old notes along with the letter of
transmittal;
-- the exchange agent must receive, before expiration of the exchange
offer, a properly transmitted agent's message or a timely
confirmation of book-entry transfer of old notes into the exchange
agent's account at DTC according to the procedure for book-entry
transfer described below; or
-- the holder must comply with the guaranteed delivery procedures
described below.
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To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under the caption "--Exchange Agent" before expiration
of the exchange offer. To receive confirmation of valid tender of old notes, a
holder should contact the exchange agent at the telephone number listed under
the caption "--Exchange Agent."
The tender by a holder that is not withdrawn before expiration of the
exchange offer will constitute an agreement between that holder and us in
accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal. If a holder tenders less than all
of the old notes held by this holder, this tendering holder should fill in the
applicable box of the letter transmittal. The amount of old notes delivered to
the exchange agent will be deemed to have been tendered unless otherwise
indicated.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE HOLDER'S ELECTION AND
RISK. RATHER THAN MAIL THESE ITEMS, WE RECOMMEND THAT HOLDERS USE AN OVERNIGHT
OR HAND DELIVERY SERVICE. IN ALL CASES, HOLDERS SHOULD ALLOW SUFFICIENT TIME TO
ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE EXPIRATION OF THE EXCHANGE OFFER.
HOLDERS SHOULD NOT SEND THE LETTER OF TRANSMITTAL OR OLD NOTES TO US. HOLDERS
MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES
OR OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR THEM.
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct it to tender
on the owner's behalf. If the beneficial owner wishes to tender on its own
behalf, it must, prior to completing and executing the letter of transmittal and
delivering its old notes, either:
-- make appropriate arrangements to register ownership of the old notes
in the owner's name; or
-- obtain a properly completed bond power from the registered holder of
old notes.
The transfer of registered ownership may take considerable time and may not
be completed prior to the expiration date.
If the applicable letter of transmittal is signed by the record holder(s)
of the old notes tendered, the signature must correspond with the name(s)
written on the face of the old note without alteration, enlargement or any
change whatsoever. If the applicable letter of transmittal is signed by a
participant in DTC, the signature must correspond with the name as it appears on
the security position listing as the holder of the old notes.
A signature on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible guarantor institution. Rule 17Ad-15 under the Exchange
Act describes eligible guarantor institutions as banks, brokers, dealers,
municipal securities dealers, municipal securities brokers, government
securities dealers, government securities brokers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. The signature need not be guaranteed by an eligible
guarantor institution if the old notes arc tendered:
-- by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery
Instructions" on the letter of transmittal; or
-- for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the
registered holder of any old notes, the old notes must be endorsed or
accompanied by a properly completed bond power. The bond power must be signed by
the registered holder as the registered holder's name appears on the old notes
and an eligible institution must guarantee the signature on the bond power.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, these
persons should so indicate when signing. Unless we waive this requirement, they
should also submit evidence satisfactory to us of their authority to deliver the
letter of transmittal.
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The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's Automated Tender Offer
Program to tender. Participants in the program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offer electronically.
They may do so by causing DTC to transfer the old notes to the exchange agent in
accordance with its procedures for transfer. DTC will then send an agent's
message to the exchange agent. The term "agent's message" means a message
transmitted by DTC, received by the exchange agent and forming part of the
book-entry confirmation, to the effect that:
-- DTC has received an express acknowledgment from a participant in its
Automated Tender Offer Program that is tendering old notes that are
the subject of the book-entry confirmation;
-- the participant has received and agrees to be bound by the terms of
the letter of transmittal or, in the case of an agent's message
relating to guaranteed delivery, that the participant has received
and agrees to be bound by the applicable notice of guaranteed
delivery; and
-- the agreement may be enforced against the participant.
We will determine in our sole discretion all questions as to the validity,
form, eligibility, including time of receipt, acceptance and withdrawal of
tendered old notes. Our determination will be final and binding. We reserve the
absolute right to reject any old notes not properly tendered or any old notes
the acceptance of which would, in the opinion of our counsel, be unlawful. We
also reserve the right to waive any defects, irregularities or conditions of
tender as to particular old notes. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
old notes must cured within the time that we determine. Although we intend to
notify holders of defects or irregularities with respect to tenders of old
notes, neither we, the exchange agent nor any other person will incur any
liability for failure to give notification. Tenders of old notes will not be
deemed made until those defects or irregularities have been cured or waived. Any
old notes received by the exchange agent that are not properly tendered and as
to which the defects or irregularities have not been cured or waived will be
returned by the exchange agent without cost to the tendering holder, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
In all cases, we will issue new notes for old notes that we have accepted
for exchange under the exchange offer only after the exchange agent timely
receives:
-- old notes or a timely book-entry confirmation that old notes have
been transferred into the exchange agent's account at DTC; and
-- a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.
Holders should receive copies of the applicable letter of transmittal with
the prospectus. A holder may obtain additional copies of the applicable letter
of transmittal for the old notes from the exchange offices listed under the
caption "--Exchange Agent." By signing the letter of transmittal, each tendering
holder of old notes will represent to us that, among other things:
-- any new notes that the holder receives will be acquired in the
ordinary course of its business;
-- the holder has no arrangement or understanding with any person or
entity to participate in the distribution of the new notes;
-- if the holder is not a broker-dealer, that it is not engaged in and
does not intend to engage in the distribution of the new notes;
-- if the holder is a broker-dealer that will receive new notes for its
own account in exchange for old notes that were acquired as a result
of market-making activities or other trading activities, that it will
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deliver a prospectus, as required by law, in connection with any
resale of those new notes (see "Plan of Distribution"); and
-- the holder is not an "affiliate" as defined in Rule 405 of the
Securities Act, of us or if the holder is an affiliate, it will
comply with any applicable registration and prospectus delivery
requirements of the Securities Act.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the old notes at DTC for purposes of the exchange offer promptly after the
date of this prospectus. Any financial institution participating in DTC's system
may make book-entry delivery of old notes by causing DTC to transfer old notes
into the exchange agent's account at DTC in accordance with DTC's procedures for
transfer. Holders of old notes who are unable to deliver confirmation of the
book-entry transfer of their old notes into the exchange agent's account at DTC
or all other documents required by the letter of transmittal to the exchange
agent on or prior to the expiration date must tender their old notes according
to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders wishing to tender their old notes but whose old notes are not
immediately available or who cannot deliver their old notes, the letter of
transmittal or any other required documents to the exchange agent or cannot
comply with the applicable procedures under DTC's Automated Tender Offer Program
before expiration of the exchange offer may tender if:
-- the tender is made through an eligible guarantor institution;
-- before expiration of the exchange offer, the exchange agent receives
from the eligible guarantor institution either a properly completed
and duly executed notice of guaranteed delivery, by facsimile
transmission, mail or hand delivery, or a properly transmitted
agent's message and notice of guaranteed delivery:
-- setting forth the name and address of the holder and the registered
number(s) and the principal amount of old notes tendered;
-- stating that the tender is being made by guaranteed delivery; and
-- guaranteeing that, within three New York Stock Exchange trading
days after expiration of the exchange offer, the letter of
transmittal, or facsimile thereof, together with the old notes or a
book-entry confirmation, and any other documents required by the
letter of transmittal will be deposited by the eligible guarantor
institution with the exchange agent; and
-- the exchange agent receives the properly completed and executed
letter of transmittal or facsimile thereof, as well as all tendered
old notes in proper form for transfer or a book-entry confirmation,
and all other documents required by the letter of transmittal, within
three New York Stock Exchange trading days after expiration of the
exchange offer.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
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WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders of old notes may
withdraw their tenders at any time before expiration of the exchange offer.
For a withdrawal to be effective:
-- the exchange agent must receive a written notice of withdrawal, which
may be by telegram, telex, facsimile transmission or letter, at one
of the addresses set forth below under the caption "--Exchange
Agent"; or
-- holders must comply with the appropriate procedures of DTC's
Automated Tender Offer Program system.
Any notice of withdrawal must:
-- specify the name of the person who tendered the old notes to be
withdrawn;
-- identify the old notes to be withdrawn, including the principal
amount of the old notes to be withdrawn; and
-- where certificates for old notes have been transmitted, specify the
name in which the old notes were registered, if different from that
of the withdrawing holder.
If certificates for old notes have been delivered or otherwise identified
to the exchange agent, then, prior to the release of those certificates, the
withdrawing holder must also submit:
-- the serial numbers of the particular certificates to be withdrawn;
and
-- a signed notice of withdrawal with signatures guaranteed by an
eligible institution, unless the withdrawing holder is an eligible
institution.
If old notes have been tendered pursuant to the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn old notes and
otherwise comply with the procedures of the facility.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of notices of withdrawal, and our determination shall
be final and binding on all parties. We will deem any old notes so withdrawn not
to have been validly tendered for exchange for purposes of the exchange offer.
We will return any old notes that have been tendered for exchange but that are
not exchanged for any reason to their holder without cost to the holder. In the
case of old notes tendered by book-entry transfer into the exchange agent's
account at DTC according to the procedures described above, those old notes will
be credited to an account maintained with DTC for old notes, as soon as
practicable after withdrawal, rejection of tender or termination of the exchange
offer. You may retender properly withdrawn old notes by following one of the
procedures described under the caption "--Procedures for Tendering" above at any
time on or before expiration of the exchange offer.
A holder may obtain a form of the notice of withdrawal from the exchange
agent at its offices listed under the caption "--Exchange Agent."
EXCHANGE AGENT
has been appointed as exchange agent for the exchange offer. You
should direct questions and requests for assistance, requests for additional
copies of this prospectus or of the letter of transmittal and requests for the
notice of guaranteed delivery or the notice of withdrawal to the exchange agent
addressed as follows:
By Registered or Certified Mail:
By Hand or Overnight Delivery:
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34
By Facsimile Transmission (for Eligible Institutions Only):
To Confirm by Telephone or for information Call:
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SHOWN
ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitations by
telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the
exchange offer, including the following:
-- SEC registration fees;
-- fees and expenses of the exchange agent and trustee;
-- accounting and legal fees; and
-- printing and mailing costs.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of old
notes under the exchange offer. The tendering holder, however, will be required
to pay any transfer taxes, whether imposed on the registered holder or any other
person, if:
-- certificates representing old notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to
be issued in the name of, any person other than the registered holder
of old notes tendered;
-- new notes are to be delivered to, or issued in the name of, any
person other than the registered holder of the old notes;
-- tendered old notes are registered in the name of any person other
than the person signing the letter of transmittal; or
-- a transfer tax is imposed for any reason other than the exchange of
old notes under the exchange offer.
If satisfactory evidence of payment of transfer taxes is not submitted with
the letter of transmittal, the amount of any transfer taxes will be billed to
the tendering holder.
ACCOUNTING TREATMENT
We will record the new notes in our accounting records at the same time
carrying value as the old notes, which is the aggregate principal amount, as
reflected in our accounting records on the date of exchange. Accordingly, we
will not recognize any gain or loss for accounting purposes in connection with
the exchange offer. We will record the expenses of the exchange offer as
incurred.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. We urge you to consult your financial and tax
advisors in making your own decision on what action to take.
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35
We may in the future seek to acquire old notes in open market or privately
negotiated transactions, through subsequent exchange offers or otherwise.
However, we have no present plans to acquire any old notes that are not tendered
in the exchange offer or to file a registration statement to permit release of
any untendered old notes.
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USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes
under the exchange offer. In consideration for issuing the new notes as
contemplated by this prospectus, we will receive the old notes in like principal
amount, the terms of which are identical in all material respects to the new
notes. The old notes surrendered in exchange for the new notes will be retired
and canceled and cannot be reissued. Accordingly, the issuance of the new notes
will not result in any increase in our indebtedness or capital stock. A portion
of the net proceeds received from the sale of the old notes and all of the net
proceeds from our offering of Class A common stock were used to repay the senior
unsecured bridge loan facility which we used to finance the acquisition of the
assets of GST. The remaining net proceeds received from the sale of the old
notes will be used for capital expenditures, working capital and general
corporate purposes.
RECENT DEVELOPMENTS
On January 10, 2001, Time Warner Telecom completed the acquisition of
substantially all of the assets of GST Telecommunications, Inc. out of
bankruptcy for cash consideration of $627 million, plus the payment of certain
liabilities and fees of $42 million and the assumption of a $21 million
obligation to complete certain fiber networks, for a total purchase price of
$690 million.
The acquisition of the GST assets expanded Time Warner Telecom's operations
into 15 additional markets in the western United States, including intercity
networks. The GST acquisition accelerates Time Warner Telecom's geographic
expansion and allows Time Warner Telecom to offer its products and services in
areas formerly served by GST. Time Warner Telecom's acquisition of the GST
assets did not include certain assets relating to products and services that do
not fit with Time Warner Telecom's core businesses. As required in the asset
purchase agreement, Time Warner Telecom entered into a services agreement with
GST to provide certain support services with respect to the GST assets that GST
is retaining for a period of up to six months for most services and up to a year
for certain limited services.
Time Warner Telecom will manage the 15 markets acquired from GST as part of
its Western Region. Time Warner Telecom expects to complete the initial
integration of former GST personnel into Time Warner Telecom's organization
within the next several months. Time Warner Telecom expects that the integration
of systems and network operations will occur in phases over approximately two
years.
In connection with the acquisition and Time Warner Telecom's capital
expenditure plans, Time Warner Telecom obtained commitments for $1.23 billion of
additional financing to increase its total commitments to $1.7 billion. Time
Warner Telecom Holdings' amended and restated senior secured credit facility
provides for an aggregate of $1 billion in borrowings, comprised of $525 million
of senior secured term loan facilities and a $475 million senior secured
revolving credit facility available to subsidiaries of Time Warner Telecom. Time
Warner Telecom also obtained $700 million in senior unsecured bridge financing
available to Time Warner Telecom. The acquisition was initially financed with
borrowings under the senior unsecured bridge loan facility. Those borrowings
were repaid with the net proceeds from our offering of Class A common stock and
a portion of the net proceeds from our sale of the old notes.
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TIME WARNER TELECOM VOTING STRUCTURE
The following diagram shows the organizational structure of Time Warner
Telecom, based on the number of shares outstanding as of December 31, 2000. The
interests of AOL Time Warner, Advance Telecom Holdings Corporation, Newhouse
Telecom Holdings Corporation and AT&T consist of Class B common stock. The
diagram shows the voting power of Time Warner Telecom's principal shareholder
groups.
[ORGANIZATIONAL STRUCTURE]
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CAPITALIZATION
The following table sets forth the capitalization of Time Warner Telecom as
of September 30, 2000.
-- on an actual basis as of September 30, 2000, and
-- pro forma as adjusted to give effect to:
- the acquisition of substantially all of the assets of GST for cash
consideration of $627 million, plus the payment of certain liabilities
and fees of $42 million and the assumption of a $21 million obligation
to complete certain fiber networks, for a total purchase price of $690
million;
- borrowings of $250 million under the senior secured credit facility;
- borrowings and subsequent repayment of $700 million under the senior
unsecured bridge loan facility;
- the issuance and sale of 7,475,000 shares of our Class A common stock
and the application of approximately $533 million of the net proceeds
therefrom; and
- the issuance and sale of $400 million of notes pursuant to this
offering and the application of approximately $389 million of net
proceeds therefrom.
This table should be read together with "Selected Combined Financial and
Other Operating Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Time Warner Telecom's financial
statements, including the notes, appearing elsewhere in this prospectus.
AS OF SEPTEMBER 30, 2000
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
(THOUSANDS)
Cash and cash equivalents................................ $ 74,091 $ 573,180
========= ==========
Marketable debt securities............................... $ 28,578 $ 28,578
========= ==========
Current portion of long-term debt and capital lease
obligations............................................ $ 736 $ 736
========= ==========
Long-term debt and capital lease obligations:
Capital lease obligations.............................. $ 3,311 $ 3,311
Senior secured credit facility......................... -- 250,000
Senior unsecured bridge loan facility.................. -- --
9 3/4% Senior Notes due 2008.......................... 400,000 400,000
10 1/8% Senior Notes due 2011.......................... -- 400,000
--------- ----------
Total long-term debt and capital lease obligations..... 403,311 1,053,311
Stockholders equity:
Preferred stock, $0.01 par value, 20,000,000 shares
authorized, no shares outstanding................... -- --
Class A Common Stock, $0.01 par value; 277,300,000
shares authorized, 33,428,172 and 40,903,172 shares
issued and outstanding on an actual and a pro forma
as adjusted basis................................... 334 409
Class B Common Stock, $0.01 par value; 162,500,000
shares authorized, 72,226,500 shares issued and
outstanding on an actual and a pro forma as adjusted
basis............................................... 722 722
Additional paid-in capital............................. 590,924 1,123,994
Accumulated other comprehensive income, net of taxes... 12,030 12,030
Accumulated deficit.................................... (133,499) (139,745)
--------- ----------
Total stockholders' equity............................. 470,511 997,410
--------- ----------
Total capitalization........................... $ 873,822 $2,050,721
========= ==========
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On January 10, 2001, Time Warner Telecom acquired substantially all of the
assets of GST out of bankruptcy for cash consideration of $627 million, plus the
payment of certain liabilities and fees of $42 million and the assumption of a
$21 million obligation to complete certain fiber networks, for a total purchase
price of $690 million. GST was a facilities based integrated communications
provider that offered voice, data and Internet services primarily to business
customers in selected markets in the western United States.
The assets excluded from the acquisition of the GST assets consist of:
-- most of the assets and operations in Hawaii;
-- specific customer contracts and certain businesses that were
determined to be inconsistent with Time Warner Telecom's core
strategy; and
-- other assets and liabilities consisting principally of cash and cash
equivalents, restricted investments, certain accounts receivable,
certain other current assets, certain accounts payable, deferred
revenue, and certain other current liabilities.
In connection with the acquisition of the GST assets and Time Warner
Telecom's capital expenditure plans, Time Warner Telecom obtained commitments
for $1.23 billion of additional financing, including $525 million of senior
secured term loan additional facilities available to subsidiaries of Time Warner
Telecom, and $700 million in unsecured bridge financing available to Time Warner
Telecom. The acquisition of the GST assets was initially financed with
borrowings under the senior unsecured bridge loan facility. Under the terms of
the senior secured term loan facility, Time Warner Telecom Holdings was required
to draw $250 million at closing of the acquisition of the GST assets. The drawn
and undrawn availability under the senior secured term loan facility is
available to Time Warner Telecom Holdings for capital expenditures, working
capital and other general corporate purposes for 24 months from January 10,
2001. For purposes of the unaudited pro forma condensed combined financial
statements, Time Warner Telecom has assumed:
-- the acquisition of the GST assets for cash consideration of $627
million, plus the payment of certain liabilities and fees of $42
million and the assumption of a $21 million obligation to complete
certain fiber networks, for a total purchase price of $690 million;
-- borrowings of $250 million under the senior secured credit facility;
-- borrowings and subsequent repayment of $700 million under the senior
unsecured bridge loan facility;
-- the issuance and sale of 7,475,000 shares of our Class A common stock
and the application of approximately $533 million of the net proceeds
therefrom; and
-- the sale of $400 million of high yield notes at an interest rate of
10 1/8% and the application of approximately $389 million of the net
proceeds therefrom.
The selected unaudited pro forma condensed combined financial information
presented below has been derived from the unaudited or audited historical
financial statements of Time Warner Telecom and GST and reflects a preliminary
estimate of certain pro forma adjustments based on information and assumptions
that management of Time Warner Telecom and GST believes are reasonable.
The unaudited pro forma condensed combined balance sheet as of September
30, 2000 gives effect to the acquisition of the GST assets as if it had been
consummated on September 30, 2000. The accompanying unaudited pro forma
condensed combined statements of operations for the year ended December 31, 1999
and the nine months ended September 30, 2000 give effect to the acquisition of
the GST assets as if it had been consummated on January 1, 1999.
The acquisition of the GST assets will be accounted for using the purchase
method of accounting. Accordingly, the purchase price will be initially
allocated to the assets acquired and liabilities assumed, at their estimated
relative fair values, and will be subject to adjustment based upon final
appraisals and other
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analyses. Time Warner Telecom cannot assure you that the final purchase price
allocations and other purchase accounting adjustments will not differ
significantly from the estimated amounts reflected in the unaudited pro forma
condensed combined financial statements.
The unaudited pro forma condensed combined financial statements may not be
indicative of the results that might have been achieved if the acquisition of
the GST assets had been completed and in effect for the periods indicated or the
results that may be achieved in the period immediately prior to closing or in
the future. The unaudited pro forma condensed combined financial statements
presented below should be read in conjunction with the historical financial
statements and related notes of Time Warner Telecom and GST appearing elsewhere
in this prospectus.
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TIME WARNER TELECOM INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 2000
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
GST PRO FORMA
---------------------------------------------- PRO FORMA ADJUSTMENTS
EXCLUSIONS RELATED TO PRO FORMA TWTC AND FOR TWTC
HISTORICAL HISTORICAL THE ASSET PURCHASE GST TO BE GST ACQUISITION AND
TWTC GST AGREEMENT(1) ACQUIRED SUBTOTAL OFFERINGS(3)
---------- ---------- --------------------- --------- ---------- ---------------
ASSETS
Current assets:
Cash and cash equivalents........ $ 74,091 $ 30,740 $ (30,740)(a) $ -- $ 74,091 $ 950,000(a)
(47,900)(b)
(669,431)(c)
10,000(k)
256,420(g)
Restricted investments........... -- 10,152 (10,152)(a) -- -- --
Marketable debt securities....... 28,578 -- -- -- 28,578 --
Trade and other receivables,
net............................ 81,821 43,881 (13,294)(a) 30,587 112,408 --
Construction contracts
receivable..................... -- 37,625 (7,822)(a) 29,803 29,803 --
Investments...................... -- 910 -- 910 910 --
Prepaid expenses and other
current assets................. 2,247 8,519 (3,574)(a) 4,945 7,192 --
---------- ---------- ----------- --------- ---------- ---------
Total current assets....... 186,737 131,827 (65,582) 66,245 252,982 499,089
---------- ---------- ----------- --------- ---------- ---------
Restricted investments........... -- 3,510 (3,510)(a) -- -- --
Property, plant and equipment.... 1,082,016 1,016,591 (82,087)(a) 934,504 2,016,520 (303,030)(c)
Less accumulated
depreciation................. (257,881) (364,433) 209,829(a) (154,604) (412,485) 154,604(c)
---------- ---------- ----------- --------- ---------- ---------
824,135 652,158 127,742 779,900 1,604,035 (148,426)
Intangible and other assets, net of
accumulated amortization......... 93,663 2,661 36,738(a) 39,399 133,062 47,900(b)
(37,111)(c)
(23,275)(i)
(5,750)(i)
(10,000)(k)
---------- ---------- ----------- --------- ---------- ---------
$1,104,535 $ 790,156 $ 95,388 $ 885,544 $1,990,079 $ 322,427
========== ========== =========== ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................. $ 46,407 $ 1,214 $ (323)(a) $ 891 $ 47,298 $ --
Deferred revenue................. 35,719 12,307 (1,794)(a) 10,513 46,232 --
Other current liabilities........ 127,356 56,443 (14,074)(a) 42,369 169,725 (22,701)(c)
---------- ---------- ----------- --------- ---------- ---------
Total current
liabilities.............. 209,482 69,964 (16,191) 53,773 263,255 (22,701)
---------- ---------- ----------- --------- ---------- ---------
Liabilities subject to
compromise....................... -- 1,322,642 (1,302,452)(a) 20,190 20,190 (20,190)(c)
Long-term debt and capital lease
obligations...................... 403,311 -- -- -- 403,311 950,000(a)
(556,420)(g)
256,420(g)
Deferred income taxes.............. 21,231 -- -- -- 21,231 --
Other long-term liabilities........ -- 25,460 -- 25,460 25,460 (25,460)(c)
Redeemable preference shares....... -- 74,008 (74,008)(a) -- -- --
Stockholders' equity (deficit):
Common stock..................... 1,056 251,575 535,042(a) 786,617 787,673 (786,617)(c)
75(g)
Additional paid-in capital....... 590,924 -- -- -- 590,924 (23,275)(i)
556,345(g)
Accumulated other comprehensive
income, net of taxes........... 12,030 -- -- -- 12,030 --
Accumulated deficit.............. (133,499) (953,493) 952,997(a) (496) (133,995) (5,750)(i)
---------- ---------- ----------- --------- ---------- ---------
Total shareholders' equity
(deficit)................ 470,511 (701,918) 1,488,039 786,121 1,256,632 (259,222)
---------- ---------- ----------- --------- ---------- ---------
$1,104,535 $ 790,156 $ 95,388 $ 885,544 $1,990,079 $ 322,427
========== ========== =========== ========= ========== =========
PRO FORMA
TWTC
COMBINED
----------
ASSETS
Current assets:
Cash and cash equivalents........ $ 573,180
Restricted investments........... --
Marketable debt securities....... 28,578
Trade and other receivables,
net............................ 112,408
Construction contracts
receivable..................... 29,803
Investments...................... 910
Prepaid expenses and other
current assets................. 7,192
----------
Total current assets....... 752,071
----------
Restricted investments........... --
Property, plant and equipment.... 1,713,490
Less accumulated
depreciation................. (257,881)
----------
1,455,609
Intangible and other assets, net of
accumulated amortization......... 104,826
----------
$2,312,506
==========
LIABILITIES AND STOCKHOLDERS' EQUIT
Current liabilities:
Accounts payable................. $ 47,298
Deferred revenue................. 46,232
Other current liabilities........ 147,024
----------
Total current
liabilities.............. 240,554
----------
Liabilities subject to
compromise....................... --
Long-term debt and capital lease
obligations...................... 1,053,311
Deferred income taxes.............. 21,231
Other long-term liabilities........ --
Redeemable preference shares....... --
Stockholders' equity (deficit):
Common stock..................... 1,131
Additional paid-in capital....... 1,123,994
Accumulated other comprehensive
income, net of taxes........... 12,030
Accumulated deficit.............. (139,745)
----------
Total shareholders' equity
(deficit)................ 997,410
----------
$2,312,506
==========
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TIME WARNER TELECOM INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
GST
--------------------------------------------------------
EXCLUSIONS
RELATED TO THE GST PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ASSETPURCHASE PRO FORMA GST TO BE TWTC AND
TWTC GST AGREEMENT(1) ADJUSTMENTS(2) ACQUIRED GST SUBTOTAL
---------- ---------- -------------- -------------- --------- ------------
Revenue:
Telecommunication services........ $268,753 $ 202,686 $(117,300)(a) $ -- $ 85,386 $ 354,139
Construction, facility sales and
other........................... -- 115,147 -- (115,147)(a) -- --
Product........................... -- 4,089 (4,089)(a) -- -- --
-------- --------- --------- --------- --------- ---------
Total revenue............... 268,753 321,922 (121,389) (115,147) 85,386 354,139
Operating costs and expenses:
Operating......................... 117,567 150,835 (90,223)(a) -- 60,612 178,179
Cost of construction revenues..... -- 74,940 -- (74,940)(a) -- --
Cost of product revenues.......... -- 2,484 (2,484)(a) -- -- --
Selling, general and
administrative.................. 113,389 122,974 (56,786)(a) -- 66,188 179,577
Depreciation and amortization..... 68,785 70,973 (22,263)(a) 2,437(b) 51,147 119,932
-------- --------- --------- --------- --------- ---------
Total costs and expenses.... 299,741 422,206 (171,756) (72,503) 177,947 477,688
-------- --------- --------- --------- --------- ---------
Operating income (loss):............ (30,988) (100,284) 50,367 (42,644) (92,561) (123,549)
Interest expense, net of amounts
capitalized....................... (45,264) (115,481) 10,287(a) -- (105,194) (150,458)
Interest income..................... 16,589 9,736 (9,736)(b) -- -- 16,589
Other............................... -- 23,460 4,571(a) -- -- --
(28,031)(c)
Equity in income of unconsolidated
affiliate......................... 202 -- -- -- -- 202
-------- --------- --------- --------- --------- ---------
Income (loss) before income taxes... (59,461) (182,569) 27,458 (42,644) (197,755) (257,216)
Income tax expense (benefit)........ 29,804 -- -- -- -- 29,804
-------- --------- --------- --------- --------- ---------
Net income (loss)................... $(89,265) (182,569) 27,458 (42,644) (197,755) (287,020)
======== ========= ========= ========= ========= =========
Basic and diluted loss per common
share............................. $ (0.93)
========
Average common shares outstanding... 95,898
========
PRO FORMA
ADJUSTMENTS
FOR TWTC PRO FORMA
ACQUISITION AND TWTC
OFFERINGS(3) COMBINED
--------------- ---------
Revenue:
Telecommunication services........ $ -- $ 354,139
Construction, facility sales and
other........................... -- --
Product........................... -- --
-------- ---------
Total revenue............... -- 354,139
Operating costs and expenses:
Operating......................... -- 178,179
Cost of construction revenues..... -- --
Cost of product revenues.......... -- --
Selling, general and
administrative.................. -- 179,577
Depreciation and amortization..... (26,896)(d) 90,163
(2,873)(e)
-------- ---------
Total costs and expenses.... (29,769) 447,919
-------- ---------
Operating income (loss):............ 29,769 (93,780)
Interest expense, net of amounts
capitalized....................... 102,381(f) (120,402)
(64,350)(h)
(2,225)(i)
(5,750)(i)
Interest income..................... -- 16,589
Other............................... --
Equity in income of unconsolidated
affiliate......................... -- 202
-------- ---------
Income (loss) before income taxes... 59,825 (197,391)
Income tax expense (benefit)........ (29,804)(i) --
-------- ---------
Net income (loss)................... 89,629 (197,391)
======== =========
Basic and diluted loss per common
share............................. $ (1.91)
=========
Average common shares outstanding... 103,373
=========
40
43
TIME WARNER TELECOM INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
GST
------------------------------------------------------
EXCLUSIONS
RELATED TO
THE ASSET GST PRO FORMA PRO FORMA
HISTORICAL HISTORICAL PURCHASE PRO FORMA GST TO BE TWTC AND
TWTC GST AGREEMENT(1) ADJUSTMENTS(2) ACQUIRED GST SUBTOTAL
---------- ---------- ------------ -------------- --------- ------------
Revenue
Telecommunications services..... $353,067 $ 160,223 $ (72,822)(a) $ -- $ 87,401 $ 440,468
Construction, facility sales and other.. -- 24,563 -- (24,563)(a) -- --
Product......................... -- 205 205(a) -- -- --
-------- --------- --------- -------- --------- ---------
Total Revenue................. 353,067 184,991 (73,027) (24,563) 87,401 440,468
-------- --------- --------- -------- --------- ---------
Operating costs and expenses:
Operating....................... 130,846 113,806 (57,853)(a) -- 55,953 186,799
Cost of construction revenues... -- 16,581 -- (16,581)(a) -- --
Cost of product revenues........ -- 307 (307)(a) -- -- --
Selling, general and
administrative................ 122,663 97,380 (38,523)(a) -- 58,857 181,520
Depreciation and amortization... 68,793 67,569 (9,407)(a) 4,045(b) 62,207 131,000
Impairment of assets.............. -- 260,827 (260,827)(c) -- -- --
-------- --------- --------- -------- --------- ---------
Total costs and expenses...... 322,302 556,470 (366,917) (12,536) 177,017 499,319
-------- --------- --------- -------- --------- ---------
Operating income (loss):.......... 30,765 (371,479) 293,890 (12,027) (89,616) (58,851)
Interest expense, net of amounts
capitalized..................... (30,657) (52,576) 4,970(a) -- (47,606) (78,263)
Interest income................... 9,016 2,117 (2,117)(b) -- -- 9,016
Other............................. -- 47,745 (2,896)(a) -- -- --
-- -- (44,849)(c) -- -- --
-------- --------- --------- -------- --------- ---------
Income (loss) before
reorganization expenses and
income tax expense (benefit).... 9,124 (374,193) 248,998 (12,027) (137,222) (128,098)
Reorganization expenses........... -- 12,777 (12,777)(d) -- -- --
-------- --------- --------- -------- --------- ---------
Income (loss) before income
taxes........................... 9,124 (386,970) 261,775 (12,027) (137,222) (128,098)
Income tax expense (benefit)...... 4,542 -- -- -- -- 4,542
-------- --------- --------- -------- --------- ---------
Net income (loss)................. $ 4,582 $(386,970) $ 261,775 $(12,027) $(137,222) $(132,640)
======== ========= ========= ======== ========= =========
Basic and diluted earnings (loss)
per common share................ $ 0.04
========
Average shares outstanding:
Basic........................... 105,262
========
Diluted......................... 108,427
========
PRO FORMA
ADJUSTMENTS
FOR TWTC PRO FORMA
ACQUISITION AND TWTC
OFFERINGS(3) COMBINED
--------------- ---------
Revenue
Telecommunications services..... $ -- $ 440,468
Construction, facility sales and -- --
Product......................... -- --
-------- ---------
Total Revenue................. -- 440,468
-------- ---------
Operating costs and expenses:
Operating....................... -- 186,799
Cost of construction revenues... -- --
Cost of product revenues........ -- --
Selling, general and
administrative................ -- 181,520
Depreciation and amortization... (20,172)(d) 107,515
(3,313)(e)
Impairment of assets.............. -- --
-------- ---------
Total costs and expenses...... (23,485) 475,834
-------- ---------
Operating income (loss):.......... 23,485 (35,366)
Interest expense, net of amounts
capitalized..................... 45,867(f) (82,327)
(48,262)(h)
(1,669)
(i)
Interest income................... -- 9,016
Other............................. -- --
-- --
-------- ---------
Income (loss) before
reorganization expenses and
income tax expense (benefit).... 19,421 (108,677)
Reorganization expenses........... -- --
-------- ---------
Income (loss) before income
taxes........................... 19,421 (108,677)
Income tax expense (benefit)...... (4,542)(j) --
-------- ---------
Net income (loss)................. $ 23,963 $(108,677)
======== =========
Basic and diluted earnings (loss)
per common share................ $ (0.96)
=========
Average shares outstanding:
Basic........................... 112,737
=========
Diluted......................... 112,737
=========
41
44
TIME WARNER TELECOM INC.
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combined balance sheet is
presented as of September 30, 2000. The accompanying unaudited pro forma
condensed combined statements of operations are presented for the year ended
December 31, 1999 and the nine months ended September 30, 2000. The adjustments
contained in the accompanying pro forma condensed combined financial statements
reflect the following:
(1) EXCLUSIONS RELATED TO THE ASSET PURCHASE AGREEMENT
(a) To reflect the exclusion of assets and liabilities of GST that were
not acquired, either because they were excluded from the purchase agreement or
because they were disposed of by GST prior to September 30, 2000.
The assets and liabilities excluded from the purchase agreement
consist of the majority of GST's Hawaiian assets and operations, certain
other businesses and contracts, and other assets and liabilities, as well
as the related revenue and expenses associated with these excluded assets
and liabilities. Other assets and liabilities excluded consist principally
of cash and cash equivalents, restricted investments, certain accounts
receivable, certain other current assets and certain accounts payable,
deferred revenue, and certain other current liabilities. The businesses and
contracts being excluded relate primarily to the operator
services/hospitality business and certain contracts for resold local and
long distance services. Additionally, to reverse the impairment charge by
GST in the third quarter of 2000, which resulted from the consummation of
the purchase agreement.
The dispositions by GST that occurred between January 1, 1999 and
September 30, 2000 have been treated as if they were consummated prior to
January 1, 1999. These divestitures consisted of:
-- a California Internet service provider;
-- a Texas company which provided long distance and ancillary
telecommunications services, and produced software used in
the telecommunications industry; and
-- the assets and liabilities primarily related to GST's Guam
operations.
(b) To eliminate GST's historical interest income as residual cash
balances were not acquired.
(c) To reflect the exclusion of non-recurring items consisting of the
following:
-- For the year ended December 31, 1999:
-- a $28.0 million favorable legal settlement.
-- For the nine months ended September 30, 2000:
-- a $260.8 million impairment of assets; and
-- a $2.5 million favorable legal settlement; and
-- a $42.3 million gain on the sale of an investment
(d) The exclusion of $12.8 million consisting of retention bonuses paid to
employees and fees paid for professional services related to the bankruptcy
reorganization of GST.
42
45
TIME WARNER TELECOM INC.
NOTES TO THE PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(2) GST PRO FORMA ADJUSTMENTS
(a) To reflect the exclusion of revenue and expenses related to GST
construction and facility sales of conduit and dark fiber previously sold by
GST. The historical GST construction and facility sales activities included:
-- outright sales to third parties, which represented $15.6 million
and $6.6 million in revenue and $12.6 million and $6.5 million
in associated expenses for the year ended December 31, 1999 and
the nine months ended September 30, 2000, respectively; and
-- the consummation of "sales-type" leases, which represented $99.5
and $18.0 million in revenue and $62.3 million and $10.1 million
in associated expenses for the year ended December 31, 1999 and
the nine months ended September 30, 2000, respectively.
This construction and facility sales activity is non-recurring in
nature. Any construction and facility sales following the acquisition will
be recorded when and if such transactions occur.
Historically, GST had treated certain long-term fiber and conduit
lease contracts entered into prior to June 30, 1999 as "sales-type" leases
and recognized the related revenue under the percentage of completion
method. In June 1999, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 43, Real Estate Sales, an Interpretation of FASB
Statement No. 66 ("FIN 43"). FIN 43 is effective for sales of real estate
with property improvements or integral equipment entered into after June
30, 1999. Under FIN 43, conduit and dark fiber are considered integral
equipment. Accordingly, for contracts entered into after June 30, 1999,
sales-type lease accounting is no longer appropriate for dark fiber and
conduit leases and therefore, such transactions will be accounted for as
operating leases unless title transfers to the lessee. Assuming that GST
adopted the methodology prescribed by FIN 43 as of January 1, 1999, GST
construction and facility sales would have aggregated $0.7 million and $2.1
million in revenue and $0.5 million and $1.6 million in depreciation
expense for the year ended December 31, 1999 and the nine months ended
September 30, 2000, respectively, and such amounts would have been included
as an adjustment under the Exclusions Related to the Purchase Agreement.
Additionally, a deferred revenue balance would be established, but would be
eliminated in purchase accounting as such balance would represent a
non-monetary liability required to be eliminated as of the acquisition
date.
(b) To reflect the effect of the adoption of Time Warner Telecom's
accounting policy for depreciable lives for fixed asset depreciation for the
periods presented.
(3) TIME WARNER TELECOM PRO FORMA ADJUSTMENTS
(a) To reflect the proceeds from borrowings under the senior secured term
loan facility and unsecured bridge loan facility as follows:
-- a $250 million borrowing by subsidiaries of Time Warner Telecom
under the secured term loan facilities; and
-- a $700 million borrowing by Time Warner Telecom under the
unsecured bridge facility.
(b) To reflect the estimated financing costs in connection with closing of
the senior secured credit facility and unsecured bridge loan facility as well as
the costs required to obtain permanent financing. This amount is net of a credit
of a portion of the fees paid to secure the bridge financing.
(c) To reflect the purchase of a majority of GST's assets under the
purchase agreement for cash consideration of $627 million plus the payment of
certain liabilities and fees of $42 million and the assumption
43
46
TIME WARNER TELECOM INC.
NOTES TO THE PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
of $21 million obligation to complete certain fiber networks, for a total
purchase price of $690 million. The final allocation of purchase price is
subject to adjustment based upon final appraisals and other analyses. As the
acquisition will be accounted for using the purchase method of accounting, the
remaining unamortized balance in intangible assets, which is primarily comprised
of goodwill and deferred loan costs, non-monetary liabilities, and the remaining
equity balance will be eliminated. As the purchase price is anticipated to be
lower than the fair value of the assets acquired, the values otherwise
assignable to plant, property and equipment will be proportionally reduced to
determine assigned values.
(d) To reflect the reduction in depreciation expense as a result of a
proportional reduction in the historical book values of plant, property and
equipment after considering the excess of the historical book values over the
remaining unallocated purchase price of $303.0 million.
(e) To eliminate the amortization expense arising from historical GST
intangible assets that has been eliminated in purchase accounting.
(f) To eliminate GST's historical interest expense, except for historical
interest expense related to assumed capital lease obligations.
(g) To reflect the net proceeds from refinancing the $700 million borrowed
under the unsecured bridge loan facility in connection with:
-- the issuance and sale of $400 million of notes pursuant to this
offering; and
-- the issuance and sale of 7.5 million shares of our Class A common
stock pursuant to our concurrent offering at a price of $74 7/16
per share.
(h) To record interest expense on $250 million in borrowings under the
senior secured term loan facility at a variable interest rate of 9.6% and the
issuance and sale of $400 million of high yield senior notes due 2011 at a fixed
interest rate of 10 1/8%. For purposes of computing interest expense on the
secured term loan facilities, Time Warner Telecom utilized the six month London
Interbank Offered Rate plus the maximum specified margin of 4%. A change of 1%
per annum in the effective annual interest cost on aggregate borrowings of $250
million would change pro forma interest expense by $2.5 million.
(i) To record amortization of deferred financing costs under the secured
term loan facilities and the unsecured bridge loan facility over an estimated
ten-year period. In connection with the issuance of the unsecured bridge loan
facility, $5.8 million of unamortized deferred financing costs were expensed in
first quarter 2001. In connection with the issuance of the equity securities,
$23.3 million of unamortized deferred financing costs were reclassified to
additional paid-in capital.
(j) The acquisition represents a purchase of assets. Accordingly, Time
Warner Telecom will not be assuming any GST historical tax attributes, including
net operating loss carryforwards. For pro forma presentation purposes, the tax
benefits of GST related to the periods presented have been recognized to the
extent of the tax expense recorded in the Time Warner Telecom historical
financial statements.
(k) To reflect the acquisition deposit paid by Time Warner Telecom upon
consummation of the purchase agreement in September 2000.
44
47
SELECTED CONSOLIDATED, COMBINED AND CONDENSED FINANCIAL AND
OTHER OPERATING DATA
The selected statements of operations data for the years ended December 31,
1997, 1998 and 1999, and the selected balance sheet data as of December 31, 1998
and 1999, are derived from, and are qualified by reference to, the financial
statements of Time Warner Telecom, including the notes, audited by Ernst & Young
LLP, independent auditors, incorporated by reference herein. The selected
statements of operations data for the year ended December 31, 1995 and 1996 and
the selected balance sheet data as of December 31, 1995, 1996 and 1997 have been
derived from audited financial statements of Time Warner Telecom not included in
this prospectus. The summary financial data as of and for the nine months ended
September 30, 1999 and 2000 are derived from the unaudited consolidated
financial statements of Time Warner Telecom, including the notes, appearing
elsewhere in this prospectus. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which in the opinion of
Time Warner Telecom, is necessary for a fair presentation of the financial
position and results of operations for these periods. Operating results for the
nine months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 2000. The
financial statements of Time Warner Telecom for all periods prior to the
Reorganization of Time Warner Telecom that occurred on July 14, 1998 reflect the
"carved out" historical financial position, results of operations, cash flows
and changes in stockholders' equity of the commercial telecommunications
operations of predecessors of Time Warner Telecom, as if they had been operating
as a separate company. The selected financial and other operating data set forth
below should be read together with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Time Warner Telecom's
financial statements, including the notes, appearing elsewhere in this
prospectus.
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Revenue:
Dedicated transport services.... $ 6,505 $ 20,362 $ 44,529 $ 84,024 $ 152,468 $ 105,727 $ 183,759
Switched services(1)............ 350 3,555 10,872 37,848 116,285 71,558 169,308
-------- -------- ---------- ---------- ---------- ---------- ----------
Total revenue............. 6,855 23,917 55,401 121,872 268,753 177,285 353,067
-------- -------- ---------- ---------- ---------- ---------- ----------
Costs and expenses(2):
Operating....................... 15,106 25,715 40,349 67,153 117,567 81,949 130,846
Selling, general and
administrative................ 34,222 60,366 54,640 77,401 113,389 80,501 122,663
Depreciation and amortization... 7,216 22,353 38,466 50,717 68,785 50,272 68,793
-------- -------- ---------- ---------- ---------- ---------- ----------
Total costs and
expenses................ 56,544 108,434 133,455 195,271 299,741 212,722 322,302
-------- -------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)........... (49,689) (84,517) (78,054) (73,399) (30,988) (35,437) 30,765
Interest expense, net and
other(2)........................ (1,416) (1,599) 7,398 (19,340) (28,473) (22,026) (21,641)
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before income
taxes........................... (51,105) (86,116) (70,656) (92,739) (59,461) (57,463) 9,124
Income tax expense(3)............. -- -- -- -- 29,804 29,473 4,542
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................. $(51,105) $(86,116) $ (70,656) $ (92,739) $ (89,265) $ (86,936) $ 4,582
======== ======== ========== ========== ========== ========== ==========
Earnings (loss) per share
Basic........................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.93) $ (0.94) $ 0.04
======== ======== ========== ========== ========== ========== ==========
Diluted......................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.93) $ (0.94) $ 0.04
======== ======== ========== ========== ========== ========== ==========
Earnings (loss) per share before
income taxes
Basic........................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.62) $ (0.62) $ 0.09
======== ======== ========== ========== ========== ========== ==========
Diluted......................... $ (0.63) $ (1.06) $ (0.87) $ (1.14) $ (0.62) $ (0.62) $ 0.08
======== ======== ========== ========== ========== ========== ==========
Weighted average shares
outstanding
Basic........................... 81,250 81,250 81,250 81,250 95,898 92,957 105,262
Diluted......................... 81,250 81,250 81,250 81,250 95,898 92,957 108,427
45
48
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA AMOUNTS)
OTHER OPERATING DATA:
EBITDA(1)(4)...................... $(42,473) $(62,164) $ (39,588) $ (22,682) $ 37,797 $ 14,835 $ 99,558
EBITDA Margin(1)(5)............... (620)% (260)% (72)% (19)% 14% 8% 28%
Net cash provided by (used in)
operating activities............ (35,605) (52,274) (29,419) (343) 54,235 (13,194) 71,238
Capital expenditures.............. 141,479 144,815 127,315 126,023 221,224 138,305 213,246
Deficiency of earnings to cover
fixed charges(7)................ 51,105 86,116 70,656 92,957 59,714 57,716 --
OPERATING DATA(6):
Operating Networks................ 15 18 19 19 21 19 22
Route miles....................... 3,207 5,010 5,913 6,968 8,872 7,326 9,271
Fiber miles....................... 116,286 198,490 233,488 272,390 332,263 289,803 344,377
DS-0 equivalents.................. 159,000 690,000 1,719,000 3,031,000 5,523,000 4,029,000 7,982,000
Digital telephone switches........ 1 2 14 16 19 19 26
Employees......................... 508 673 714 919 1,259 1,118 1,539
BALANCE SHEET DATA:
Cash and cash equivalents......... $ -- $ -- $ -- $ 105,140 $ 90,586 $ 42,394 $ 74,091
Marketable debt securities........ -- -- -- 250,857 173,985 229,793 28,578
Property, plant and equipment,
net............................. 199,005 323,161 415,158 494,158 677,106 613,137 824,135
Total assets...................... 214,963 341,480 438,077 904,344 1,043,012 976,375 1,104,535
Long-term debt and capital lease
obligations(6).................. -- -- 75,475 574,940 403,627 403,342 403,311
Total stockholders' equity........ $179,589 $294,937 $ 300,390 $ 207,651 $ 422,916 $ 419,650 $ 470,511
- ------------
(1) Includes the recognition of non-recurring $7.6 million and $27.3 million
settlements of reciprocal compensation in the fourth quarter of 1999 and for
the nine months ended September 30, 2000, respectively.
(2) Includes expenses resulting from transactions with affiliates of $6.5
million, $12.4 million, $17.1 million, $27.7 million, $20.0 million, $15.9
million, and $11.4 million for the years ended December 31, 1995, 1996,
1997, 1998 and 1999, and for the nine months ended September 30, 1999 and
2000, respectively. See Time Warner Telecom's financial statements appearing
elsewhere in this prospectus for an explanation of these expenses.
(3) During 1999, Time Warner Telecom recorded a non-recurring $39.4 million
charge to earnings to record a net deferred tax liability associated with
the Reconstitution. This change occurred immediately prior to Time Warner
Telecom's initial public offering.
(4) "EBITDA" is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provision for income taxes. Accordingly, EBITDA is not intended to replace
operating income, net income (loss), cash flow and other measures of
financial performance and liquidity reported in accordance with generally
accepted accounting principles. Rather, EBITDA is a measure of operating
performance and liquidity that investors may consider in addition to such
measures. Management believes that EBITDA is a standard measure of operating
performance and liquidity that is commonly reported and widely used by
analysts, investors and other interested parties in the telecommunications
industry because it eliminates many differences in financial, capitalization
and tax structures, as well as non-cash and non-operating charges to
earnings. EBITDA is used internally by Time Warner Telecom's management to
assess on-going operations and is a component of a covenant of the 9 3/4%
Senior Notes that limits Time Warner Telecom's ability to incur additional
future indebtedness. However, EBITDA as used in this report may not be
comparable to similarly titled measures reported by other companies due to
differences in accounting policies.
(5) EBITDA Margin represents EBITDA as a percentage of revenue.
(6) Includes all managed properties including unconsolidated affiliates,
MetroComm AxS, L.P. in Columbus, Ohio and the Albany and Binghamton, New
York networks. Albany and Binghamton were wholly owned at December 31, 1997
and MetroComm AxS, L.P. was wholly owned at December 31, 1999.
(7) For purposes of computing the deficiency of earnings to cover fixed charges,
earnings were calculated by adding (i) net income (loss) before income taxes
and (ii) interest expense, including the portion of rents representative of
an interest factor. Fixed charges consist of interest expense, capitalized
interest and the portion of rents representative of an interest factor.
46
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with Time
Warner Telecom's financial statements, including the notes, incorporated by
reference herein. Certain information contained in the discussion and analysis
set forth below and elsewhere in this prospectus, including information with
respect to Time Warner Telecom's plans and strategy for its business and related
financing, includes forward-looking statements that involve risk and
uncertainties. See "Risk Factors" for a discussion of important factors that
could cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained in this prospectus.
OVERVIEW
Time Warner Telecom is a leading fiber facilities-based integrated
communications provider offering local businesses "last mile" broadband
connections for data, high-speed internet access, local voice and long distance
services. As of January 9, 2001, Time Warner Telecom served customers in 24
metropolitan markets in the United States. The markets include: Austin, Dallas,
Houston and San Antonio, Texas; Charlotte, Fayetteville, Greensboro and Raleigh,
North Carolina; Albany, Binghamton, New York City and Rochester, New York;
Northern New Jersey; Cincinnati, Columbus and Dayton, Ohio; Memphis, Tennessee;
Orlando and Tampa, Florida; Indianapolis, Indiana; Milwaukee, Wisconsin; Los
Angeles/Orange County and San Diego, California and Honolulu, Hawaii. Time
Warner Telecom plans to activate its networks in Chicago, Illinois; Atlanta,
Georgia; Minneapolis, Minnesota; Denver, Colorado; and Columbia, South Carolina
prior to the end of 2001.
Time Warner Cable began our business in 1993. During the last few years,
our business has changed substantially with an exclusive focus on business
customers and a rapid expansion into switched services and geographic areas
beyond the Time Warner Cable footprint.
On July 14, 1998 we were reorganized into a limited liability company and
conducted the offering of the 9 3/4% Senior Notes. In the transaction, referred
to as the "Reorganization," the Class B Stockholders, either directly or through
subsidiaries, became the owners of all the limited liability company interests
in TWT LLC.
On May 10, 1999, in preparation for our initial public offering, TWT LLC
was reconstituted as a Delaware corporation under the name Time Warner Telecom
Inc. We refer to this transaction as the "Reconstitution." The outstanding
limited liability company interests were converted into common stock of the
newly formed corporation, Time Warner Telecom Inc. Time Warner Telecom accounted
for the Reorganization and the Reconstitution at each of the Class B
Stockholders' historical cost basis and, except as noted below, the
Reorganization and the Reconstitution had no effect on our total stockholders'
equity, which has been presented on a consistent basis.
As a result of the change in legal structure from a limited liability
company to a corporation, all future net operating loss carry forwards from the
date of the Reconstitution can be utilized against future earnings of Time
Warner Telecom. Prior to the Reconstitution, all net operating losses were
allocated to and utilized primarily by the Class B Stockholders. As a result of
the Reconstitution, which occurred during the second quarter of 1999, Time
Warner Telecom recorded a non-recurring charge to earnings for a net deferred
tax liability of approximately $39.4 million.
On May 14, 1999, in conjunction with the Reconstitution, we completed an
initial public offering of 20,700,000 shares of Class A common stock at a price
of $14 per share. The IPO generated approximately $270.2 million in proceeds for
us, net of underwriting discounts and expenses. A portion of the proceeds of the
IPO was used to repay $180 million of loans from Time Warner, Advance/Newhouse
Partnership and MediaOne that were generated from the financing requirements of
Time Warner Telecom from July 1, 1997 through July 14, 1998, which had remained
outstanding, accruing interest, through May 14, 1999. The proceeds of the IPO
remaining after repayment of the loans were used to repay assumed debt from
acquisitions and to fund capital expenditures.
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As a result of the IPO, Time Warner Telecom has two classes of common stock
outstanding, Class A common stock and Class B common stock. In general, holders
of Class A common stock have one vote per share and holders of Class B common
stock have ten votes per share. Each share of Class B common stock is
convertible, at the option of the holder, into one share of Class A common
stock. Holders of Class A common stock and Class B common stock generally vote
together as a single class. However, some matters require the approval of 100%
of the holders of the Class B common stock voting separately as a class, and
some matters require the approval of a majority of the holders of the Class A
common stock, voting separately as a class. Upon completion of the IPO, the
Class B Stockholders owned all of the 81,250,000 shares of outstanding Class B
common stock. Subsequent to the IPO, 9,023,500 shares of Class B common stock
have been converted into Class A common stock. As of September 30, 2000, the
Class B Stockholders had approximately 95.6% of the combined voting power of the
outstanding common stock.
In connection with the Reconstitution, Time Warner Telecom assumed the
obligations under the former Time Warner Telecom LLC 1998 Option Plan, amended
the plan, and renamed it the Time Warner Telecom 1998 Stock Option Plan. The
plan provides for the granting of stock options to purchase shares of Class A
common stock to directors and current or prospective employees of, and
consultants or other individuals providing services to, Time Warner Telecom and
its subsidiaries. As of December 31, 2000, options for approximately 10.4
million shares were outstanding under both plans.
ACQUISITIONS
During the second quarter of 1999, Time Warner Telecom acquired all of the
outstanding common stock of Internet Connect, Inc., an internet service
provider, for consideration consisting of $3.8 million of Class A limited
liability interests in TWT LLC, Time Warner Telecom's predecessor, approximately
$3.5 million in net cash and the assumption of $1.9 million in liabilities. At
the time of the IPO, the Class A limited liability interests were converted into
307,550 shares of Class A common stock of Time Warner Telecom. Through the
acquisition of this subsidiary, Time Warner Telecom manages current and future
data networks and provides new internet products.
During the second quarter of 1999, Time Warner Telecom acquired all of the
outstanding common stock of MetroComm, Inc. through the issuance of 2,190,308
shares of Class A common stock of Time Warner Telecom valued at $24.1 million,
and the assumption of $20.1 million in liabilities. Through the acquisition of
MetroComm, Time Warner Telecom acquired the 50% interest of MetroComm AxS, L.P.,
a competitive local exchange carrier in Columbus, Ohio, not already owned by
Time Warner Telecom.
On January 10, 2001, Time Warner Telecom completed the acquisitions of
substantially all of the assets of GST for cash consideration of $627 million,
plus the payment of certain liabilities and fees of $42 million and the
assumption of a $21 million obligation to complete certain fiber networks, for a
total purchase price of $690 million. The acquisition added to Time Warner
Telecom's network 4,210 route miles, 227,674 fiber miles and service to 345
on-net buildings.
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RESULTS OF OPERATIONS
The following table sets forth certain consolidated and combined statements
of operations data of Time Warner Telecom, in thousands of dollars and expressed
as a percentage of total revenue, for each of the periods presented. This table
should be read together with Time Warner Telecom's financial statements,
including the notes, appearing elsewhere in this prospectus:
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------- -----------------------------------
1997 1998 1999 1999 2000
---------------- --------------- --------------- --------------- ---------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Revenue:
Dedicated transport
services................... $ 44,529 80% $ 84,024 69% $ 152,468 57% $ 105,727 60% $ 183,759 52%
Switched services(1)......... 10,872 20 37,848 31 116,285 43 71,558 40 169,308 48
--------- ---- --------- --- --------- --- --------- --- --------- ---
Total revenue.............. 55,401 100 121,872 100 268,753 100 177,285 100 353,067 100
--------- ---- --------- --- --------- --- --------- --- --------- ---
Costs and expenses(2):
Operating.................... 40,349 73 67,153 55 117,567 44 81,949 46 130,846 37
Selling, general and
administrative............. 54,640 99 77,401 63 113,389 42 80,501 46 122,663 35
Depreciation and
amortization............... 38,466 69 50,717 42 68,785 25 50,272 28 68,793 19
--------- ---- --------- --- --------- --- --------- --- --------- ---
Total costs and expenses... 133,455 241 195,271 160 299,741 111 212,722 120 322,302 91
--------- ---- --------- --- --------- --- --------- --- --------- ---
Operating income (loss)........ (78,054) (141) (73,399) (60) (30,988) (11) (35,437) (20) 30,765 9
Interest expense(2)............ (1,538) (3) (29,198) (24) (45,264) (17) (35,139) (20) (30,657) (9)
Interest income................ -- -- 9,731 8 16,589 6 12,828 8 9,016 2
Equity in income (losses) of
unconsolidated affiliate..... (2,082) (4) 127 -- 202 -- 285 -- -- --
Gain on disposition of
investments(3)............... 11,018 20 -- -- -- -- -- -- -- --
--------- ---- --------- --- --------- --- --------- --- --------- ---
Net income (loss) before income
taxes........................ (70,656) (128) (92,739) (76) (59,461) (22) (57,463) (32) 9,124 2
Income tax expense(4).......... -- -- -- -- 29,804 11 29,473 17 4,542 1
--------- ---- --------- --- --------- --- --------- --- --------- ---
Net income (loss).............. $ (70,656) (128)% $ (92,739) (76)% $ (89,265) (33)% $ (86,936) (49)% $ 4,582 1%
--------- ---- --------- --- --------- --- --------- --- --------- ---
Basic and diluted earnings
(loss) per share)............ $ (0.87) $ (1.14) $ (0.93) $ (0.94) $ 0.04
Earnings (loss) per share
before income taxes:
Basic........................ $ (0.87) $ (1.14) $ (0.62) $ (0.62) $ 0.09
Diluted...................... $ (0.87) $ (1.14) $ (0.62) $ (0.62) $ 0.08
Weighted average shares
outstanding:
Basic........................ 81,250 81,250 95,898 92,957 105,262
Diluted...................... 81,250 81,250 95,898 92,957 108,427
EBITDA(1)(5)................... $ (39,588) (71)% $ (22,682) (19)% $ 37,797 14% $ 14,835 8% $ 99,558 28%
Net cash provided by (used in)
operating activities......... (29,419) (343) 54,235 (13,194) 71,238
Net cash provided by (used in)
investing activities......... (120,621) (378,083) (146,917) (124,804) (87,817)
Net cash provided by financing
activities................... 150,040 483,566 78,128 75,252 84
(footnotes on next page)
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- ------------
(1) Includes the recognition of non-recurring $7.6 million and $27.3 million
settlements of reciprocal compensation in the fourth quarter of 1999 and the
nine months ended September 30, 2000, respectively.
(2) Includes expenses resulting from transactions with affiliates of $17.1
million, $27.7 million, $20.0 million, $15.9 million, and $11.4 million for
the years ended December 31, 1997, 1998 and 1999 and for the nine months
ended September 30, 1999 and 2000, respectively.
(3) In 1997, Time Warner Telecom completed a series of transactions related to
its interests in the Hyperion Partnerships, a group of unconsolidated
telecommunication partnerships serving the New York area, whereby it sold
its interests in the partnerships serving the Buffalo and Syracuse markets
in exchange for approximately $7.0 million of cash and all of the minority
interests in the partnerships serving the Albany and Binghamton markets that
were not already owned by Time Warner Telecom. In connection with these
transactions, Time Warner Telecom recognized a gain of approximately $11.0
million.
(4) A non-recurring charge to earnings of $39.4 million was recorded in 1999 to
reflect the initial net deferred tax liability associated with the change
from a limited liability company to a corporation. Income tax expense for
1999 reflects the $39.4 million charge, net of a $9.6 million deferred
income tax benefit.
(5) "EBITDA" is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense or
provision for income taxes. Accordingly, EBITDA is not intended to replace
operating income, net income (loss), cash flow and other measures of
financial performance and liquidity reported in accordance with generally
accepted accounting principles. Rather, EBITDA is a measure of operating
performance and liquidity that investors may consider in addition to those
measures. Management believes that EBITDA is a standard measure of operating
performance and liquidity that is commonly reported and widely used by
analysts, investors and other interested parties in the telecommunications
industry because it eliminates many differences in financial,
capitalization, and tax structures, as well as non-operating one-time
charges to earnings. EBITDA is used internally by Time Warner Telecom's
management to assess ongoing operations and is a component of a covenant of
the 9 3/4% Senior Notes that limits Time Warner Telecom's ability to incur
certain additional future indebtedness. However, EBITDA as used in this
report may not be comparable to similarly titled measures reported by other
companies due to differences in accounting policies.
GENERAL
Time Warner Telecom operates in metropolitan areas that have high
concentrations of medium- and large-sized businesses. Historically, Time Warner
Telecom has focused its sales and marketing efforts on such businesses, as they
are potentially high volume users of Time Warner Telecom's services. To drive
revenue growth in these markets, Time Warner Telecom has expanded its direct
sales force to focus on these business customers while it develops managed
service offerings to meet their voice, data, and Internet needs. Time Warner
Telecom's revenue has been derived primarily from business telephony services,
including dedicated transport, local switched, long distance, data and
high-speed Internet access services. An increasing percentage of Time Warner
Telecom's revenue growth is in switched services provided through the 24 digital
Lucent Technologies Inc. 5ESS switches that Time Warner Telecom has deployed,
and through the rapid growth in demand for switching data traffic. Also, through
the acquisition of Internet Connect, Inc. in 1999, Time Warner Telecom has
deployed a national Internet backbone and has experienced growth in data and
high-speed Internet services. Time Warner Telecom believes that data services
are becoming increasingly more important to Time Warner Telecom's target
customer base. In particular, Time Warner Telecom believes that the demand for
high-speed, high quality local area network and wide area network connectivity
will continue to grow over the near term.
Time Warner Telecom continues to expand its footprint within its existing
markets by expanding its network into new buildings and geographically by
turning up two new markets since this time last year: Northern New Jersey and
Dallas, Texas. Time Warner Telecom is also interconnecting existing service
areas within regional clusters with owned or leased fiber optic facilities. The
goal is to rapidly deploy new services and technologies when technically proven
and when customer demand is evident. As new technologies arise that enable the
switching of voice calls over an Internet protocol and local area network
infrastructure, Time Warner Telecom will evaluate how to best integrate this
soft switch technology into its infrastructure. There is no assurance that Time
Warner Telecom will bring any or all of these products to market successfully or
profitably.
Reciprocal compensation revenue is an element of switched services revenue,
which represents compensation from local exchange carriers for local exchange
traffic terminated on Time Warner Telecom's facilities
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originated by other local exchange carriers. Reciprocal compensation is based on
contracts between Time Warner Telecom and local exchange carriers. Time Warner
Telecom recognizes reciprocal compensation revenue as it is earned, except in
those cases where the revenue is under dispute or at risk. Under several of its
contracts, the local exchange carriers have disputed the payment of reciprocal
compensation for traffic terminating to internet service provider customers,
contending that the traffic was not local. As a result, Time Warner Telecom
initiated the dispute resolution process under the applicable contracts to
collect these amounts and filed complaints with various public utility
commissions contending that the internet service provider traffic is local.
Several of these with respect to prior periods were resolved in favor of Time
Warner Telecom and are no longer subject to appeal, but some favorable decisions
by public utility commissions in the midwest have subsequently been appealed by
the local exchange carriers. While Time Warner Telecom believes that these
disputes will ultimately be resolved in its favor, Time Warner Telecom only
recognizes revenue on a portion of the cash received and defers recognition of a
portion of this revenue pending the final outcome of the dispute. In addition,
the payment of reciprocal compensation under certain of Time Warner Telecom's
interconnection agreements is, by the terms of those agreements, subject to
adjustment or repayment depending on prospective federal or state generic
rulings with respect to reciprocal compensation for internet service provider
traffic. Switched services revenue for the nine months ended September 30, 2000
includes the recognition of $27.3 million of non-recurring reciprocal
compensation. A significant portion of the non-recurring reciprocal compensation
revenue recognized during the nine months ended September 30, 2000 was a result
of certain cases involving reciprocal compensation disputes that were resolved.
As of September 30, 2000, Time Warner Telecom had deferred recognition of $25.4
million in reciprocal compensation revenue for payments received associated with
pending disputes and agreements that are subject to future reciprocal
compensation adjustments. Time Warner Telecom pays reciprocal compensation
expense to the other local exchange carriers for local exchange traffic it
terminates on the local exchange carriers facilities. These costs are recognized
as incurred.
A portion of Time Warner Telecom's revenue is comprised of services that
are rate sensitive. Switched access--the connection between a long distance
carrier's point of presence and an end-user's premises provided through the
switching facilities of a local exchange carrier--is billed on a per minute of
use basis. Historically, the Federal Communications Commission has regulated the
access rates imposed by the incumbent local exchange carriers, while the
integrated communications provider access rates have been less regulated. During
the second quarter of 2000, the Federal Communications Commission adopted a
proposal that substantially reduces the incumbent local exchange carrier
per-minute access charges while allowing for an increase in the flat monthly
charge paid by local residential service subscribers. While the Federal
Communications Commission decision does not specifically apply to the switched
access rates charged by non-dominant providers of access services, it places
significant downward market pressure on non-dominant providers' provider access
rates. For the nine months ended September 30, 2000 and 1999, switched access
revenue represented 10% and 11% of total revenue, respectively. Management
believes that increased volume in services and markets served will partially
offset the impact of rate reduction. However, the degree and timing of the
reductions in Time Warner Telecom's access revenue cannot be predicted.
Reciprocal compensation is another component of switched services that is
rate sensitive. Rates are established by interconnection agreements between the
parties based on regulatory and judicial rulings in each of the states. Several
significant agreements expired in 1999 and 2000 and have been renegotiated. In
most of the states, regulatory bodies have established lower traffic termination
rates than the rates provided under Time Warner Telecom's expired agreements;
and as a result, the rates under the new agreements, while reasonable in light
of the regulatory environment, are lower than the rates under the expired
agreements. As discussed below, reciprocal compensation represented 6% and 7% of
revenue, excluding the effects of the recognition of $27.3 million on
non-recurring reciprocal compensation during the nine months ended September 30,
2000, for the nine months ended September 30, 2000 and 1999, respectively.
Although the renegotiated interconnection agreements have resulted in lower
prospective rates, management believes that the growth in Internet and related
markets will partially mitigate the impact of the rate reduction. The outcome of
regulatory and judicial rulings on reciprocal compensation for Internet service
provider traffic may also negatively impact Time Warner Telecom's revenue from
reciprocal compensation since the rates under most interconnection agreements
are subject to change based on such rulings. The FCC is considering
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proposals to phase out reciprocal compensation over time and to replace
reciprocal compensation with "bill-and-keep" arrangements. Time Warner Telecom
cannot predict the outcome of these rulings. In addition, legislation has been
introduced in Congress which would prohibit payment of reciprocal compensation
for Internet-bound traffic. Accordingly, there is no assurance that Time Warner
Telecom will be able to compensate for the reduction in reciprocal compensation
with increased volume of terminating local traffic.
Time Warner Telecom benefits from its strategic relationship with Time
Warner Cable both through access to local right-of-way and construction
cost-sharing. Time Warner Telecom's networks have been constructed primarily
through the use of fiber capacity licensed from Time Warner Cable. As of
September 30, 2000, Time Warner Telecom operated networks in 22 metropolitan
areas that spanned 9,457 route miles, contained 363,644 fiber miles and offered
service to 7,228 on-net and off-net buildings.
Time Warner Telecom plans to continue expanding its revenue base by fully
utilizing available network capacity in its existing markets, by adding networks
in new markets and by continuing to develop and selectively tailor new services
in competitively-priced packages to meet the needs of its medium- and large-
sized business and other customers, including long distance carriers. Time
Warner Telecom intends to expand its product offerings on a continuous basis to
achieve a diverse revenue base. As part of that process, Time Warner Telecom is
targeting the expansion of data and internet products that can be offered on its
existing network.
Operating expenses consist of costs directly related to the operation and
maintenance of the networks and the ordering and provisioning of Time Warner
Telecom's services. This includes the salaries and related expenses of
operations and engineering personnel, as well as costs incurred from the
incumbent local exchange carriers, other competitors and long distance providers
for facility leases and interconnection. These costs have increased over time as
Time Warner Telecom has increased its operations and revenue. Time Warner
Telecom expects these costs to continue to increase as its revenue growth
continues, but generally at a slower rate than revenue growth. The fact that a
significant portion of Time Warner Telecom's traffic rides on its own fiber
infrastructure enhances the Company's ability to control its costs.
Selling, general and administrative expenses consist of salaries and
related costs for employees other than those involved in operations and
engineering. These expenses include costs related to sales and marketing,
information technology, billing, regulatory and legal costs. These costs have
increased over time as Time Warner Telecom has increased its operations and
revenue. Time Warner Telecom expects these costs to continue to increase as its
revenue growth continues, but generally at a slower rate than revenue growth.
In the normal course of business, Time Warner Telecom engages in various
transactions with Time Warner Cable, generally on negotiated terms among the
affected units that, in management's view, result in reasonable allocations. In
connection with the Reorganization, Time Warner Telecom entered into several
contracts with Time Warner, Advance/Newhouse Partnership and MediaOne with
respect to certain of those transactions. Time Warner Telecom's selling, general
and administrative expenses include charges allocated from Time Warner Cable for
office rent and overhead charges for various administrative functions they
perform for Time Warner Telecom. These charges are required to reflect all costs
of doing business and are based on various methods, which management believes
result in reasonable allocations of those costs that are necessary to present
Time Warner Telecom's operations as if they are operated on a stand alone basis.
In addition, Time Warner Telecom licenses the right to use the majority of its
fiber optic cable capacity from Time Warner Cable through prepaid right-to-use
agreements and reimburses Time Warner Cable for facility maintenance and pole
rental costs. The maintenance and pole rental costs are included in Time Warner
Telecom's operating expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
Revenue. Revenue increased $175.8 million, or 99%, to $353.1 million for
the nine months ended September 30, 2000, from $177.3 million for the comparable
period in 1999. Exclusive of the effects of acquisitions and the effects of the
recognition of $27.3 million of non-recurring reciprocal compensation during the
nine months ended September 30, 2000, revenue increased $139.3 million, or 81%
to $311.3 million, from $172.0 million for the comparable period in 1999.
Revenue from the provision of dedicated transport services increased $78.0
million, or 74%, to $183.8 million for the nine months ended September 30, 2000,
from
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$105.7 million for the comparable period in 1999. Switched service revenue
increased $97.8 million, or 137%, to $169.3 million for the nine months ended
September 30, 2000, from $71.6 million for the comparable period in 1999.
Exclusive of the effects of acquisitions and the effects of the recognition of
$27.3 million of non-recurring reciprocal compensation for the nine months ended
September 30, 2000, dedicated transport service and switched service revenue
increased 68% and 100%, respectively. The increase in revenue from dedicated
transport services primarily reflects a 30% increase in average dedicated
transport customers and a broader array of products and services offered in
existing markets. The increase in switched service revenue reflects a 73%
increase in average switched service customers, increased revenue from switched
access services and reciprocal compensation, and a broader array of products and
services offered in existing markets. Reciprocal compensation represented 6% and
7% of total revenue for the nine months ended September 30, 2000 and 1999,
respectively, excluding the effects of the recognition of $27.3 million of
non-recurring reciprocal compensation during the nine months ended September 30,
2000. At September 30, 2000, Time Warner Telecom offered dedicated transport
services in 22 metropolitan areas, all of which also offered switched services.
At September 30, 1999, Time Warner Telecom offered dedicated transport services
in 19 consolidated metropolitan areas, 16 of which also offered switched
services.
Operating Expenses. Operating expenses increased $48.9 million, or 60%, to
$130.8 million for the nine months ended September 30, 2000, from $81.9 million
for the comparable period in 1999. Exclusive of the effects of acquisitions,
these expenses increased 52%. The increase in operating expenses was primarily
attributable to Time Warner Telecom's expansion of its business, principally
switched services, the ongoing development of existing markets resulting in
higher local exchange carrier charges for circuit leases and interconnection,
and higher headcount for technical personnel. As a percentage of revenue,
operating expenses decreased to 37% for the nine months ended September 30, 2000
from 46% for the comparable period in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $42.2 million, or 52%, to $122.7 million for
the nine months ended September 30, 2000, from $80.5 million for the comparable
period in 1999. Exclusive of the effects of acquisitions, these expenses
increased 51%. The increase in selling, general and administrative expenses was
primarily attributable to an increase in employee headcount and higher direct
sales costs associated with the increase in revenue, higher property tax expense
and an increase in the provision for doubtful accounts related to the increase
in revenue. Included in selling, general and administrative expenses is
approximately $1.0 million in costs related to a Form S-1 filing with the
Securities and Exchange Commission to facilitate the sale of shares by a Class B
Stockholder. Time Warner Telecom was required to bear these costs under the
terms of the stockholders' agreement with the Class B Stockholders. As a
percentage of revenue, selling, general and administrative expenses decreased to
35% for the nine months ended September 30, 2000 from 46% for the comparable
period in 1999.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $18.5 million, or 37%, to $68.8 million for the nine months
ended September 30, 2000, from $50.3 million for the comparable period in 1999.
Exclusive of the effects of acquisitions, this expense increased 35%. The
increase in depreciation and amortization expense was primarily attributable to
increased capital expenditures and increased goodwill generated from
acquisitions.
EBITDA. EBITDA for the nine months ended September 30, 2000 increased $84.7
million to $99.6 million, from $14.8 million in 1999. The increase was $58.1
million, exclusive of the effects of acquisitions and the effects of the
recognition of $27.3 million of non-recurring reciprocal compensation for the
nine months ended September 30, 2000. This improvement was primarily the result
of economies of scale as more revenue was generated in existing markets,
increased utilization of networks and facilities and a more skilled and
productive workforce.
Interest Expense. During the period July 1, 1997 through July 14, 1998, all
of Time Warner Telecom's financing requirements were funded with subordinated
loans from Time Warner, Advance/Newhouse Partnership and Media One. These loans
remained outstanding, accruing interest, through May 14, 1999. On July 21, 1998,
Time Warner Telecom issued $400 million in 9 3/4% Senior Notes in a public
offering. On May 14, 1999, the subordinated loans of approximately $180 million,
including accrued interest, were repaid in full to Time Warner, Advance/Newhouse
Partnership and MediaOne from the IPO proceeds. Interest expense relating to the
9 3/4% Senior Notes was $30.1 million for the nine months ended September 30,
2000
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and interest expense relating to the 9 3/4% Senior Notes and subordinated loans
payable aggregated $35.1 million for the nine months ended September 30, 1999.
The decrease of $5.0 million is primarily due to the lower weighted average debt
balance during the nine months ended September 30, 2000. Interest expense will
increase in future periods as a result of borrowing to finance the GST
acquisition.
Net Income. Earnings changed $91.5 million to $4.6 million for the nine
months ended September 30, 2000, from a net loss of $86.9 million for the
comparable period in 1999. The earnings change is primarily due to the
improvement in EBITDA and a decrease in income tax expense as discussed in the
table above.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue. Revenue increased $146.9 million, or 121%, to $268.8 million for
1999, from $121.9 million for 1998. This increase in revenue is primarily
because of increased customers, increased revenue from existing customers, a
broader array of products offered and acquisitions. Revenue from the provision
of dedicated transport services increased $68.4 million, or 81%, to $152.5
million for 1999, from $84.0 million for 1998. Switched service revenue
increased $78.4 million, or 207%, to $116.3 million for 1999, from $37.8 million
for 1998. Exclusive of the effects of acquisitions and the effects of the
recognition of a non-recurring $7.6 million settlement of reciprocal
compensation in the fourth quarter of 1999, dedicated transport service and
switched service revenue increased 73% and 182%, respectively. The increase in
revenue from dedicated transport services primarily reflects a 54% increase in
average dedicated transport customers and a broader array of products and
services offered in existing markets. The increase in switched service revenue
reflects a 136% increase in average switched service customers, and an increase
in revenue from switched access services, reciprocal compensation, and a broader
array of products and services offered in existing markets. Reciprocal
compensation, the mutual charges by local carriers for recovery of costs
associated with the termination of traffic on each other's networks, represented
7% and 8% of total revenue for 1999 and 1998, respectively, excluding the
effects of the recognition of a non-recurring $7.6 million settlement of
reciprocal compensation in the fourth quarter of 1999. At December 31, 1999,
Time Warner Telecom offered dedicated transport services in 21 metropolitan
areas, 20 of which also offered switched services. At December 31, 1998, Time
Warner Telecom offered dedicated transport services in 19 metropolitan areas, 16
of which also offered switched services.
Operating Expenses. Operating expenses increased $50.4 million, or 75%, to
$117.6 million for 1999, from $67.2 million for 1998. Exclusive of the effects
of acquisitions, these expenses increased 67%. The increase in operating
expenses was primarily attributable to Time Warner Telecom's expansion of its
business, principally switched services, the ongoing development of existing
markets resulting in higher local exchange carrier charges for circuit leases
and interconnection, and higher technical personnel costs. As a percentage of
revenue, operating expenses decreased to 44% for 1999 from 55% for 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $36.0 million, or 46%, to $113.4 million for
1999, from $77.4 million for 1998. Exclusive of the effects of acquisitions,
these expenses increased 43%. The increase in selling, general and
administrative expenses was primarily attributable to an increase in employee
headcount and higher direct sales costs associated with the increase in revenue,
higher data processing costs and an increase in the provision for doubtful
accounts related to the increase in revenue. As a percentage of revenue,
selling, general and administrative expenses decreased to 42% for 1999 from 63%
for 1998.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $18.1 million, or 36%, to $68.8 million for 1999, from $50.7
million for 1998. Exclusive of the effects of acquisitions, this expense
increased 28%. The increase in depreciation and amortization expense was
primarily attributable to increased capital expenditures and increased goodwill
generated from acquisitions.
EBITDA. EBITDA increased $60.5 million, to $37.8 million, for 1999 from a
loss of $22.7 million for 1998. Exclusive of the effects of acquisitions and the
effects of the recognition of a non-recurring $7.6 million settlement of
reciprocal compensation in the fourth quarter of 1999, this amount increased
$51.6 million. This improvement was primarily the result of economies of scale
as more revenue was generated in existing markets, increased utilization of
networks and facilities, and a more skilled and productive workforce.
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Interest Expense. During the period July 1, 1997 through July 14, 1998, all
of Time Warner Telecom's financing requirements were funded with loans from Time
Warner, Advance/Newhouse Partnership and MediaOne. These loans remained
outstanding, accruing interest, through May 14, 1999. On July 21, 1998, Time
Warner Telecom issued $400 million in 9 3/4% Senior Notes in a public offering.
On May 14, 1999, the subordinated loans of approximately $180 million, including
accrued interest, were repaid in full to Time Warner, Advance/Newhouse
Partnership and MediaOne from the IPO proceeds. Interest expense relating to
these loans and 9 3/4% Senior Notes totaled $45.3 million and $29.2 million for
1999 and 1998, respectively. The increase of $16.1 million is primarily due to
the higher weighted average debt balance during 1999.
Net Loss. Net loss decreased $3.5 million, or 4%, to $89.3 million for
1999, from a net loss of $92.7 million for 1998. The decrease in net loss is
primarily related to improved results from operations, partially offset by an
increase in net interest expense of $9.2 million and income tax expense of $29.8
million.
Loss per Common Share. The basic and diluted loss per common share was
computed by dividing net loss applicable to common shares by the weighted
average outstanding common shares for the period. Potential common shares were
not included in the computation of weighted average shares outstanding because
their inclusion would be anti-dilutive. The increase in the weighted average
shares outstanding is due to the issuance of Class A common stock for the IPO,
for acquisitions and upon the exercise of stock options. For 1999, the basic and
diluted loss per common share decreased $0.21 per share, or 18%, to ($0.93) per
share from ($1.14) per share for 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenue. Revenue increased $66.5 million, or 120%, to $121.9 million for
1998, from $55.4 million for 1997. Revenue from the provision of dedicated
transport services increased $39.5 million, or 89%, to $84.0 million for 1998,
from $44.5 million for 1997. Switched service revenue increased $27.0 million,
or 248%, to $37.8 million for 1998, from $10.9 million for 1997. The increase in
revenue from dedicated transport services primarily reflects growth of services
and new products offered in existing markets. The increase in switched services
resulted from the offering of services in new markets and the growth of services
in existing markets including reciprocal compensation. Reciprocal compensation
represented 8% and 9% of total revenue for 1998 and 1997, respectively. At
December 31, 1998, Time Warner Telecom offered dedicated transport services in
19 metropolitan areas, 16 of which also offered switched services, as compared
to offering dedicated transport services in 19 metropolitan areas, 14 of which
also offered switched services at December 31, 1997. The metropolitan areas do
not include MetroComm AxS, L.P., a 50% owned entity of Time Warner Telecom at
such time.
Operating Expenses. Operating expenses increased $26.8 million, or 66%, to
$67.2 million for 1998, from $40.3 million for 1997. The increase in operating
expenses was primarily attributable to Time Warner Telecom's expansion of its
business, principally switched services, the ongoing development of existing
markets resulting in higher local exchange carrier charges for circuit leases
and interconnection, higher technical personnel costs, and higher data
processing costs. As a percentage of revenue, operating expenses decreased to
55% in 1998 from 73% for 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $22.8 million, or 42%, to $77.4 million for
1998, from $54.6 million for 1997. The increase in selling, general and
administrative expenses was primarily attributable to higher direct sales costs
associated with the increase in revenue, higher property taxes, an increase in
consulting expenses relating to local regulatory matters, the implementation of
new billing and system software, and an increase in the provision for doubtful
accounts related to the increase in revenue. As a percentage of revenue,
selling, general and administrative expenses decreased to 63% for 1998 from 99%
for 1997.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $12.3 million, or 32%, to $50.7 million for 1998, from $38.5
million for 1997. The increase in depreciation and amortization expense was
primarily attributable to higher capital expenditures related to the ongoing
construction and expansion of Time Warner Telecom's telecommunications networks
in both 1998 and 1997. As a percentage of revenue, depreciation and amortization
expenses decreased to 42% for 1998, from 69% for 1997.
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EBITDA. The EBITDA loss for 1998 decreased $16.9 million, or 43%, to a loss
of $22.7 million for 1998, from a loss of $39.6 million for 1997. This
improvement was primarily the result of increased revenue due to Time Warner
Telecom's expansion of local telecommunications networks in new and existing
markets and growth of Time Warner Telecom's customer base, partially offset by
higher operating expenses in support of the larger customer base, and higher
selling, general and administrative expenses required to support the expansion.
Interest Expense. During the period July 1, 1997 through July 14, 1998, all
of Time Warner Telecom's financing requirements were funded with loans from Time
Warner, Advance/Newhouse Partnership and MediaOne. On July 21, 1998, Time Warner
Telecom issued $400 million in 9 3/4% Senior Notes in a public offering.
Interest expense relating to these loans and 9 3/4% Senior Notes totaled $29.2
million and $1.5 million for 1998 and 1997, respectively.
Net Loss. Net loss increased $22.1 million, or 31%, to $92.7 million for
1998, from a net loss of $70.7 million for 1997. This increase resulted from
higher depreciation and amortization expenses relating to Time Warner Telecom's
expansion of telecommunications networks in new and existing markets, as well as
interest expense relating to the subordinated loans payable to Time Warner,
Advance/Newhouse Partnership and MediaOne and the 9 3/4% Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
Operations. For 1999, Time Warner Telecom's cash provided by operations was
$54.2 million, as compared to cash used in operations of $343,000 for 1998. This
increase in cash provided by operations of $54.6 million principally resulted
from an increase in EBITDA of $60.5 million. During the second quarter of 1999,
Time Warner Telecom achieved positive EBITDA. Time Warner Telecom's cash
provided by operating activities was $71.2 million for the nine months ended
September 30, 2000, as compared to cash used in operating activities of $13.2
million for the comparable period in 1999. This increase in cash provided by
operating activities of $84.4 million principally resulted from an increase in
EBITDA of $84.7 million.
As Time Warner Telecom continues its expansion plan to enter into new
markets, the expenditures incurred, together with initial operating expenses,
will generally result in negative EBITDA and operating losses from a network
until an adequate customer base and revenue stream for the network have been
established. Accordingly, Time Warner Telecom expects that the network
constructed in each new market will generally produce negative EBITDA for at
least eighteen months after operations commence in each market. Additionally,
Time Warner Telecom currently expects the GST operations to generate negative
EBITDA until an adequate customer base and revenue stream for the network have
been established. Although overall Time Warner Telecom expects to continue to
have positive EBITDA for the near future as it develops and expands its business
as well as integrates the GST acquisition, there can be no assurance that Time
Warner Telecom will sustain sufficient positive EBITDA to meet its working
capital requirements and to service its indebtedness.
Investing. Cash used in investing activities decreased $231.2 million to
$146.9 million in 1999, as compared to $378.1 million in 1998. During 1999, a
portion of the proceeds from maturities of marketable securities were used to
partially fund capital expenditures and working capital requirements. During
1998, the net proceeds from the issuance of the 9 3/4% Senior Notes were
primarily invested in marketable securities. Cash used in investing activities
was $87.8 million for the nine months ended September 30, 2000, as compared to
cash provided by investing activities of $124.8 million for the comparable
period in 1999. During both the nine months ended September 30, 2000 and 1999,
proceeds from the maturities of marketable securities were primarily used to
fund capital expenditures. During the nine months ended September 30, 2000,
capital expenditures were also funded through cash flows from operating
activities.
During 1999, capital expenditures were $221.2 million (net of capital
leases incurred of $3.7 million), an increase of $95.2 million from 1998. The
largest commitment of capital was related to the installation of transport and
switch related electronics to support the increase in sales activity and the
addition of 1,904 route miles of fiber since December 31, 1998. During the nine
months ended September 30, 2000, capital expenditures were $213.2 million, an
increase of $74.9 million from the comparable period in 1999. The largest
commitment of capital was related to the installation of transport and switch
related electronics to
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support the increase in sales activity and the addition of 585 route miles of
fiber since December 31, 1999. Based on historic capital requirements for
network construction in relation to sales volumes and network expansion plans,
Time Warner Telecom anticipates it will commit approximately $600 million in
2001 to fund its capital expenditure, and Time Warner Telecom also expects to
have substantial capital expenditures in subsequent periods. This target
spending includes requirements for current operating markets and Time Warner
Telecom's expansion plans, including the GST markets.
The facilities-based telecommunications service business is a capital
intensive business. Time Warner Telecom's operations have required and will
continue to require substantial capital investment for:
-- the purchase and installation of switches, electronics, fiber and
other technologies in existing networks and in additional networks to
be constructed in new service areas;
-- the acquisition and expansion of networks currently owned and
operated by other companies, including the acquisition of
substantially all of the assets of GST; and
-- the evolution of the network to support new products, services and
technologies.
Time Warner Telecom's expected capital expenditures for general corporate
and working capital purposes include:
-- expenditures with respect to Time Warner Telecom's management
information system and corporate service support infrastructure; and
-- operating and administrative expenses with respect to new networks
and debt service.
Time Warner Telecom plans to make substantial capital investments in
connection with plans to construct and develop new networks, as well as for
technology upgrades. Expansion of Time Warner Telecom's networks will include
the geographic expansion of Time Warner Telecom's existing operations, and Time
Warner Telecom will consider the development of new markets. In addition, Time
Warner Telecom may acquire existing networks in the future.
Time Warner Telecom regularly evaluates potential acquisitions and joint
ventures that would extend its geographic markets, expand its products and
services and/or enlarge the capacity of its networks. In the event Time Warner
Telecom enters into a definitive agreement with respect to any acquisition or
joint venture, it may require additional financing. If Time Warner Telecom
enters into a definitive agreement with respect to any material transaction, it
could result in Time Warner Telecom increasing its leverage or issuing
additional common stock or both. There can be no assurance, however, that Time
Warner Telecom will enter into any transaction or, if it does, on what terms.
See "Risk Factors -- We may complete a significant business combination or other
transaction that could affect our leverage, result in a change of control or
both."
While Time Warner Telecom intends to continue to leverage its relationship
with Time Warner Cable in pursuing expansion opportunities, to the extent Time
Warner Telecom seeks to expand into service areas where Time Warner Cable does
not conduct cable operations, Time Warner Telecom may incur significant
additional costs in excess of those historically incurred by Time Warner Telecom
when expanding into existing Time Warner Cable service areas. In addition, Time
Warner Cable is not obligated to construct or provide additional fiber optic
capacity in excess of what is already licensed to Time Warner Telecom under the
Capacity License Agreements. Accordingly, if Time Warner Telecom is unable to
lease additional capacity at the same rates as are currently provided for under
the Capacity License Agreements, Time Warner Telecom may be required to obtain
additional capacity on more expensive terms. See "Certain Relationships and
Related Transactions--Certain Operating Agreements."
The development and expansion of Time Warner Telecom's existing and future
networks and services will require significant capital investment. Time Warner
Telecom expects that its future cash requirements will principally be:
-- for funding growth and capital expenditure;
-- the purchase of network assets; and
-- to finance the cost of the GST asset acquisition.
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In light of future cash requirements, our subsidiary Time Warner Telecom
Holdings replaced its $475 million senior secured revolving credit facility with
a $1 billion senior secured credit facility which provides for $525 million of
senior secured term loan facilities and a $475 million senior secured revolving
credit facility. Time Warner Telecom Holdings' obligations under the senior
secured credit facility are secured by substantially all of the assets of Time
Warner Telecom's subsidiaries, including the GST assets. In addition, Time
Warner Telecom has pledged its equity interest in its subsidiaries as
collateral. Also, the senior secured credit facility contains restrictive
covenants, including conditions on the ability of Time Warner Telecom's
subsidiaries to declare dividends to Time Warner Telecom, and provides for
customary events of default, including cross default provisions. For a further
description of the senior secured facility, please see "Description of Certain
Indebtedness".
Time Warner Telecom also entered into a senior unsecured bridge loan
facility and borrowed $700 million under this facility to finance the purchase
of the GST assets and pay related fees and expenses. For further information on
the senior unsecured bridge loan facility, please see "Description of Certain
Indebtedness".
Financing. Net cash provided by financing activities for 1999 decreased by
$405.4 million, as compared to 1998. Net cash provided by financing activities
for 1999, reflects the net proceeds from the IPO of $270.2 million, offset by
the repayment of loans from Time Warner, Advance/Newhouse Partnership and
MediaOne of $180 million, as well as acquired debt and capital lease
obligations. Net cash provided by financing activities for 1998, reflects
proceeds from issuance of the 9 3/4% Senior Notes and loans from the Former
Parent Companies. Net cash provided by financing activities for the nine months
ended September 30, 2000 was $84,000 and was primarily due to the net proceeds
from both the issuance of common stock upon exercise of stock options and the
issuance of common stock in connection with the employee stock purchase plan,
partially offset by deferred debt issue costs related to our senior secured
revolving credit facility.
During the period from July 1, 1997 through July 14, 1998, all of Time
Warner Telecom's financing requirements were funded with subordinated loans from
the Former Parent Companies. These loans remained outstanding, accruing
interest, through May 14, 1999. The loans from Time Warner, Advance/Newhouse
Partnership and MediaOne were subordinated in right of payment to the 9 3/4%
Senior Notes, except for a provision allowing repayment prior to maturity with
the net proceeds of any offering of Common Stock or equivalent interest of Time
Warner Telecom. The $400 million principal amount in 9 3/4% Senior Notes that
Time Warner Telecom issued in July 1998 are unsecured, unsubordinated
obligations of Time Warner Telecom. Interest on the 9 3/4% Senior Notes is
payable semiannually on January 15 and July 15, beginning on January 15, 1999.
Aggregate annual interest payments on the 9 3/4% Senior Notes through 2008 are
expected to be approximately $39 million. The 9 3/4% Senior Notes are required
to be repaid on July 15, 2008. On May 14, 1999, approximately $180 million of
the proceeds from the IPO were used to repay the subordinated loans payable to
Time Warner, Advance/Newhouse Partnership and MediaOne in full, including
accrued interest. The proceeds of the IPO remaining after repayment of the
subordinated loans payable, combined with the proceeds from the 9 3/4% Senior
Notes, have been used to continue funding Time Warner Telecom's continued
growth, which includes expansion of its networks, and for general corporate
purposes.
The 9 3/4% Senior Notes are governed by an indenture that contains certain
restrictive covenants. These restrictions affect, and in many respects
significantly limit or prohibit, among other things, the ability of Time Warner
Telecom to incur indebtedness, make prepayments of certain indebtedness, pay
dividends, make investments, engage in transactions with shareholders and
affiliates, issue capital stock of subsidiaries, create liens, sell assets and
engage in mergers and consolidations.
The obligations under the senior secured credit facility are secured by
Time Warner Telecom's interests in all of its subsidiaries and substantially all
of the assets of Time Warner Telecom's subsidiaries, including the assets of
GST, except for certain assets with respect to which the grant of a security
interest is prohibited by governing agreements. The senior secured credit
facility requires Time Warner Telecom to prepay outstanding loans when its cash
flow exceeds certain levels and with the proceeds received from a number of
specified events or transactions, including certain asset sales and insurance
recoveries for assets not replaced. In
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addition, obligations under the senior secured credit facility are subject to
various covenants that limit Time Warner Telecom's ability to:
-- borrow and incur liens on its property;
-- pay dividends or make other distributions; and
-- make capital expenditures.
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, Time Warner Telecom is deemed to be in default under
the senior secured credit facility if Time Warner Telecom has defaulted under
any of the other material outstanding obligations, such as the 9 3/4% Senior
Notes.
Time Warner Telecom repaid the $700 million senior unsecured bridge loan
facility with a portion of the net proceeds from the sale of the old notes and
the issuance and sale of 7,475,000 shares of Class A common stock. In connection
with the repayment of the senior unsecured bridge loan facility, Time Warner
Telecom will record $5.8 million of deferred financing costs as a non-recurring
expense in the first quarter of 2001. In connection with the issuance of Class A
common stock pursuant to Time Warner Telecom's equity offering, approximately
$23.3 million of unamortized deferred financial costs will be reclassified to
additional paid-in capital in the first quarter of 2001.
Time Warner Telecom believes that the net proceeds from the sale of the old
notes and the offering of its Class A common stock, the funds generated by
operations, the additional availability of funds under its senior secured credit
facility and cash and cash equivalents will be sufficient to fund its operations
and capital expenditure requirements in accordance with its current business
plan.
EFFECTS OF INFLATION
Historically, inflation has not had a material effect on Time Warner
Telecom.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Time Warner Telecom's interest income is sensitive to changes in the
general level of interest rates. In this regard, changes in interest rates can
affect the interest earned on Time Warner Telecom's cash equivalents and
marketable securities. To mitigate the impact of fluctuations in interest rates,
Time Warner Telecom generally enters into fixed rate investing arrangements.
The following table provides information at December 31, 1999, about Time
Warner Telecom's financial instruments that are sensitive to changes in interest
rates. For investment securities, the table presents related weighted-average
interest rates expected by the maturity dates. These investment securities will
mature within one year. At December 31, 1999, the fair value of Time Warner
Telecom's fixed rate 9 3/4% Senior Notes due 2008 was $415 million, as compared
to a carrying value of $400 million on such date, based on market prices at
December 31, 1999.
2000 MATURITIES
------------------
(DOLLAR AMOUNTS IN
THOUSANDS)
Assets
Marketable securities:
Shares of money market mutual funds.................... $ 4,510
Average interest rate................................ 5.5%
Certificates of deposit with banks..................... $ 54,797
Average interest rate................................ 5.3%
Corporate and municipal debt securities................ $196,455
Average interest rate................................ 5.9%
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BUSINESS
OVERVIEW
Time Warner Telecom is a leading fiber facilities-based integrated
communications provider offering local business "last mile" broadband
connections for data, high-speed internet access, local voice and long distance
services. Time Warner Telecom's customers are principally
telecommunications-intensive business end-users, long distance carriers,
internet service providers, wireless communications companies and governmental
entities. As of January 9, 2001, Time Warner Telecom operated networks in 24
metropolitan markets in the United States and offered switched services in all
24 service areas. On January 10, 2001, Time Warner Telecom substantially
expanded its geographic coverage by acquiring substantially all of the assets of
GST out of bankruptcy. As a result of the acquisition, Time Warner Telecom added
15 markets in the western United States. Time Warner Telecom expects to activate
networks in five additional markets by the end of 2001.
Time Warner Telecom benefits from its strategic relationship with Time
Warner Cable both through access to local right-of-way and construction
cost-sharing. As a result, Time Warner Telecom's networks have been constructed
primarily through licensing the use of fiber capacity from Time Warner Cable. As
of September 30, 2000, Time Warner Telecom's fiber optic networks spanned 9,457
route miles and contained 363,644 fiber miles and Time Warner Telecom offered
service to 7,228 on-net and off-net buildings. The recent acquisition of the
assets of GST adds to Time Warner Telecom's network 4,210 route miles, 227,674
fiber miles and service to 345 on-net buildings.
BUSINESS STRATEGY
Time Warner Telecom's primary objective is to be a leading provider to
medium- and large-sized businesses of superior telecommunications services
through advanced networks in its existing and future service areas. The key
elements of Time Warner Telecom's business strategy include the following:
Leverage Existing Fiber Optic Networks. Time Warner Telecom runs local and
regional fiber networks to serve geographic locations where we believe there are
large numbers of potential customers. As of September 30, 2000, Time Warner
Telecom operated networks that spanned over 9,457 route miles and contained over
363,644 fiber miles. During 1999, Time Warner Telecom deployed a fully managed,
fiber-based nationwide infrastructure to ensure that its long-haul internet
products provide the capacity and high quality level of service increasingly
demanded by its customers. These highly concentrated networks are leased from
other carriers and will provide the capacity to serve a substantially larger
base of customers with a larger array of products. We believe that Time Warner
Telecom's extensive fiber network capacity allows it to:
-- increase orders substantially from new and existing customers while
realizing higher gross margins than non-fiber facilities based
carriers;
-- emphasize its fiber facilities-based services rather than resale of
network capacity of other providers; and
-- provide better customer service because Time Warner Telecom can exert
greater control over its services than its competitors that depend on
off-net facilities.
Time Warner Telecom plans to extend its network in its present markets in
order to reach additional commercial buildings directly with its fiber
facilities. In addition, Time Warner Telecom has deployed new technologies such
as dense wave division multiplexing to provide additional bandwidth and higher
speed without the need to add additional fiber capacity.
Enter New Geographic Areas. Time Warner Telecom's strategy is to target
metropolitan areas possessing demographic, economic and telecommunications
demand profiles that it believes provide it with the potential to generate an
attractive economic return. As of January 9, 2001, Time Warner Telecom operated
networks in a total of 24 metropolitan areas. The acquisition of the GST assets
accelerated Time Warner Telecom's geographic expansion by adding to its network
15 markets in the western United States. Time
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Warner Telecom expects to activate networks in five additional markets by the
end of 2001 and continuously evaluates other expansion opportunities.
Expand Switched Services. Time Warner Telecom provided a broad range of
switched services in all of its 22 markets as of September 30, 2000. For 1999,
revenue from switched services grew by 207% as compared to 1998. Because of the
market demand for switched services, Time Warner Telecom has rapidly installed
switches in its markets and management expects Time Warner Telecom to derive a
growing portion of its revenue from switched services. Time Warner Telecom
utilizes high-capacity digital 5ESS switches manufactured by Lucent Technologies
Inc. However, as new technologies arise that enable the switching of voice calls
over an internet protocol and local area network infrastructure, Time Warner
Telecom will evaluate how to best integrate this "softswitch" technology into
its infrastructure. Time Warner Telecom has selected Sonus Networks as the
initial supplier of this capability/technology and has begun deployment to serve
a variety of applications including primary rate interface services and voice
over internet protocol.
Expand Data Services. Data services are becoming increasingly more
important to Time Warner Telecom's target end-user and carrier customer base. In
particular, Time Warner Telecom believes that the demand for high-speed, high
quality local area network and wide area network connectivity will continue to
grow over the near term. This demand will grow in support of specific
applications such as virtual private networks, website hosting, e-commerce,
intranet and internet access. Time Warner Telecom will continue to deliver
high-speed traditional transport services, for example, DS1, DS3, OC-n, through
its fiber optic networks, but will also focus on the delivery of next generation
data networking and converged network services, which means voice and data
applications delivered over a common network infrastructure. Time Warner Telecom
anticipates that the converged network will be capable of providing applications
such as virtual private networking, hosted web and e-mail services and new
applications such as unified messaging. Time Warner Telecom believes that key to
the evolution of the converged network is delivery of management services along
with the network service so that the medium and small business customers in the
multi-tenant buildings Time Warner Telecom serves can rely on it to manage the
network 24 hours-a-day, 7 days-a-week.
Target Business Customers. Time Warner Telecom operates networks in
metropolitan areas that have high concentrations of medium- and large-sized
businesses. These businesses tend to be telecommunications-intensive and are
more likely to seek the greater reliability provided by an advanced network such
as Time Warner Telecom's. Historically, Time Warner Telecom has focused its
sales and marketing efforts on such businesses, as they are potentially high
volume users of Time Warner Telecom's services. To drive revenue growth in these
markets, Time Warner Telecom is expanding its direct sales force to focus on
such business customers while it develops managed services offerings to meet the
voice, data and internet needs of those customers. In addition, in order to
achieve further economies of scale and network utilization, Time Warner Telecom
is targeting smaller business customers in buildings Time Warner Telecom already
serves where it can offer a package of network services that may not otherwise
be available to those customers.
Interconnect Service Areas. Time Warner Telecom groups the service areas in
which Time Warner Telecom currently operates into geographic clusters across the
United States. Time Warner Telecom is in the process of interconnecting certain
of its existing markets within regional clusters with owned or licensed fiber
optic facilities. The interconnection of service areas is expected to increase
Time Warner Telecom's revenue potential and increase margins by addressing
customers' regional long distance voice, data and video requirements. Time
Warner Telecom began interconnecting its service areas in 1998. The GST asset
acquisition included regional fiber networks in the western United States. Time
Warner Telecom may sell or swap the former GST regional fiber networks that are
not needed for new fiber or conduit.
Utilize Strategic Relationships with Time Warner Cable. Time Warner Telecom
has benefitted from and continues to leverage its relationships with Time Warner
Cable, one of the largest multiple system cable operators in the U.S., by
licensing and sharing the cost of fiber optic facilities. This licensing
arrangement allows Time Warner Telecom to benefit from Time Warner Cable's
access to rights-of-way, easements, poles, ducts and conduits. See "Certain
Relationships and Related Transactions--Certain Operating Agreements." By
leveraging its existing relationship with Time Warner Cable, Time Warner Telecom
believes that it can benefit from existing regulatory approvals and licenses,
derive economies of scale in network costs and extend
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its existing networks in a rapid, efficient and cost-effective manner.
Furthermore, management believes that the strong awareness and positive
recognition of the "Time Warner" brand name contributes to its marketing
programs and sales efforts by distinguishing it from its competitors.
Continue Disciplined Expenditure Program. Time Warner Telecom increases
operational efficiencies by pursuing a disciplined approach to capital
expenditures. This capital expenditure program requires that prior to making
expenditures on a project, the project must be evaluated to determine whether it
meets stringent financial criteria such as minimum recurring revenue, cash flow
margins and rate of return.
The telecommunications industry has experienced, and is expected to
continue to experience, rapid and significant changes in technology. While Time
Warner Telecom believes that, for the foreseeable future, these changes will
neither materially affect the continued use of fiber optic cable or digital
switches and transmission equipment nor materially hinder Time Warner Telecom's
ability to acquire necessary technologies, the effect of technological changes
on Time Warner Telecom's business and operations cannot be predicted. Time
Warner Telecom believes that its future success will depend, in part, on its
ability to anticipate or adapt to these changes and to offer, on a timely basis,
services that meet customer demands on a competitive basis. There can be no
assurance that Time Warner Telecom will obtain access to new technologies on a
timely basis or on satisfactory terms. Any failure by Time Warner Telecom to
obtain new technologies could have a material adverse effect on Time Warner
Telecom's business, financial condition and results of operations. In addition,
Time Warner Telecom's growth plans depend in part upon Time Warner Telecom's
ability to obtain fiber capacity at rates that will allow it to generate a
reasonable rate of return. We cannot assure you that we will be successful in
obtaining such fiber capacity.
SERVICES
Time Warner Telecom currently provides its customers with a wide range of
telecommunications services, including dedicated transmission, local switched,
long distance, data and video transmission services and high-speed dedicated
internet access services. Time Warner Telecom's dedicated services, which
include private line and special access services, use high-capacity digital
circuits to carry voice, data and video transmissions from point-to-point in
multiple configurations. Switched voice services offered by Time Warner Telecom
use high-capacity digital switches to route voice transmissions anywhere on the
public switched telephone network. In offering its dedicated transmission and
switched services, Time Warner Telecom also provides private network management
and systems integration services for businesses that require combinations of
various dedicated and switched telecommunications services. Data services
provided by Time Warner Telecom allow customers to create their own internal
computer networks and access external computer networks and the internet. Time
Warner Telecom can provide its customers, including companies in the media
industry, with advanced video transport services such as point-to-point,
broadcast-quality video to major television networks as well as to advertising
agencies and other customers. Internet services provided by Time Warner Telecom
include dedicated internet access, website hosting, transport and e-commerce
services for business customers and local internet service providers.
DEDICATED TRANSPORT SERVICES
Time Warner Telecom currently provides a complete range of dedicated
transport services with transmission speeds from 64 kilobits per second to 2.488
gigabits per second to its long distance carrier and end-user customers. All
products and services can be used for voice, data, image and video transmission.
Time Warner Telecom offers the following dedicated transport links:
-- POP-to-POP Special Access. Telecommunications lines linking the
points of presence, or POPs, of one long distance carrier or the
points of presence of different long distance carriers in a market,
allowing the points of presence to exchange transmissions for
transport to their final destinations.
-- End-user/Long Distance Carrier Special Access. Telecommunications
lines between an end-user, such as a large business, and the local
points of presence of its selected long distance carrier.
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-- Private Line. Telecommunications lines connecting various locations
of a customer's operations, suitable for transmitting voice and data
traffic internally.
-- Transport Arrangement Service. Provides dedicated transport between
local exchange carrier central offices and customer designated points
of presence of a long distance carrier for transport of local
exchange carrier-provided switched access or local exchange
carrier-provided special access. This point-to-point service is
available at DS1 or DS3 interfaces at both ends. DS1 and DS3
interfaces are standard North American telecommunications industry
digital signal formats that are distinguishable by the number of
binary digits transmitted per second, or bit rate. DS1 has a bit rate
of 1.544 megabits per second and DS3 has a bit rate of 44.736
megabits per second.
Time Warner Telecom provides the following services that use high-capacity
digital circuits to carry voice, data and video transmissions from point to
point in flexible configurations involving different standardized transmission
speeds and circuit capacities:
-- broadcast video TV-1, which is the dedicated transport of broadcast
quality video signals;
-- STS-1, which is the full duplex, synchronous optical transmission of
digital data on synchronous optical network, or SONET, standards, and
eliminates the need to maintain and pay for multiple dedicated lines;
and
-- private network transport service, which is a private, dedicated
premium quality service over fully redundant, diverse routed, SONET
rings with bandwidth that is dedicated and always available.
The transmission speeds and circuit capacities used for these services
include DSO, DS1, DS3 and SONET OC-N. DSO is a standard North American
telecommunications industry digital signal format that has a bit rate of 64
kilobits per second.
SWITCHED SERVICES
Time Warner Telecom's switched services provide business customers with
local calling capabilities and connections to their long distance carriers. Time
Warner Telecom owns, houses, manages and maintains the switches used to provide
the services. Time Warner Telecom's switched services include the following:
-- Business Access Line Service. This service provides voice and data
customers quality analog voice grade telephone lines for use at any
time. Business access line service provides customers with
flexibility in network configurations because lines can be added,
deleted and moved as needed.
-- Access Trunks. Access trunks provide communication lines between two
switching systems. These trunks are utilized by private branch
exchange customers, which are customers that own and operate a switch
on their own premises. Private branch exchange customers use these
trunks to provide access to the local, regional and long distance
telephone networks. Private branch exchange customers may use either
Time Warner Telecom's telephone numbers or their incumbent local
exchange carrier-assigned telephone numbers. Customer access to Time
Warner Telecom's local exchange services is accomplished by a DS1
digital connection or DS0 analog trunks between the customer's
private branch exchange port and Time Warner Telecom's switching
centers.
-- Local Toll Service. This service provides customers with a
competitive alternative to incumbent local exchange carrier service
for intraLATA toll calls. It is a customized, high-quality local
calling plan available to business access line and access trunk
customers. Time Warner Telecom works with customers to devise
cost-saving programs based on actual usage and calling patterns.
-- Local Telephone Service. Local telephone service is basic local
exchange service which can be tailored to a customer's particular
calling requirements. Local telephone service includes operator and
directory assistance services, as well as an optional intraLATA toll
plan.
-- Long Distance Service. Long distance service provides the
capabilities for a customer to place a voice call from one local
calling area to another, including international calling.
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-- Switched Access Service. The connection between a long distance
carrier's POP and an end-user's premises that is provided through the
switching facilities of a local exchange carrier are referred to as
switched access services. These services provide long distance
carriers with a switched connection to their customers for the
origination and termination of long distance telephone calls.
-- Other Services. Other services offered by Time Warner Telecom include
telephone numbers, listings, customized calling features, voice
messaging, hunting, blocking services and two-way, simultaneous voice
and data transmission in digital formats over the same transmission
line, which is an international standard referred to as integrated
services digital network or ISDN.
DATA TRANSMISSION SERVICES
Time Warner Telecom offers its customers a broad array of data transmission
services that enable customers to create their own internal computer networks
and access external computer networks and the internet. In 1996, Time Warner
Telecom introduced its native speed local area network inter-networking data
service that is used to connect workstations and personal computer users on one
or more local area networks. Native speed services avoid the bottleneck problems
that are frequently encountered with customary DS1 connections by providing the
customer with a circuit that matches the transmission speeds of its local area
network. Time Warner Telecom's local area network service provides dedicated
circuits, guaranteed transmission capacity and guaranteed bandwidth for
virtually all local area network applications. Users can share files and
databases as if they are all working on the same computer, or within the same
local area network.
As companies and communications become more sophisticated, there is an
increased need for customer access to superior traffic management of sensitive
data, video and voice transmission within a single metropolitan area, or between
various company operations. Time Warner Telecom's switched data services offer
sophisticated switching technology and provide high standards in reliability and
flexibility while enabling users to reduce the costs associated with
interconnecting architecturally diverse information systems. Time Warner
Telecom's data service offerings support evolving high-speed applications, such
as multimedia, desktop video conferencing and medical imaging. Time Warner
Telecom offers native speed connections to end-users as well as interexchange
data carriers. Time Warner Telecom's services allow users to interconnect both
high-speed and low-speed local area network environments and to benefit from
flexible billing, as well as detailed usage reports.
In 2000, Time Warner Telecom extended its current base of native local area
network services operating at 10 and 100 megabits per second to include gigabit
ethernet that operates at 1000 megabits per second, or 1 gigabit per second.
This extended bandwidth capacity will allow customers to connect at very
high-speeds to the internet, to the application service provider of choice or to
other customer locations.
VIDEO TRANSMISSION SERVICES
Time Warner Telecom provides broadcast quality digital and analog video
link services to its video services customers, including media industry
customers, such as television networks, and advertising agencies. Time Warner
Telecom's video services include offering broadcast quality, digital channel
transmissions that can be provided on a point-to-point or point-to-multipoint
basis.
INTERNET SERVICES
During 1999, Time Warner Telecom deployed a fiber-based internet protocol
backbone connecting Time Warner Telecom's hub cities, including 21 asynchronous
transfer mode data switches through which it provides dedicated internet
connectivity at speeds of up to DS3. This deployment was accomplished in part
through the acquisition of Inc.Net, a regional internet service provider that
became a wholly owned subsidiary of Time Warner Telecom in April 1999. Through
this operating subsidiary, Time Warner Telecom will manage its data network and
new internet products. Although data and internet revenue represented only 4% of
total 1999 revenue, Time Warner Telecom expects an increasing portion of its
future total revenue to be contributed by these services. Time Warner Telecom is
upgrading its internet backbone to include OC-3e and greater capacity.
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LONG DISTANCE SERVICES
Time Warner Telecom began to offer basic long distance services in 1998
including toll free, calling card and international calling. Time Warner Telecom
offers these services primarily to enhance its ability to offer a complete
package of services to customers, rather than as core services. The target
customers are medium-and small-size business customers. Generally, large
businesses tend to obtain their long distance needs directly from the major long
distance carriers. Time Warner Telecom offers long distance services in a
bundled product because it believes medium- and small-size businesses may prefer
to obtain their long distance services from competitive local exchange carriers
rather than the major long distance carriers.
TELECOMMUNICATIONS NETWORKS AND FACILITIES
Overview. Time Warner Telecom uses advanced technologies and network
architectures to develop a highly reliable infrastructure for delivering
high-speed, quality digital transmissions of voice, data and video
telecommunications. Time Warner Telecom's basic transmission platform consists
primarily of optical fiber equipped with high-capacity SONET equipment deployed
in fully redundant, self-healing rings. These SONET rings give Time Warner
Telecom the capability of routing customer traffic in both directions around the
ring, thereby eliminating loss of service in the event of a cable cut. Time
Warner Telecom's networks are designed for remote automated provisioning, which
allows it to meet customers' real time service needs. Time Warner Telecom
extends SONET rings or point-to-point links from rings to each customer's
premises over its own fiber optic cable and unbundled facilities obtained from
incumbent local exchange carriers. Time Warner Telecom also installs diverse
building entry points where a customer's security needs require such redundancy.
Time Warner Telecom then places necessary customer-dedicated or shared
electronic equipment at a location near or in the customer's premises to
terminate the link.
Time Warner Telecom serves its customers from one or more central offices
or hubs strategically positioned throughout its networks. The central offices
house the transmission and switching equipment needed to interconnect customers
with each other, the long distance carriers and other local exchange networks.
Redundant electronics, with automatic switching to the backup equipment in the
event of failure, protects against signal deterioration or outages. Time Warner
Telecom continuously monitors system components from its network operations
center and proactively focuses on avoiding problems rather than merely reacting
to trouble.
Time Warner Telecom adds switched, dedicated and data services to its basic
fiber optic transmission platform by installing sophisticated digital
electronics at its central offices and nodes and at customer locations. Time
Warner Telecom's advanced 5ESS digital telephone switches from Lucent are
connected to multiple incumbent local exchange carrier and long distance carrier
switches to provide Time Warner Telecom's customers access to telephones in the
local market as well as the public switched telephone network. Similarly, in
certain markets, Time Warner Telecom provides asynchronous transfer mode
switched and local area network multiplexers at its customers' premises and in
its central offices to provide high-speed local area network interconnection
services.
Time Warner Telecom's strategy for adding customers is designed to maximize
the speed and impact of its marketing efforts while maintaining attractive rates
of return on capital invested to connect customers directly to its networks. To
initially serve a new customer, Time Warner Telecom may use various transitional
links, such as reselling a portion of an incumbent local exchange carrier's
network. Once the new customer's communications volume and product needs are
identified, Time Warner Telecom may build its own fiber optic connection between
the customer's premises and Time Warner Telecom's network to accommodate: (i)
the customer's needs; and (ii) Time Warner Telecom's efforts to maximize return
on network investment.
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Telecommunications Networks. The following chart sets forth information
regarding each of Time Warner Telecom's telecommunications networks as of
September 30, 2000:
SWITCHED
NETWORK SERVICES TOTAL MSA
COMMERCIALLY COMMERCIALLY SWITCH & DED.
METROPOLITAN SERVICE AREA AVAILABLE AVAILABLE(1) REV. (000'S)(3)
------------------------- ------------ ------------ ---------------
Albany, New York(4)...................................... Jul 95 Sep 99 267,380
Austin, Texas(4)......................................... Sep 94 Apr 97 335,979
Binghamton, New York(4).................................. Jan 95 Aug 00 72,726
Charlotte, North Carolina(4)............................. Sep 94 Dec 97 464,254
Cincinnati, Ohio(4)...................................... Jul 95 Nov 97 355,080
Columbus, Ohio(4)........................................ Mar 91 Jul 97 305,953
Dallas, Texas............................................ Sep 99 Sep 99 941,038
Fayetteville, North Carolina(4).......................... Apr 00 Apr 00 42,249
Greensboro, North Carolina(4)............................ Jan 96 Sep 99 295,136
Honolulu, Hawaii(4)...................................... Jun 94 Jan 98 193,977
Houston, Texas(4)........................................ Jan 96 Sep 97 1,062,643
Indianapolis, Indiana(4)................................. Sep 87 Dec 97 311,261
Jersey City, New Jersey.................................. Jul 99 Jul 99 140,162
Manhattan, New York(4)................................... Feb 96 Feb 98 2,396,091
Memphis, Tennessee(4).................................... May 95 May 97 222,876
Milwaukee, Wisconsin(4).................................. Feb 96 Sep 97 330,056
Orlando, Florida(4)...................................... Jul 95 Jul 97 741,266
Raleigh, North Carolina(4)............................... Oct 94 Sep 97 263,492
Rochester, New York(4)................................... Dec 94 Feb 95 315,849
San Antonio, Texas(4).................................... May 93 Nov 97 354,157
San Diego, California(4)................................. Jun 95 Jul 97 556,694
Tampa, Florida(4)........................................ Dec 97 Jan 98 863,010
----------
SUBTOTAL................................................. 10,831,329
UNDER CONSTRUCTION (AS OF SEPTEMBER 30, 2000)
Dayton, Ohio(4).......................................... Nov 00 Nov 00 173,666
Orange County, California................................ Jan 01 Jan 01 654,629
Chicago, Illinois........................................ TBD TBD 1,905,181
Columbia, South Carolina................................. TBD TBD 89,167
Atlanta, Georgia......................................... TBD TBD 1,003,189
Minneapolis, Minnesota................................... TBD TBD 510,442
Denver, Colorado......................................... TBD TBD 516,168
SUBTOTAL................................................. 4,852,442
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TIME WARNER TELECOM TOTAL.................................. 15,683,771
GST CITIES
Albuquerque, New Mexico.................................. Jan 96 Sep 97 123,479
Bakersfield, California.................................. Nov 96 Mar 98 108,855
Boise, Idaho............................................. May 97 Mar 98 77,567
Fresno, California....................................... Nov 98 Mar 98 162,719
Houston, Texas........................................... Mar 98 Mar 98 1,062,643
Los Angeles, California(2)............................... Dec 96 Jul 97 3,121,749
Oakland, California(5)................................... Sep 97 Nov 97 588,183
Phoenix, Arizona......................................... Feb 94 Aug 97 581,185
Portland, Oregon......................................... Mar 98 Mar 98 392,329
Sacramento, California................................... Jul 99 -- 307,330
San Francisco, California................................ Sep 97 Mar 98 489,894
San Luis Obispo, California.............................. Mar 98 Dec 97 48,530
Santa Barbara, California................................ Jun 98 June 98 82,682
Seattle, Washington(6)................................... Dec 99 Jan 99 573,533
Spokane, Washington...................................... Sep 96 Dec 97 102,589
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SWITCHED
NETWORK SERVICES TOTAL MSA
COMMERCIALLY COMMERCIALLY SWITCH & DED.
METROPOLITAN SERVICE AREA AVAILABLE AVAILABLE(1) REV. (000'S)(3)
------------------------- ------------ ------------ ---------------
Tucson, Arizona.......................................... Sep 95 Sep 97 146,121
----------
--------- ----------
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GST TOTAL.................................................. 7,969,388
----------
TOTAL TIME WARNER TELECOM AND GST(7)....................... 21,935,887
==========
- ------------
(1) Date of "Switched Services Commercially Available" is the first date on
which switched services were provided to a customer of Time Warner Telecom,
or GST, as the case may be.
(2) Includes Los Angeles, Riverside and Ventura.
(3) Metropolitan statistical area business lines data are modeled from
Statistics of Communications Common Carrier 1999 Business Data.
(4) Metropolitan statistical areas in which Time Warner Telecom obtains or
expects to obtain fiber capacity through licensing agreements with Time
Warner Cable. See "Certain Relationships and Related Transactions--Certain
Operating Agreements."
(5) Includes Oakland and Stockton MSAs.
(6) Does not include 75 miles of conduit in Seattle.
(7) Total adjusted to include Houston and Orange County only once to reflect
true MSA total after both companies are combined.
Information Systems Infrastructure. Time Warner Telecom uses advanced
technology in its information systems infrastructure. Time Warner Telecom also
uses a centrally deployed series of client server platforms and relational
database servers to provide cost effective nationwide computing support. These
services and products enable employees to support customers directly, manage the
telephony infrastructure and report and manage trouble resolution. The computing
infrastructure strategy enables Time Warner Telecom to mix and match platforms
to create the best compliment of computing engines to meet its specific business
needs. This includes telephony ordering, provisioning, inventory, engineering,
installation, billing, decision support and customer care business functions.
The strategy of buying "off the shelf" products and integrating them into Time
Warner Telecom's existing information systems infrastructure versus utilizing
several stand-alone applications supports a more responsive and flexible
environment that better suits the needs of a nimble market competitor. Time
Warner Telecom's information systems provide real time support of network
operations and deliver data at the network, regional and corporate level, and
can sort by customer and vendor. The systems selected or built utilize open
system standards and architectures, thus allowing maximum interoperability with
third parties' systems. Time Warner Telecom's Information Systems Development
teams have developed competencies in application integration using the latest in
Enterprise Application products and strategies. Time Warner Telecom has
implemented an enterprise resource system, which provides improved real-time
management information for Time Warner Telecom's financial, procurement and
human resource functions. Time Warner Telecom's Business Systems Analysis teams
have supported the identification and implementation of new revenue assurance
platforms and billing platform enhancements which improve revenue stream
accuracy.
Network Monitoring and Management. Time Warner Telecom provides a single
point of contact for all of its customers and consolidates all of its systems
support, expertise and technical training at its network operations center in
Greenwood Village, Colorado. With approximately 850 technicians and customer
service representatives dedicated to providing superior customer service, Time
Warner Telecom is able to quickly correct, and often anticipate, problems that
may arise in its networks. Time Warner Telecom provides 24 hour-a-day, 7
days-a-week surveillance and monitoring of networks to achieve its network
reliability and performance targets. Network analysts monitor real-time alarm,
status and performance information for network circuits, which allows them to
react swiftly to repair network trouble. The acquisition of GST's assets
provides Time Warner Telecom with a second network operations center, in
Vancouver, Washington. In order to avoid interruption in the ongoing business
being conducted with the GST assets, Time Warner Telecom will operate the former
GST network operations center in parallel with its Greenwood Village network
operation center to monitor the newly acquired local and intercity networks.
Time Warner Telecom expects to integrate the two network operations centers
within the next two years to three years.
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Network Development and Application Laboratory. Time Warner Telecom's
network development and application laboratory is a comprehensive
telecommunications technology, applications and services development laboratory,
equipped with advanced systems and equipment, including those used by Time
Warner Telecom in the operation of its local digital networks. The center is
designed to provide a self-contained testing and integration environment, fully
compatible with Time Warner Telecom's digital networks, for the purposes of:
-- verifying the technical and operational integrity of new equipment
prior to installation in the networks;
-- developing new services and applications;
-- providing a realistic training environment for technicians, engineers
and others; and
-- providing a network simulation environment to assist in fault
isolation and recovery.
Technologies currently under evaluation in the laboratory include dense
wave division multiplexing equipment from new vendors, optical bandwidth
management, internet protocol telephony, including components used to service
next generation softswitches, media gateway technologies, Signaling System 7
gateway systems and related data applications.
Billing Systems. Time Warner Telecom contracts with outside vendors for
customer billing. Time Warner Telecom has licensed a system for switched
services billing that it operates on its own equipment and has a service bureau
arrangement with another vendor for dedicated transport service and
interconnection billing. Since GST used different billing systems than Time
Warner Telecom, Time Warner Telecom plans to continue to bill former GST
customers and new customers in former GST markets under the GST billing systems
until all billing can be converted to Time Warner Telecom's system. This
conversion is planned for 2002, after Time Warner Telecom integrates all of the
ordering systems. See "Risk Factors--We depend on third party vendors for
information systems."
NETWORK DESIGN AND CONSTRUCTION
In order to take advantage of its relationship with Time Warner Cable, Time
Warner Telecom has constructed most of its existing networks in selected
metropolitan statistical areas served by Time Warner Cable's fiber optic
infrastructure. This has allowed Time Warner Telecom to develop, in a
cost-efficient way, an extensive network in each of its metropolitan statistical
areas. As of September 30, 2000, Time Warner Telecom's networks spanned 9,457
route miles, contained 363,644 fiber miles and offered service to 7,228 on-net
and off-net buildings with DS-O equivalent circuits.
Time Warner Telecom plans to activate its networks in five additional
metropolitan statistical areas by the end of 2001, using its relationship with
Time Warner Cable or other fiber providers, or by developing the networks
in-house, whichever is most effective and economical. Before deciding to
construct or acquire a network in a particular metropolitan statistical area,
Time Warner Telecom's corporate planning group reviews the demographic,
economic, competitive and telecommunications demand characteristics of the
metropolitan statistical area, including its location, the concentration of
potential business, government and institutional end-user customers, the
economic prospects for the area, available data regarding long distance carrier
and end-user special access and switched access transport demand and actual and
potential competitive access provider and competitive local exchange carrier
competitors. Market demand is estimated on the basis of market research
performed by Company personnel and others, utilizing a variety of data including
estimates of the number of interstate access and intrastate private lines in the
metropolitan statistical area based primarily on FCC reports and commercial
databases. This process has enabled Time Warner Telecom to reduce its start-up
costs and shorten lead times.
If a particular metropolitan statistical area targeted for development is
found to have sufficiently attractive demographic, economic, competitive and
telecommunications demand characteristics, Time Warner Telecom's network
planning and design personnel design a network targeted to provide access to the
major long distance carrier, points of presence and the incumbent local exchange
carrier's principal central office(s) in the metropolitan statistical area.
Consistent with Time Warner Telecom's disciplined capital
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expenditure program, distribution rings are designed to cover strategic or
highly concentrated business parks and downtown metropolitan areas. Through a
combination of its own network and the use of Type II circuits purchased from
the incumbent local exchange carrier to reach low density areas where Time
Warner Telecom cannot economically build facilities, Time Warner Telecom can
serve virtually any customer within the metropolitan statistical area it serves.
Based on the data obtained through the foregoing process, in connection
with either the construction or an acquisition of a network, Time Warner Telecom
develops detailed financial estimates based on the anticipated demand for its
current services. If the financial estimates meet or exceed Time Warner
Telecom's minimum rate of return thresholds using a discounted cash flow
analysis, Time Warner Telecom's corporate planning personnel prepare a detailed
business and financial plan for the proposed network.
Prior to commencing construction, Time Warner Telecom's local staff,
working together with Time Warner Cable, where applicable, obtains any needed
city franchises, permits or other municipal requirements to initiate
construction and operate the network. In some cities, a construction permit is
all that is required. In other cities, a right-of-way agreement or franchise may
also be required. Such agreements and franchises are generally for a term of
limited duration. In addition, the Telecommunications Act of 1996 requires that
local governmental authorities treat all telecommunications carriers in a
competitively neutral, non-discriminatory manner. Time Warner Telecom's current
right-of-way agreements and franchises expire in years ranging from 2008 to
2015. City franchises often require payment of franchise fees that in some cases
can be directly passed through on customers' invoices. Time Warner Telecom's
local staff also finalizes arrangements for other needed rights-of-way.
Rights-of-way are typically licensed from Time Warner Cable under multi-year
agreements with renewal options and are generally non-exclusive. See "Certain
Relationships and Related Transactions--Certain Operating Agreements." Time
Warner Telecom leases underground conduit and pole space and other rights-of-way
from entities such as local exchange carriers and other utilities, railroads,
long distance providers, state highway authorities, local governments and
transit authorities. The Telecommunications Act of 1996 requires most utilities,
including most local exchange carriers and electric companies, to afford
competitive access providers and competitive local exchange carriers access to
their poles, conduits and rights-of-way at reasonable rates on
non-discriminatory terms and conditions.
Time Warner Telecom's networks are constructed to cost-effectively access
areas of significant commercial end-user telecommunications traffic, as well as
the points of presence of most long distance carriers and cellular companies and
the principal local exchange carrier central offices in a metropolitan
statistical area. Time Warner Telecom establishes general requirements for
network design, and internally engineers the contemplated network and the
required deployment. Construction and installation services are provided by
independent contractors, including Time Warner Cable, selected through a
competitive bidding process. Company personnel provide project management
services, including contract negotiation and supervision of the construction,
testing and certification of all facilities. The construction period for a new
network varies depending upon the number of route miles to be installed, the
initial number of buildings targeted for connection to the network, the general
deployment of the network and other field conditions. Networks that Time Warner
Telecom has installed to date generally have become operational within nine to
twelve months after the beginning of construction.
EQUIPMENT SUPPLY
Time Warner Telecom acquires Lucent 5ESS digital switches pursuant to an
exclusive vendor agreement which provides for discounted pricing. The Lucent
agreement expires in June 2002 and is renewable for up to four additional years
upon the parties' mutual agreement. The Lucent agreement provides that if Time
Warner Telecom purchases digital switches from a vendor other than Lucent during
the term of the agreement, Lucent, among other things, may discontinue the
agreed upon discounted pricing on all future orders, renegotiate higher prices
for digital switches and may not be liable for failures to meet certain delivery
and installation schedules on future orders.
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CUSTOMERS AND SALES AND MARKETING
Time Warner Telecom's customers are principally
telecommunications-intensive medium- and large-sized businesses, long distance
carriers, internet service providers, wireless communications companies, other
local providers and various governmental entities. Historically, Time Warner
Telecom's customers were primarily long distance carriers. While Time Warner
Telecom's long distance carrier business has grown by approximately 98% in 1999
over 1998, it has declined as a proportion of total revenue from approximately
26% of Time Warner Telecom's total 1998 revenue to approximately 24% of Time
Warner Telecom's total 1999 revenue. Of this long distance carrier revenue,
approximately 72% is directed by the end-user customer rather than the long
distance carrier since an end user may switch long distance carriers while
retaining Time Warner Telecom as its local exchange carrier.
Time Warner Telecom has substantial business relationships with a few large
customers. For the nine months ended September 30, 2000, Time Warner Telecom's
top ten customers accounted for approximately 46% of its total revenue. Time
Warner Telecom's largest customer for the nine months ended September 30, 2000,
MCI Worldcom, Inc. and its affiliates, accounted for more than 10% of Time
Warner Telecom's total revenue. However, a portion of that revenue results from
traffic that is directed to Time Warner Telecom by customers that have selected
that long distance carrier. No other customer, including customers who direct
their business through long distance carriers, accounted for 10% or more of
revenue.
Time Warner Telecom recently entered into an agreement with AT&T that
specifies the terms under which AT&T will purchase certain switched and
dedicated services in selected metropolitan statistical areas of Time Warner
Telecom. The agreement, but not the individual services purchased under the
agreement, has a five year term ending on December 31, 2005, with a one year
rollover term that AT&T may elect at its option. The agreement may be terminated
in whole or in part under specified circumstances of default prior to that time.
Certain affiliates of AT&T are also eligible to purchase services under the
agreement. The agreement settles the dispute process triggered by Time Warner
Telecom in December 1999 under its past agreement with AT&T. The dispute
involved the appropriate billing rates for switched access services.
Time Warner Telecom provides incentives to its sales force to negotiate
service contracts that have a minimum term of one year, and provides enhanced
commissions to its sales force for executing agreements with terms of three
years or greater. Currently, more than half of service agreements have a
duration of greater than three years.
Time Warner Telecom's marketing emphasizes its:
-- reliable, facilities-based networks;
-- flexibly priced, bundled products and services;
-- responsive customer service orientation; and
-- integrated operations, customer support and network monitoring and
management systems.
Time Warner Telecom's centrally managed customer support operations are
designed to facilitate the processing of orders for changes and upgrades in
customer services. To reduce the inherent risk in bringing new and untested
telecommunications products and services to a dynamically changing market, Time
Warner Telecom introduces its products and services once market demand develops
and offers them in diversified, competitively-priced bundles, thereby increasing
usage among its existing customers and attracting new customers. The services
offered by Time Warner Telecom are typically priced at a discount to the prices
of the incumbent local exchange carriers.
With a direct sales force in each of its service areas along with regional
and national sales support, Time Warner Telecom targets medium- and large-sized
telecommunications-intensive businesses in the areas served by its networks.
Compensation for Time Warner Telecom's sales representatives is based primarily
on commissions that are tied to sales generated. Time Warner Telecom's customers
include financial services firms, health care, media, telecommunications
services and high tech companies and various governmental institutions. In
addition, Time Warner Telecom markets its services through sales agents,
landlords, advertisements, trade journals, media relations, direct mail and
participation in trade conferences.
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Time Warner Telecom also targets long distance carriers, internet service
providers, large, strategic business accounts and wireless telephone companies
through its national sales organization. Time Warner Telecom has master services
agreements, which generally set forth technical standards, ordering processes,
pricing methodologies and service grade requirements, but do not guarantee any
specified level of business for Time Warner Telecom, with a significant number
of the long distance carriers, including AT&T, MCI-WorldCom, Sprint Corporation,
and Qwest Communications. By providing long distance carriers with a local
connection to their customers, Time Warner Telecom enables them to avoid
complete dependence on the incumbent local exchange carriers for access to
customers and to obtain a high quality and reliable local connection. Time
Warner Telecom provides a variety of transport services and arrangements that
allow long distance carriers to connect their own switches in both local areas,
or intra-city, and in wide areas, or inter-city. Additionally, long distance
carriers may purchase Time Warner Telecom's transport services that allow them
to connect their switch to an incumbent local exchange carrier switch and to
end-user locations directly. Time Warner Telecom's advanced networks allow it to
offer high volume business customers and long distance carriers uniformity of
services, pricing, quality standards and customer service.
CUSTOMER SERVICE
With approximately 850 expert technicians and customer service
representatives at September 30, 2000, Time Warner Telecom provides its
customers with continuous support and superior service. To serve its customers,
account representatives are assigned to Time Warner Telecom's customers to act
as effective liaisons with Time Warner Telecom. Technicians and other support
personnel are available in each of Time Warner Telecom's service areas to react
to any network failures or problems. In addition, the network operations center
provides 24 hour-a-day, 7 days-a-week surveillance and monitoring of networks to
maintain Time Warner Telecom's network reliability and performance. See
"--Telecommunications Networks and Facilities--Network Monitoring and
Management."
COMPETITION
Time Warner Telecom believes that the principal competitive factors
affecting its business are, and will continue to be:
-- pricing;
-- the availability of proven support systems for Time Warner Telecom's
back office systems, including provisioning and billing;
-- competition for skilled, experienced personnel; and
-- regulatory decisions and policies that promote competition.
Time Warner Telecom believes that it competes favorably with other
companies in the industry or is impacted favorably with respect to each of these
factors. The technologies and systems which provide back office support for the
competitive local exchange carrier industry are nascent and may not keep pace
with the growth of order volume, integration with other systems, and production
of required information for systems managers. The best personnel in all areas of
Time Warner Telecom's operations are in demand by the numerous participants in
the highly specialized competitive local exchange carrier industry. While Time
Warner Telecom's employee base is generally stable, it is anticipated that
others in the industry will continue to demand high quality personnel and will
thus drive pressure to maintain extremely competitive compensation and benefits
packages in addition to an attractive work environment. Regulatory environments
at both the state and Federal level differ widely and have considerable
influence on Time Warner Telecom's market and economic opportunities and
resulting investment decisions. Time Warner Telecom believes it must continue
monitoring regulatory developments and remain active in its participation in
regulatory issues.
Services substantially similar to those offered by Time Warner Telecom are
also offered by the incumbent local exchange carriers, which include Verizon
Corporation, BellSouth Corporation, Qwest Communications and SBC Communications,
Inc. Time Warner Telecom believes that many incumbent local
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exchange carriers may have competitive advantages over Time Warner Telecom.
Incumbent local exchange carriers generally benefit from their long-standing
relationships with customers and greater technical and financial resources. The
incumbent local exchange carriers have the potential to subsidize services of
the type offered by Time Warner Telecom from service revenue in unrelated
businesses. While regulatory initiatives that allow competitive local exchange
carriers such as Time Warner Telecom to interconnect with incumbent local
exchange carrier facilities and provide increased business opportunities for
Time Warner Telecom, such interconnection opportunities have been accompanied by
increased pricing flexibility for and relaxation of regulatory oversight of the
incumbent local exchange carriers. In addition, in most of the metropolitan
areas in which Time Warner Telecom currently operates, at least one, and
sometimes many, other competitive access providers or competitive local exchange
carriers offer substantially similar services at substantially similar prices to
those of Time Warner Telecom.
Many communications services can be provided without incurring an
incremental charge for an additional unit of service. For example, there is
virtually no marginal cost for a carrier to transmit a call over its own
network. As a result, once there are several facilities-based carriers providing
a service in a given market, price competition is likely and can be severe. As a
result, Time Warner Telecom has experienced price competition, which is expected
to continue. In each of its service areas, additional competitors could build
facilities. If additional competitors build facilities in Time Warner Telecom's
service areas, this price competition may increases significantly.
Time Warner Telecom also faces competition from new entrants in the local
services business who may also be better established and have greater financial
resources. Other competitive local exchange carriers, competitive access
providers, cable television companies, electric utilities, long distance
carriers, microwave carriers, wireless telephone system operators and private
networks built by large end-users currently do, and may in the future, offer
services similar to those offered by Time Warner Telecom.
Time Warner Telecom believes that the Telecommunications Act of 1996 will
provide increased business opportunities by opening all local markets to
competition. The Telecommunications Act of 1996:
-- requires all local exchange providers to offer their services for
resale;
-- requires incumbent local exchange carriers to provide increased
direct interconnection;
-- requires incumbent local exchange carriers to offer network elements
on an unbundled basis; and
-- requires incumbent local exchange carriers to offer the services they
provide to end-users to other carriers at wholesale rates.
However, under the Telecommunications Act of 1996, the FCC and some state
regulatory authorities may provide incumbent local exchange carriers with
increased flexibility to reprice their services as competition develops and as
incumbent local exchange carriers allow competitors to interconnect to their
networks. In addition, some new entrants in the local market may price certain
services to particular customers or for particular routes below the prices
charged by Time Warner Telecom for services to those customers or for those
routes, just as Time Warner Telecom may itself underprice those new entrants for
other services, customers or routes. If the incumbent local exchange carriers
and other competitors lower their rates and can sustain significantly lower
prices over time, this may adversely affect revenue of Time Warner Telecom if it
is required by market pressure to price at or below the incumbent local exchange
carriers' prices. If regulatory decisions permit the incumbent local exchange
carriers to charge competitive access providers and competitive local exchange
carriers substantial fees for interconnection to the incumbent local exchange
carriers' networks or afford incumbent local exchange carriers other regulatory
relief, such decisions could also have a material adverse effect on Time Warner
Telecom.
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However, Time Warner Telecom believes that the negative effects of the
Telecommunications Act of 1996 may be more than offset by:
-- the increased revenue available as a result of being able to address
the entire local exchange market;
-- reciprocal compensation with the incumbent local exchange carrier;
-- obtaining access to off-network customers through more reasonably
priced expanded interconnection with incumbent local exchange carrier
networks; and
-- a shift by long distance carriers to purchase access services from
competitive access providers and competitive local exchange carriers
instead of incumbent local exchange carriers.
Time Warner Telecom cannot assure you, however, that these anticipated
results will offset completely the effects of increased competition as a result
of the Telecommunications Act of 1996.
The current trend of business combinations and alliances in the
telecommunications industry, including mergers between subsidiaries of Bell
operating companies, between Bell operating companies and other incumbent local
exchange carriers or competitive local exchange carriers, and between major long
distance carriers and competitive local exchange carriers, may create
significant new competitors for Time Warner Telecom and may result in
competitors favoring the use of their subsidiaries and division for services
provided by Time Warner Telecom. For example, Bell Atlantic has acquired the
local exchange carriers owned by NYNEX, and SBC, corporate parent of
Southwestern Bell Telephone Company, has acquired Southern New England Telephone
and Pacific Telesis. In addition, SBC and Ameritech have merged, as have Bell
Atlantic and GTE Corporation, with the combined company renamed Verizon, Qwest
Communications has completed its acquisition of U S WEST, now renamed Qwest. In
July 1998, AT&T acquired TCG, a competitor of Time Warner Telecom, and in March
1999, AT&T acquired Tele-Communications, Inc., a major cable operator. In
addition, several other competitive local exchange carrier ("CLEC")
consolidations have been announced, including Worldcom's acquisition of
Intermedia Communications and McLeod USA's acquisition of CapRock
Communications.
In addition, the Telecommunications Act of 1996 allows the regional Bell
operating companies and others such as electric utilities to enter the long
distance market. Certain of the regional Bell operating companies have begun
providing out-of-region long distance services across local access and transport
areas, or interLATA. When a regional Bell operating company obtains authority to
provide in-region interLATA services, it will be able to offer customers both
local and long distance telephone services. Given the market power the regional
Bell operating companies currently possess in the local exchange market, the
ability to provide both local and long distance services is expected to make the
regional Bell operating companies very strong competitors. Certain regional Bell
operating companies are actively working to satisfy prerequisites for entry into
the in-region long distance business. To date, only two Bell Operating
Companies--Bell Atlantic (now Verizon) in New York, and SBC in Texas--have been
granted authority under Section 271 to provide in-region InterLATA service.
However, Verizon has applied to the FCC for Section 271 Authority to provide
interLATA service in Massachusetts, and it is expected that additional
applications for Section 271 authority will be submitted to the FCC in the
future. SBC has requested Section 271 Authority for Kansas and Oklahoma.
The WTO agreement on basic telecommunications services which became
effective in 1998 could increase Time Warner Telecom's competition for
telecommunications services both domestically and internationally. Under this
agreement, the United States and other members of the WTO committed themselves
to opening their telecommunications markets to competition and foreign ownership
and to adopting regulatory measures to protect competitors against
anticompetitive behavior by dominant telephone companies. As part of the U.S.
government's implementation of the WTO agreement, the FCC has established new
rules making it easier for foreign carriers to enter the U.S. telecommunications
market. See "Business--Government Regulation." Additional competition will arise
from internet service providers as they begin to deliver advanced communications
services (e.g., internet protocol telephony) over their networks. Some of these
internet service providers benefit from the very large scale of their backbones
because of their or
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their affiliates' other businesses (e.g., Sprint owns its own backbone and
benefits through its long haul assets). At this time, it has not yet been
determined whether to subject internet protocol telephony to the same regulatory
requirements as are applicable to traditional telecommunications services,
including, for example, the obligation to support universal service and the
requirement to pay access charges to local exchange carriers.
To the extent Time Warner Telecom interconnects with and uses incumbent
local exchange carrier networks to service its customers, Time Warner Telecom
will be dependent upon the technology and capabilities of the incumbent local
exchange carriers to meet certain telecommunications needs of Time Warner
Telecom's customers and to maintain its service standards. Time Warner Telecom
will become increasingly dependent on interconnection with incumbent local
exchange carriers as switched services become a greater percentage of Time
Warner Telecom's business. The Telecommunications Act of 1996 imposes
interconnection obligations on incumbent local exchange carriers; however, such
interconnection requires the negotiation of interconnection and collocation
agreements with the incumbent local exchange carriers, which can take
considerable time, effort and expense and are subject to Federal and state
regulation. Time Warner Telecom cannot assure you that it will be able to obtain
the interconnection it requires at rates, and on terms and conditions, that
permit Time Warner Telecom to offer switched services at rates that are both
competitive and profitable. In the event that Time Warner Telecom experiences
difficulties in obtaining high quality, reliable and reasonably priced service
from the incumbent local exchange carriers, the attractiveness of Time Warner
Telecom's services to its customers could be impaired.
Historically, Time Warner Telecom has been able to build new networks and
expand existing networks in a timely and economical manner through strategic
arrangements such as leasing fiber optic cable from Time Warner Cable, which
already possesses rights-of-way. Time Warner Telecom intends to use its
experience and presence in the telecommunications industry to fully exploit its
available capacity, further develop and expand its existing telecommunications
infrastructure and offer a diversified range of products and services in
competitively priced bundles.
GOVERNMENT REGULATION
Historically, interstate and foreign communication services were subject to
the regulatory jurisdiction of the FCC, and intrastate and local
telecommunications services were subject to regulation by state public service
commissions. With the enactment of the Telecommunications Act of 1996,
competition in all telecommunications market segments, including interstate and
intrastate, local and long distance, became matters of national policy. Time
Warner Telecom believes that the national policy fostered by the
Telecommunications Act of 1996 has contributed to significant market
opportunities for Time Warner Telecom. As Federal and state regulatory
commissions have largely implemented the provisions of the Telecommunications
Act of 1996, Time Warner Telecom believes that future regulation will focus
largely on enforcement of carrier-to-carrier requirements under the law and
consumer protection measures.
Telecommunications Act of 1996. The Telecommunications Act of 1996 is
intended to increase competition in local telecommunications services by
requiring incumbent local exchange carriers to interconnect their networks with
competitive local exchange carriers. The Telecommunications Act of 1996 imposes
a number of access and interconnection requirements on all local exchange
carriers, including competitive local exchange carriers, with additional
requirements imposed on incumbent local exchange carriers. Competitive local
exchange carriers and incumbent local exchange carriers are required to attempt
to negotiate interconnection agreements for at least 135 days. During these
negotiations, the parties may submit disputes to state regulators for mediation
and, after the negotiation period has expired, the parties may submit
outstanding disputes to state regulators for arbitration. Time Warner Telecom
has executed interconnection agreements with the incumbent local exchange
carriers in each of the markets in which it offers switched services and has
negotiated, or is negotiating, secondary interconnection arrangements with
carriers whose territories are adjacent to Time Warner Telecom's for intrastate
intraLATA toll traffic and extended area services. Many of these agreements
expired in 1999 or 2000, and Time Warner Telecom is in the process of
negotiating new contracts. Typically, the expired agreements allow Time Warner
Telecom to continue to exchange traffic with the other carrier pending execution
of a new agreement. Incumbent local exchange carriers are seeking
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renegotiation of certain terms and conditions, including reciprocal compensation
for internet service provider-bound traffic. Time Warner Telecom cannot predict
the outcome of the negotiations, especially in light of pending legal and
regulatory actions pertaining to reciprocal compensation, as described below.
Under the Telecommunications Act of 1996, the FCC was required to establish
rules and regulations to implement the local competition provisions of the
Telecommunications Act of 1996 within six months of enactment. In August 1996,
the FCC issued two reports and orders promulgating rules to govern
interconnection, resale, unbundled network elements, and the pricing of those
facilities and services, as well as rules to govern, among other things, the
dialing parity requirements of the Telecommunications Act of 1996. Certain
incumbent local exchange carriers and states challenged the authority of the FCC
to issue these rules.
On January 25, 1999, the Supreme Court issued a decision upholding most of
the FCC's rules with respect to interconnection, resale and the dialing parity
rule and confirming the FCC's jurisdiction to issue national pricing rules for
interconnection, unbundled network elements and resale. However, the Supreme
Court did not address the lawfulness of the pricing rules established by the
FCC. The Supreme Court also reinstated the FCC's rule that requires the
incumbent local exchange carriers to offer network elements in combined form
where those elements are already combined in the incumbent local exchange
carrier's networks. This potentially enables non-facilities-based carriers to
obtain all of the network elements necessary to serve end-users without making
capital investments. Time Warner Telecom believes that the availability of
combined platforms of network elements at prices based on the FCC's Total
Element Long Run Incremental Cost standard could create economic incentives for
new competitors to enter local markets through acquisition of incumbent local
exchange carrier network element platforms rather than by investing in their own
network facilities as Time Warner Telecom does.
The Court also vacated a rule requiring incumbent local exchange carriers
to make available to requesting carriers any of the network elements within the
FCC's definition of that term. The Court remanded to the FCC for further
consideration the criteria for determining what constitutes an unbundled network
element and what network elements must be provided based on the availability
standards of the Telecommunications Act of 1996. In response to the Court's
remand, the FCC conducted a further rulemaking proceeding. In its November 1999
order, the FCC reaffirmed the necessity for continued incumbent local exchange
carrier provision of most of the original unbundled network elements, but
allowed incumbent local exchange carriers to withdraw the local switching
element in the highest density areas of the top 50 metropolitan statistical
areas. The withdrawal of the local switching element also effectively withdraws
the unbundled network element platform in those same high-density areas. The FCC
also declined to allow the combination of loop and transport by regional Bell
operating companies purely for the provision of interexchange special access
services. This issue is pending final resolution in a separate proceeding.
On July 18, 2000, the U.S. Court of Appeals for the Eighth Circuit issued a
decision in which it concluded that the FCC's pricing rule based on the Total
Element Long-Run Incremental Cost standard was unlawful, and vacated that rule
and remanded the matter to the FCC for further consideration. In September 2000,
that same court stayed its ruling pending review of the rules by the Supreme
Court. On January 22, 2001, the Supreme Court granted certiorari and agreed to
hear the case during the October 2001 term. The Supreme Court has also agreed to
review another court of appeals decision involving the lawfulness of the TELRIC
standard for purposes of establishing universal service contributions.
Elimination of the TELRIC pricing standard could increase the costs to Time
Warner Telecom of interconnection and of obtaining network elements from
incumbent LECs.
The Telecommunications Act of 1996 provides a detailed list of items that
are subject to interconnection negotiations, as well as a detailed set of duties
for all affected carriers. All local exchange carriers, including Time Warner
Telecom, have a duty to:
- not unreasonably limit the resale of their services;
- provide number portability if technically feasible;
- provide dialing parity to competing telecommunications providers;
- provide access to poles, ducts and conduits; and
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- establish reciprocal compensation arrangements for the transport
and termination of telecommunications.
Time Warner Telecom has fully complied with these requirements. Time Warner
Telecom does not restrict the resale of its services, engages in reciprocal
compensation arrangements, provides dialing parity, and provides full number
portability, satisfying four of the five requirements. Time Warner Telecom
generally licenses poles, ducts and conduits, and therefore owns few such
rights-of-way subject to the requirement to make them available to other
carriers.
Pursuant to the requirements of the Telecommunications Act of 1996 and the
FCC's rules under the Telecommunications Act of 1996, Time Warner Telecom is
required to compensate other local exchange carriers for termination of local
exchange traffic originated by Time Warner Telecom. Conversely, Time Warner
Telecom is entitled to receipt of compensation from other local exchange
carriers when it terminates local exchange traffic originated by other local
exchange carriers. This requirement is commonly referred to as reciprocal
compensation. Time Warner Telecom, like other competitive local exchange
carriers, receives reciprocal compensation from incumbent local exchange
carriers for local calls it terminates at the premises of internet service
providers. Incumbent local exchange carriers have attempted to persuade state
commissions and the FCC that such traffic is not local traffic and that such
traffic should not be subject to reciprocal compensation. To date, nearly every
state commission which has considered the issue has concluded that local traffic
terminated at internet service provider locations is local traffic and is
subject to reciprocal compensation under state-approved interconnection
agreements. However, on February 26, 1999, the FCC issued a declaratory ruling
in which it concluded that telecommunications traffic delivered to internet
service provider locations in a local exchange was not local traffic, but rather
was largely interstate or foreign traffic. At the same time, the FCC sought
comment on proposed rules to govern reciprocal compensation for such internet-
bound traffic. On March 24, 2000, the U.S. Court of Appeals for the District of
Columbia Circuit vacated the FCC ruling on the basis that the FCC had not
adequately explained its conclusion that such traffic was interstate or foreign.
Presently, the FCC is reconsidering its jurisdictional determination in light of
the court of appeals decision and is still considering whether to adopt a rule
governing reciprocal compensation for internet-bound traffic. Pending completion
of that further rulemaking, determinations of whether reciprocal compensation
should be paid on traffic terminated at internet service provider locations will
be made by state commissions and under the terms of approved interconnection
agreements. Incumbent local exchange carriers have continued attempts to
persuade the FCC and state commissions that traffic delivered to internet
service providers should not be subject to reciprocal compensation. In addition,
legislation has been introduced in Congress which would prohibit payment of
reciprocal compensation on traffic routed to internet service providers. Time
Warner Telecom cannot predict the outcome of those proceedings or whether
legislation affecting reciprocal compensation will be enacted. In some cases
Time Warner Telecom's right to receive reciprocal compensation for traffic
destined for its internet service provider customers is contractually dependent
on the outcome of the FCC rulemaking and pending state proceedings addressing
reciprocal compensation for internet service provider traffic generally. In some
cases, decisions by state commissions that reciprocal compensation is payable to
Time Warner Telecom for internet service provider traffic are under appeal in
federal courts. Exclusion of such traffic from reciprocal compensation
requirements will reduce the revenue received by Time Warner Telecom for
terminating traffic originated by incumbent local exchange carriers.
Federal Regulation. The Telecommunications Act of 1996 obligates the FCC to
establish mechanisms for ensuring that consumers, including low income consumers
and those located in rural, insular and high cost areas, have access to
telecommunications and information services at rates reasonably comparable to
those charged for similar services in urban areas. The Telecommunications Act of
1996 also requires the FCC to establish funding mechanisms to make available
access to telecommunications services, including advanced services, to schools,
libraries and rural health care centers. These requirements are generally
referred to as the "universal service requirements" of the Telecommunications
Act of 1996. In May 1997, the FCC adopted rules to implement the universal
service requirements. Under those rules, all telecommunications carriers,
including Time Warner Telecom, must contribute to support universal service. We
have the ability to recover these costs from our customer. If Time Warner
Telecom offers to provide local exchange service to all
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customers within certain geographic areas, it may be deemed to be an "Eligible
Carrier" and therefore entitled to subsidy funds under the program established
by the FCC.
In December 1998, the FCC established rules to govern the manner in which
telecommunications carriers effectuate and verify selection by consumers of
preferred providers of local exchange and interexchange services. Time Warner
Telecom is subject to those rules and is required to comply with the specific
verification requirements established by the FCC. Violation of those rules could
subject Time Warner Telecom to sanctions imposed by the FCC. The FCC also has
established rules governing the billing of telecommunications services. These
rules, generally referred to as the "truth-in-billing" rules require the Company
to provide clear and explicit information on consumer bills, including
identification of new service providers and descriptions of charges imposed by
service providers on consumers as a result of regulatory policies. Violation of
these requirements could subject Time Warner Telecom to sanctions imposed by the
FCC.
In its August 1999 Order on Access Reform, the FCC established a framework
for the eventual deregulation of incumbent local exchange carrier interstate
access charges. Degrees of increased pricing flexibility and ultimate price
deregulation are triggered by the extent of competitive development within
metropolitan statistical areas. This will exert greater downward pressure on
Time Warner Telecom's interstate access prices as the various conditions are met
over the next few years.
In addition, a group of incumbent local exchange carriers and long distance
carriers, the Coalition for Affordable Local and Long Distance Services, or
CALLS, submitted to the FCC a proposal for reforming the federal access charge
and universal service regimes. The proposal includes a substantial reduction in
incumbent local exchange carrier per-minute access charges and an increase in
the flat monthly charge paid by local residential and business service
subscribers. In addition, the proposal includes a significant increase in the
size of the federal universal service fund. The CALLS access reform proposal was
adopted by the FCC and became effective in time for incumbent local exchange
carriers to file revised access tariffs effective July 1, 2000. Implementation
of CALLS proposal may place downward pressure on Time Warner Telecom's access
service prices.
In a related access reform proceeding pending before the FCC, the FCC is
considering imposing regulation on competitive local exchange carrier access
charges that would restrict such prices to levels below an established
"benchmark" price. Some parties have proposed benchmarks that are no higher than
individual incumbent local exchange carrier prices, while others have argued
that the tariffed rates of the National Exchange Carrier Association are more
representative of competitive local exchange carrier cost characteristics. A
regulated price cap at incumbent local exchange carrier rate levels would reduce
the per-minute rates Time Warner Telecom receives for access service.
Sprint is withholding access charge payments from competitive local
exchange carriers, including Time Warner Telecom, arguing that competitive local
exchange carrier access rates should be no higher than individual incumbent
local exchange carrier rates. Time Warner Telecom does not believe that Sprint
has a sustainable legal basis for its position and has filed a complaint against
Sprint with the FCC which has been fully briefed by both TWT and Sprint. Time
Warner Telecom can provide no assurance, however, that it will prevail in this
proceeding.
The Communications Assistance for Law Enforcement Act, enacted in 1994,
requires telecommunications carriers, including Time Warner Telecom, to make
their equipment and facilities capable of assisting authorized law enforcement
agencies to conduct electronic surveillance. The FCC has extended the date for
compliance with some of these requirements until June 30, 2000 and other
requirements by September 2001. Time Warner Telecom filed a request for a waiver
with the FCC to extend the due date for its remaining switches until August
2000. It completed the necessary upgrades before the FCC ruled on its waiver
request and withdrew its waiver request. The GST network is not compliant. GST
was granted a waiver until March 31, 2001, but the network may not be compliant
by that date. Time Warner Telecom will file a new waiver request to delay
compliance until December 31, 2001. Time Warner Telecom does not anticipate any
difficulty in obtaining the extension for time to comply, but cannot assure you
that the extension will be granted. The FCC may impose substantial monetary
penalties.
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State Regulation. Time Warner Telecom is authorized to provide
telecommunications services in all states where it presently operates. Most
state public service commissions require carriers that wish to provide local and
other jurisdictionally intrastate common carrier services to be authorized to
provide such services. Time Warner Telecom's operating subsidiaries and
affiliates are authorized as common carriers in 20 states. These certifications
cover the provision of switched and dedicated services including local basic
exchange service, point-to-point private line, competitive access services and
long distance services.
Local Government Authorizations. Time Warner Telecom may be required to
obtain from municipal authorities street opening and construction permits and
other rights-of-way to install and expand its networks in certain cities. In
some cities, Time Warner Telecom's affiliates or subcontractors may already
possess the requisite authorizations to construct or expand its networks. Any
increase in the difficulty or cost of obtaining these authorizations and permits
could adversely affect Time Warner Telecom, particularly where it must compete
with companies that already have the necessary permits.
In some of the metropolitan areas where Time Warner Telecom provides
network services, Time Warner Telecom pays license or franchise fees based on a
percent of gross revenue. We cannot assure you that municipalities that do not
currently impose fees will not seek to impose fees in the future, nor can we
assure you that, following the expiration of existing franchises, fees will
remain at their current levels. Under the Telecommunications Act of 1996,
municipalities are required to impose such fees on a competitively neutral and
nondiscriminatory basis. However, municipalities that currently favor the
incumbent local exchange carriers may or may not conform their practices in a
timely manner or without legal challenges by Time Warner Telecom or another
competitive access provider or competitive local exchange carrier. Moreover, we
cannot assure you that incumbent local exchange carriers with whom Time Warner
Telecom competes will not be excluded from such local franchise fee requirements
by previously-enacted legislation allowing them to utilize rights-of-way
throughout their states without being required to pay franchise fees to local
governments.
If any of Time Warner Telecom's existing franchise or license agreements
for a particular metropolitan area were terminated prior to its expiration date
and Time Warner Telecom were forced to remove its fiber optic cables from the
streets or abandon its network in place, even with compensation, such
termination could have a material adverse effect on Time Warner Telecom's
operation in that metropolitan area and could have a material adverse effect on
Time Warner Telecom.
Time Warner Telecom is party to various regulatory and administrative
proceedings, however, subject to the discussion above, Time Warner Telecom does
not believe that any such proceedings will have a material adverse effect on its
business.
COMPANY NAME
Time Warner Telecom's use of the "Time Warner" name is subject to a license
agreement with Time Warner. See "Risk Factors--Risks Relating to us and our
Business--We may lose the right to use the 'Time Warner' name" and "Certain
Relationships and Related Transactions--Certain Operating Agreements."
EMPLOYEES
As of September 30, 2000, Time Warner Telecom employed approximately 1,697
employees. Time Warner Telecom believes that its relations with its employees
are good. By succession, the New York City operating entity is a party to a
collective bargaining agreement. In connection with the construction and
maintenance of its networks and the conduct of its other business operations,
Time Warner Telecom uses third party contractors, some of whose employees may be
represented by unions or collective bargaining agreements. Time Warner Telecom
believes that its success will depend in part on its ability to attract and
retain highly qualified employees and maintain good working relations with its
current employees.
PROPERTIES
Time Warner Telecom leases network hub sites and other facility locations
and sales and administrative offices, many from Time Warner Cable, in each of
the cities in which it operates networks. During 1999, 1998
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and 1997, rental expense for Time Warner Telecom's facilities and offices
totaled approximately $6.6 million, $4.8 million and $4.7 million, respectively.
Time Warner Telecom owns no material real estate. Management believes that its
properties, taken as a whole, are in good operating condition and are suitable
and adequate for Time Warner Telecom's business operations. Time Warner Telecom
currently leases approximately 83,107 square feet of space in Littleton,
Colorado, where its corporate headquarters are located and approximately 130,000
square feet of space in Greenwood Village, Colorado, where the network
operations center and other administrative functions are located.
LEGAL PROCEEDINGS
Time Warner Telecom currently has no material legal proceedings pending.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning the individuals who
serve as directors and executive officers of Time Warner Telecom.
NAME AND AGE DIRECTOR SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
------------ -------------- ------------------------------------------
Larissa L. Herda (42).................. July 1998 President and Chief Executive Officer of
Time Warner Telecom since June 1998.
Senior Vice President--Sales of Time Warner
Telecom from March 1997 to June 1998.
1989-1997 employed by MFS Telecom, Inc., a
competitive local exchange carrier, most
recently as Southeast Regional Vice
president and General Manager.
David J. Rayner (43)................... N/A Senior Vice President and Chief Financial
Officer of Time Warner Telecom since June
1998.
Vice President, Finance of Time Warner
Telecom from February 1997 to May 1998.
Controller of Time Warner Telecom from May
1994 to February 1997.
Financial and operational management
positions at Time Warner Cable from 1982 to
1994.
Paul B. Jones (54)..................... N/A Senior Vice President, General Counsel and
Regulatory Policy of Time Warner Telecom
since August 1998.
Senior Vice President, Legal and Regulatory
Policy of Time Warner Telecom from October
1993 to August 1998.
Senior Vice President, Corporate Development
of Time Warner Cable Ventures from
1992-1993.
Senior Vice President and General Counsel of
Warner Cable from 1987 to 1992.
Vice President, Strategy and Development of
CBS Publishing Group from 1985 to 1986.
Assistant General Counsel for the FCC from
1977 to 1979.
Pat Gorman (46)........................ N/A Executive Vice President, Corporate
Operations since August 2000.
Director, Frame Relay, ATM and Dial Services
of AT&T from 1995 to 1999.
Vice President, Ordering and Project
Management of AT&T from 1999 to August 2000.
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NAME AND AGE DIRECTOR SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
------------ -------------- ------------------------------------------
John T. Blount (42).................... N/A Executive Vice President, Field Operations
since October 2000.
Senior Vice President--Sales of Time Warner
Telecom from June 1998 to October 2000.
Regional Vice President for the Midwest and
Southwest Regions of Time Warner Telecom
from January 1997 to June 1998.
Vice President and General Manager/Milwaukee
of Time Warner Telecom from January 1996 to
January 1997.
General Manager/Milwaukee of Time Warner
Telecom from February 1995 to January 1996.
Employed by U S WEST Enterprise from 1988 to
February 1995.
Michael Rouleau (42)................... N/A Senior Vice President, Marketing and
Business Development of Time Warner Telecom
since November 1999.
Vice President, Marketing and Product
Development of Transport Service of U S
WEST, Inc. from July 1997 to November 1999.
Executive Director, Marketing and Product
Development of U S WEST, Inc. from April
1995 to June 1997.
A. Graham Powers (54).................. N/A Senior Vice President, Chief Information
Officer of Time Warner Telecom since April
1998.
Senior Vice President, Engineering and
Technology of Time Warner Telecom from June
1996 to March 1998.
Senior Vice President, Operations
Development and Business Implementation of
Time Warner Telecom from August 1993 to May
1996.
President of Telecommunications Strategy
Inc., a technology consulting service, from
May 1992 to July 1993.
Raymond H. Whinery (46)................ N/A Senior Vice President, Engineering,
Technology and Operations of Time Warner
Telecom since April 1999.
Senior Vice President, Technical Operations
of Time Warner Telecom from January 1997 to
April 1999.
Senior Director of Engineering and Planning
of Time Warner Telecom from May 1994 to
January 1997.
Employed by U S WEST, Inc. from 1978 to May
1994.
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NAME AND AGE DIRECTOR SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
------------ -------------- ------------------------------------------
Julie A. Rich (47)..................... N/A Senior Vice President, Human Resources and
Business Administration of Time Warner
Telecom since April 1999.
Vice President, Human Resources and Business
Administration of Time Warner Telecom from
March 1998 to April 1999.
Owner of an independent human resources
consulting practice from June 1996 to
February 1998.
Founder of XEL Communications, Inc., a
telecommunications manufacturer, holding
positions of Director and Vice President of
Human Resources from 1984 to 1996.
Mark A. Peters (40).................... N/A Vice President, Treasurer of Time Warner
Telecom since July 1998.
Participant in entrepreneurial start-up
ventures from March 1996 to July 1998.
Executive officer with Nextel
Communications, Inc. and predececssor
OneComm from January 1990 to February 1996,
most recently as Vice President of Finance
and Treasurer.
Glenn A. Britt (51).................... July 1998 Vice President of Time Warner Telecom and
non-executive Chairman of the Board of
Directors since July 1998.
President of Time Warner Cable since January
1999.
Chief Executive Officer and President of
Time Warner Cable Ventures, a division of
Time Warner Cable, for more than the past
five years.
Bruce Claflin (48)..................... August 1999 President and Chief Operating Officer for
3Com Corporation since August 1998.
Senior Vice President and General Manager,
Sales and Marketing at Digital Equipment
Corporation from July 1997 to June 1998.
Vice President and General Manager--Personal
Computer Business Unit at Digital Equipment
Corporation from October 1995 to June 1997.
Senior management and executive positions at
International Business Machines Corporation
from April 1973 to October 1995.
Richard J. Davies (52)................. October 1998 Senior Vice President, Corporate Development
of Time Warner Cable since January 1999.
Senior Vice President of Time Warner Cable
Ventures from June 1996 to December 1998.
Chief Financial Officer of Time Warner
Telecom from March 1993 to June 1996.
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NAME AND AGE DIRECTOR SINCE PRINCIPAL OCCUPATION AND OTHER INFORMATION
------------ -------------- ------------------------------------------
Spencer B. Hays (55)................... October 1999 Senior Vice President and Deputy General
Counsel of AOL Time Warner Inc. since its
formation on January 11, 2001. Prior
thereto, Vice President and Deputy General
Counsel of Time Warner Inc. since its
formation in 1990.
Prior to 1990 employed in various capacities
by Time Warner Inc.'s predecessor, Warner
Communications Inc., most recently as Senior
Vice President and General Counsel.
William T. Schleyer (49)............... January 2001 Director, Wink Communications, Inc. since
January 1998.
President and Chief Operating Officer,
MediaOne, from November 1996 to October
1997.
President and Chief Operating Officer,
Continental Cablevision, Inc., from November
1994 to November 1996.
Robert J. Miron (62)................... July 1998 President of Advance/Newhouse Communications
since April 1995.
President of Newhouse Broadcasting
Corporation from October 1986 to April 1995.
STRUCTURE OF THE BOARD
Time Warner Telecom's directors are elected annually. The board of
directors currently has seven directors and two newly created directorships that
have not yet been filled.
At each annual stockholders meeting at which directors are elected, the
Class B Stockholders will vote their shares in favor of the following nominees:
-- up to eight nominees selected by the holders of Class B common stock;
-- the Chief Executive Officer of Time Warner Telecom; and
-- three nominees selected by the Nominating Committee who are neither
employed by nor affiliated with Time Warner Telecom or any holder of
Class B common stock.
The holders of the Class A common stock do not have the right, as a class,
under Time Warner Telecom's restated certificate of incorporation to nominate
any individuals for election to the board of directors.
COMMITTEES OF THE BOARD
Audit Committee. The Audit Committee reviews the internal accounting and
financial controls for Time Warner Telecom and the accounting principles and
auditing practices and procedures to be employed in the preparation and review
of financial statements of Time Warner Telecom. It also makes recommendations to
the board of directors regarding the appointment of Time Warner Telecom's
independent public accountants and the scope of their audit. The board of
directors established the Audit Committee in August 1999 and the committee held
one meeting in 1999. The members are the independent directors, Messrs. Claflin
and Schleyer.
Human Resources and Benefits Committee. The Human Resources and Benefits
Committee determines the salary, bonus and other compensation for our senior
management personnel and makes recommen-
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dations with respect to grants of options and other grants of Company equity
securities to senior management personnel and to directors of Time Warner
Telecom, subject to approval of such grants by the Compensation Committee. The
Human Resources and Benefits Committee also establishes policies with respect to
compensation of employees generally and any other matters that the board of
directors may delegate to the committee. The committee was established in August
1999 and its members are Messrs. Britt, Miron and Claflin. The Human Resources
and Benefits Committee members communicate with each other from time to time in
person and by telephone and act on matters by way of a formal meeting or by
unanimous written consent. The committee met twice in 1999.
Compensation Committee. The Compensation Committee approves option grants
to our senior officers and directors under Time Warner Telecom's 1998 Stock
Option Plan and future option plans and addresses other matters that the board
of directors may delegate to it. The committee also makes other determinations
regarding compensation matters that any tax, stock exchange or Federal
securities law or regulation requires to be made by a committee composed
entirely of independent or non-employee directors. The members are the
independent directors as defined by the Nasdaq National Market, Messrs. Claflin
and Schleyer. The Compensation Committee acted twice by unanimous written
consent and met twice in 1999.
Nominating Committee. The Nominating Committee consists of Messrs. Britt,
Davies, Hays and Miron. The Nominating Committee nominates the independent
directors. The committee met twice in 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a Compensation Committee until August 1999. Our Class B
Stockholders determined the compensation of our executive officers in effect at
the time of our initial public offering in May 1999, and that compensation was
approved by the board of directors, as reflected in the initial employment
agreements. Some of the members of the board of directors at that time were
employees or officers of the Class B Stockholders or their affiliates. In
addition, our Human Resources and Benefits Committee makes recommendations with
respect to some matters involving executive compensation. Mr. Britt, an officer
of an affiliate of Time Warner, is a member of the Human Resources and Benefits
Committee. We have described certain relationships and transactions between Time
Warner Telecom and Time Warner under "Certain Relationships and Related
Transactions."
COMPENSATION OF DIRECTORS
We do not compensate directors who are our employees or employees of any
Class B Stockholders or their affiliates for services as directors. We have a
target compensation of $60,000 per annum for independent directors of which
$12,500 is provided through an annual retainer plus a per meeting fee of $1,000
and $1,000 for serving as a Committee Chairman. The balance of the compensation
each year is paid in stock options of Time Warner Telecom at a rate of 500 per
quarter. The options are fully vested when granted.
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EXECUTIVE COMPENSATION
The following table summarizes the compensation we paid during 1998 and
1999 to the President and Chief Executive Officer and to each of the four other
most highly compensated executive officers of Time Warner Telecom as of the end
of 1999, based on salary and annual incentive plan bonus.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION AWARDS
------------------------
TIME
WARNER
TELECOM TIME
CLASS A WARNER INC.
COMMON COMMON
STOCK STOCK PAYOUTS
ANNUAL COMPENSATION UNDERLYING UNDERLYING ----------
--------------------------- OPTIONS OPTIONS LTIP ALL OTHER
NAME & PRINCIPAL POSITION YEAR(1) SALARY BONUS AWARDED(2) AWARDED(8) PAYOUTS(7) COMPENSATION(3)
------------------------- ------- ------- ------- ---------- ----------- ---------- ---------------
Larissa L. Herda.............. 1999 312,025 234,009 1,000,000 -- -- 8,000
President and Chief 1998 300,000 169,381 375,000 7,600 -- --
Executive Officer(4)
Paul B. Jones................. 1999 259,242 184,710 100,000 -- 96,900 8,000
Senior Vice President, 1998 259,242 171,748 166,000 16,700 134,400 --
General Counsel & Regulatory
Policy(5)
A. Graham Powers.............. 1999 182,500 132,311 100,000 -- 43,605 8,000
Senior Vice President 1998 175,479 118,448 100,000 7,600 60,480 --
Engineering & Technology(5)
David J. Rayner............... 1999 182,970 132,653 300,000 -- -- 8,000
Senior Vice President and 1998 171,000 94,792 125,000 7,600 -- --
Chief Financial Officer(5)
John T. Blount................ 1999 180,730 128,770 300,000 -- -- 8,000
Senior Vice President, 1998 170,500 65,963 100,000 -- -- --
Sales(6)
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(1) Time Warner Telecom's predecessor, Time Warner Telecom LLC, was created in
July 1998. Prior to that time, Time Warner Telecom operated as a division of
Time Warner Entertainment Company. The amounts shown for 1998 are the actual
salaries received by the named executive officers for 1998.
(2) Options awarded under Time Warner Telecom's 1998 Option Plan.
(3) Includes contributions made by Time Warner Telecom to its defined
contribution 401(k) plan on behalf of the named executive officers.
(4) Ms. Herda became President and Chief Executive Officer of Time Warner
Telecom on June 22, 1998. Prior to June 22, 1998, Ms. Herda served as the
Senior Vice President, Sales.
(5) Time Warner Telecom does not currently have its own pension plan. However,
Messrs. Jones, Powers and Rayner will, upon retirement, be entitled to
receive benefits under the Time Warner Cable Pension Plan based on service
to Time Warner Telecom and/or Time Warner Cable on or prior to December 31,
1998.
(6) As a result of his previous employment with U S WEST, Inc., the predecessor
of MediaOne, Mr. Blount and certain other former employees of U S WEST
participate in a pension plan under the administration of MediaOne. Mr.
Blount's benefits under that plan upon his retirement are based on service
to U S WEST and/or Time Warner Telecom.
(7) These payouts were made in 1999 to participants in the Time Warner Cable
Long-Term Cash-Flow Incentive Plan for the 1995-1998 four-year cycle.
(8) Options awarded under Time Warner Inc. stock option plans. No options under
Time Warner Inc. plans were awarded to the named executive officers during
1999.
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EMPLOYMENT AGREEMENTS
Time Warner Telecom has employment agreements with each of its current
executive officers shown in the Summary Compensation Table. Among other things,
these agreements provide for:
-- a five-year term for Ms. Herda, four-year term for Messrs. Blount and
Rayner, and three-year terms for Messrs. Jones and Powers, commencing
January 1, 2000;
-- an annual salary and an annual bonus at the discretion of Time Warner
Telecom, generally targeted at 50%-75% of the named executive's
salary; and
-- participation in any pension, profit-sharing, employee equity
ownership, vacation, insurance, hospitalization, medical, health,
disability and other employee benefit or welfare plan, program or
policy that Time Warner Telecom may adopt if employees at the
executive's level are eligible under the provisions of the plan or
program.
The minimum annual salaries under the agreements in effect in 2000 are
$300,000 for Ms. Herda; $259,000 for Mr. Jones; $175,497 for Mr. Powers;
$171,000 for Mr. Rayner and $170,500 for Mr. Blount.
The agreements include a narrow definition of the term "cause." If the
contract is terminated for cause, the executive will only receive earned and
unpaid base salary accrued through such date of termination.
These agreements provide that if Time Warner Telecom materially breaches or
terminates the executive's employment during the term without cause, the
executive may elect either:
-- to receive a lump-sum payment of the present value of the base salary
and annual bonus otherwise payable during the remaining term of
employment, but not less than the sum of such salary and bonus
prorated for an 18-month period; or
-- to remain an employee of Time Warner Telecom for up to 18 months and,
without performing any services, receive the base salary and annual
bonus otherwise payable.
The executives have the same two options if a change of control occurs and
that change results in:
-- a change of more than 50 miles in the location of the executive's
office or Time Warner Telecom's principal executive offices;
-- a material reduction in the executive's responsibilities; or
-- Time Warner Telecom's material breach of the agreement.
The agreements define change of control to mean that:
-- the Class B Stockholders cease to have the ability as a group to
elect a majority of Time Warner Telecom's board of directors;
-- another person or group has become the beneficial owner of more than
35% of the total voting power of Time Warner Telecom's voting
interests; and
-- the percentage voting interest of that person or group is greater
than that held by the Class B Stockholders.
Executives are not generally required to mitigate damages after such a
termination, except as necessary to prevent Time Warner Telecom from losing any
tax deductions that it otherwise would have been entitled to for any payments
deemed to be "contingent on a change" under the Internal Revenue Code.
If an executive becomes disabled during the term of his or her employment
agreement, the executive typically will receive 75% of the executive's then
current salary and his or her applicable target annual bonus amount prorated for
an 18-month period. These payments will be reduced by amounts received from
worker's compensation, Social Security and disability insurance policies
maintained by Time Warner Telecom.
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If an executive dies during the term of an employment agreement, generally
the executive's beneficiaries will receive the executive's earned and unpaid
salary up to thirty days after the date of death and a pro rata portion of the
executive's bonus for the year of death.
STOCK OPTIONS AWARDED BY TIME WARNER TELECOM DURING 1999
The following table lists our grants during 1999 of stock options to the
officers named in the "Summary Compensation Table." All of the options were
nonqualified under the tax code and Time Warner Telecom did not award any stock
appreciation rights. The amounts shown as potential realizable values rely on
arbitrarily assumed increases in value required by the Securities and Exchange
Commission. In assessing those amounts, please note that the ultimate value of
the options, as well as your shares, depends on actual future share prices.
Market conditions and the efforts of the directors, the officers and others to
foster the future success of Time Warner Telecom can influence those future
share values.
OPTION GRANTS IN 1999
INDIVIDUAL GRANTS(1)
-------------------------------------- POTENTIAL REALIZABLE
NUMBER % OF TOTAL VALUE AT ASSUMED
OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM
OPTIONS IN 1999 BASE PRICE EXPIRATION -------------------------
NAME GRANTED(2) FISCAL YEAR ($/SHARE) DATE 5%(1) 10%(1)
---- ---------- ----------- ----------- ---------- ----------- -----------
Larissa L. Herda..... 1,000,000 33.9% $34.50 11/17/09 $21,696,864 $54,984,114
Paul B. Jones........ 100,000 3.4% 34.50 11/17/09 2,169,686 5,498,411
A. Graham Powers..... 100,000 3.4% 34.50 11/17/09 2,169,686 5,498,411
David J. Rayner...... 300,000 10.2% 34.50 11/17/09 6,509,059 16,495,234
John T. Blount....... 300,000 10.2% 34.50 11/17/09 6,509,059 16,495,234
- ------------
Total shares granted to all employees in 1999: 2,950,750(2)
(1) The options shown in the above table were awarded to the named executive
officers under Time Warner Telecom's 1998 Option Plan and the terms are
governed by that plan and the recipient's option agreement. The exercise
price is the fair market value of the Class A common stock on the date of
grant. The options become exercisable over a four-year vesting period and
expire ten years from the date of grant. As required by Securities and
Exchange Commission rules, the dollar amounts in the last two columns
represent the hypothetical gain or "option spread" that would exist for the
options based on assumed 5% and 10% annual compounded rates of Class A
common stock appreciation over the full ten-year option term (resulting in
63% and 159% appreciation, respectively). These assumed rates of
appreciation applied to the exercise price would result in a Class A common
stock value on November 17, 2009 of $56.20 and $89.48, respectively. These
prescribed rates are not intended to forecast possible future appreciation,
if any, of the Class A Common Stock.
(2) The options granted to all employees in 1999 include options to purchase
100,000 shares that were granted outside of Time Warner Telecom's 1998
Option Plan.
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OPTION EXERCISES AND VALUES IN 1999
None of the named executive officers listed under the heading "Option
Grants in the Last Fiscal Year" exercised options in 1999. The table below shows
the number and value of their exercisable and non-exercisable options as of
December 31, 1999.
AGGREGATED OPTION EXERCISES IN 1999 YEAR AND 1999 YEAR-END OPTION VALUES TABLE
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES VALUE YEAR-END FISCAL YEAR-END
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE(#) ON EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
Larissa H. Herda..... -- -- 140,625 1,234,375 $5,335,031 $24,329,719
Paul B. Jones........ -- -- 62,250 203,750 2,361,641 5,479,868
A. Graham Powers..... -- -- 37,500 162,500 1,422,675 3,914,925
David J. Rayner...... -- -- 46,875 378,125 1,778,344 7,595,306
John T. Blount....... -- -- 37,500 362,500 1,422,675 7,002,525
The in-the-money value of unexercised options is equal to the excess of the
per share market price of our Class A common stock at December 31, 1999 ($49.94)
over the per share exercise price, multiplied by the number of unexercised
options.
The following table lists for each of the named executive officers
information with respect to option exercises during 1999 and the status of their
options on December 31, 1999:
-- the number of shares of Time Warner common stock, or MediaOne common
stock in the case of Mr. Blount, underlying options exercised during
1999;
-- the aggregate dollar value realized upon exercise of such options;
-- the total number of shares of Time Warner common stock or of MediaOne
common stock in the case of Mr. Blount, underlying exercisable and
nonexercisable stock options held on December 31, 1999; and
-- the aggregate dollar value of in-the-money exercisable and
nonexercisable stock options on December 31, 1999.
None of the named executive officers has been awarded stock appreciation
rights alone or in tandem with options.
AGGREGATE OPTION EXERCISES OF TIME WARNER AND MEDIAONE OPTIONS IN
1999 YEAR END AND 1999 YEAR-END OPTION VALUES TABLE
NUMBER OF SHARES
NUMBER OF UNDERLYING UNEXERCISED DOLLAR VALUE OF UNEXERCISED
SHARES OPTIONS ON IN-THE-MONEY OPTIONS ON
UNDERLYING DOLLAR VALUE DECEMBER 31, 1999 DECEMBER 31, 1999*
OPTIONS REALIZED ON ---------------------------- -----------------------------
NAME EXERCISED EXERCISE EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
---- ---------- ------------ ----------- -------------- ----------- ---------------
Larissa L. Herda..... -- $ -- 17,600 -- $ 766,772 $ --
Paul B. Jones........ 101,778 4,133,526 16,698 -- 671,594 --
A. Graham Powers..... 10,000 475,627 34,600 -- 1,635,207 --
David J. Rayner...... 3,868 170,720 5,732 -- 179,691 --
John T. Blount....... -- -- 521 -- 32,583 --
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* Based on a closing price of $72.31 per share of Time Warner common stock, and
$76.81 per share of MediaOne common stock with respect to stock options held
by Mr. Blount, on December 31, 1999 as reported on the New York Stock Exchange
Composite Listing.
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The option exercise price of all options held by the named executive
officers is the fair market value of the stock on the date of grant. All of the
options held by the named executive officers become immediately exercisable in
full upon the occurrence of certain events, including the death or total
disability of the option holder, certain change-of-control transactions and, in
most cases, Time Warner Telecom's breach of the holder's employment agreement.
The Time Warner options held by the named executive officers generally remain
exercisable for three years after their employment is terminated without cause,
for one year after death or total disability, for five years after retirement
and for three months after termination for any other reason, except that such
stock options awarded before 1996 are exercisable for three months after a
termination without cause and after retirement and those awarded after July 1997
are exercisable for three years after death or disability. All Time Warner
options terminate immediately if the holder's employment is terminated for
cause. The terms of the options shown in the chart are ten years.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Time Warner Telecom's restated certificate of incorporation limits the
liability of Time Warner Telecom's directors to the fullest extent permitted by
the Delaware General Corporation Law. In addition, Time Warner Telecom's
restated certificate of incorporation provides that Time Warner Telecom shall
indemnify directors and officers of Time Warner Telecom to the fullest extent
permitted by that law. Time Warner Telecom has entered into separate
indemnification agreements with its current directors and executive officers
which have the effect of providing such persons indemnification protection in
the event Time Warner Telecom's restated certificate of incorporation is
subsequently amended.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT
The Class B Stockholders entered into a Stockholders Agreement in
connection with the Reconstitution in May 1999. These Class B Stockholders
presently hold all of Time Warner Telecom's Class B common stock. We cannot
assure you that the Class B Stockholders will not change the Stockholders
Agreement or terminate it or cause Time Warner Telecom to waive any provision of
such agreement.
Under the Stockholders Agreement, AOL Time Warner (as successor by merger
to Time Warner) initially has the right to designate four nominees for the board
of directors at each annual stockholders meeting at which directors are elected.
AT&T (as successor by merger to MediaOne) has the right to designate three
nominees and the Advance/Newhouse stockholder group has the right to designate
one. The Class B Stockholders' ability to designate any nominees depends on the
identity of the particular stockholder and the percentage of shares of common
stock owned by it. The Stockholders Agreement provides that the percentage of
common stock that each Class B Stockholder must own in order to have the right
to nominate directors will be adjusted over time to reflect new issuances of
common stock by Time Warner Telecom. As of June 30, 2000, each Class B
Stockholder must own at least 7.28% of the common stock to appoint one director.
AOL Time Warner is entitled to nominate four directors so long as it owns at
least 14.55% of the common stock. If AOL Time Warner owns less than 14.55% of
the common stock ("Time Warner Step Event"), the number of directors that AOL
Time Warner may nominate decreases proportionally with its ownership of the
common stock until it owns less than 7.28%. AT&T is entitled to nominate three
directors as long as it owns at least 7.28% of the common stock. If a Time
Warner Step Event occurs, the number of directors that AT&T is entitled to
nominate decreases proportionally with its ownership of the common stock. The
Advance/Newhouse stockholder group is entitled to nominate one director as long
as it owns at least 7.28% of the common stock. None of the Class B Stockholders
have the right to designate nominees if they own less than 7.28% of the common
stock. These percentages continue to adjust from time to time if Time Warner
Telecom issues additional shares of common stock or takes actions such as stock
splits or recapitalizations so as to maintain the same relative rights. As a
result of MediaOne's underwritten offering on May 1, 2000, of 9,000,000 shares
of Class A common stock of Time Warner Telecom, MediaOne (and subsequently AT&T)
was no longer entitled to nominate three members of Time Warner Telecom's board
of directors and the three directors nominated by MediaOne have resigned.
The Stockholders Agreement requires the Class B Stockholders to vote their
shares in favor of:
-- the nominees selected by the Holders of Class B common stock, as
previously described;
-- the Chief Executive Officer of Time Warner Telecom; and
-- three nominees who are not affiliated with Time Warner Telecom or any
holder of Class B common stock and are selected by the Nominating
Committee.
The Stockholders Agreement prohibits the Class B Stockholders from any
transfer of Class B common stock, unless expressly permitted by the agreement.
In addition, the Stockholders Agreement prohibits any of the Class B
Stockholders from entering into voting agreements relating to the Class B common
stock with any third party.
If a Class B Stockholder wants to sell all of its Class B common stock
pursuant to a bona fide offer from an unaffiliated third party, that stockholder
must give notice (the "Refusal Notice") to all Class B Stockholders. The notice
must contain the identity of the offeror and offer to sell the stock to the
other Class B Stockholders upon the same terms and subject to the conditions as
the offer from the third party. The non-selling holders of Class B common stock
will have the right to purchase pro rata all, but not less than all, of the
Class B common stock. If the non-selling holders fail to exercise their right to
purchase all of the shares, the selling Class B Stockholder is free, for a
period of 90 days, to sell the shares of Class B common stock (as shares of
Class B common stock) to the third party offeror on terms and conditions no less
favorable to the selling Class B Stockholder than those contained in the Refusal
Notice. A Class B Stockholder may transfer
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all of its right to nominate Class B nominees for election to the board of
directors if it sells all of its shares Class B common stock. If AOL Time Warner
wants to sell all of its Class B common stock and its Class A common stock that
represent more than one-third of the outstanding shares of common stock, the
other holders of Class B common stock will have certain "tag-along" rights.
These rights provide them the right to sell their shares of Class A common stock
and Class B common stock on a pro rata basis along with, and on the same terms
and conditions as AOL Time Warner. In that sale, AOL Time Warner (and any other
stockholder transferring all of its shares of Class B common stock) will have
the right to transfer its right to nominate Class B nominees for election to the
board of directors.
Except for transfers to affiliates and the other transfers described above,
all shares of Class B common stock must be converted to Class A common stock
immediately prior to any direct transfer or certain indirect transfers of Class
B common stock. In addition, except for transfers described in the paragraph
above, a stockholder will not have the right to transfer its right to nominate
Class B nominees. A Class B Stockholder that is acquired by a third party or
spins off to its stockholders a company holding its shares of Class B common
stock (as well as other assets), is required to convert its shares into Class A
common stock and its right to nominate Class B nominees to the board of
directors will not terminate.
The Class B Stockholders have demand registration rights for shares of
Class A common stock (including shares of Class A common stock resulting from
the conversion of shares of Class B common stock) if they wish to register Class
A common stock constituting at least 1% of the total outstanding Class A common
stock. Once Time Warner Telecom has registered shares of Class A common stock as
a result of a demand registration, it is not required to register shares again,
pursuant to a Class B Stockholder demand, until 180 days after the first
registration statement is effective. In addition, each Class B Stockholder may
require Time Warner Telecom to include its shares in certain other registered
offerings under the Securities Act of 1933, subject to certain conditions. Each
Class B Stockholder must pay all underwriting discounts, commissions and
transfer taxes attributable to the sale of its shares. Time Warner Telecom will
pay all expenses relating to the filing and effectiveness of a registration
statement, the legal fees of one counsel representing the Class B Stockholders
and the auditors' fees and expenses.
RESTATED CERTIFICATE OF INCORPORATION
Our restated certificate of incorporation prohibits us from (i) engaging in
the business of providing, offering, packaging, marketing, promoting or branding
(alone or jointly with or as an agent for other parties) any residential
services, or (ii) producing or otherwise providing entertainment, information or
other content services, without the consent of all the Class B Stockholders.
This prohibition expires in May 2004 or earlier if the Class B Stockholders no
longer hold 50% of the total voting power for the board of directors.
CERTAIN OPERATING AGREEMENTS
Capacity License Agreements. We currently license much of our fiber
capacity from Time Warner Cable. Each of our local operations where Time Warner
Cable has a network is party to a Capacity License Agreement with the local
cable television operation of Time Warner Cable, providing us with a 30 year
exclusive right to use all of the capacity of specified fiber-optic cable owned
by the Time Warner Cable operation. The Capacity Licenses for network that
existed as of July 1998 have been fully paid and do not require additional
license fees. However, we must pay certain maintenance fees and fees for
splicing and similar services. We may request that Time Warner Cable construct
and provide additional fiber-optic cable capacity to meet our future needs. Time
Warner Cable is not obligated to provide such fiber capacity to us. If Time
Warner Cable provides additional capacity, we must pay an allocable share of the
cost of construction of the fiber upon which capacity is to be provided, plus a
permitting fee. We are responsible for all taxes and franchise or similar fees
arising out of our use of the capacity, and a portion of other out-of-pocket
expenses incurred by Time Warner Cable for the cable use to provide us the
capacity. We are permitted to use the capacity for telecommunications services
and any other lawful purpose, but not for the provision of residential services
and content services. If we violate the limitations on our business activities
contained in our the restated certificate of incorporation or the Capacity
License Agreements, Time Warner Cable may terminate the Capacity License
Agreements. Accordingly, the Capacity License Agreements restrictions will apply
after
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the restrictions in the restated certificate of incorporation have terminated.
Although management does not believe that the restrictions contained in the
Capacity License Agreements will materially affect our business and operations
in the immediate future, we cannot predict the effect of such restrictions in
the rapidly changing telecommunications industry.
The Capacity License Agreements do not restrict us from licensing
fiber-optic capacity from parties other than Time Warner Cable. The Capacity
License Agreements expire in 2028. Although Time Warner Cable has agreed to
negotiate renewal or alternative provisions in good faith at that time, we
cannot assure that the parties will agree on the terms of any renewal or
alternative provisions or that the terms of any renewal or alternative
provisions will be favorable to us. If the Capacity License Agreements are not
renewed in 2028, we will have no further interest in the capacity under the
Capacity License Agreements and may need to build, lease or otherwise obtain
transmission capacity in order to serve our customers in the service areas
covered by the Capacity License Agreements. The terms of such arrangements could
have a material adverse effect on our business, financial condition and results
of operations. We have the right to terminate a Capacity License Agreement in
whole or in part at any time upon 180 days' notice and payment of any
outstanding fees regarding the terminated capacity. Time Warner Cable has the
right to terminate a Capacity License Agreement upon 180 days' notice in the
event of, among other things, certain governmental proceedings or third party
challenges to Time Warner Cable's franchises or a Capacity License Agreement.
The Capacity License Agreements include substantial limitations on liability for
service interruptions.
Facility Lease Agreements. We lease or sublease physical space located at
Time Warner Cable's facilities for various purposes under Facility Lease
Agreements. If certain events occur we will be required, at our own expense, to
segregate and partition our space in a reasonable, secure manner. Those events
are:
-- at least a majority of any Time Warner Cable system is not owned by
one or more of the Class B Stockholders;
-- Time Warner owning less than 30% of Time Warner Telecom's common
stock;
-- Time Warner having the right to nominate less than three nominees to
our board of directors;
-- our non-compliance with the restrictions in the restated certificate
of incorporation regarding residential services and content services;
or
-- a Class B Stockholder transferring its Class B common stock together
with its rights to designate nominees to the board of directors under
the Stockholders Agreement.
The lease rates for properties Time Warner Cable owns and leases to us are
based upon comparable rents in the local market, taking into account other
factors such as the term of the lease, type of space, square footage, location
and leasehold improvements funded. Generally, the leases have 15-year terms,
with two five year options to renew. For properties Time Warner Cable subleases
to us, we pay a pro rata portion of the rent and fees payable under the primary
lease. The duration of our subleases are as long as Time Warner Cable's primary
lease.
Services Agreement. Time Warner Cable provides us certain tax and
management information systems and support services pursuant to the
Administrative Services Agreement. Time Warner Cable determines the costs for
such services based upon our historical and projected usage, depending on the
amount and type of administrative services to be provided.
Residential Support Agreements. We provide certain support services or
service elements, on an unbundled basis, to Time Warner Cable for its
residential telephony business. Generally, we may adjust all rates for such
residential support services we provide to Time Warner Cable annually, but the
rates may not be less favorable than the rates we charge other customers for
comparable services.
Time Warner License Agreement. We use the "Time Warner" name under a
license agreement with Time Warner. We may change our name to "TW Telecom Inc."
and will no longer have the right to use the
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"Time Warner" name when the initial four year term or any renewal term expires.
We must also discontinue using the "Time Warner" name if:
-- Time Warner owns less than 30% of Time Warner Telecom's common stock;
-- Time Warner has the right to nominate less than three nominees to our
board of directors;
-- our non-compliance with the restrictions in the restated certificate
of incorporation regarding residential services and content services;
or
-- a Class B Stockholder transfers its Class B common stock together
with its rights to designate nominees to the board of directors under
the Stockholders Agreement.
This name change, and the inability to use the "Time Warner" name, could
adversely effect our ability to conduct our business and our financial condition
and results of operations.
We believe that the terms and conditions, taken as a whole, of the
transactions described under the headings "Capacity License Agreements,"
"Facility Lease Agreements," "Services Agreement," "Residential Support
Agreements" and the "Time Warner License Agreement" were no less favorable to us
than we could have obtained from unaffiliated parties.
The Class B Stockholders hold all of our Class B common stock and have the
collective ability to control all matters requiring stockholder approval,
including the election of directors. All of the Class B Stockholders are in the
cable television business and may provide the same services or similar services
to those we provide. There is no restriction on the Class B Stockholders'
ability to compete with Time Warner Telecom and we cannot assure that the Class
B Stockholders will not compete with Time Warner Telecom. Our directors, who are
also directors, officers or employees of the Class B Stockholders, may encounter
conflicts of interest in certain business opportunities available to, and
certain transactions involving, Time Warner Telecom. The Class B Stockholders
have not adopted any special voting procedures to deal with conflicts of
interest, and we cannot assure that any conflict will be resolved in Time Warner
Telecom's favor.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the equity securities of Time Warner Telecom as of January 24,
2001:
- each owner of more than 5% of any class of equity securities of Time
Warner Telecom;
- each of the directors and the named executive officers; and
- all directors and executive officers as a group.
To Time Warner Telecom's knowledge, each person, along with his or her
spouse, has sole voting and investment power over the shares unless otherwise
noted. Information in the first table is as of the latest reports by those
entities received by Time Warner Telecom. Ownership includes direct and indirect
(beneficial) ownership, as defined by SEC rules. Each executive officer's
address is c/o Time Warner Telecom, 10475 Park Meadows Drive, Littleton, CO
80124.
CLASS A COMMON STOCK(1)(2) CLASS B COMMON STOCK(1)(2)
-------------------------------- ---------------------------------
PERCENT OF CLASS PERCENT OF CLASS
-------------------- --------------------
PRIOR TO FOLLOWING PRIOR TO FOLLOWING
NO. OF THE THE NO. OF THE THE
NAME OF BENEFICIAL OWNER SHARES OFFERING OFFERING SHARES OFFERING OFFERING
- ------------------------ --------- -------- --------- ---------- -------- ---------
FIVE PERCENT
STOCKHOLDERS:
AOL Time Warner(3)....... -- -- -- 50,363,739 69.7% 69.7%
AT&T..................... -- -- -- 6,289,842 8.7% 8.7%
Newhouse Telecom Holdings
Corp.(4) ............... -- -- -- 9,536,856 13.2% 13.2%
Advance Telecom Holdings
Corp.(4) ............... -- -- -- 6,036,063 8.4% 8.4%
Putnam Investment
Management, Inc.(8)..... 2,979,150 8.8% 7.2% -- -- --
INVESCO Funds Group,
Inc.(6)................. 2,914,550 8.6% 7.1% -- -- --
MFS Investment
Management.............. 1,715,530 5.1% 4.2% -- -- --
FMR Corp.(5)............. 4,873,550 14.5% 11.8% -- -- --
DIRECTORS AND EXECUTIVE
OFFICERS:
Larissa L. Herda......... 249,375 * * -- -- --
Glenn A. Britt........... -- -- -- --
Bruce Claflin............ 1,700 * * -- -- --
Richard J. Davies........ -- -- -- --
Spencer B. Hays.......... 2,000 * * -- -- --
William T. Schleyer...... -- -- -- --
Robert J. Miron.......... 7,500 * * -- -- --
David J. Rayner.......... 78,125 * * -- -- --
Paul B. Jones............ 110,750 * * -- -- --
John T. Blount........... 62,500 * * -- -- --
A. Graham Powers......... 63,500 * * -- -- --
All directors and
executive officers as a
group (14 persons)(7)... 730,880 2.2% 1.8% -- -- --
TOTAL COMMON STOCK
---------------------------------------------
% OF
PERCENT OF EQUITY VOTING
-------------------- POWER
PRIOR TO FOLLOWING FOLLOWING
NO. OF THE THE THE
NAME OF BENEFICIAL OWNER SHARES OFFERING OFFERING OFFERING
- ------------------------ ---------- -------- --------- ---------
FIVE PERCENT
STOCKHOLDERS:
AOL Time Warner(3)....... 50,363,739 47.5% 44.4% 66.0%
AT&T..................... 6,289,842 5.9% 5.5% 8.2%
Newhouse Telecom Holdings
Corp.(4) ............... 9,536,856 9.0% 8.4% 12.5%
Advance Telecom Holdings
Corp.(4) ............... 6,036,063 5.7% 5.3% 7.9%
Putnam Investment
Management, Inc.(8)..... 2,979,150 2.8% 2.6% *
INVESCO Funds Group,
Inc.(6)................. 2,914,550 2.8% 2.6% *
MFS Investment
Management.............. 1,715,530 1.6% 1.5% *
FMR Corp.(5)............. 4,873,550 4.6% 4.3% *
DIRECTORS AND EXECUTIVE
OFFICERS:
Larissa L. Herda......... 249,375 * * *
Glenn A. Britt........... --
Bruce Claflin............ 1,700 * * *
Richard J. Davies........ --
Spencer B. Hays.......... 2,000 * * *
William T. Schleyer...... --
Robert J. Miron.......... 7,500 * * *
David J. Rayner.......... 78,125 * * *
Paul B. Jones............ 110,750 * * *
John T. Blount........... 62,500 * * *
A. Graham Powers......... 63,500 * * *
All directors and
executive officers as a
group (14 persons)(7)... 730,880 * * *
- ------------
* Represents less than one percent.
(1) Time Warner Telecom has two classes of outstanding common stock, the Class A
common stock and the Class B common stock. Beneficial ownership of common
stock has been determined in accordance with the rules of the Securities and
Exchange Commission, which is based upon having or sharing the power to vote
or dispose of shares. Includes shares of Class A common stock issuable upon
exercise of options exercisable within 60 days of December 31, 2000, as
follows: Ms. Herda -- 234,375 shares; Mr. Rayner -- 78,125 shares; Mr.
Jones -- 103,750 shares; Mr. Blount -- 62,500 shares; Mr. Powers -- 62,500
shares; and all directors and executive officers as a group -- 677,250
shares.
(2) Excludes an equal amount of Class A common stock into which Class B common
stock are convertible. The Class B common stock held by AOL Time Warner,
AT&T, Newhouse Telecom Holdings Corporation, and Advance Telecom Holdings
Corporation, represented on a converted basis 47.5%, 5.9%, 9.0% and 5.7%,
respectively, of the Class A common stock prior to the offering.
(3) Owned by Time Warner Companies, Inc., American Television and Communications
Corporation, Warner Communications, Inc., TW/TAE, Inc., FibrCOM Holdings,
L.P. and Paragon Communications, each a direct or indirect wholly owned
subsidiary of AOL Time Warner Inc. The business address of AOL Time Warner
Inc. is 75 Rockefeller Plaza, New York, NY 10019.
(4) The business address of Advance Telecom Holdings Corporation and Newhouse
Telecom Holdings Corporation is 5015 Campuswood Drive, East Syracuse, NY
13057.
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(5) Based on a Schedule 13G dated March 10, 2000. The business address of FMR
Corp. is 82 Devonshire Street, Boston, Massachusetts 02109.
(6) Based on a Schedule 13G dated January 9, 2001, the business address of
INVESCO Funds Group, Inc. is 7800 E. Union Avenue, Denver, Colorado 80237.
(7) Solely as a result of the agreement of the Class B Stockholders to vote in
favor of the others' director nominees under the stockholders agreement, the
Class B Stockholders may be deemed to share beneficial ownership of the
shares beneficially owned by each of them. See "Certain Relationships and
Related Transactions -- Stockholders Agreement."
(8) Based on a Schedule 13G dated November 13, 2000, this interest is held by
Putnam Investments, Inc. and related affiliates. The business address for
Putnam Investments, Inc. is One Post Office Square, Boston, Massachusetts
02109.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
9 3/4% SENIOR NOTES
On July 21, 1998, Time Warner Telecom completed the public offering of $400
million aggregate principal amount of the 9 3/4% Senior Notes. For the purposes
of this section only, the term "obligor" refers to Time Warner Telecom:
The 9 3/4% Senior Notes are unsecured unsubordinated obligations ranking
equally in right of payment with all existing and future unsubordinated
indebtedness and senior in right of payment to all subordinated indebtedness of
the obligor. Interest on the 9 3/4% Senior Notes will accrue at the rate of
9 3/4% per annum payable semiannually on January 15 and July 15. The 9 3/4%
Senior Notes will be subject to redemption at the option of the obligor, in
whole or in part, at any time on or after July 15, 2003, initially at 104.875%
of their principal amount and declining to 100% of their principal amount at
maturity on or after July 15, 2006, plus accrued and unpaid interest to the
applicable redemption date. In addition, at any time prior to July 15, 2001, in
the event of an offering of the common stock of Time Warner Telecom for cash,
the obligor may, at its option, within 90 days of an offering, use the net
proceeds of the offering to redeem up to 35% of the aggregate principal amount
at maturity of the 9 3/4% Senior Notes at a redemption price of 109.75% of the
principal amount on the redemption date; provided that at least 65% of the
aggregate principal amount at maturity of the 9 3/4% Senior Notes originally
issued remain outstanding immediately after each redemption. Upon the occurrence
of a change of control under the indenture, the obligor must commence an offer
to purchase the 9 3/4% Senior Notes then outstanding at a purchase price of 101%
of their principal amount; provided that the obligor shall not be required to
commence an offer to purchase if, at any time within 30 days of the later of the
occurrence of the change of control and the end of the change of control period,
the 9 3/4% Senior Notes shall be rated investment grade under the indenture.
The indenture limits, and in some circumstances prohibits, the ability of
Time Warner Telecom (and its restricted subsidiaries) to:
-- incur additional debt;
-- pay dividends;
-- make investments or other restricted payments;
-- engage in transactions with stockholders and affiliates;
-- create liens;
-- sell assets;
-- issue or sell capital stock of subsidiaries; and
-- engage in mergers and consolidations.
The indenture also provides for the repayment of subordinated debt,
including the subordinated indebtedness to affiliates of the Class B
Stockholders, prior to maturity with the net proceeds of any offering of Common
Stock or equivalent interests of Time Warner Telecom.
SENIOR SECURED CREDIT FACILITY
On December 8, 2000, we entered into a senior secured credit agreement with
The Chase Manhattan Bank, Morgan Stanley Senior Funding and certain other
lenders, which took effect on January 10, 2001, and amends, restates and
supersedes our $475 million senior secured credit facility in its entirety. The
senior secured credit facility provides for an aggregate of $1 billion in
borrowings, comprised of $525 million of senior secured term loan facilities and
a $475 million senior secured revolving credit facility. We also have the option
to increase the size of the senior secured credit facility with the consent of
the participating banks. Borrowings under the senior secured credit facility
will be made by Time Warner Telecom Holdings Inc., one of our wholly owned
subsidiaries.
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On January 10, 2001, we made a term loan borrowing of $250 million as
discussed more fully below. The proceeds of the $250 million term loan, along
with the revolving credit facility and the remaining amounts available under the
term loan facilities, will be used for capital expenditures, purchase of network
assets, working capital and general corporate purposes.
The $525 million term loan portion of the senior secured credit facility
consists of a $275 million delayed-draw term facility and a $250 million tranche
B term facility. Under the delayed-draw facility, we have the ability to make
multiple borrowings (up to 10 drawings) for up to 24 months after the initial
funding date for the senior secured credit facility, which occurred on January
10, 2001, and coincided with the closing date for the GST asset purchase.
Borrowings under the delayed-draw facility will not be available after the
expiration of the 24 month period. Amounts borrowed under the delayed-draw
facility will be repaid in quarterly installments beginning in 2003, with the
final installment due on December 31, 2007. The entire amount of the tranche B
facility, $250 million, was borrowed on the initial funding date. The tranche B
loan will be repaid in nominal amounts beginning in 2003, with substantially all
of the principal due in a final installment on March 31, 2008.
Loans under the delayed draw and revolving credit facilities will bear
interest initially at a yearly rate equal to:
-- for any base rate loans, the banks' announced base rate under the
senior secured credit facility plus an applicable margin of 1.75%;
and
-- for any LIBOR loans, the eurodollar rate plus an applicable margin of
2.75%.
The applicable margins may be reduced based upon our financial performance.
Our $250 million tranche B term loan will bear interest initially at a
yearly rate equal to:
-- to the extent that this loan is treated as a base rate loan, the
banks' announced base rate under the senior secured credit facility
plus an applicable margin of 3.00%; and
-- to the extent that this loan is treated as a LIBOR loan, the
eurodollar rate plus an applicable margin of 4.00%.
We are required to pay customary commitment fees on a quarterly basis on
the undrawn available commitments and we paid certain underwriting, escrow and
arrangement fees on the initial funding date.
Our obligations under the senior secured credit facility are secured by
substantially all of the assets of our subsidiaries, including the acquired GST
assets, together with any assets that may be acquired in the future. We also
have pledged the capital stock of all of our subsidiaries as collateral.
We are required to prepay any amounts that we have borrowed with the
proceeds we receive from a number of specified events or transactions. In
addition, our obligations under the senior secured credit facility are subject
to various covenants that will limit our ability to:
-- borrow and incur liens on our property;
-- pay dividends or make other distributions; and
-- make capital expenditures.
The senior secured credit facility also contains financial covenants,
including a consolidated and senior debt leverage ratio, a consolidated interest
coverage ratio and a consolidated debt service coverage ratio. In addition, the
senior secured credit facility contains customary events of default, including
cross default provisions. Under the cross default provisions, we will be deemed
to be in default under the senior secured credit facility if we have defaulted
under any of our other material outstanding obligations, such as our Senior
Notes or under the senior unsecured bridge loan facility described below.
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SENIOR UNSECURED BRIDGE LOAN FACILITY
On December 15, 2000, we entered into a senior unsecured bridge loan
agreement with Morgan Stanley Senior Funding, Lehman Commercial Paper Inc., The
Chase Manhattan Bank, Bear Stearns Corporate Lending Inc. and ABN AMRO Bank N.V.
On January 10, 2001, we borrowed $700 million under the senior unsecured bridge
loan facility to finance the purchase of the GST assets and pay related fees and
expenses. On January 29, 2001, we repaid the borrowings under the senior
unsecured bridge loan facility with the net proceeds from our offering of Class
A common stock and a portion of the net proceeds from our sale of the old notes.
No additional borrowings are available under the senior unsecured bridge loan
facility.
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DESCRIPTION OF THE NEW NOTES
The new notes will be issued under the indenture, dated as of January 29,
2001, between Time Warner Telecom and The Chase Manhattan Bank, as trustee,
under which the old notes were issued. A copy of the indenture is available upon
request from Time Warner Telecom.
The terms of the new notes will be substantially identical to the terms of
the old notes, except that the new notes will not contain terms with respect to
transfer restrictions and will not require the issuers to complete a registered
exchange offer. Except as described in the previous sentence, the new notes will
evidence the same debt as the old notes and will be entitled to the same
benefits under the indenture as the old notes. Accordingly, unless specifically
stated to the contrary, the following description applies equally to the old
notes and the new notes.
The following summary of certain provisions of the indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the indenture, including the definitions of
certain terms in the indenture and those terms made a part of the indenture by
reference to the Trust Indenture Act of 1939, as amended. Whenever particular
defined terms of the indenture not otherwise defined herein are referred to,
such defined terms are incorporated herein by reference. For definitions of
certain capitalized terms used in the following summary, see "--Certain
Definitions."
GENERAL
The notes will be unsecured unsubordinated obligations of Time Warner
Telecom and will mature on February 1, 2011.
Interest on the notes will be payable semiannually (to holders of record at
the close of business on the January 15 or July 15 immediately preceding the
interest payment date) on February 1 and August 1 of each year, commencing
August 1, 2001. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
Principal of, premium, if any, and interest on the notes will be payable,
and the notes may be exchanged or transferred, at the office or agency of Time
Warner Telecom in the Borough of Manhattan, The City of New York (which
initially will be the corporate trust officer of the Trustee at The Chase
Manhattan Bank, Corporate Trust Securities Window, Room 234, 55 Water Street,
New York, NY 10041; provided, however, that at Time Warner Telecom's option,
payment of interest may be made by check mailed to the Holders at their
addresses as they appear in the security register maintained for the notes.
The notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple of $1,000.
See "Book-Entry, Delivery and Form." No service charge will be made for any
registration of transfer or exchange of notes, but Time Warner Telecom may
require payment of a fee to cover any transfer tax or other similar governmental
charge payable in connection with a registration of transfer or exchange.
Time Warner Telecom may, subject to the covenants described below under
"--Certain Covenants" and applicable law, issue additional notes under the
indenture. The notes offered under this prospectus and any additional notes
subsequently issued would be treated as a single class for all purposes under
the indenture.
OPTIONAL REDEMPTION
Except as set forth below, Time Warner Telecom will not be entitled to
redeem the notes at its option prior to February 1, 2006.
On and after February 1, 2006 and prior to maturity, Time Warner Telecom
may, at its option, in whole or in part, at any time or from time to time,
redeem any of the notes upon not less than 30 nor more than 60 days' prior
notice mailed by first class mail to each holder's last address as it appears in
the security register. The notes will be redeemable at the following redemption
prices (expressed in percentages of principal amount), plus accrued and unpaid
interest, if any, to the redemption date (subject to the right of Holders of
record on the relevant regular record date that is on or prior to the redemption
date to receive interest due on
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an interest payment date), if redeemed during the 12-month period commencing
February 1, of the years set forth below:
YEAR REDEMPTION PRICE
- ---- ----------------
2006..................................... 105.063%
2007..................................... 103.375%
2008..................................... 101.688%
2009 and thereafter...................... 100.000%
In addition, prior to February 1, 2004, Time Warner Telecom may, at its
option, at any time or from time to time, redeem up to 35% of the aggregate
principal amount of the notes with the net proceeds from one or more equity
offerings at a redemption price of 110.125% of their principal amount; provided,
however,
-- that notes representing at least 65% of the principal amount of the
notes initially issued remain outstanding immediately after each such
redemption; and
-- that notice of each such redemption is mailed within 90 days of each
such equity offering.
In the case of any partial redemption, the Trustee will select the notes
for redemption:
-- in compliance with the requirements of the principal national
securities exchange, if any, on which the notes are listed; or
-- if the notes are not so listed, by lot or by such other method as the
Trustee in its sole discretion deems to be fair and appropriate.
However, no note of $1,000 or less, in original principal amount,
will be redeemed in part.
If any note is to be redeemed in part, the notice of redemption relating to that
note will state the portion of the principal amount of the note to be redeemed.
A new note in principal amount equal to the unredeemed portion of the note will
be issued in the name of the holder upon cancellation of the original note.
SINKING FUND
There will be no sinking fund payments for the notes.
RANKING
The notes will rank:
-- equally in right of payment with all existing and future
unsubordinated indebtedness of Time Warner Telecom;
-- senior in right of payment to all subordinated indebtedness of Time
Warner Telecom;
-- subordinated to all existing and future secured obligations of Time
Warner Telecom and its restricted subsidiaries; and
-- subordinated to all existing and future liabilities (including trade
payables) of Time Warner Telecom's subsidiaries.
As of September 30, 2000, after giving effect to the acquisition of the
assets of GST, to the borrowings under the senior secured credit facility and
the senior unsecured bridge loan facility and to this offering and our
concurrent offering of our Class A common stock and to the application of the
proceeds therefrom, Time Warner Telecom and its subsidiaries would have had $848
million of indebtedness outstanding, other than the notes, $448 million of which
would have been senior to the notes, and $400 million of which would rank
equally with the notes. Additionally, we would have had $750 million of
borrowings available under the senior secured credit facility, subject to
certain conditions. The senior secured credit facility will be secured by
substantially all of the assets of Time Warner Telecom and its subsidiaries,
including the GST assets. The
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notes will be effectively subordinated to any indebtedness under the senior
secured credit facility to the extent of such security interests.
As of September 30, 2000, after giving effect to the acquisition of GST, to
the borrowings under the senior secured credit facility and the senior unsecured
bridge loan facility and to this offering and our concurrent offering of our
Class A common stock and to the application of the proceeds therefrom, Time
Warner Telecom and its subsidiaries would have had $250 million of secured
indebtedness outstanding.
As of September 30, 2000, after giving effect to the acquisition of the
assets of GST, to the borrowings under the senior secured credit facility and
the senior unsecured bridge loan facility and to this offering and our
concurrent offering of our Class A common stock and to the application of the
proceeds therefrom, Time Warner Telecom's subsidiaries would have had $198
million of liabilities outstanding, other than $250 million outstanding under
the senior secured credit facility, all of which would have been effectively
senior to the notes.
Time Warner Telecom conducts a substantial portion of its operations
through subsidiaries and, therefore, Time Warner Telecom largely depends upon
the cash flow of its subsidiaries to meet its obligations, including its
obligations under the notes. Time Warner Telecom's subsidiaries have not
guaranteed the notes and are separate entities, with no obligation to make
payments on the notes or to make funds available therefor. Generally, with
respect to the assets and earnings of such subsidiaries, priority will be given
to claims of the subsidiaries' creditors, including trade creditors, secured
creditors, creditors holder indebtedness and guarantees issued by the
subsidiaries, and claims of equityholders, if any, of the subsidiaries over the
claims of Time Warner Telecom's creditors, including Holders of the notes. The
borrower under the senior secured credit facility is a subsidiary of Time Warner
Telecom. The senior secured credit facility is also being guaranteed by certain
subsidiaries of Time Warner Telecom. The notes, therefore, will be effectively
subordinated to all existing and future liabilities of Time Warner Telecom's
subsidiaries, including indebtedness incurred under the senior secured credit
facility.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the indenture. Reference is made to the
indenture for the definition of any other capitalized term used herein for which
no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; provided, however, that Indebtedness of such Person
which is redeemed, defeased, retired or otherwise repaid at the time of or
immediately upon consummation of the transactions by which such Person becomes a
Restricted Subsidiary or such Asset Acquisition shall not be Acquired
Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, aggregate net
income (or loss) of Time Warner Telecom and its Restricted Subsidiaries for such
period determined in conformity with GAAP; provided, however, that the following
items shall be excluded in computing Adjusted Consolidated Net Income (without
duplication):
(1) the net income (or loss) of any Person that is not a Restricted
Subsidiary, except (A) with respect to net income, to the extent of the
amount of dividends or other distributions actually paid to Time Warner
Telecom or any of its Restricted Subsidiaries by such Person during such
period and (B) with respect to net losses, to the extent of the amount of
Investments made by Time Warner Telecom or any of its Restricted
Subsidiaries in such Person during such period;
(2) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause 4(C) of the first paragraph of
the "Limitation on Restricted Payments" covenant (and in such case, except
to the extent includable pursuant to clause (1) above), the net income (or
loss) of any Person accrued prior to the date it becomes a Restricted
Subsidiary or is merged into or consolidated
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with Time Warner Telecom or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by
Time Warner Telecom or any of its Restricted Subsidiaries;
(3) the net income of any Restricted Subsidiary to the extent that
the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary;
(4) any gains or losses (on an after-tax basis) attributable to Asset
Sales;
(5) except for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause 4(C) of the first paragraph of
the "Limitation on Restricted Payments" covenant, any amount paid or
accrued as dividends (other than dividends to the extent paid or payable in
shares of Capital Stock (other than Disqualified Stock) of Time Warner
Telecom) on Preferred Stock of Time Warner Telecom or any Restricted
Subsidiary owned by Persons other than Time Warner Telecom and any of its
Restricted Subsidiaries;
(6) all extraordinary gains and extraordinary losses; and
(7) any compensation expense paid or payable solely with Capital
Stock (other than Disqualified Stock) of Time Warner Telecom or any
options, warrants or other rights to acquire Capital Stock (other than
Disqualified Stock).
"Adjusted Consolidated Net Tangible Assets" means the total amount of Time
Warner Telecom's assets and those of its Restricted Subsidiaries (less
applicable depreciation, amortization and other valuation reserves), except to
the extent resulting from write-ups of capital assets (excluding write-ups in
connection with accounting for acquisitions in conformity with GAAP), after
deducting therefrom:
(1) all of Time Warner Telecom's current liabilities and those of its
Restricted Subsidiaries (excluding intercompany items); and
(2) all goodwill, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles, all as set forth on Time
Warner Telecom's most recent quarterly or annual consolidated balance sheet
and those of its Restricted Subsidiaries, prepared in conformity with GAAP
and filed with the SEC or provided to the Trustee pursuant to the "SEC
Reports and Reports to Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means:
(1) an investment by Time Warner Telecom or any of its Restricted
Subsidiaries in any other Person pursuant to which such Person shall become
a Restricted Subsidiary or shall be merged into or consolidated with Time
Warner Telecom or any of its Restricted Subsidiaries; provided, however,
that such Person's primary business is related, ancillary or complementary
to Time Warner Telecom's businesses and those of its Restricted
Subsidiaries on the date of such investment; or
(2) an acquisition by Time Warner Telecom or any of its Restricted
Subsidiaries of the property and assets of any Person other than Time
Warner Telecom or any of its Restricted Subsidiaries that constitute
substantially all of a division or line of business of such Person;
provided, however, that the property and assets acquired are related,
ancillary or complementary to Time Warner Telecom's businesses and those of
its Restricted Subsidiaries on the date of such acquisition.
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"Asset Disposition" means the sale or other disposition by Time Warner
Telecom or any of its Restricted Subsidiaries (other than to Time Warner Telecom
or another Restricted Subsidiary) of:
(1) all or substantially all of the Capital Stock of any Restricted
Subsidiary; or
(2) all or substantially all of the assets that constitute a division
or line of business of Time Warner Telecom or any of its Restricted
Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by Time Warner Telecom or any of its
Restricted Subsidiaries to any Person other than Time Warner Telecom or any of
its Restricted Subsidiaries of:
(1) all or any of the Capital Stock of any Restricted Subsidiary;
(2) all or substantially all of the property and assets of an
operating unit or business of Time Warner Telecom or any of its Restricted
Subsidiaries; or
(3) any other property and assets (other than the Capital Stock or
other Investment in an Unrestricted Subsidiary) of Time Warner Telecom or
any of its Restricted Subsidiaries outside the ordinary course of business
of Time Warner Telecom or such Restricted Subsidiary and, in each case,
that is not governed by the provisions of the indenture applicable to
mergers, consolidations and sales of all or substantially all of the assets
of Time Warner Telecom; provided, however, that "Asset Sale" shall not
include:
(A) sales or other dispositions of inventory, receivables and
other current assets;
(B) sales, transfers or other dispositions of assets constituting
a Restricted Payment permitted to be made under the "Limitation on
Restricted Payments" covenant;
(C) sales, transfers or other dispositions of assets with a fair
market value (as certified in an Officer's Certificate) not in excess of
$5 million in any transaction or series of related transactions; or
(D) sales or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold or disposed of,
to the extent that the consideration received would constitute property,
assets or securities of the kind described in clause (1)(B) of the
"Limitation on Asset Sales" covenant.
"Average Life" means, at any date of determination with respect to any
note, the quotient obtained by dividing
(1) the sum of the products of (A) the number of years from such date
of determination to the dates of each successive scheduled principal
payment of such note and (B) the amount of such principal payment by
(2) the sum of all such principal payments.
"Board of Directors" means Time Warner Telecom's Board of Directors.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all common
stock and preferred stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, Personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
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"Change of Control" means such time as:
(1) the Former Parent Companies as a group cease to have the ability
to elect a majority of the members of the Board of Directors (other than
Time Warner Telecom's chief executive officer and independent directors;
provided, however, that independent directors shall be included in
calculating whether the foregoing majority requirement is satisfied if the
directors nominated by the Former Parent Companies do not constitute a
majority of the committee that selects the Board of Directors' nominees for
independent directors) and a "Person" or "group" (within the meaning of
Sections 13(d) and 14(d)(2) of the Exchange Act) (other than the Former
Parent Companies) has become the ultimate "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) of more than 35% of the total voting
power of Time Warner Telecom's voting stock, on a fully diluted basis and
such ownership represents a greater percentage of the total voting power of
its voting stock, on a fully diluted basis, than is held by the Former
Parent Companies as a group on such date; or
(2) individuals who on the Closing Date constitute the Board of
Directors (together with any new directors whose election by the Board of
Directors or whose nomination by the Board of Directors for election by
Time Warner Telecom's stockholders or members, as the case may be, was
approved by a vote of at least two-thirds of the members of the Board of
Directors then in office who either were members of the Board of Directors
on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of
the members of the Board of Directors then in office.
"Change of Control Period" means, with respect to a Change of Control, the
period of 60 days commencing on the date of the earlier to occur of (1) public
notice of the occurrence of a Change of Control or of Time Warner Telecom's
intention to effect a Change of Control and (2) the Change of Control.
"Closing Date" means the date on which the notes are originally issued
under the indenture.
"Common Stock" means, with respect to any Person, such Person's equity
other than Preferred Stock of such Person, whether outstanding on the Closing
Date or issued thereafter, including, without limitation, all series and classes
of such common stock, including any and all shares, interests, participations or
other equivalents (however designated, whether voting or non-voting) thereof.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period:
(1) plus, to the extent such amount was deducted in calculating such
Adjusted Consolidated Net Income:
(A) Consolidated Interest Expense;
(B) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or
losses or sales of assets);
(C) depreciation expense;
(D) amortization expense; and
(E) all other non-cash items reducing Adjusted Consolidated Net
Income (other than items that will require cash payments and for which
an accrual or reserve is, or is required by GAAP to be, made), less all
non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for Time Warner Telecom and its
Restricted Subsidiaries in conformity with GAAP; and
(2) solely for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (4)(C) of the first paragraph
of the "Limitation on Restricted Payments" covenant described below, less
(to the extent not otherwise reduced in accordance with GAAP) the aggregate
amount of deposits made by Time Warner Telecom and its Restricted
Subsidiaries after the Existing High Yield Closing Date in connection with
proposed Asset Acquisitions that are forfeited by Time Warner Telecom or
any of its Restricted Subsidiaries; provided, however, that if any
Restricted
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Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with
GAAP) by an amount equal to:
(A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by;
(B) the percentage ownership interest in the income of such
Restricted Subsidiary not owned on the last day of such period by Time
Warner Telecom or any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and interest
on Indebtedness that is Guaranteed or secured by Time Warner Telecom or any of
its Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations, in each case that is paid, accrued or
scheduled to be paid or to be accrued by Time Warner Telecom and its Restricted
Subsidiaries during such period: excluding, however,
(1) in calculating Consolidated EBITDA, any amount of such interest
of any Restricted Subsidiary if the net income of such Restricted
Subsidiary is excluded in the calculation of Adjusted Consolidated Net
Income pursuant to clause (3) of the definition thereof (but only in the
same proportion as the net income of such Restricted Subsidiary is excluded
from the calculation of Adjusted Consolidated Net Income pursuant to clause
(3) of the definition thereof) and
(2) any premiums, fees and expenses (and any, amortization thereof)
payable in connection with the offering of the notes, all as determined on
a consolidated basis, (without taking into account Unrestricted
Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of:
(1) the aggregate amount of Indebtedness of Time Warner Telecom and
its Restricted Subsidiaries on a consolidated basis outstanding on such
Transaction Date to;
(2) the aggregate amount of Consolidated EBITDA for the then most
recent four fiscal quarters for which Time Warner Telecom's financial
statements have been filed with the SEC or provided to the Trustee pursuant
to the "SEC Reports and Reports to Holders" covenant (such four fiscal
quarter period being the "Four Quarter Period"); provided, that in making
the foregoing calculation:
(A) pro forma effect shall be given to any Indebtedness to be
Incurred or repaid on the Transaction Date;
(B) pro forma effect shall be given to Asset Dispositions and
Asset Acquisitions (including giving pro forma effect to the application
of proceeds of any Asset Disposition) that occur from the beginning of
the Four Quarter Period through the Transaction Date (the "Reference
Period"), as if they had occurred and such proceeds had been applied on
the first day of such Reference Period; and
(C) pro forma effect shall be given to asset dispositions and
asset acquisitions (including giving pro forma effect to the application
of proceeds of any asset disposition) that have been made by any Person
that has become a Restricted Subsidiary or has been merged with or into
Time Warner Telecom or any Restricted Subsidiary during such Reference
Period and that would have constituted Asset Dispositions or Asset
Acquisitions had such transactions occurred when such Person was a
Restricted Subsidiary as if such asset dispositions or asset
acquisitions were Asset Dispositions or Asset Acquisitions that occurred
on the first day of such Reference Period;
provided, that to the extent that clause (B) or (C) of this sentence requires
that pro forma effect be given to an Asset Acquisition or Asset Disposition,
such pro forma calculation shall be based upon the four full fiscal
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quarters immediately preceding the Transaction Date the Person, or division or
line of business of the Person, that is acquired or disposed of for which
financial information is available.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on Time Warner Telecom's most recently available quarterly
or annual consolidated balance sheet and those of its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of
Capital Stock of Time Warner Telecom or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of foreign
currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"Credit Agreement" means credit agreements, vendor financings, or similar
facilities or arrangements made available from time to time to Time Warner
Telecom and its Restricted Subsidiaries from banks, other financial institutions
and/or equipment manufacturers for the Incurrence of Indebtedness, including
letters of credit and any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, as the same may be
amended, supplemented, modified or restated from time to time.
"Currency Agreement" means any foreign exchange contract. currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is:
(1) required to be redeemed prior to the Stated Maturity of the
notes;
(2) redeemable at the option of the holder of such class or series of
Capital Stock at any time prior to the Stated Maturity of the notes; or
(3) convertible into or exchangeable for Capital Stock referred to in
clause (1) or (2) above or Indebtedness having a scheduled maturity prior
to the Stated Maturity of the notes;
provided, however, that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the Stated Maturity of
the notes shall not constitute Disqualified Stock if the "asset sale" or "change
of control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in "Limitation
on Asset Sales" and "Repurchase of Debt Securities Upon a Change of Control"
covenants and such Capital Stock, or the agreements or instruments governing the
redemption rights thereof, specifically provides, that such Person will not
repurchase or redeem any such stock pursuant to such provision prior to Time
Warner Telecom's repurchase of such notes as are required to be repurchased
pursuant to the "Limitation on Asset Sales" and "Repurchase of Debt Securities
Upon a Change of Control" covenants described below.
"Equity Offering" means an offering of Common Stock of Time Warner Telecom
for cash pursuant to an effective registration statement under the Securities
Act of 1933 or an exemption from the registration requirements contained
therein.
"Existing High Yield Closing Date" means July 21, 1998.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be
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conclusive if evidenced by a Board Resolution; provided that for purposes of
clause (8) of the second paragraph of the "Limitation on Indebtedness" covenant
(1) the fair market value of any security registered under the
Exchange Act shall be the average of the closing prices, regular way, of
such security for the 20 consecutive trading days immediately preceding the
sale of Capital Stock; and
(2) in the event the aggregate fair market value of any other property
(other than cash or cash equivalents) received by Time Warner Telecom
exceeds $15 million, the fair market value of such property shall be
determined by a nationally recognized investment banking firm and set forth
in their written opinion which shall be delivered to the trustee.
"Former Parent Companies" means Time Warner Inc., MediaOne Group, Inc.
(since acquired by AT&T), Advance/Newhouse Partnership and the Affiliates of
each of the foregoing.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the indentures shall be
made without giving effect to (1) the amortization of any expenses incurred in
connection with the offering of the notes and (2) except as otherwise provided,
the amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person
(1) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services (unless such purchase
arrangements are on arm's-length terms and are entered into in the ordinary
course of business), to take-or-pay, or to maintain financial statement
conditions or otherwise); or
(2) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); provided
that the term "Guarantee" shall not include endorsements for collection or
deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided, however, that
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):
(1) all indebtedness of such Person for borrowed money;
(2) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(3) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto, but excluding obligations with respect to letters of credit
(including trade letters of credit) securing obligations (other than
obligations described in (1) or (2) above or (5), (6) or (7) below) entered
into in the ordinary course of business of such
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Person to the extent such letters of credit are not drawn upon or, if drawn
upon, to the extent such drawing is reimbursed no later than the third
business day following receipt by such Person of a demand for
reimbursement);
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services,
except Trade Payables;
(5) all Capitalized Lease Obligations of such Person;
(6) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination
and (B) the amount of such Indebtedness;
(7) all Indebtedness of other Persons Guaranteed by such Person to
the extent such Indebtedness is Guaranteed by such Person; and
(8) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements. The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above
and, with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, provided
(A) that the amount outstanding at any time of any Indebtedness
issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original
issue discount of such Indebtedness at the time of its issuance as
determined in conformity with GAAP,
(B) that money borrowed and set aside at the time of the
Incurrence of any Indebtedness in order to prefund the payment of the
interest on such Indebtedness shall not be deemed to be "Indebtedness"
so long as such money is held to secure the payment of such interest and
(C) that Indebtedness shall not include any liability for federal,
state, local or other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on Time Warner Telecom's balance sheet or those of any Restricted Subsidiaries)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall
include:
(1) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary; and
(2) the fair market value of the Capital Stock (or any other
Investment), held by Time Warner Telecom or any of its Restricted
Subsidiaries, of (or in) any Person that has ceased to be a Restricted
Subsidiary, including without limitation, by reason of any transaction
permitted by clause (3) of the "Limitation on the Issuance and Sale of
Capital Stock of Restricted Subsidiaries" covenant; provided that the fair
market value of the Investment remaining in any Person that has ceased to
be a Restricted Subsidiary shall not exceed the aggregate amount of
Investments previously made in such Person valued at the time such
Investments were made less the net reduction of such Investments.
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For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant described below:
(1) "Investment" shall include the fair market value of the assets
(net of liabilities (other than liabilities of Time Warner Telecom or any
of its Restricted Subsidiaries)) of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary;
(2) the fair market value of the assets (net of liabilities (other
than liabilities of Time Warner Telecom or any of its Restricted
Subsidiaries)) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary shall be
considered a reduction in outstanding Investments; and
(3) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer.
"Investment Grade" means a rating of notes by both S&P and Moody's, each
such rating being in one of such agency's four highest generic rating categories
that signifies investment grade (i.e., BBB- (or the equivalent) or higher by S&P
and Baa3 (or the equivalent) or higher by Moody's) provided that in each case,
such ratings are publicly available; provided further, however, that in the
event Moody's or S&P is no longer in existence, for purposes of determining
whether the notes are rated "Investment Grade," such organization may be
replaced by a nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) designated by Time Warner Telecom, notice
of which designation shall be given to the Trustee.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means,
(1) with respect to any Asset Sale, the proceeds of such Asset Sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal,
but not interest, component thereof) when received in the form of cash or
cash equivalents (except to the extent such obligations are financed or
sold with recourse to Time Warner Telecom or any Restricted Subsidiary) and
proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of
(A) brokerage commissions and other fees and expenses (including
fees and expenses of counsel and investment bankers) related to such
Asset Sale,
(B) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without
regard to Time Warner Telecom's consolidated results of operations and
those of its Restricted Subsidiaries, taken as a whole,
(C) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (i) is secured by
a Lien on the property or assets sold or (ii) is required to be paid as
a result of such sale, and
(D) appropriate amounts to be provided by Time Warner Telecom or
any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension
and other post employment benefit liabilities, liabilities, liabilities
related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as
determined in conformity with GAAP and
(2) with respect to any issuance or sale of Capital Stock, the
proceeds of such issuance or sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the
extent corresponding to the principal, but not interest, component thereof)
when received in the form
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of cash or cash equivalents (except to the extent such obligations are
financed or sold with recourse to Time Warner Telecom or any Restricted
Subsidiary) and proceeds from the conversion of other property received
when converted to cash or cash equivalents, net of attorney's fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection
with such issuance or sale and net of taxes paid or payable as a result
thereof.
"Offer to Purchase" means an offer to purchase notes by the Time Warner
Telecom from the holders commenced by mailing a notice to the Trustee and each
holder stating:
(1) the covenant pursuant to which the offer is being made and that
all notes validly tendered will be accepted for payment on a pro rata
basis;
(2) the purchase price and the date of purchase (which shall be a
business day no earlier than 30 days nor later than 60 days from the date
such notice is mailed) (the "Payment Date");
(3) that any note not tendered will continue to accrue interest
pursuant to its terms;
(4) that, unless Time Warner Telecom defaults in the payment of the
purchase price, any note accepted for payment pursuant to the Offer to
Purchase shall cease to accrue interest on and after the Payment Date;
(5) that holders electing to have a note purchased pursuant to the
Offer to Purchase will be required to surrender the note, together with the
form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the business day immediately
preceding the Payment Date;
(6) that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
business day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such holder, the principal
amount of notes delivered for purchase and a statement that such holder is
withdrawing his election to have such notes purchased; and
(7) that holders whose notes are being purchased only in part will be
issued new notes equal in principal amount to the unpurchased portion of
the notes surrendered; provided, however, that each note purchased and each
new note issued shall be in a principal amount of $1,000 or an integral
multiple thereof. On the Payment Date, Time Warner Telecom shall:
(A) accept for payment on a pro rata basis notes or portions
thereof tendered pursuant to an Offer to Purchase;
(B) deposit with the Paying Agent money sufficient to pay the
purchase price of all notes or portions thereof so accepted; and
(C) deliver, or cause to be delivered, to the Trustee all notes or
portions thereof so accepted together with an Officer's Certificate
specifying the notes or portions thereof accepted for payment by Time
Warner Telecom.
The Paying Agent shall promptly mail to the holders of notes so accepted
payment in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such holders a new note equal in principal amount to
any unpurchased portion of the note surrendered; provided, however, that each
note purchased and each new note issued shall be in a principal amount of $1,000
or an integral multiple thereof. Time Warner Telecom will publicly announce the
results of an Offer to Purchase as soon as practicable after the Payment Date.
The Trustee shall act as the Paying Agent for an Offer to Purchase. Time Warner
Telecom will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that Time Warner Telecom is required to
repurchase notes pursuant to an Offer to Purchase.
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"Parent Company Debt" means Time Warner Telecom's Indebtedness to any
Existing Stockholder that is subordinated in right of payment to the notes, as
evidenced by a promissory note dated the date of the Reorganization, and any
additional notes issued pursuant to the terms of such note.
"Permitted Investment" means:
(1) an Investment in Time Warner Telecom or a Restricted Subsidiary
or a Person which will, upon the making of such Investment, become a
Restricted Subsidiary or be merged or consolidated with or into, or
transfer or convey all or substantially all its assets to Time Warner
Telecom, or a Restricted Subsidiary; provided, however, that such Person's
primary business is related, ancillary or complementary to the businesses
of Time Warner Telecom and its Restricted Subsidiaries on the date of such
Investment;
(2) Temporary Cash Investments;
(3) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP;
(4) stock, obligations or securities received in settlement of
Indebtedness Incurred in the ordinary course of business, upon foreclosure
of a Lien created in the ordinary course of business or in satisfaction of
judgments, including in connection with a bankruptcy proceeding;
(5) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits;
(6) Interest Rate Agreements and Currency Agreements designed solely
to protect Time Warner Telecom or its Restricted Subsidiaries against
fluctuations in interest rates or foreign currency exchange rates;
(7) loans or advances to Time Warner Telecom's officers or employees
or those of any Restricted Subsidiary that do not in the aggregate exceed
$2 million at any time outstanding; and
(8) Investments in any Person that is engaged in the
telecommunications business and that is not Time Warner Telecom's Affiliate
or a Related Person.
"Permitted Liens" means
(1) Liens for taxes, assessments, governmental charges or claims that
are being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made;
(2) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made;
(3) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
(4) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment
of borrowed money);
(5) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of Time
Warner Telecom or any of its Restricted Subsidiaries;
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(6) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Existing High Yield Closing Date;
provided, however, that
(A) such Lien is created solely for the purpose of securing
Indebtedness Incurred, in accordance with the "Limitation on
Indebtedness" covenant described below, to finance the cost (including
the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration and all
transaction costs related to the foregoing) of the item of property or
assets subject thereto and such Lien is created prior to, at the time of
or within six months after the later of the acquisition, the completion
of construction or the commencement of full operation of such property,
(B) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost and
(C) any such Lien shall not extend to or cover any property or
assets other than such item of property or assets and any improvements
on such item;
(7) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of Time Warner Telecom and
its Restricted Subsidiaries, taken as a whole;
(8) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of Time Warner Telecom or
its Restricted Subsidiaries relating to such property or assets;
(9) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating, lease;
(10) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(11) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or
becomes a part of, any Restricted Subsidiary; provided, however, that such
Liens do not extend to or cover any property or assets of, Time Warner
Telecom or any Restricted Subsidiary other than the property or assets
acquired;
(12) Liens in favor of Time Warner Telecom or any Restricted
Subsidiary;
(13) Liens arising from the rendering, of a final judgment or order
against Time Warner Telecom or any Restricted Subsidiary that does not give
rise to an Event of Default;
(14) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(15) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(16) Liens encumbering customary initial deposits and margin
deposits, and other Liens that are within the general parameters customary
in the industry and incurred in the ordinary course of business, in each
case, securing Indebtedness under Interest Rate Agreements and Currency
Agreements and forward contracts, options, future contracts, futures
options or similar agreements or arrangements designed solely to protect
Time Warner Telecom or any of its Restricted Subsidiaries from fluctuations
in interest rates, currencies or the price of commodities;
(17) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
Time Warner Telecom or any of its Restricted Subsidiaries in the ordinary
course of business in accordance with the past practices of Time Warner
Telecom and its Restricted Subsidiaries prior to the Existing High Yield
Closing Date;
(18) Liens on or sales of receivables; and
(19) Liens that secure Indebtedness with an aggregate principal
amount not in excess of $5 million at any time outstanding.
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"Person" means, an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Preferred Stock" means, with respect to any Person, Capital Stock issued
by such Person that is entitled to preference or priority over one or more
series or classes of other Capital Stock issued by such Person upon any
distribution of such Person's property and assets, whether by dividend or upon
liquidation.
"Related Person" means, as applied to any Person, any other Person directly
or indirectly owning
(1) 10% or more of the outstanding Common Stock of such Person (or,
in the case of a Person that is not a corporation, 10% or more of the
outstanding equity interest in such Person) or
(2) 10% or more of the combined outstanding voting power of the
voting stock of such Person, and all Affiliates of any such other Person.
"Restricted Subsidiary" means any of Time Warner Telecom's Subsidiaries
other than an Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries,
(1) for Time Warner Telecom's most recent fiscal year, accounted for
more than 10% of the consolidated revenue of Time Warner Telecom and its
Restricted Subsidiaries; or
(2) as of the end of such fiscal year, was the owner of more than 10%
of Time Warner Telecom's consolidated assets and those of its Restricted
Subsidiaries, all as set forth on the most recently available consolidated
financial statements of Time Warner Telecom for such fiscal year.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, and its successors.
"Specified Date" means any Redemption Date, any Payment Date for an Offer
to Purchase or any date on which the notes first become due and payable after an
Event of Default.
"Stated Maturity" means,
(1) with respect to the notes, the date specified in such notes as
the fixed date on which the final installment of principal of such notes is
due and payable; and
(2) with respect to any scheduled installment of principal of or
interest on any notes, the date specified in such notes as the fixed date
on which such installment is due and payable.
"Strategic Subordinated Indebtedness" means Time Warner Telecom's
Indebtedness Incurred to finance the acquisition of a Person engaged in a
business that is related, ancillary or complementary to the business conducted
by Time Warner Telecom or any of its Restricted Subsidiaries, which Indebtedness
by its terms, or by the terms of any agreement or instrument pursuant to which
such Indebtedness is Incurred:
(1) is expressly made subordinate in right of payment to the notes;
and
(2) provides that no payment of principal, premium or interest on, or
any other payment with respect to, such Indebtedness may be made prior to
the payment in full of all of Time Warner Telecom's obligations under the
notes; provided, however, that such Indebtedness may provide for and be
repaid at any time from the proceeds of the sale of Time Warner Telecom's
Capital Stock (other than Disqualified Stock) or other of Time Warner
Telecom's Indebtedness which by its terms, or by the terms of any agreement
or instrument pursuant to which such other Indebtedness is Incurred, meets
clauses (1) and (2) above after the Incurrence of such Indebtedness.
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"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding voting stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Tax Amount" means, with respect to any period, without duplication, the
increase in the cumulative United States Federal, state and local tax liability
of holders of equity interests in Time Warner Telecom (or if such holder is a
pass-through entity for United States income tax purposes, holders of its equity
interests) in respect of their interests in Time Warner Telecom for such period
plus any additional amounts payable to such holders to cover taxes arising from
the ownership of such equity interests, but excluding any increase in tax
liability or additional amounts payable in respect of a gain realized by a
holder of an equity interest in Time Warner Telecom upon the sale or disposition
by such holder of an equity interest, including without limitation, any
redemption thereof by Time Warner Telecom, in Time Warner Telecom.
"Temporary Cash Investment" means any of the following:
(1) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the United
States of America or any agency thereof;
(2) time deposit accounts, certificates of deposit and money market
deposits maturing within one year of the date of acquisition thereof issued
by a bank or trust company which is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $500 million (or the
foreign currency equivalent thereof) and has outstanding debt which is
rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above;
(4) commercial paper, maturing not more than one year after the date
of acquisition, issued by a corporation (other than Time Warner Telecom's
Affiliate) organized and in existence under the laws of the United States
of America, any state thereof or any foreign country recognized by the
United States of America with a rating at the time as of which any
Investment therein is made of "P-1" (or higher) according to Moody's or
"A-1" (or higher) according to S&P;
(5) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or Moody's;
(6) corporate debt securities with maturities of eighteen months or
less from the date of acquisition and with a rating at the time as of which
any Investment "therein is made of "A3" (or higher) according to Moody's or
"A-" (or higher) according to S&P and
(7) money market funds at least 95% of the assets of which are
invested in the foregoing.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness Time Warner Telecom or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means
(1) any Subsidiary of Time Warner Telecom that at the time of
determination shall be designated an Unrestricted Subsidiary by the Board
of Directors in the manner provided below; and
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(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Restricted Subsidiary (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary
unless such Subsidiary owns any of Time Warner Telecom's Capital Stock, or owns
or holds any Lien on any property of, Time Warner Telecom or any Restricted
Subsidiary; provided, however, that
(A) any Guarantee by Time Warner Telecom or any Restricted
Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment"
by Time Warner Telecom or such Restricted Subsidiary (or both, if
applicable) at the time of such designation;
(B) either (I) the Subsidiary to be so designated has total assets
of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on
Restricted Payments" covenant; and
(C) if applicable, the Incurrence of Indebtedness and the
Investment referred to in clause (A) of this proviso would be permitted
under the "Limitation on Indebtedness" and "Limitation on Restricted
Payments" covenants.
The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that
(i) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such designation;
and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately after such designation would, if Incurred at
such time, have been permitted to be Incurred (and shall be deemed to
have been Incurred) for all purposes of the indenture. Any such
designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the board resolution
giving effect to such designation and an Officer's Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which it is full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof at any time prior
to the Stated Maturity of such Securities, and shall also include a depository
receipt issued by a bank or trust company as custodian with respect to any such
U.S. Government Obligation or a specific payment of interest on or principal of
any such U.S. Government Obligation held by such custodian for the account of
the holder of a depository receipt; provided, however, that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of interest on or principal of the U.S. Government Obligation evidenced by such
depository receipt.
"Voting Stock" means, with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
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CERTAIN COVENANTS
LIMITATION ON INDEBTEDNESS
Time Warner Telecom will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the notes and Indebtedness
existing on the Existing High Yield Closing Date); provided, however, that Time
Warner Telecom may Incur Indebtedness if, after giving effect to the Incurrence
of such Indebtedness and the receipt and application of the proceeds therefrom,
the Consolidated Leverage Ratio would be greater than zero and less than 6.0:1.
Notwithstanding the foregoing, Time Warner Telecom and any Restricted
Subsidiary (except as specified below) may Incur each and all of the following:
(1) Indebtedness outstanding at any time in an aggregate principal
amount not to exceed $300 million, less any amount of such Indebtedness
permanently repaid as provided under the "Limitation on Asset Sales"
covenant described below;
(2) Indebtedness owed:
(A) to Time Warner Telecom evidenced by a promissory note; or
(B) to any Restricted Subsidiary; provided, however, that any
event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to Time Warner Telecom or another Restricted Subsidiary)
shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this paragraph (2);
(3) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness (other than
Indebtedness Incurred under paragraph (1), (2), (4), (6), (8) or (9) of
this paragraph) and any refinancings thereof in an amount not to exceed the
amount so refinanced or refunded (plus premiums, accrued interest, fees and
expenses); provided, however, that Indebtedness the proceeds of which are
used to refinance or refund the notes or Indebtedness that is pari passu
with, or subordinated in right of payment to, the notes shall only be
permitted under this paragraph (3) if:
(A) in case the notes are refinanced in part or the Indebtedness
to be refinanced is pari passu with the notes, such new Indebtedness, by
its terms or by the terms of any agreement or instrument pursuant to
which such new Indebtedness is outstanding, is expressly made pari passu
with, or subordinate in right of payment to, the remaining notes;
(B) in case the Indebtedness to be refinanced is subordinated in
right of payment to the notes such new Indebtedness, by its terms or by
the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the notes at least to the extent that
the Indebtedness to be refinanced is subordinated to the notes; and
(C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity
of the Indebtedness to be refinanced or funded, and the Average Life of
such new Indebtedness is at least equal to the remaining Average Life of
the Indebtedness to be refinanced or refunded; and provided further that
in no event may Time Warner Telecom's Indebtedness be refinanced by
means of any Indebtedness of any Restricted Subsidiary pursuant to this
paragraph (3);
(4) Indebtedness:
(A) in respect of performance, surety or appeal bonds provided in
the ordinary course of business;
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(B) under Currency Agreements and Interest Rate Agreements;
provided, however, that such agreements are:
(i) designed solely to protect Time Warner Telecom or its
Restricted Subsidiaries against fluctuations in foreign currency
exchange rates or interest rates; and
(ii) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of
fees, indemnities and compensation payable thereunder; and
(C) arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from Guarantees
or letters of credit, surety bonds or performance bonds securing any of
Time Warner Telecom's obligations or those of any of its Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary (other than Guarantees of Indebtedness Incurred by any Person
acquiring all or any portion of such business, assets or Restricted
Subsidiary for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by
Time Warner Telecom or any Restricted Subsidiary in connection with such
disposition;
(5) Time Warner Telecom's Indebtedness, to the extent the net
proceeds thereof are promptly:
(A) used to purchase notes tendered in an Offer to Purchase made
as a result of a Change of Control; or
(B) deposited to defease the notes as described below under
"Defeasance";
(6) Guarantees of the notes and Guarantees of Indebtedness of Time
Warner Telecom by any Restricted Subsidiary; provided that the Guarantee of
such Indebtedness is permitted by and made in accordance with the
"Limitation on Issuance of Guarantees by Restricted Subsidiaries" covenant;
(7) Indebtedness Incurred to finance the cost (including the cost of
design, development, acquisition, construction, installation, improvement,
transportation or integration and all transaction costs related to the
foregoing) to acquire equipment, inventory or network assets (including
acquisitions by way of Capitalized Lease and acquisitions of the Capital
Stock of a Person that becomes a Restricted Subsidiary to extent of the
fair market value of the equipment, inventory or network assets so
acquired, plus goodwill associated therewith) by Time Warner Telecom or a
Restricted Subsidiary after the Closing Date;
(8) Time Warner Telecom's Indebtedness not to exceed, at any one
time, outstanding, two times:
(A) the Net Cash Proceeds received by Time Warner Telecom after
the Existing High Yield Closing Date from the issuance and sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of Time Warner Telecom, to the extent:
(i) such Net Cash Proceeds have not been used pursuant to
clause (4)(C)(2) of the first paragraph or clause (3), (4), (6) or
(7) of the second paragraph of the "Limitation on Restricted
Payments" covenant to make a Restricted Payment; and
(ii) if such Net Cash Proceeds are used to consummate a
transaction pursuant to which Time Warner Telecom Incurs Acquired
Indebtedness, the amount of such Net Cash Proceeds exceeds one-half
of the amount of Acquired Indebtedness so Incurred; and
(B) 80% of the fair market value of property (other than cash and
cash equivalent) received by Time Warner Telecom after the Existing High
Yield Closing Date from the sale of its Capital Stock (other than
Disqualified Stock) to a Person that is not a Subsidiary of Time Warner
Telecom, to the extent:
(i) such sale of Capital Stock has not been used pursuant to
clause (3), (4), (6) or (7) of the second paragraph of the
"Limitation on Restricted Payments" covenant to make a Restricted
Payment; and
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(ii) if such Capital Stock is used to consummate a transaction
pursuant to which Time Warner Telecom Incurs Acquired Indebtedness,
80% of the fair market value of the property received exceeds
one-half of the amount of Acquired Indebtedness so Incurred;
provided, however, that such Indebtedness does not mature prior to
the Stated Maturity of the notes and has an Average Life longer than
the notes;
(9) Acquired Indebtedness;
(10) Strategic Subordinated Indebtedness; and
(11) Time Warner Telecom's subordinated Indebtedness (in addition to
Indebtedness permitted under clauses (1) through (10) above) in an
aggregate principal amount outstanding at any time not to exceed $200
million, less any amount of such Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant.
Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that Time Warner Telecom or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant:
(1) Guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of
such particular amount shall not be included and
(2) any Liens granted pursuant to the equal and ratable provisions
referred to in the "Limitation on Liens" covenant shall not be treated as
Indebtedness.
For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, Time Warner Telecom, in its sole discretion, shall classify, and from
time to time may reclassify, such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses.
For purposes of determining compliance with any dollar-denominated
restriction on the Incurrence of Indebtedness denominated in a foreign currency,
the dollar-equivalent principal amount of such Indebtedness Incurred pursuant
thereto shall be calculated based on the relevant currency exchange rate in
effect on the date that such Indebtedness was Incurred, provided, however, that:
(1) the dollar-equivalent principal amount of any such Indebtedness
outstanding on the Existing High Yield Closing Date shall be calculated
based on the relevant currency exchange rate in effect on the Existing High
Yield Closing Date; and
(2) if such Indebtedness is Incurred to refinance other Indebtedness
denominated in a foreign currency, and such refinancing would cause the
applicable dollar-denominated restriction to be exceeded if calculated at
the relevant currency exchange rate in effect on the date of such
refinancing, such dollar-denominated restriction shall be deemed not to
have been exceeded so long as the principal amount of such refinancing
Indebtedness, converted into the currency in which the Indebtedness being
refinanced is denominated at the currency exchange rate in effect on the
date of such refinancing, does not exceed the principal amount of such
Indebtedness being refinanced (plus premiums, accrued interest, fees and
expenses).
The principal amount of any Indebtedness Incurred to refinance other
Indebtedness, if Incurred in a different currency from the Indebtedness being
refinanced, shall be calculated based on the foreign currency exchange rate
applicable to the currencies in which such respective Indebtedness is
denominated that is in effect on the date of such refinancing.
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LIMITATION ON RESTRICTED PAYMENTS
Time Warner Telecom will not, and will not permit any Restricted Subsidiary
to directly or indirectly:
(1) declare or pay any dividend or make any distribution on or with
respect to its Capital Stock (other than: (A) dividends or distributions
payable solely in shares of Time Warner Telecom's Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire
shares of Capital Stock; and (B) pro rata dividends or distributions on
Common Stock of Restricted Subsidiaries held by minority stockholders) held
by Persons other than Time Warner Telecom or any of its Restricted
Subsidiaries;
(2) purchase, redeem, retire or otherwise acquire for value any
shares of Capital Stock of:
(A) Time Warner Telecom or an Unrestricted Subsidiary (including
options, warrants or other rights to acquire such shares of Capital
Stock) held by any Person; or
(B) a Restricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Affiliate of
Time Warner Telecom (other than a Wholly Owned Restricted Subsidiary) or
any holder (or any Affiliate of such holder) of 5% or more of its
Capital Stock;
(3) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Time Warner Telecom's Indebtedness that is
subordinated in right of payment to the notes; or
(4) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (1) through
(4) above being collectively called "Restricted Payments") if, at the time
of, and after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be
continuing;
(B) Time Warner Telecom could not Incur at least $1.00 of
Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant; or
(C) the aggregate amount of all Restricted Payments (the amount,
if other than in cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a
board resolution) made after the Existing High Yield Closing Date shall
exceed the sum of:
(i) the amount by which Consolidated EBITDA exceeds 150% of
Consolidated Interest Expense, in each case, determined on a
cumulative basis during the period (taken as one accounting period)
beginning on the first day of the fiscal quarter immediately
following the Existing High Yield Closing Date and ending on the last
day of the last fiscal quarter preceding the Transaction Date for
which reports have been filed with the SEC or provided to the Trustee
pursuant to the "SEC Reports and Reports to Holders" covenant; plus
(ii) the aggregate Net Cash Proceeds received by Time Warner
Telecom after the Existing High Yield Closing Date from the issuance
and sale permitted by the indenture of its Capital Stock (other than
Disqualified Stock) to a Person who is not Time Warner Telecom's
Subsidiary, including an issuance or sale permitted by the indenture
of Indebtedness of Time Warner Telecom for cash subsequent to the
Existing High Yield Closing Date upon the conversion of such
Indebtedness into Time Warner Telecom's Capital Stock (other than
Disqualified Stock), or from the issuance to a Person who is not Time
Warner Telecom's Subsidiary of any options, warrants or other rights
to acquire Capital Stock of Time Warner Telecom (in each case,
exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are
required to be redeemed, prior to the Stated Maturity of the notes),
in each case except to the extent such Net Cash Proceeds are used to
Incur Indebtedness pursuant to clause (8) or (9) of the second
paragraph under the "Limitation on Indebtedness" covenant; plus
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(iii) an amount equal to the net reduction in Investments
(other than reductions in Permitted Investments) in any Person
resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in
each case to Time Warner Telecom or any Restricted Subsidiary or from
the Net Cash Proceeds from the sale of any such Investment (except,
in each case, to the extent any such payment or proceeds are included
in the calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of
Investments previously made by Time Warner Telecom or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(1) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph;
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the notes including premium, if any, and accrued and unpaid
interest, with the proceeds of, or in exchange for, Indebtedness Incurred
under clause (3) of the "Limitation on Indebtedness" covenant;
(3) the repurchase, redemption or other acquisition of Time Warner
Telecom's Capital Stock or that of an Unrestricted Subsidiary (or options,
warrants or other rights to acquire such Capital Stock) in exchange for, or
out of the proceeds of a substantially concurrent offering of, shares of
Capital Stock (other than Disqualified Stock) of Time Warner Telecom (or
options, warrants or other rights to acquire such Capital Stock);
(4) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for value of Time
Warner Telecom's Indebtedness which is subordinated in right of payment to
the notes in exchange for, or out of the proceeds of a substantially
concurrent sale of, shares of Capital Stock (other than Disqualified Stock)
of Time Warner Telecom (or options, warrants or other rights to acquire
such Capital Stock);
(5) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger
or transfer of assets that complies with the provisions of the indenture
applicable to mergers, consolidations and transfers of all or substantially
all of Time Warner Telecom's property and assets;
(6) Investments in any Person the primary business of which is
related, ancillary or complementary to Time Warner Telecom's business and
that of its Restricted Subsidiaries on the date of such Investments;
provided, however, that the aggregate amount of Investments made pursuant
to this clause (6) does not exceed the sum of:
(A) $10 million and
(B) the amount of Net Cash Proceeds received by Time Warner
Telecom after the Existing High Yield Closing Date from the sale of its
Capital Stock (other than Disqualified Stock) to a Person who is not a
Subsidiary of Time Warner Telecom, except to the extent such Net Cash
Proceeds are used to Incur Indebtedness pursuant to clause (8) or (9)
under the "Limitation on Indebtedness" covenant or to make Restricted
Payments pursuant to clause (4)(C)(2) of the first paragraph, or clauses
(3) or (4) of this paragraph, of this "Limitation on Restricted
Payments" covenant, plus
(C) the net reduction in Investments made pursuant to this clause
(6) resulting from distributions on or repayments of such Investments or
from the Net Cash Proceeds from the sale of any such Investment (except
in each case to the extent any such payment or proceeds is included in
the calculation of Adjusted Consolidated Net Income) or from such Person
becoming a Restricted
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Subsidiary (valued in each case as provided in the definition of
"Investments"), provided, however, that the net reduction in any
Investment shall not exceed the amount of such Investment;
(7) Investments acquired in exchange for Capital Stock (other than
Disqualified Stock) of Time Warner Telecom;
(8) other Restricted Payments in an aggregate amount not to exceed
$10 million;
(9) for so long as Time Warner Telecom is treated as a pass-through
entity for United States Federal income tax purposes, distributions to Time
Warner Telecom's equityholders in an amount not to exceed the Tax Amount
for such period; and
(10) the repurchase, redemption or other acquisition of Time Warner
Telecom's Capital Stock (or options, warrants, or other rights to acquire
such Capital Stock) from Persons who are or were formerly Time Warner
Telecom's directors, officers or employees or those of its Restricted
Subsidiaries, provided, however, that the aggregate amount of all such
repurchases made in any calendar year pursuant to this clause (10) shall
not exceed $2.0 million; provided further, however, that except in the case
of clauses (1) and (3) of this paragraph no Default or Event of Default
shall have occurred and be continuing or occur as a consequence of the
actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (2) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (3) or (4) thereof and an Investment referred to in clause (6) thereof),
and the Net Cash Proceeds from any issuance of Capital Stock referred to in
clauses (3), (4) and (6), shall be included in calculating whether the
conditions of clause (4)(C) of the first paragraph of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Time Warner
Telecom's Capital Stock are used for the redemption, repurchase or other
acquisition of the notes, or Indebtedness that is pari passu with the notes,
then the Net Cash Proceeds of such issuance shall be included in clause (4)(C)
of the first paragraph of this "Limitation on Restricted Payments" covenant only
to the extent such proceeds are not used for such redemption, repurchase or
other acquisition of Indebtedness.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
Time Warner Telecom will not, and will not permit any Restricted Subsidiary
to, create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to:
(1) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by
Time Warner Telecom or any other Restricted Subsidiary;
(2) pay any Indebtedness owed to Time Warner Telecom or any other
Restricted Subsidiary;
(3) make loans or advances to Time Warner Telecom or any other
Restricted Subsidiary; or
(4) transfer any of its property or assets to Time Warner Telecom or
any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(1) existing on the Closing Date of this indenture or any other
agreements in effect on the Existing High Yield Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements;
provided, however, that the encumbrances and restrictions in any
extensions, refinancings, renewals or replacements are no less favorable in
any material respect to the Holders than those encumbrances or restrictions
that are then in effect and that are being extended, refinanced, renewed or
replaced;
(2) existing under or by reason of applicable law or required by any
regulatory authority having jurisdiction over Time Warner Telecom or any
Restricted Subsidiary;
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(3) existing with respect to any Person or the property or assets of
such Person acquired by Time Warner Telecom or any Restricted Subsidiary,
existing at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any
Person or the property or assets of any Person other than such Person or
the property or assets of such Person so acquired, and any extensions,
renewals or replacements of such encumbrances or restrictions; provided,
however, that the encumbrances and restrictions in any such extensions,
renewals or replacements are no less favorable in any material respect to
the Holders than those encumbrances or restrictions that are then in effect
and that are being extended, renewed or replaced;
(4) in the case of clause (4) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant:
(A) that restrict in a customary manner the subletting, assignment
or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset;
(B) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on any of Time Warner Telecom's
property or assets or those of a Restricted Subsidiary not otherwise
prohibited by the indenture; or
(C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in the
aggregate, detract from the value of Time Warner Telecom's property or
assets of those of a Restricted Subsidiary in any manner material to
Time Warner Telecom or any Restricted Subsidiary;
(5) with respect to a Restricted Subsidiary and imposed pursuant to
an agreement that has been entered into for the sale or disposition of all
or substantially all of the Capital Stock of, or property and assets of,
such Restricted Subsidiary; or
(6) contained in the terms of any Indebtedness or any agreement
pursuant to which such Indebtedness was issued if:
(A) the encumbrance or restriction either:
(i) applies only in the event of a payment default or
non-compliance with respect to a financial covenant contained in such
Indebtedness or agreement; or
(ii) is contained in a Credit Agreement
(B) the encumbrance or restriction is not materially more
disadvantageous to the Holders of the notes than is customary in
comparable financings (as determined by Time Warner Telecom); and
(C) Time Warner Telecom determines on the date of the Incurrence
of such Indebtedness that any such encumbrance or restriction would not
be expected to materially impair either Time Warner Telecom's ability to
make principal or interest payments on the notes.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent Time
Warner Telecom or any Restricted Subsidiary from:
(1) creating, incurring, assuming or suffering to exist any Liens
otherwise permitted in the "Limitation on Liens" covenant; or
(2) restricting the sale or other disposition of Time Warner
Telecom's property or assets of those of any of its Restricted Subsidiaries
that secure Time Warner Telecom's Indebtedness or that of any of its
Restricted Subsidiaries.
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LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
Time Warner Telecom will not sell, and will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell, any shares of Capital
Stock of a Restricted Subsidiary (including options, warrants or other rights to
purchase shares of such Capital Stock) except:
(1) to Time Warner Telecom or a Wholly Owned Restricted Subsidiary;
(2) issuances of director's qualifying shares or sales to foreign
nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to
the extent required by applicable law;
(3) if, immediately after giving effect to such issuance or sale,
such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary and any Investment in such Person remaining after giving effect
to such issuance or sale would have been permitted to be made under the
"Limitation on Restricted Payments" covenant if made on the date of such
issuance or sale; or
(4) issuances or sales of Common Stock of a Restricted Subsidiary,
provided, however, that Time Warner Telecom or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale in compliance with
the "Limitation on Asset Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
Time Warner Telecom will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any of Time Warner Telecom's Indebtedness which is pari
passu with or subordinate in right of payment to the notes ("Guaranteed
Indebtedness"), unless:
(1) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the indenture providing for a Guarantee (a
"Subsidiary Guarantee") of payment of the notes by such Restricted
Subsidiary; and
(2) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against Time
Warner Telecom or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Subsidiary Guarantee;
provided, however, that this paragraph shall not be applicable to any
Guarantee of any Restricted Subsidiary that existed at the time such Person
became a Restricted Subsidiary and was not Incurred in connection with, or
in contemplation of, such Person becoming a Restricted Subsidiary.
If the Guaranteed Indebtedness is:
(A) pari passu with the notes, then the Guarantee of such
Guaranteed Indebtedness shall be pari passu with, or subordinated to,
the Subsidiary Guarantee; or
(B) subordinated to the notes, then the Guarantee of such
Guaranteed Indebtedness shall be subordinated to the Subsidiary
Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon:
(1) any sale, exchange or transfer, to any Person not an Affiliate of
Time Warner Telecom, of all of Time Warner Telecom's and each Restricted
Subsidiary's Capital Stock in, or all or substantially all the assets of,
such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the indenture); or
(2) the release or discharge of the Guarantee which resulted in the
creation of such Subsidiary Guarantee, except a discharge or release by or
as a result of payment under such Guarantee.
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LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
Time Warner Telecom will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with a Related Person or
with any of Time Warner Telecom's Affiliates or any Restricted Subsidiary,
except upon fair and reasonable terms no less favorable to Time Warner Telecom
or such Restricted Subsidiary than could be obtained, at the time of such
transaction or, if such transaction is pursuant to a written agreement, at the
time of the execution of the agreement providing therefor, in a comparable
arm's-length transaction with a Person that is not such a Related Person or an
Affiliate.
The foregoing limitation does not limit and shall not apply to:
(1) transactions:
(A) approved by a majority of the disinterested members of the
Board of Directors; or
(B) for which Time Warner Telecom or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized
investment banking firm stating that the transaction is fair to Time
Warner Telecom or such Restricted Subsidiary from a financial point of
view;
(2) any transaction solely between Time Warner Telecom and any of its
Wholly Owned Restricted Subsidiaries or solely between Wholly Owned
Restricted Subsidiaries;
(3) the payment of reasonable and customary regular fees to Time
Warner Telecom's directors who are not its employees;
(4) any payments or other transactions pursuant to any tax-sharing
agreement between Time Warner Telecom and any other Person with which Time
Warner Telecom files a consolidated tax return or with which Time Warner
Telecom is part of a consolidated group for tax purposes;
(5) any transaction with respect to the lease or sharing or other use
of cable or fiber lines, equipment, transmission capacity, right-of-way or
other access rights, between Time Warner Telecom or any Restricted
Subsidiary and any other Person; provided, however, that such transaction
is on terms that:
(A) are consistent with Time Warner Telecom's past practice and
those of its Restricted Subsidiaries; and
(B) are no less favorable, taken as a whole, to Time Warner
Telecom or the relevant Restricted Subsidiary than those that could have
been obtained in a comparable transaction by Time Warner Telecom or such
Restricted Subsidiary with an unrelated Person (or, in the event that
there are no comparable transactions involving unrelated Persons to
apply for comparative purposes, is otherwise on terms that, taken as a
whole, Time Warner Telecom has determined to be fair to Time Warner
Telecom or the relevant Restricted Subsidiary); or
(6) any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant.
Notwithstanding the foregoing, any transaction or series of related
transactions covered by the first paragraph of this "Limitation on Transactions
with Shareholders and Affiliates" covenant and not covered by clauses (2)
through (6) of this paragraph, the aggregate amount of which exceeds $10 million
in value, must be determined to be fair in the manner provided for in clause
(1)(A) or (B) above.
LIMITATION ON LIENS
Time Warner Telecom will not, and will not permit any Restricted Subsidiary
to, create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character (including, without limitation, licenses), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the notes and all other amounts due under
the indenture to be directly secured
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equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the notes, prior to) the
obligation or liability secured by such Lien.
The foregoing limitation does not apply to:
(1) Liens existing on the Existing High Yield Closing Date;
(2) Liens granted after the Existing High Yield Closing Date on any
assets of Capital Stock of Time Warner Telecom or its Restricted
Subsidiaries created in favor of the Holders;
(3) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to Time Warner Telecom or a Wholly
Owned Restricted Subsidiary to secure Indebtedness owing to Time Warner
Telecom or such other Restricted Subsidiary;
(4) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (3) of
the second paragraph of the "Limitation on Indebtedness" covenant;
provided, however, that such Liens do not extend to or cover any property
or assets of Time Warner Telecom or any Restricted Subsidiary other than
the property or assets securing the Indebtedness being refinanced;
(5) Liens on the Capital Stock of, or any property or assets of, a
Restricted Subsidiary securing Indebtedness of such Restricted Subsidiary
permitted under the "Limitation on Indebtedness" covenant; or
(6) Permitted Liens
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
Time Warner Telecom will not, and will not permit any Restricted Subsidiary
to, enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby Time Warner Telecom
or a Restricted Subsidiary sells or transfers such assets or properties and then
or thereafter leases such assets or properties or any part thereof or any other
assets or properties which Time Warner Telecom or such Restricted Subsidiary, as
the case may be, intends to use for substantially the same purpose or purposes
as the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if:
(1) the lease is for a period, including renewal rights, of not in
excess of three years;
(2) the lease secures or relates to industrial revenue or pollution
control bonds;
(3) the transaction is solely between Time Warner Telecom and any
Wholly Owned Restricted Subsidiary or solely between Wholly Owned
Restricted Subsidiaries; or
(4) Time Warner Telecom or such Restricted Subsidiary applies an
amount not less than the net proceeds received from such sale in compliance
with the "Limitation on Asset Sales" covenant.
LIMITATION ON ASSET SALES
Time Warner Telecom will not, and will not permit any Restricted Subsidiary
to, consummate any Asset Sale, unless:
(1) the consideration received by Time Warner Telecom or its
Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of; and
(2) at least 75% of the consideration received consists of cash,
Temporary Cash Investments or the assumption of Indebtedness by Time Warner
Telecom (other than Indebtedness that is subordinated to the notes) or of a
Restricted Subsidiary and unconditional release of Time Warner Telecom and
its Restricted Subsidiaries from all liability on the Indebtedness assumed;
provided, however, that this clause shall not apply to long-term
assignments of capacity in a telecommunications network.
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In the event and to the extent that the Net Cash Proceeds received by Time
Warner Telecom or any of its Restricted Subsidiaries from one or more Asset
Sales occurring on or after the Closing Date in any period of 12 consecutive
months exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of
the date closest to the commencement of such 12-month period for which a
consolidated balance sheet of Time Warner Telecom and its Subsidiaries has been
filed with the SEC pursuant to the "SEC Reports and Reports to Holders"
covenant), then Time Warner Telecom shall or shall cause the relevant Restricted
Subsidiary to:
(1) within 12 months after the date Net Cash Proceeds so received
exceed 10% of Adjusted Consolidated Net Tangible Assets:
(A) apply an amount equal to such excess Net Cash Proceeds less
any amounts invested within 6 months prior to such Asset Sale in
property or assets of a nature or type or that are used in a business
(or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the
property and assets of, or the business of, Time Warner Telecom and its
Restricted Subsidiaries on the date of such Asset Sale (the "Adjusted
Net Cash Proceeds") to permanently repay Time Warner Telecom's
unsubordinated Indebtedness or that of any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on
Issuances of Guarantees by Restricted Subsidiaries" covenant or
Indebtedness of any other Restricted Subsidiary, in each case owing to a
Person other than Time Warner Telecom or its Restricted Subsidiaries; or
(B) invest an equal amount, or the amount of Adjusted Net Cash
Proceeds not so applied pursuant to clause (A) (or enter into a
definitive agreement committing to so invest within 12 months after the
date of such agreement), in property or assets (other than current
assets) of a nature or type or that are used in a business (or in a
company having property and assets of a nature or type, or engaged in a
business) similar or related to the nature or type of the property and
assets of, or the business of, Time Warner Telecom and its Restricted
Subsidiaries existing on the date of such investment (as determined in
good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a board resolution); and
(2) apply (no later than the end of the 12-month period referred to
clause (1)) such excess Adjusted Net Cash Proceeds (to the extent not
applied pursuant to clause (1) as provided in the following paragraph of
this "Limitation on Asset Sales" covenant): The amount of such excess
Adjusted Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (1) of the
preceding sentence and not applied as so required by the end of such period
shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10 million, Time Warner
Telecom must commence, not later than the fifteenth Business Day of such month,
and consummate an Offer to Purchase from the holders on a pro rata basis an
aggregate principal amount of notes and to the extent permitted or required by
the terms thereof, any other of Time Warner Telecom's Indebtedness that is pari
passu with the notes, equal to the Excess Proceeds on such date, at a purchase
price equal to 100% of the principal amount of the notes and such other
Indebtedness, if applicable, on the relevant Payment Date, plus, in each case,
accrued interest (if any) to the Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Time Warner Telecom must commence, within 30 days of the later of (1) the
occurrence of a Change of Control; and (2) the end of the Change of Control
Period with respect to a Change of Control, and consummate an Offer to Purchase
for all notes then outstanding, at a purchase price equal to 101% of the
principal amount thereof on the relevant Payment Date, plus accrued interest (if
any) to the Payment Date; provided, however, that Time Warner Telecom shall not
be required to commence and consummate an Offer to Purchase if, at the time
specified above for the commencement of an Offer to Purchase the notes shall be
rated Investment Grade.
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Time Warner Telecom cannot assure you that it will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of the notes) required by the foregoing covenant (as well
as may be contained in Time Warner Telecom's other securities which might be
outstanding at the time).
The above covenant requiring Time Warner Telecom to repurchase the notes
will, unless consents are obtained, require Time Warner Telecom to repay all
Indebtedness then outstanding which by its terms would prohibit such note
repurchase, either prior to or concurrently with such note repurchase.
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not Time Warner Telecom is then required to file reports with
the SEC, Time Warner Telecom will file with the SEC all reports and other
information as they would be required to file with the SEC by Sections 13(a) or
15(d) under the Securities Exchange Act of 1934 if they were subject thereto.
Time Warner Telecom will supply the Trustee and each holder or will supply to
the Trustee for forwarding to each holder, without cost to any holder, copies of
the reports and other information.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the indenture:
(1) default in the payment of principal of (or premium, if any, on)
any note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise;
(2) default in the payment of interest on any note when the same
becomes due and payable, and such default continues for a period of 30
days;
(3) default in the performance or breach of the provisions of the
indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of Time Warner Telecom or the failure to
make or consummate an Offer to Purchase in accordance with the "Limitation
on Asset Sales" or "Repurchase of notes upon a Change of Control" covenant;
(4) Time Warner Telecom defaults in the performance of or breaches
any other covenant or agreement of Time Warner Telecom in the indenture or
under the notes (other than a default specified in clause (1), (2) or (3)
above), and such default or breach continues for a period of 30 consecutive
days after written notice by the Trustee or the holders of 25% or more in
aggregate principal amount of the notes;
(5) there occurs with respect to any issue or issues of Indebtedness
of Time Warner Telecom or any Significant Subsidiary having an outstanding
principal amount of $12 million or more in the aggregate for all such
issues of all such Persons, whether such Indebtedness now exists or shall
hereafter be created, (A) an event of default that has caused the holder
thereof to declare such Indebtedness to be due and payable prior to its
Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (B) the failure to make a principal payment at the
final (but not any interim) fixed maturity and such defaulted payment shall
not have been made, waived or extended within 30 days of such payment
default;
(6) any final judgment or order (not covered by insurance) for the
payment of money in excess of $12 million in the aggregate for all such
final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against Time Warner Telecom or any Significant Subsidiary and
shall not be paid or discharged, and there shall be any period of 30
consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and
not paid or discharged against all such Persons to exceed $12 million
during which a stay of enforcement of such final judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect;
(7) a court having jurisdiction in the premises enters a decree or
order for
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(A) relief in respect of Time Warner Telecom or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect;
(B) appointment of a receiver, liquidator, assignee, custodian,
Trustee, sequestrator or similar official of Time Warner Telecom or any
Significant Subsidiary or for all or substantially all of the property
and assets of Time Warner Telecom or any Significant Subsidiary; or
(C) the winding up or liquidation of the affairs of Time Warner
Telecom or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed and in effect for a period of 30 consecutive
days; or
(8) Time Warner Telecom or any Significant Subsidiary
(A) commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consents
to the entry of an order for relief in an involuntary case under any
such law;
(B) consents to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of Time Warner Telecom or any Significant Subsidiary or
for all or substantially all of the property and assets of Time Warner
Telecom or any Significant Subsidiary; or
(C) effects any general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(7) or (8) above that occurs with respect to Time Warner Telecom) occurs and is
continuing under the indenture, the Trustee or holders of at least 25% in
aggregate principal amount of the notes then outstanding by written notice to
Time Warner Telecom (and to the Trustee if such notice is given by the holders),
may, and the Trustee at the request of such holders shall, declare the principal
amount of, premium, if any, and accrued interest on the notes to be immediately
due and payable. Upon a declaration of acceleration, such principal amount,
premium, if any, and accrued interest shall be immediately due and payable.
In the event of a declaration of acceleration because an Event of Default
set forth in clause (5) above has occurred and is continuing, such declaration
of acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (5) shall be
remedied or cured by Time Warner Telecom or the relevant Significant Subsidiary
or waived by the holders of the relevant Indebtedness within 60 days after the
declaration of acceleration with respect thereto.
If an Event of Default specified in clause (7) or (8) above occurs with
respect to Time Warner Telecom, the principal amount of, premium, if any, and
accrued interest on the notes then outstanding shall become and be immediately
due and payable without any declaration or other act on the part of the Trustee
or any holder.
The holders of at least a majority in principal amount of the outstanding
notes by written notice to Time Warner Telecom and to the Trustee, may waive all
past Defaults and rescind and annul a declaration of acceleration and its
consequences if (1) all existing Events of Default, other than the nonpayment of
the principal of, premium, if any, and interest on the notes that have become
due solely by such declaration of acceleration, have been cured or waived and
(2) the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction. For information as to the waiver of defaults, see
"--Modification and Waiver".
The holders of at least a majority in aggregate principal amount of the
outstanding notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of holders of notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from holders of such notes.
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A Holder may not pursue any remedy with respect to the indenture or the
notes unless:
(1) the holder gives the Trustee written notice of a continuing Event
of Default;
(2) the holders of at least 25% in aggregate principal amount of
outstanding notes make a written request to the Trustee to pursue the
remedy;
(3) such holder or holders offer the Trustee indemnity satisfactory
to the Trustee against any costs, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period, the holders of a majority in aggregate
principal amount of the outstanding notes do not give the Trustee a
direction that is inconsistent with the request.
However, such limitations do not apply to the right of any holder of a note
to receive payment of the principal amount of, premium, if any, or interest on,
such note or to bring suit for the enforcement of any such payment, on or after
the due date expressed in the notes, which right shall not be impaired or
affected without the consent of the holder.
The indenture will require certain of Time Warner Telecom's officers to
certify, on or before a date not more than 90 days after the end of each fiscal
year, that a review has been conducted of Time Warner Telecom's activities and
its Restricted Subsidiaries and its Restricted Subsidiaries' performance under
the indenture and that Time Warner telecom has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. Time
Warner Telecom will also be obligated to notify the Trustee of any default or
defaults in the performance of any covenants or agreements under the indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Time Warner Telecom will not consolidate with, merge with or into, or sell,
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into Time Warner Telecom unless:
(1) Time Warner Telecom shall be the continuing Person, or the Person
(if other than Time Warner Telecom) formed by such consolidation or into
which Time Warner Telecom is merged or that acquired or leased its property
and assets shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to
the Trustee, all of its obligations on all of the notes and under the
indenture;
(2) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction on a pro
forma basis, Time Warner Telecom or any Person becoming the successor
obligor of the notes shall have a Consolidated Net Worth equal to or
greater than the Consolidated Net Worth of Time Warner Telecom immediately
prior to such transaction; provided, however, that this clause (3) shall
only apply to a sale of substantially all, but less than all, of Time
Warner Telecom's assets;
(4) immediately after giving effect to such transaction on a pro
forma basis Time Warner Telecom, or any Person becoming the successor
obligor of the notes, as the case may be, could Incur at least $1.00 of
Indebtedness under (A) of the "Limitation on Indebtedness" covenant;
provided, however, that this clause (4) shall not apply to:
(A) a consolidation, merger or sale of all (but not less than all)
of Time Warner Telecom's assets if all of its Liens and Indebtedness of
Time Warner Telecom or of any Person becoming the
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successor obligor on the notes, as the case may be, and its Restricted
Subsidiaries outstanding immediately after such transaction would, if
Incurred at such time, have been permitted to be Incurred (and all such
Liens and Indebtedness, other than its Liens and Indebtedness of Time
Warner Telecom and its Restricted Subsidiaries outstanding immediately
prior to the transaction, shall be deemed to have been Incurred) for all
purposes of the indenture or
(B) a consolidation, merger or sale of all or substantially all of
Time Warner Telecom's assets if immediately after giving effect to such
transaction on a pro forma basis, Time Warner Telecom or any Person
becoming the successor obligor of the notes shall have a Consolidated
Leverage Ratio equal to or less than the Consolidated Leverage Ratio of
Time Warner Telecom immediately prior to such transaction; and
(5) Time Warner Telecom delivers to the Trustee an Officer's
Certificate (attaching the arithmetic computations to demonstrate
compliance with clauses (3) and (4) above) and opinion of counsel, in each
case stating that such consolidation, merger or transfer and such
supplemental indenture complies with this provision and that all conditions
precedent provided for herein relating to such transaction have been
complied with;
provided that paragraphs (3) and (4) above do not apply if, in the good faith
determination of Time Warner Telecom's Board of Directors, whose determination
shall be evidenced by a board resolution, the principal purpose of such
transaction is to change Time Warner Telecom's state of incorporation; and
provided further, however, that any such transaction shall not have as one of
its purposes the evasion of the foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE
The indenture will provide that Time Warner Telecom will be deemed to have
paid and will be discharged from any and all obligations in respect of the notes
on the 123rd day after the deposit referred to below, and the provisions of the
indenture will no longer be in effect with respect to the notes (except for,
among other matters, certain obligations to register the transfer or exchange of
the notes, to replace stolen, lost or mutilated notes, to maintain paying
agencies and to hold monies for payment in trust) if, among other things:
(1) Time Warner Telecom has deposited with the Trustee, in trust,
money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms
will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the notes on the Stated Maturity
of such payments in accordance with the terms of the indenture and the
notes;
(2) Time Warner Telecom has delivered to the Trustee
(A) either (i) an opinion of counsel to the effect that Holders
will not recognize income, gain or loss for federal income tax purposes
as a result of Time Warner Telecom's exercise of its option under this
"Defeasance" provision and will be subject to federal income tax on the
same amount and in the same manner and at the same times as would have
been the case if such deposit, defeasance and discharge had not
occurred, which opinion of counsel must be based upon (and accompanied
by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax
law after the Closing Date such that a ruling is no longer required or
(ii) a ruling directed to the Trustee received from the Internal Revenue
Service to the same effect as the aforementioned opinion of counsel and
(B) an opinion of counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and
after the passage of 123 days following the deposit, the trust fund will
not be subject to the effect of Section 547 of the United States
Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law;
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(3) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending
on the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which Time Warner telecom or any of its
Subsidiaries is a party or by which Time Warner Telecom or any of its
Subsidiaries is bound; and
(4) if at such time the notes are listed on a national securities
exchange, Time Warner Telecom has delivered to the Trustee and opinion of
counsel to the effect that the notes will not be delisted as a result of
such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT
The indenture further will provide that the provisions of the indenture
will no longer be in effect with respect to clauses (3) and (4) under
"Consolidation, Merger and Sale of Assets" and all the covenants described
herein under "Covenants," clause (3) under "Events of Default" with respect to
such clauses (3) and (4) under "Consolidation, Merger and Sale of Assets,"
clause (4) under "Events of Default" with respect to such other covenants and
clauses (5) and (6) under "Events of Default" shall be deemed not to be Events
of Default upon, among other things, the deposit with the Trustee, in trust, of
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the notes on the Stated Maturity of such payments in
accordance with the terms of the indenture and the notes, the satisfaction of
the provisions described in clauses (B)(2), (3) and (4) of the preceding
paragraph and the delivery by Time Warner Telecom to the Trustee of an opinion
of counsel to the effect that, among other things, the holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and defeasance of certain covenants and Events of Default and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT
In the event Time Warner Telecom exercises its option to omit compliance
with certain covenants and provisions of the indenture with respect to the notes
as described in the immediately preceding paragraph and such notes are declared
due and payable because of the occurrence of an Event of Default that remains
applicable, the amount of money and/or U.S. Government Obligations on deposit
with the Trustee will be sufficient to pay amounts due on such notes at the time
of their Stated Maturity but may not be sufficient to pay amounts due on such
notes at the time of the acceleration resulting from such Event of Default.
However, Time Warner Telecom will remain liable for such payments.
MODIFICATION AND WAIVER
WITH THE CONSENT OF HOLDERS
Modifications and amendments of the indenture may be made by Time Warner
Telecom and the Trustee with the consent of the holders of not less than a
majority in aggregate principal amount of the outstanding notes; provided that
no such modification or amendment may, without the consent of each holder
affected thereby:
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any note;
(2) reduce the principal amount of, or premium, if any, or interest
on, any note;
(3) change the place or currency of payment of principal of, or
premium, if any, or interest on, any note;
(4) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption,
on or after the Redemption Date) of any note;
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(5) reduce the above-stated percentage of outstanding notes, the
consent of whose Holders is necessary to modify or amend the indenture;
(6) waive a default in the payment of principal of, premium, if any,
or interest on the notes or modify any provisions of the indenture relating
to modification or amendment thereof; or
(7) reduce the percentage or aggregate principal amount of
outstanding notes, the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the indenture or for waiver of
certain defaults.
WITHOUT CONSENT OF THE HOLDERS
Time Warner Telecom, when authorized by a resolution of our Board of
Directors (as evidenced by board resolutions), and the Trustee may amend or
supplement this indenture or the notes without notice to or the consent of any
holder:
(1) to cure any ambiguity, defect or inconsistency in this indenture;
provided that such amendments or supplements shall not, in the good faith
opinion of the Board of Directors as evidenced by a board resolution,
adversely affect the interests of the Holders in any material respect;
(2) to comply with the provisions concerning consolidation, merger
and sale of assets;
(3) to comply with any requirements of the SEC in connection with the
qualification of this indenture under the Trust Indenture Act;
(4) to evidence and provide for the acceptance of appointment
hereunder by a successor trustee;
(5) to provide for uncertificated notes in addition to or in place of
certificated notes.
(6) to add one or more Subsidiary Guarantees on the terms required by
this indenture; and
(7) to make any change that, in the good faith opinion of the Board
of Directors as evidenced by a board resolution, does not materially and
adversely affect the rights of any holder.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of Time Warner Telecom in the indenture, or in
any of the notes or because of the creation of any Indebtedness represented
thereby, shall be had against any incorporator, stockholder, officer, director,
employee or controlling Person of either Time Warner Telecom or of any of its
successors. Each holder, by accepting the notes, waives and releases all such
liability.
TRUSTEE
The indenture provides that, except during the continuance of a Default,
the Trustee will perform only such duties as are specifically set forth in the
indenture. If an Event of Default has occurred and is continuing, the Trustee
will use the same degree of care and skill in its exercise of the rights and
powers vested in it under the indenture as a prudent person would exercise under
the circumstances in the conduct of such person's own affairs.
The indenture and provisions of the Trust Indenture Act of 1939,
incorporated by reference into the indenture contain limitations on the rights
of the Trustee, should it become a creditor of an Obligor, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided that if it acquires any conflicting
interest, it must eliminate such conflict or resign.
Affiliates of the Trustee, including The Chase Manhattan Bank and Chase
Securities Inc., have in the past provided and may in the future from time to
time provide, investment banking and general financing and banking services to
Time Warner Telecom and its affiliates for which they have received customary
fees.
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BOOK-ENTRY, DELIVERY AND FORM
THE NEW NOTES
The new notes will be issued in the form of one or more fully registered
new notes in the form of global notes. Global notes are not issued in
certificated form. Instead, global notes are deposited and registered in the
name of the Depository Trust Company. Unlike notes in certificated form where
there is an actual transfer or exchange of a certificated note, transfers and
exchanges of beneficial interest in global notes can only be effected through
DTC.
DEPOSITARY PROCEDURES
The global notes will be deposited upon issuance with, or on behalf of, the
DTC and registered in the name of DTC or its nominee. Except as described below,
the global notes may be transferred, in whole and not in part, only to DTC or
another nominee of DTC. Investors may hold their beneficial interests in the
global notes directly through DTC if they have an account with DTC or indirectly
through organizations which have accounts with DTC. Upon the issuance of the
global notes, DTC or its nominee will credit, on its book-entry registration and
transfer system, the number of new notes represented by the global notes to the
accounts of institutions that have accounts with DTC or its nominee
("participants"). The accounts to be credited shall be designated by the initial
purchasers.
Ownership of beneficial interests in the global notes will be limited to
participants or persons that may hold interests through participants. Ownership
of beneficial interests in the global notes will be shown on, and the transfer
of those ownership interests will be effected only through, records maintained
by DTC or its nominee, with respect to participants' interests, for the global
notes, or by participants or persons that hold interests through participants
with respect to beneficial interests in the global notes of persons other than
participants. The laws of some jurisdictions may require that some purchasers of
securities take physical delivery of the securities in definitive form. These
limits and laws may impair the ability to transfer or pledge beneficial interest
in the global notes.
So long as DTC, or its nominee, is the registered holder and owner of any
global notes, DTC or the nominee, will be considered the sole legal owner and
holder of the new notes represented by the global notes for all purposes under
the notes indenture. Except as set forth below, owners of beneficial interests
in the global notes will not:
-- be entitled to have the global notes or new notes represented by the
global notes registered in their names;
-- receive or be entitled to receive physical delivery of certificated
notes in definitive form; and
-- be considered to be the owners or holders of the global notes or any
new notes represented by the global notes for any purpose under the
notes indenture.
We understand that under existing industry practice, in the event an owner
of a beneficial interest in a global note desires to take any action that DTC,
as the holder of the global note, is entitled to take, DC would authorize the
participants to take the action, and that the participants would authorize
beneficial owners owning through these participants to take the action or would
otherwise act upon the instructions of beneficial owners owning through them.
Any payment of principal or interest due on the global notes on any payment
date or a maturity or upon mandatory redemption will be made available by us to
the trustee by that date. As soon as possible thereafter, the trusts will make
the payments to DTC or its nominee, as the registered owner of the global notes
in accordance with existing arrangement between the trustee and DTC.
We expect that:
-- DTC or its nominee, upon receipt of any payment of principal or
interest in respect of the global notes, will credit immediately the
accounts of the related participants with payments in amounts
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proportionate to their respective beneficial interests in the global
note as shown on the records of DTC; and
-- payments by participants to owners of beneficial interests in the
global notes held through the participants will be governed by
standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of these
participants.
None of us, the trustee and any payment agent for the global notes will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in any of the
global notes or for maintaining, supervising or reviewing any records relating
to the beneficial ownership interests or for other aspects of the relationship
between DTC and its participants or the relationship between these participants
and the owners of beneficial interests in the global notes owning through these
participants.
As long as the new notes are represented by a global note, DTC's nominee
will be the holder of the new notes and therefore will be the only entity that
can exercise a right to repayment or repurchase of the new notes, including
following a change of control or a tender offer for the new notes. Notice by
participants or by owners of beneficial interests in a global note held through
these participants of the exercise of the option to elect repayment of
beneficial interests in the new notes represented by a global note must be
transmitted to DTC in accordance with its procedures on a form required by DTC
and provided to participants. In order to ensure that DTC's nominee will timely
exercise a right to repayment with respect to a particular new note, the
beneficial owner of the new note must instruct the broker or other participant
to exercise a right to repayment. Different firms have cut-off times for
accepting instructions from their customers, and, accordingly, each beneficial
owner should consult the broker or other participant through which it holds an
interest in a security in order to ascertain the cut-off time by which such an
instruction must be given in order for timely notice to be delivered to DTC. We
will not be liable for any delay in delivery of notices of the exercise of the
option to elect repayment.
Unless and until exchanged in whole or in part for certificated notes in
definitive form, the global notes may not be transferred except as a whole by
DTC to a nominee of the DTC or by a nominee of the DTC to the DTC or another
nominee of the DTC.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global notes among participants of DTC, it is
under no obligation to perform or continue to perform these procedures, and
these procedures may be discontinued at any time. Neither the trustee nor we
will have any responsibility for the performance by DTC or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
DTC has advised us that DTC is:
-- a limited-purpose trust company organized under the laws of the State
of New York;
-- a member of the Federal Reserve System;
-- a "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
-- a "clearing agency" registered under the provisions of Section 17A of
the Exchange Act.
DTC was created to hold securities of institutions that have accounts with
DTC and to facilitate the clearance and settlement of securities transactions
among its participants in the securities through electronic book-entry changes
in accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. DTC's participants include securities
brokers and dealers, banks, trust companies, clearing corporations and other
organizations. The securities brokers may include Donaldson, Lufkin & Jenrette
Securities Corporation and Banc of America Securities LLC. Access to DTC's
book-entry system is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, whether directly or indirectly.
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EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A global note shall be exchangeable for corresponding certificated notes
registered in the name of persons other than DTC or its nominee only if:
(1) DTC:
-- notifies us that it is unwilling or unable to continue as depositary
for the global note; or
-- at any time ceases to be a clearing agency registered under the
Securities Exchange Act of 1934 and a successor depositary is not
appointed by us within 90 days;
(2) we in our discretion at any time determine not to have all of the
securities represented by the global notes; or
(3) an Event of Default (as defined in the notes indenture) with respect to
the new notes has occurred and is continuing.
Any new note that is exchangeable under the preceding sentence is
exchangeable for certificated notes issuable in authorized denominations and
registered in the names as DTC shall direct. Subject to the foregoing, the
global notes are not exchangeable, except for global notes of the same aggregate
denomination to be registered in the name of DTC or its nominee.
SAME-DAY PAYMENT
The notes indenture requires that payments in respect of the new notes
including principal, premium and interest be made by wire transfer of
immediately available U.S. dollar funds to the accounts specified by the holders
of the new note, or, if an account is not specified, by mailing a check to each
of the holder's registered address.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
This general discussion of certain U.S. Federal income and estate tax
consequences applies to you if you acquired old notes at original issue for cash
in the amount of the issue price, exchange your old notes for new notes pursuant
to the terms set forth in this prospectus and hold the new notes as capital
assets within the meaning of Section 1221 of the Internal Revenue Code of 1986,
as amended (the "Code"). This discussion is a summary for general information
only and does not consider all aspects of U.S. Federal income tax that may be
relevant to the purchase, ownership and disposition of the notes. This
discussion also does not address all of the U.S. Federal income tax consequences
of ownership of notes that may be relevant to you or the U.S. Federal income tax
consequences to you if you are subject to special treatment under the U.S.
Federal income tax laws, such as dealers in securities or foreign currency,
tax-exempt entities, banks, thrifts, insurance companies, persons that hold the
notes as part of a "straddle," a "hedge" against currency risk or a "conversion
transaction," have a functional currency other than the U.S. dollar and
investors in pass-through entities. It does not describe any tax consequences
arising out of the tax laws of any state, local or foreign jurisdiction.
This discussion is based upon the Code, regulations of the Treasury
Department, Internal Revenue Service ("IRS") rulings and pronouncements and
judicial decisions now in effect, all of which are subject to change (possibly
on a retroactive basis). We have not and will not seek any rulings or opinions
from the IRS or counsel regarding the matters discussed below. There can be no
assurance that the IRS will not take positions concerning the tax consequences
of the purchase, ownership or disposition of the notes that are different from
those discussed below.
PERSONS CONSIDERING THE EXCHANGE OF NOTES SHOULD CONSULT THEIR OWN ADVISERS
CONCERNING THE APPLICATION OF U.S. FEDERAL INCOME TAX LAWS, AS WELL AS THE LAWS
OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THEIR PARTICULAR
SITUATIONS.
U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a "U.S. Holder," which means a beneficial owner of a
note that is (1) a citizen or resident of the United States, (2) a corporation
or other entity taxed as a corporation created or organized under the laws of
the United States or any of its political subdivisions, (3) an estate the income
of which is subject to U.S. Federal income taxation regardless of its source, or
(4) a trust if a U.S. court is able to exercise primary supervision over
administration of the trust and one or more U.S. persons have authority to
control all substantial decisions of the trust. Certain U.S. Federal income tax
consequences relevant to a Holder other than a U.S. Holder are discussed
separately below.
Payment of Interest on Notes. Interest paid or payable on a note will be
taxable to a U.S. Holder as ordinary interest income, generally at the time it
is received or accrued, in accordance with such Holder's regular method of
accounting for U.S. Federal income tax purposes. The notes will not be issued
with original issue discount.
Failure of the Company to file or cause to be declared effective an
exchange offer registration statement or to consummate the exchange offer as
described under "Description of the Notes--Registration Rights" will cause
additional interest to accrue on the notes in the manner described therein. Such
additional interest may be treated as original issue discount, includable by a
Holder in income as such interest accrues, in advance of receipt of any cash
payment thereof.
Sale, Exchange or Retirement of the Notes. Upon the sale, exchange,
retirement or other disposition of a note, a U.S. Holder will generally
recognize taxable capital gain or loss equal to the difference between (1) the
amount realized on the disposition, except to the extent that amounts received
are attributable to accrued interest, which portion of the consideration would
be taxed as ordinary income if the interest was previously untaxed, and (2) the
U.S. Holder's adjusted tax basis in the note. A U.S. Holder's adjusted tax basis
in a note generally will equal the cost of the note to the U.S. Holder less any
principal payment received by such Holder. In the case of a noncorporate U.S.
Holder (including an individual), such capital gain or loss will be
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long term capital gain or loss if the note has been held for more than one year
at the time of the sale, exchange, retirement or other disposition.
Exchange Offer. The exchange of notes for exchange notes pursuant to the
Exchange Offer will not constitute a taxable event for U.S. Federal income tax
purposes. As a result, a Holder of the notes will not recognize taxable gain or
loss as a result of the exchange of these notes for exchange notes, the holding
period of the exchange notes will include the holding period of the notes
surrendered in exchange therefor and a Holder's adjusted tax basis in the
exchange notes will be the same as such Holder's adjusted tax basis in the notes
immediately prior to the surrender of such notes pursuant to the Exchange Offer.
Information Reporting and Backup Withholding. U.S. Holders of notes may be
subject, under certain circumstances, to information reporting and backup
withholding at a 31% rate on cash payments of principal and premium, if any, and
interest and on the gross proceeds from dispositions of notes. Backup
withholding applies only if the U.S. Holder: (1) fails to furnish its social
security or other taxpayer identification number within a reasonable time after
a request for such information, (2) furnishes an incorrect taxpayer
identification number, (3) fails to report properly interest or dividends or (4)
fails, under certain circumstances, to provide a certified statement, signed
under penalty of perjury, that the taxpayer identification number provided is
its correct number and that it is not subject to backup withholding.
Any amount withheld from a payment to a U.S. Holder under the backup
withholding rules is allowable as a credit and may entitle such Holder to a
refund against such U.S. Holder's U.S. Federal income tax liability, provided
that the required information is furnished to the IRS. Certain persons are
exempt from backup withholding, including corporations and financial
institutions. U.S. Holders of notes should consult their tax advisers as to
their qualification for exemption from backup withholding and the procedure for
obtaining such exemption.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a Holder of a note that is not a U.S. Holder (a
"Non-U.S. Holder").
Subject to the discussion of backup withholding below, payments of interest
on a note to any Non-U.S. Holder will generally not be subject to U.S. Federal
income tax or withholding, provided that:
(1) the Holder is not
(a) an actual or constructive owner of 10% or more of the total
voting power of all our voting stock,
(b) a controlled foreign corporation related (directly or
indirectly) to us through stock ownership or
(c) a foreign tax-exempt organization or a foreign private
foundation for U.S. Federal income tax purposes,
(2) such interest payments are not effectively connected with the
conduct by the Non-U.S. Holder of a trade or business within the United
States (and, if the Non-U.S. Holder can claim the benefit of an income tax
treaty, the interest is not attributable to a U.S. permanent establishment
r fixed base) and
(3) we or our paying agent receives
(a) from the Non-U.S. Holder, a properly completed Form W-8BEN (or
substitute Form W-8BEN) under penalty of perjury which provides that
Non-U.S. Holder's name and address and certifies that the Non-U.S.
Holder of the note is a Non-U.S. Holder or
(b) from a security clearing organization, bank or other financial
institution that holds the notes in the ordinary course of its trade or
business (a "financial institution") on behalf of the Non-U.S. Holder,
certification under penalty of perjury that such a Form W-8BEN (or
substitute Form W-8BEN) has been received by it, or by another such
financial institution, from the
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Non-U.S. Holder, and a copy of the Form W-8BEN (or substitute Form
W-8BEN) is furnished to the payor.
A Non-U.S. Holder that does not qualify for exemption from withholding
under the preceding paragraph generally (except as provided in the following
paragraph) will be subject to withholding of U.S. Federal income tax at the rate
of 30% (or lower applicable treaty rate) on payments of interest on a note.
If the payments of interest on a note are effectively connected with the
conduct by a Non-U.S. Holder of a trade or business in the United States (and,
if the Non-U.S. Holder can claim the benefit of an income tax treaty, the
interest is not attributable to a U.S. permanent establishment), such payments
will be subject to U.S. Federal income tax on a net basis at the rates
applicable to U.S. persons generally (and, if paid to corporate Holders, may
also be subject to a 30% branch profits tax). If payments are subject to U.S.
Federal income tax on a net basis in accordance with the rules described in the
preceding sentence, such payments will not be subject to U.S. withholding tax so
long as the Holder provides the Company or the paying agent with a properly
executed Form W-8ECI.
Non-U.S. Holders should consult any applicable income tax treaties, which
may provide for a lower rate of withholding tax, exemption from or reduction of
branch profits tax, or other rules different from those described above. To
claim the protection of an income tax treaty for withholding tax, a Non-U.S.
Holder must provide a properly executed Form W-BEN prior to the payment of
interest and must periodically update Form W-8BEN (or, if necessary, provide us
with the applicable successor form). New regulations that became effective on
January 1, 2001, require a Non-U.S. Holder to obtain a U.S. taxpayer
identification number and provide documentary evidence of residence in order to
claim treaty benefit.
Sale, Exchange or Retirement of Notes. Subject to the discussion of backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange,
retirement or other disposition of a note generally will not be subject to U.S.
Federal income tax, unless: (1) such gain is effectively connected with the
conduct by such Non-U.S. Holder of a trade or business within the United States
(and, if the Non-U.S. Holder can claim the benefit of an income tax treaty, the
gain is not attributable to a U.S. permanent establishment), (2) the Non-U.S.
Holder is an individual who is present in the United States for 183 days or more
in the taxable year of the disposition and certain other requirements are
satisfied or (3) the Non-U.S. Holder is subject to tax under provisions of U.S.
Federal tax law applicable to certain U.S. expatriates.
Federal Estate Tax. Notes held or treated as held by an individual who is a
Non-US. Holder at the time of his or her death will not be subject to U.S.
Federal estate tax provided that (1) the individual does not actually or
constructively own 10% or more of the total voting power of all our voting stock
and (2) income on the note was not effectively connected with the conduct by
such Non-U.S. Holder of a trade or business within the United States.
Information Reporting and Backup Withholding. We must report annually to
the IRS and to each Non-U.S. Holder any interest that is subject to withholding
or that is exempt from U.S. withholding tax. Copies of those information returns
may also be made available, under the provisions of a specific treaty or
agreement, to the tax authorities of the country in which the Non-U.S. Holder
resides.
The regulations provide that backup withholding is a withholding tax
imposed at the rate of 31% on payments to persons that fail to furnish certain
required information, and information reporting will not apply to payments made
on notes by us to a Non-U.S. Holder if the Holder certifies as to its non-U.S.
status under penalty of perjury or otherwise establishes an exemption, provided
that neither we nor our paying agent has actual knowledge that the Holder is a
U.S. person or that the conditions of any other exemption are not, in fact,
satisfied.
The payment of the proceeds from the disposition of notes to or through the
U.S. office of any broker, U.S. or foreign, will be subject to information
reporting and possibly backup withholding unless the owner certifies as to its
non-U.S. status under penalty of perjury or otherwise establishes an exemption,
provided that the broker does not have actual knowledge that the Holder is a
U.S. person or that the conditions of any other exemption are not, in fact,
satisfied. The payment of the proceeds from the disposition of a note to or
through a
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non-U.S. office of a non-U.S. broker that is not a U.S. related person will not
be subject to information reporting or backup withholding. For this purpose, a
"U.S. related person" is (1) a "controlled foreign corporation" for U.S. Federal
income tax purposes or (2) a foreign person 50% or more of whose gross income
from all sources for the three-year period ending with the close of its taxable
year preceding the payment, or for such part of the period that the broker has
been in existence, is derived from activities that are effectively connected
with the conduct of a U.S. trade or business, or, is not a foreign partnership
doing business in the United States or in which U.S. persons own more than 50%
of the income or capital investment.
In the case of the payment of proceeds from the disposition of notes to or
through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the regulations require information reporting on the payment
unless the broker has documentary evidence in its files that the owner is a
Non-U.S. Holder and the broker has no knowledge to the contrary. Backup
withholding will not apply to payments made through foreign offices of a broker
that is a U.S. person or a U.S. related person, absent actual knowledge that the
payee is a U.S. person.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. Federal income tax liability, provided that the requisite
procedures are followed.
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142
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of the new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes where the old notes
were acquired as a result of market-making activities or other trading
activities. We have agreed that, for at least 90 days after the exchange offer
is completed, we will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any resale of new
notes.
We will not receive any proceeds from any sales of the new notes by
broker-dealers. The new notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of methods of resale,
at market prices prevailing at the time of resale, at prices related to those
prevailing market prices or at negotiated prices. Any resale may be made
directly to the purchaser or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from the broker-dealer
and/or the purchasers of the new notes. Any broker-dealer that resells the new
notes that were received by it for its own account pursuant to the exchange
offer and any broker or dealer that participates in a distribution of the new
notes may be deemed to be an "underwriter" within the meaning of the Securities
Act and any profit on any resale of new notes and any commissions or concessions
received by any of those persons may be deemed to be underwriting compensation
under the Securities Act. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
We have agreed to pay the expenses incident to the exchange offer, other
than commission or concessions of any brokers or dealers and the fees of any
counsel or other advisors or experts retained by the holders of old notes, and
will indemnify the holder of the new notes (including any broker-dealers)
against related liabilities, including liabilities under the Securities Act.
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143
LEGAL MATTERS
Certain legal matters in connection with the new notes offered hereby will
be passed upon for Time Warner Telecom by Cravath, Swaine & Moore, New York, New
York.
EXPERTS
The consolidated and combined financial statements of Time Warner Telecom
Inc. ("the Company") appearing in the Company's Annual Report (Form 10-K) for
the year ended December 31, 1999, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated and combined financial
statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
The consolidated balance sheets of GST Telecommunications, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' deficit and cash flows for each of the
years in the two-year period ended December 31, 1999, the three month period
ended December 31, 1997 and for the year ended September 30, 1997 have been
incorporated by reference herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing. The report of KPMG LLP covering the December 31,
1999, financial statements contains an explanatory paragraph that states that
the accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in note 16(c) and (d)
to the consolidated financial statements, on May 17, 2000, the Company filed for
protection from its creditors under Chapter 11 of the U.S. Bankruptcy Laws.
Subsequent to this filing, the Company conducted an auction under the
supervision of the U.S. District Court for the District of Delaware that has
resulted in a definitive agreement to sell a substantial portion of the
Company's assets to Time Warner Telecom Inc. These actions raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the restated certificate of incorporation of Time Warner
Telecom Inc. (the "Company") provides that to the fullest extent permitted under
the General Corporation Law of the State of Delaware (the "DGCL"), a director of
the Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director.
Section 102(b)(7) of the DGCL provides that a corporation may eliminate or
limit the personal liability of a director (or certain persons who, pursuant to
the provisions of the certificate of incorporation, exercise or perform duties
conferred or imposed upon directors by the DGCL) to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a
director:
-- for any breach of the director's duty of loyalty to the corporation
or its stockholders;
-- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
-- under Section 174 of the DGCL (providing for liability of directors
for unlawful payment of dividends or unlawful stock purchases or
redemptions); or
-- for any transaction from which the director derived an improper
personal benefit.
Article VII of the By-laws of the Company provides that to the fullest
extent permitted under the DGCL, the Company will indemnify and hold harmless
any person that was or is made or threatened to be made a party or is otherwise
involved in any action, suit or proceeding by reason of the fact that such
person is or was a director or officer of the Company. Section 145 of the DGCL
provides that a corporation may indemnify directors and officers as well as
other employees and individuals against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation -- a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) actually and reasonably incurred
in connection with the defense or settlement of such action, and the statute
requires court approval before there can be any indemnification where the person
seeking indemnification has been found liable to the corporation. The statute
provides that it is not exclusive of other indemnification that may be granted
by a corporation's charter, by-laws, disinterested director vote, stockholder
vote, agreement or otherwise. The Company also has obtained insurance policies
which provide coverage for the Company's directors and officers in certain
situations, including some situations where the Company cannot directly
indemnify the directors of officers.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2.1 -- Reorganization Agreement among Time Warner Companies, Inc.,
MediaOne Group, Inc., Advance/Newhouse Partnership, Time
Warner Entertainment Company, L.P., and Time Warner
Entertainment-Advance/Newhouse Partnership (filed as Exhibit
2.1 to Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998)*
2.2 -- Merger Agreement among the Company, Time Warner Telecom LLC
and Time Warner Telecom Inc. (filed as Exhibit 2.2 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-49439))*
2.3 -- Asset Purchase Agreement dated as of September 11, 2000
among Time Warner Telecom Inc., GST Telecommunications,
Inc., GST USA, Inc. and the other parties identified on
Exhibit A thereto (filed as Exhibit 2.1 to the Company's
Report on Form 8-K dated September 18, 2000 and dated
September 11, 2000).*
3.1 -- Restated Certificate of Incorporation of the Company (filed
as Exhibit 3.1 to Company's Registration Statement on Form
S-1 (Registration No. 333-=49439))*
3.2 -- Restated By-laws of the Company (filed as Exhibit 3.2 to
Company's Registration Statement on Form S-1 (Registration
No. 333-=49439))*
4.1 -- Stockholders Agreement, among the Company, Time Warner
Companies, Inc., American Television and Communications
Corporation, Warner Communications Inc., TW/TAE Inc.,
FibrCom Holdings, L.P., Paragon Communications, MediaOne
Group, Inc., Multimedia Communications, Inc. and
Advance/Newhouse Partnership (filed as Exhibit 4.1 to Com-
pany's Registration Statement on Form S-1 (Registration No.
333-49439))*
4.2 -- Amendment No. 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 of Colorado, Inc., Multimedia Communications, Inc.
and Advance/Newhouse Partnerships.**
4.3 -- Indenture, between Time Warner Telecom LLC, TWT Inc. and The
Chase Manhattan Bank, as Trustee (filed as Exhibit 4.1 to
Time Warner Telecom LLC's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998)*
4.4 -- Indenture, between the Company 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))*
5.1 -- Opinion of Cravath, Swaine & Moore**
10.1 -- Lease, between Quebec Court Joint Venture No. 2, Landlord,
and Intelligent Advanced Systems, Inc., Tenant, dated June
3, 1994 (filed as Exhibit 10.1 to Time Warner Telecom LLC's
Registration Statement on Form S-1 (Registration No.
333-53553))*
10.2 -- Agreement for Assignment of Lease, dated September 12, 1997,
between Ingram Micro Inc. and Time Warner Communications
Holdings Inc. (filed as Exhibit 10.2 to Time Warner Telecom
LLC's Registration Statement on Form S-1 (Registration No.
333-53553))*
10.3 -- First Amendment to Lease, dated October 15, 1997, by
CarrAmerica Realty, L.P. and Time Warner Communications
Holdings Inc. (filed as Exhibit 10.3 to Time Warner Telecom
LLC's Registration Statement on Form S-1 (Registration No.
333-53553))*
10.4 -- Time Warner LLC 1998 Option Plan as amended December 8, 1999
10.5 -- Employment Agreement between the Company and Larissa L.
Herda (filed as Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999)*
10.6 -- Employment Agreement between the Company and Paul B. Jones
(filed as Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)*
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146
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.7 -- Employment Agreement between the Company and A. Graham
Powers (filed as Exhibit 10.7 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999)*
10.8 -- Employment Agreement between the Company and David Rayner
(filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)*
10.9 -- Employment Agreement between the Company and John T. Blount
(filed as Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)*
10.10 -- Employment Agreement between the Company and Michael Rouleau
(filed as Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)*
10.11 -- Employment Agreement between the Company and Julie Rich
(filed as Exhibit 10.11 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)*
10.12 -- Employment Agreement between the Company and Raymond Whinery
(filed as Exhibit 10.12 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)*
10.13 -- Capacity License Agreement (filed as Exhibit 10.3 to
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998)*
10.14 -- Trade Name License Agreement (filed as Exhibit 10.4 to
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998)*
10.15 -- Master Capacity Agreement between MCImetro Access
Transmission Services, Inc. and Time Warner Communications
dated September 9, 1994, as amended on September 9, 1999 and
August 28, 1997 (field as Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (Registration No.
333-49439))*
10.16 -- Amended and Restated Bank Facility (filed as Exhibit 99.2 to
the Company's Current Report on Form 8-K dated January 12,
2001)*
10.17 -- Amended and Restated Guarantee and Collateral Agreement
(filed as Exhibit 99.3 to the Company's Current Report on
Form 8-K dated January 12, 2001)*
10.18 -- Bridge Credit Agreement (filed as Exhibit 99.4 to the
Company's Current Report on Form 8-K dated January 12,
2001)*
21.1 -- Subsidiaries of the Company (filed as Exhibit 21 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-49439))*
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of KPMG LLP
23.3 -- Consent of Cravath, Swaine & Moore (contained in Exhibit
5.1)
24.1 -- Power of Attorney (included in signature page)
25.1 -- Statement of Eligibility of Trustee (filed as Exhibit 25 to
the Company's Registration Statement on Form S-3
(Registration No. 333-49818))*
99.1 -- Letter of Transmittal
99.2 -- Notice of Guaranteed Delivery
99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies
99.4 -- Form of Letter to Clients
99.5 -- Guidelines for Certification of Taxpayer Identification
Number on Substitute Form 99
- ---------------
* Incorporated by reference.
** To be filed by amendment.
II-3
147
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of any
of the registrant's annual reports pursuant to section 13(a) or section 15(d) of
the Exchange Act that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described in Item 20 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrants of expenses incurred or paid by a director, officer
or controlling person of the registrants in the successful defense of any
action, suit or proceeding) is asserted by such officer, director or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of their counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by them is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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148
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Littleton, State of Colorado, on this 9th day of
February, 2001.
TIME WARNER TELECOM INC.
By: /s/ PAUL B. JONES
------------------------------------
Name: Paul B. Jones
Title: Senior Vice President,
General
Counsel & Regulatory Policy
POWERS OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below hereby constitutes and appoints Paul B. Jones and David J. Rayner, and
each of them singly, his or her true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this Registration Statement
(any of which amendments may make such changes and additions to this
Registration Statement as such attorneys-in-fact may deem necessary or
appropriate) and to file the same, with all exhibits thereto, and any other
documents that may be required in connection therewith, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LARISSA L. HERDA President and Chief Executive February 9, 2001
- --------------------------------------------------- Officer and Representative
Larissa L. Herda
/s/ DAVID J. RAYNER Senior Vice President and February 9, 2001
- --------------------------------------------------- Chief Financial Officer
David J. Rayner
/s/ JILL STUART Vice President, Accounting February 9, 2001
- --------------------------------------------------- and Finance and Chief
Jill Stuart Accounting Officer
/s/ GLENN A. BRITT Director February 9, 2001
- ---------------------------------------------------
Glenn A. Britt
Director
- ---------------------------------------------------
Bruce Claflin
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149
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD J. DAVIES Director February 9, 2001
- ---------------------------------------------------
Richard J. Davies
Director
- ---------------------------------------------------
Spencer B. Hays
/s/ LARISSA L. HERDA Director February 9, 2001
- ---------------------------------------------------
Larissa L. Herda
Director
- ---------------------------------------------------
Robert J. Miron
/s/ WILLIAM T. SCHLEYER Director February 9, 2001
- ---------------------------------------------------
William T. Schleyer
/s/ LISA HOOK Director February 9, 2001
- ---------------------------------------------------
Lisa Hook
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EXHIBITS INDEX
The following exhibits are filed as a part of this Registration Statement.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2.1 -- Reorganization Agreement among Time Warner Companies, Inc.,
MediaOne Group, Inc., Advance/Newhouse Partnership, Time
Warner Entertainment Company, L.P., and Time Warner
Entertainment-Advance/Newhouse Partnership (filed as Exhibit
2.1 to Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998)*
2.2 -- Merger Agreement among the Company, Time Warner Telecom LLC
and Time Warner Telecom Inc. (filed as Exhibit 2.2 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-49439))*
2.3 -- Asset Purchase Agreement dated as of September 11, 2000
among Time Warner Telecom Inc., GST Telecommunications,
Inc., GST USA, Inc. and the other parties identified on
Exhibit A thereto (filed as Exhibit 2.1 to the Company's
Report on Form 8-K dated September 18, 2000 and dated
September 11, 2000).*
3.1 -- Restated Certificate of Incorporation of the Company (filed
as Exhibit 3.1 to Company's Registration Statement on Form
S-1 (Registration No. 333-=49439))*
3.2 -- Restated By-laws of the Company (filed as Exhibit 3.2 to
Company's Registration Statement on Form S-1 (Registration
No. 333-=49439))*
4.1 -- Stockholders Agreement, among the Company, Time Warner
Companies, Inc., American Television and Communications
Corporation, Warner Communications Inc., TW/TAE Inc.,
FibrCom Holdings, L.P., Paragon Communications, MediaOne
Group, Inc., Multimedia Communications, Inc. and
Advance/Newhouse Partnership (filed as Exhibit 4.1 to Com-
pany's Registration Statement on Form S-1 (Registration No.
333-49439))*
4.2 -- Amendment No. 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 of Colorado, Inc., Multimedia Communications, Inc.
and Advance/Newhouse Partnerships.**
4.3 -- Indenture, between Time Warner Telecom LLC, TWT Inc. and The
Chase Manhattan Bank, as Trustee (filed as Exhibit 4.1 to
Time Warner Telecom LLC's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998)*
4.4 -- Indenture, between the Company 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))*
5.1 -- Opinion of Craveth, Swaine & Moore**
10.1 -- Lease, between Quebec Court Joint Venture No. 2, Landlord,
and Intelligent Advanced Systems, Inc., Tenant, dated June
3, 1994 (filed as Exhibit 10.1 to Time Warner Telecom LLC's
Registration Statement on Form S-1 (Registration No.
333-53553))*
10.2 -- Agreement for Assignment of Lease, dated September 12, 1997,
between Ingram Micro Inc. and Time Warner Communications
Holdings Inc. (filed as Exhibit 10.2 to Time Warner Telecom
LLC's Registration Statement on Form S-1 (Registration No.
333-53553))*
10.3 -- First Amendment to Lease, dated October 15, 1997, by
CarrAmerica Realty, L.P. and Time Warner Communications
Holdings Inc. (filed as Exhibit 10.3 to Time Warner Telecom
LLC's Registration Statement on Form S-1 (Registration No.
333-53553))*
10.4 -- Time Warner LLC 1998 Option Plan as amended December 8, 1999
10.5 -- Employment Agreement between the Company and Larissa L.
Herda (filed as Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999)*
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151
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.6 -- Employment Agreement between the Company and Paul B. Jones
(filed as Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)*
10.7 -- Employment Agreement between the Company and A. Graham
Powers (filed as Exhibit 10.7 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999)*
10.8 -- Employment Agreement between the Company and David Rayner
(filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)*
10.9 -- Employment Agreement between the Company and John T. Blount
(filed as Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)*
10.10 -- Employment Agreement between the Company and Michael Rouleau
(filed as Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)*
10.11 -- Employment Agreement between the Company and Julie Rich
(filed as Exhibit 10.11 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)*
10.12 -- Employment Agreement between the Company and Raymond Whinery
(filed as Exhibit 10.12 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)*
10.13 -- Capacity License Agreement (filed as Exhibit 10.3 to
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998)*
10.14 -- Trade Name License Agreement (filed as Exhibit 10.4 to
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998)*
10.15 -- Master Capacity Agreement between MCImetro Access
Transmission Services, Inc. and Time Warner Communications
dated September 9, 1994, as amended on September 9, 1999 and
August 28, 1997 (field as Exhibit 10.12 to the Company's
Registration Statement on Form S-1 (Registration No.
333-49439))*
10.16 -- Amended and Restated Bank Facility (filed as Exhibit 99.2 to
the Company's Current Report on Form 8-K dated January 12,
2001)*
10.17 -- Amended and Restated Guarantee and Collateral Agreement
(filed as Exhibit 99.3 to the Company's Current Report on
Form 8-K dated January 12, 2001)*
10.18 -- Bridge Credit Agreement (filed as Exhibit 99.4 to the
Company's Current Report on Form 8-K dated January 12,
2001)*
21.1 -- Subsidiaries of the Company (filed as Exhibit 21 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-49439))*
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of KPMG LLP
23.3 -- Consent of Cravath, Swaine & Moore (contained in Exhibit
5.1)
24.1 -- Power of Attorney (included in signature page)
25.1 -- Statement of Eligibility of Trustee (filed as Exhibit 25 to
the Company's Registration Statement on Form S-3
(Registration No. 333-49818))*
99.1 -- Letter of Transmittal
99.2 -- Notice of Guaranteed Delivery
99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies
99.4 -- Form of Letter to Clients
99.5 -- Guidelines for Certification of Taxpayer Identification
Number on Substitute Form 99
- ---------------
* Incorporated by reference.
** To be filed by amendment.
II-8