UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-30218
TIME WARNER TELECOM INC.
------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1500624
- ------------------------------------ ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10475 Park Meadows Drive
Littleton, Colorado 80124
- ----------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 566-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of Time Warner Telecom Inc.'s common stock as
of October 31, 2001 was:
Time Warner Telecom Inc. Class A common stock -- 48,436,351 shares
Time Warner Telecom Inc. Class B common stock -- 65,936,658 shares
TIME WARNER TELECOM INC.
INDEX TO FORM 10-Q
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Page
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Part I. Financial Information
---------------------
Item 1. Financial Statements:
---------------------
Consolidated and Condensed Balance Sheets at September 30,
2001 and December 31, 2000 1
Consolidated Statements of Operations for the three and nine months
ended September 30, 2001 and 2000 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000 3
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended September 30, 2001 4
Notes to Consolidated and Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Part II. Other Information
-----------------
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
TIME WARNER TELECOM INC.
CONSOLIDATED AND CONDENSED BALANCE SHEETS
September 30, December 31,
2001 2000
------------------- ------------------
(unaudited)
(amounts in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 364,174 71,739
Cash held in escrow........................................................ - 179,000
Marketable debt securities................................................. 15,945 3,496
Receivables, less allowances of $28,093 and $17,610, respectively ......... 98,637 83,027
Prepaid expenses........................................................... 4,911 2,505
Deferred income taxes...................................................... 32,316 34,418
---------- ----------
Total current assets.................................................. 515,983 374,185
---------- ----------
Property, plant and equipment................................................... 2,217,605 1,195,744
Less accumulated depreciation.............................................. (419,065) (283,572)
---------- ----------
1,798,540 912,172
---------- ----------
Deferred income taxes........................................................... 7,735 -
Intangible and other assets, net of accumulated amortization (notes 1 and 2).. 66,192 101,397
---------- ----------
Total assets.......................................................... $2,388,450 1,387,754
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 72,978 72,041
Deferred revenue........................................................... 46,812 53,286
Other current liabilities.................................................. 224,441 159,390
---------- ----------
Total current liabilities............................................ 344,231 284,717
---------- ----------
Long-term debt and capital lease obligations (note 3)........................... 1,064,836 585,107
Deferred income taxes........................................................... - 46,163
Stockholders' equity (note 1):
Preferred stock, $0.01 par value, 20,000,000 shares authorized, no
shares issued and outstanding.......................................... - -
Class A common stock, $0.01 par value, 277,300,000 shares authorized,
48,436,351 and 33,702,461 shares issued and outstanding in 2001
and 2000, respectively................................................... 484 337
Class B common stock, $0.01 par value, 162,500,000 shares authorized,
65,936,658 and 72,226,500 shares issued and outstanding in 2001 and
2000, respectively....................................................... 659 722
Additional paid-in capital................................................. 1,164,350 601,081
Accumulated other comprehensive income (loss), net of taxes................ (600) 6,492
Accumulated deficit........................................................ (185,510) (136,865)
---------- ----------
Total stockholders' equity............................................ 979,383 471,767
---------- ----------
Total liabilities and stockholders' equity............................ $2,388,450 1,387,754
========== =========
See accompanying notes.
1
TIME WARNER TELECOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2001 2000 2001 2000
--------- ------- ------- -------
(amounts in thousands, except per share amounts)
Revenue (a):
Dedicated transport services.................................. $ 105,872 71,129 319,645 183,759
Switched services............................................. 66,853 50,027 244,104 169,308
--------- ------- ------- -------
Total revenue............................................ 172,725 121,156 563,749 353,067
--------- ------- ------- -------
Costs and expenses (a):
Operating..................................................... 77,505 48,299 237,872 130,846
Selling, general and administrative........................... 58,238 44,475 180,170 122,663
Depreciation and amortization................................. 51,951 23,994 150,848 68,793
--------- ------- ------- -------
Total costs and expenses................................. 187,694 116,768 568,890 322,302
--------- ------- ------- -------
Operating income (loss) ............................................ (14,969) 4,388 (5,141) 30,765
Interest expense ................................................... (26,980) (10,043) (88,050) (30,657)
Interest income..................................................... 3,795 2,220 16,370 9,016
Investment losses, net.............................................. (1,464) - (1,464) -
--------- ------- ------- -------
Net income (loss) before income taxes............................... (39,618) (3,435) (78,285) 9,124
Income tax expense (benefit)........................................ (15,295) (1,110) (29,640) 4,542
--------- ------- ------- -------
Net income (loss)................................................... $ (24,323) (2,325) (48,645) 4,582
========= ======= ======= =======
Basic and diluted earnings (loss) per share $ (0.21) (0.02) (0.43) 0.04
========= ======= ======= =======
Weighted average shares outstanding:
Basic.......................................................... 114,340 105,531 113,466 105,262
========= ======= ======= =======
Diluted........................................................ 114,340 105,531 113,466 108,427
========= ======= ======= =======
(a) Includes revenue and expenses resulting from transactions with affiliates
(note 4):
Revenue................................................ $ 6,458 3,514 18,051 7,036
========= ======= ======= =======
Operating.............................................. $ 680 682 2,039 2,045
========= ======= ======= =======
Selling, general, and administrative................... $ 451 399 1,222 1,100
========= ======= ======= =======
Depreciation and amortization.......................... $ 3,436 2,834 10,089 8,377
========= ======= ======= =======
See accompanying notes.
2
TIME WARNER TELECOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
----------------------------------
2001 2000
-------------- --------------
(amounts in thousands)
Cash flows from operating activities:
Net income (loss)................................................................... $ (48,645) 4,582
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.................................................... 150,848 68,793
Impairment of deferred debt issue costs.......................................... 5,814 -
Investment losses, net........................................................... 1,464 -
Amortization of deferred debt issue costs........................................ 3,334 1,661
Deferred income tax expense (benefit)............................................ (29,874) 4,542
Changes in operating assets and liabilities, net of the effect of an
acquisition:
Receivables and prepaid expenses.............................................. (3,135) (28,478)
Accounts payable, deferred revenue and other current liabilities.............. 26,817 20,138
--------- -------
Net cash provided by operating activities.................................. 106,623 71,238
--------- -------
Cash flows from investing activities:
Capital expenditures................................................................ (337,136) (213,246)
Cash paid for an acquisition........................................................ (651,689) (10,000)
Purchases of marketable securities.................................................. (71,073) (93,919)
Proceeds from maturities of marketable securities................................... 58,624 239,326
Other investing activities.......................................................... 3,363 (9,978)
--------- -------
Net cash used in investing activities....................................... (997,911) (87,817)
--------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock.......................................... 532,178 -
Net proceeds from issuance of debt.................................................. 1,159,586 -
Repayments of debt.................................................................. (700,000) -
Net proceeds from issuance of common stock upon exercise of stock options........... 12,997 10,370
Net proceeds from issuance of common stock in connection with the employee
stock purchase plan.............................................................. 1,004 2,089
Payment of capital lease obligations................................................ (2,120) (315)
Deferred debt issue costs, net...................................................... 1,078 (12,060)
--------- -------
Net cash provided by financing activities................................... 1,004,723 84
--------- -------
Increase (decrease) in cash, cash equivalents, and cash held in escrow...... 113,435 (16,495)
Cash, cash equivalents, and cash held in escrow at beginning of period...... 250,739 90,586
--------- -------
Cash, cash equivalents, and cash held in escrow at end of period............ $ 364,174 74,091
========= =======
Supplemental disclosures of cash flow information:
Cash paid for interest....................................................... $ 82,468 38,407
========= =======
Tax benefit related to exercise of non-qualified stock options............... $ 17,174 18,524
========= =======
Cash paid for income taxes................................................... $ 728 419
========= =======
See accompanying notes.
3
TIME WARNER TELECOM INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2001
(Unaudited)
Common Stock Additional
---------------------------------------------
Class A Class B paid-in
-------------------- --------------------
Shares Amount Shares Amount capital
-------- ------- --------- ------- -----------
(amounts in thousands)
Balance at January 1, 2001.............................. 33,702 $337 72,227 $722 601,081
Issuance of common stock, net of
offering expenses of $24,243
(note 1).......................................... 7,475 75 - - 532,103
Shares issued for cash in connection
with the exercise of stock options................... 933 9 - - 30,162
Shares issued for cash in connection
with the employee stock purchase
plan.................................................. 36 - - - 1,004
Conversion of shares by related party.................... 6,290 63 (6,290) (63) -
Change in unrealized holding gain for
available-for-sale security, net
of taxes............................................... - - - - -
Net loss................................................. - - - - -
------ ---- ------ ---- ---------
Balance at September 30, 2001............................... 48,436 $484 65,937 $659 1,164,350
====== ==== ====== ==== =========
Accumulated
other
comprehensive Total
income, Accumulated stockholders'
net of taxes deficit equity
------------ ----------- ------------
Balance at January 1, 2001.............................. 6,492 (136,865) 471,767
Issuance of common stock, net of
offering expenses of $24,243
(note 1).......................................... - - 532,178
Shares issued for cash in connection
with the exercise of stock options................... - - 30,171
Shares issued for cash in connection
with the employee stock purchase
plan.................................................. - - 1,004
Conversion of shares by related party.................... - - -
Change in unrealized holding gain for
available-for-sale security, net
of taxes............................................... (7,092) - (7,092)
Net loss................................................. - (48,645) (48,645)
------ -------- -------
Balance at September 30, 2001............................... (600) (185,510) 979,383
====== ======== =======
See accompanying notes.
4
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
September 30, 2001
(unaudited)
1. Organization and Summary of Significant Accounting Policies
Description of Business and Capital Structure
Time Warner Telecom Inc. (the "Company"), a Delaware corporation, is a
leading fiber facilities-based provider of integrated communications
services and solutions to medium and large-sized business customers in
selected metropolitan markets across the United States. The Company offers
local businesses "last-mile" broadband connections for data, high-speed
Internet access, local voice, and long distance services.
The Company has two classes of common stock outstanding, Class A
common stock and Class B common stock. Holders of Class A common stock have
one vote per share and holders of Class B common stock have ten votes per
share. Each share of Class B common stock is convertible, at the option of
the holder, into one share of Class A common stock. The Class B common
stock is collectively owned by Time Warner Inc., a wholly owned subsidiary
of AOL Time Warner Inc. ("Time Warner"), Advance Telecom Holdings
Corporation, and Newhouse Telecom Holdings Corporation. Holders of Class A
common stock and Class B common stock generally vote together as a single
class. However, some matters require the approval of 100% of the holders of
the Class B common stock voting separately as a class, and some matters
require the approval of a majority of the holders of the Class A common
stock, voting separately as a class. During the second quarter of 2001,
AT&T Corp. converted its remaining Class B common stock into Class A common
stock. As of September 30, 2001, the Class B Stockholders had approximately
93.2% of the combined voting power of the outstanding common stock.
On January 25, 2001, the Company completed a public offering of
7,475,000 shares of Class A common stock at a price of $74 7/16 per share
(the "Offering"). The Offering generated $532.2 million in proceeds for the
Company, net of underwriting discounts and expenses. Also on January 25,
2001, the Company completed a private placement of $400 million principal
amount of 10 1/8% Senior Notes due February 2011 (the "Old Notes").
Pursuant to an exchange offer in March 2001, all of the holders of the Old
Notes exchanged their Old Notes for new 10 1/8% Senior Notes due February
2011 (the "10 1/8% Senior Notes") with the same financial terms that were
registered under the Securities Act of 1933. The Company used all of the
net proceeds from the Offering and a portion of the net proceeds from the
offering of the Old Notes to repay the $700 million senior unsecured bridge
facility, that initially financed the acquisition of substantially all of
the assets of GST Telecommunications, Inc. ("GST") (see note 2). The
remaining net proceeds from the offering of the Old Notes will be used for
capital expenditures, working capital, and general corporate purposes.
Basis of Presentation
The accompanying interim consolidated and condensed financial
statements are unaudited, but in the opinion of management, reflect all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of operations for
any interim period are not necessarily indicative of results for the full
year. The accompanying financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto for
the year ended December 31, 2000.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
5
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and all entities in which the Company has a controlling voting
interest ("subsidiaries"). Significant intercompany accounts and
transactions have been eliminated. Significant accounts and transactions
with Time Warner are disclosed as related party transactions.
Investments
Marketable equity securities held by the Company are classified as
available-for-sale. Accordingly, these securities are included in other
assets at fair value. Unrealized holding gains and losses on securities
classified as available-for-sale are carried net of taxes as a component of
accumulated other comprehensive income (loss) in stockholders' equity.
Other equity investments which are not considered marketable securities and
in which ownership interest is less than 20% are generally carried at the
lower of cost or net realizable value. Realized gains and losses are
determined on a specific identification basis. During the nine months ended
September 30, 2001, the Company recognized an aggregate $4.0 million
impairment on two of these investments.
At September 30, 2001, the fair value of the Company's available-for-
sale security was $1.2 million. The unrealized holding loss on this
marketable equity security is reported as accumulated other comprehensive
loss, net of taxes, in the accompanying consolidated financial statements.
As of September 30, 2001, the unrealized holding loss on this security was
$600,000, net of taxes. During the nine months ended September 30, 2001,
the Company liquidated a portion of its investment in this security for
proceeds of $3.4 million, resulting in a pretax gain of $2.5 million. There
were no sales of marketable equity securities for the nine months ended
September 30, 2000.
Revenue
The Company's revenue has been derived primarily from business
telephony services, including dedicated transport, local switched, long
distance, data and high-speed Internet access services. The Company's
customers are principally telecommunications-intensive business end-users,
long distance carriers, Internet service providers ("ISPs"), wireless
communications companies, and governmental entities.
Revenue for dedicated transport, data, Internet and the majority
of switched services exclusive of switched access is generally billed in
advance on a fixed rate basis and recognized over the period the services
are provided. Revenue for the majority of switched access and long distance
is generally billed on a transactional basis determined by customer usage
with some fixed rate elements. The transactional elements of switched
services are billed in arrears and estimates are used to recognize revenue
in the period earned. The fixed rate elements are billed in advance and
recognized over the period the services are provided.
Reciprocal compensation revenue is an element of switched services
revenue, which represents compensation from local exchange carriers
("LECs") for local exchange traffic terminated on the Company's facilities
originated by other LECs. Reciprocal compensation represented 6% of revenue
for both the nine months ended September 30, 2001 and 2000, excluding the
effects of the recognition of $37.0 million and $27.3 million of non-
recurring reciprocal compensation, primarily reflecting resolution of
disputes, during the nine months ended September 30, 2001 and 2000,
respectively. Reciprocal compensation is based on contracts between the
Company and LECs. The Company recognizes reciprocal compensation revenue as
it is earned, except in those cases where the revenue is under dispute or
at risk. The payment of reciprocal compensation under certain of the
Company's interconnection agreements is, by the terms of those agreements,
subject to adjustment or repayment depending on prospective federal or
state generic rulings with respect to reciprocal compensation for ISP
traffic. The Company pays reciprocal compensation expense to the other
6
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
LECs for local exchange traffic it terminates on the LEC's facilities.
These costs are recognized as incurred.
As of September 30, 2001, the Company had deferred recognition of
$26.0 million in reciprocal compensation revenue for payments received
associated with pending disputes and agreements that are subject to future
adjustments.
Switched access is the connection between a long distance carrier's
point of presence and an end-user's premises provided through the switching
facilities of a LEC. Historically, the FCC has regulated the access rates
imposed by the incumbent local exchange carriers ("ILECs"), while the
competitive local exchange carriers' ("CLECs") access rates have been less
regulated. However, the FCC released an order effective in June 2001 that
subjects CLECs' interstate switched access charges to regulation. Effective
with that order, the Company's rates were reduced and will continue to
decline over a three-year period to parity with the ILEC rates competing in
each area. In addition, when a CLEC enters a new market its access charges
may be no higher than the incumbent LEC's. This order does not affect rates
subject to contracts that the Company has entered into with certain long
distance carriers. The Company and several other CLECs have filed petitions
with the FCC for reconsideration of the provisions of the order relating to
new markets and expects that there will be other legal challenges to the
order filed in federal court. There is no assurance that any legal
challenge will be successful or that a successful challenge will change the
trend toward lower access charges. Switched access revenue represented 7%
and 10% of total revenue for the nine months ended September 30, 2001 and
2000, respectively, excluding the effects of the recognition of $37.0
million and $27.3 million of non-recurring reciprocal compensation during
the nine months ended September 30, 2001 and 2000, respectively. The
Company expects that switched access revenue will continue to decline as a
percentage of the Company's total revenue due to mandated or contracted
rate reductions. There is no assurance that the Company will be able to
compensate for reductions in switched access revenue resulting from the FCC
order with revenue from other sources.
Segment Reporting
As of September 30, 2001, the Company operated in 42 service areas and
the Company's management has made decisions on resource allocation and
assesses performance based on total revenue, EBITDA, and capital spending
of these operating locations. Each of the service areas offers similar
products and services, has similar customers and networks, is regulated by
the same type of authorities, and is managed directly by the Company's
executives, allowing the 42 service areas to be aggregated, resulting in
one reportable line of business.
Earnings (Loss) Per Common Share and Potential Common Share
Basic earnings (loss) per share for all periods presented herein was
computed by dividing the net income (loss) by the weighted average shares
outstanding for the period.
The diluted loss per common share for the three and nine months ended
September 30, 2001, and the three months ended September 30, 2000 was
computed by dividing the net loss attributable to common shares by the
weighted average outstanding common shares for the period. Potential common
shares related to stock options were not included in the computation of
weighted average shares outstanding because their inclusion would be anti-
dilutive.
The diluted earnings per share for the nine months ended September 30,
2000 was computed by dividing the net income by the weighted average number
of common shares and dilutive potential common shares related to stock
options outstanding during the period.
7
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
Set forth below is a reconciliation of the basic and diluted earnings
(loss) per share for each period:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- -----------------------------
2001 2000 2001 2000
-------------- -------------- ------------ -------------
(amounts in thousands, except per share amounts)
Net income (loss) for basic and
diluted earnings (loss) per share ($ 24,323) (2,325) (48,645) 4,582
============== ============== ============ =============
Weighted-average number of
shares-basic 114,340 105,531 113,466 105,262
Dilutive effect of stock options - - - 3,165
-------------- -------------- ------------ -------------
Weighted-average number of
shares-diluted 114,340 105,531 113,466 108,427
============== ============== ============ =============
Earnings (loss) per share:
Basic (0.21) (0.02) (0.43) 0.04
============== ============== ============ =============
Diluted (0.21) (0.02) (0.43) 0.04
============== ============== ============ =============
Reclassifications
Certain prior period amounts have been reclassified for comparability
with the 2001 presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), as amended by SFAS 138, which was adopted by the
Company on January 1, 2001. SFAS 133 requires that all derivatives be
recorded on the balance sheet at fair value. Changes in derivatives that
are not hedges are adjusted to fair value through income. Changes in
derivatives that meet SFAS 133's hedge criteria are either offset through
income or recognized in other comprehensive income until the hedged item is
recognized in earnings. The adoption of SFAS 133 on January 1, 2001 did not
have a material effect on the Company's financial condition, results of
operations, or cash flows because the Company does not own any derivative
instruments.
In July 2001, the Financial Accounting Standards Board issued
Statement No. 141, Business Combinations ("SFAS 141") and Statement No.
142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires
companies to reflect intangible assets apart from goodwill and supercedes
previous guidance related to business combinations. SFAS 142 eliminates
amortization of goodwill and amortization of indefinite lived intangible
assets. However, SFAS 142 also requires the Company to perform impairment
tests at least annually on all goodwill and other intangible assets. These
statements are required to be adopted by the Company on January 1, 2002 and
for any acquisitions entered into after July 1, 2001. The Company is
evaluating the impact of the statements on its financial position, results
of operations, and cash flows. Goodwill amortization expense aggregated
$2.3 million and $2.5 million for the nine months ended September 30, 2001
and 2000, respectively.
8
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
2. Acquisition
On January 10, 2001, the Company completed the acquisition of
substantially all of the assets of GST out of bankruptcy (the "GST
Acquisition") for cash consideration of approximately $627 million,
including a $10 million deposit paid in 2000, plus the payment of certain
liabilities and fees of approximately $42 million, and the assumption of an
approximate $21 million obligation to complete certain fiber networks, for
a total purchase price of $690 million. As a result of this acquisition,
the Company added 15 markets, approximately 4,210 route miles, and
approximately 227,674 fiber miles in the western United States. This
transaction has been accounted for under the purchase method of accounting.
The acquisition is summarized as follows (amounts in thousands):
2001
----
Recorded value of fixed assets acquired $697,331
Receivables, prepaids, and other assets 15,244
Deposit paid in 2000 (10,000)
Assumed liabilities (50,886)
--------
Cash paid for acquisition in 2001 $651,689
========
The allocation of the purchase price is preliminary, but was based in
part on appraised values. However, the allocation is subject to final
evaluation of the assets purchased and liabilities assumed, which will be
completed by the end of the year. Since this acquisition is accounted for
as a purchase, the results of operations are consolidated with the
Company's results of operations from the acquisition date. Had this
acquisition occurred on January 1, 2000, total revenue, net loss, and basic
and diluted loss per common share for the nine months ended September 30,
2000 would have been approximately $440.5 million, $108.7 million, and
$(0.97), respectively. The pro forma results do not include any anticipated
cost savings or other effects of the integration of GST into the Company
and are not necessarily indicative of the results which would have occurred
if the acquisition had been in effect on the date indicated, or which may
result in the future.
The Company announced in October 2001 a restructuring of its
workforce in the acquired operations to improve efficiencies. This
restructuring eliminates approximately 250 positions, primarily in
Vancouver, Washington, and includes the transition of the Company's
Vancouver network operations center functions to the Company's Greenwood
Village, Colorado network operations center. In connection with this
restructuring, the Company expects to take a one-time, pre-tax
restructuring charge of approximately $6-8 million in the fourth quarter of
2001 for severance and benefits related to the elimination of positions and
a non-cash charge for the write-down of certain Vancouver-based property
and equipment.
3. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations are summarized as
follows:
September 30, December 31,
2001 2000
------------- ------------
(amounts in thousands)
9 3/4% Senior Notes $ 400,000 400,000
10 1/4% Senior Notes 400,000 --
Credit Facility 250,000 179,000
Capital lease obligations 14,836 6,107
---------- -----------
$1,064,836 585,107
========== ===========
9
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
The $400 million principal amount 9 3/4% Senior Notes due July 2008
(the "9 3/4% Senior Notes") are unsecured, unsubordinated obligations of
the Company. Interest on the 9 3/4% Senior Notes is payable semi-annually
on January 15 and July 15, and began on January 15, 1999. Interest expense,
including amortization of debt discount, relating to the 9 3/4% Senior
Notes totaled approximately $30.2 million and $30.1 million for the nine
months ended September 30, 2001 and 2000, respectively. At September 30,
2001, the fair market value of the $400 million of 9 3/4% Senior Notes was
$256 million, based on market prices.
The $400 million principal amount 10 1/8% Senior Notes are unsecured,
subordinated obligations of the Company. Interest on the 10 1/8% Senior
Notes is payable semiannually on February 1 and August 1, beginning on
August 1, 2001. Interest expense, including amortization of debt discount,
relating to the 10 1/8% Senior Notes totaled approximately $28.6 million
for the nine months ended September 30, 2001. At September 30, 2001, the
fair market value of the $400 million of 10 1/8% Senior Notes was $256
million, based on market prices.
The 9 3/4% Senior Notes and the 10 1/8% Senior Notes are governed by
Indentures that contain certain restrictive covenants. These restrictions
affect, and in many respects significantly limit or prohibit, among other
things, the ability of the Company to incur indebtedness, make prepayments
of certain indebtedness, pay dividends, make investments, engage in
transactions with shareholders and affiliates, issue capital stock of
subsidiaries, create liens, sell assets, and engage in mergers and
consolidations.
On April 10, 2000, the Company executed a $475 million Senior Secured
Revolving Credit Facility (the "Revolver"). The Revolver had a final
maturity of December 31, 2007, with annual reductions in the principal
amount available under the Revolver commencing on December 31, 2004.
In connection with the GST Acquisition and the Company's capital
expenditure plans, the Company obtained commitments for $1.225 billion of
additional financing to increase its total commitments to $1.7 billion. The
Company replaced its Revolver with an amended and restated senior secured
credit facility (the "Credit Facility") providing for an aggregate of $1
billion in borrowings, comprised of $525 million of senior secured term
loan facilities and a $475 million senior secured revolving credit
facility. The Credit Facility has a final maturity of December 31, 2007,
with annual reductions in the principal amount available under the $475
million senior secured revolving credit facility commencing on December 31,
2004. The Company also obtained $700 million in senior unsecured bridge
financing that it used to initially finance the GST Acquisition. The
borrowings under the senior unsecured bridge loan facility were made and
repaid in full in January 2001, with the net proceeds from the Offering and
a portion of the net proceeds from the sale of the Old Notes. In connection
with the repayment of the senior unsecured bridge loan facility, the
Company recorded $5.8 million of deferred financing costs as a non-
recurring expense, as well as $3.5 million in interest expense for the nine
months ended September 30, 2001. In December 2000, the Company was required
to draw and hold in escrow, $179 million of the Credit Facility until the
closing of the GST Acquisition, at which time the draw increased to $250
million. Interest expense on the $250 million drawn under the Credit
Facility is computed utilizing a specific Eurodollar Rate plus 4.0%, which
totaled 8.7% as of September 30, 2001. Interest is payable at least
quarterly. Interest expense, including amortization of debt discount,
relating to the $250 million draw was $17.6 million for the nine months
ended September 30, 2001.
At September 30, 2001, the undrawn available commitment under the
Credit Facility was $750 million. The Company is required to pay commitment
fees on a quarterly basis ranging from 0.500% to 1.000% per annum on the
undrawn available commitment of the Credit Facility. Commitment fee expense
was $5.6 million for the nine months ended September 30, 2001 and has been
classified as a component of interest expense in the accompanying
consolidated statements of
10
TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
operations. Capitalized interest was $6.2 million and $2.6 million for the
nine months ended September 30, 2001 and 2000, respectively.
Borrowings under the Credit Facility are secured by substantially all
of the assets of the Company, including the assets acquired from GST,
except for certain assets with respect to which the grant of a security
interest is prohibited by governing agreements. The Credit Facility
requires the Company to prepay outstanding loans when its cash flow exceeds
certain levels and with the proceeds received from a number of specified
events or transactions, including certain asset sales and insurance
recoveries for assets not replaced. In addition, obligations under the
Credit Facility are subject to various covenants that limit the Company's
ability to:
. borrow and incur liens on its property;
. pay dividends or make other distributions; and
. make capital expenditures.
The Credit Facility also contains financial covenants, including a
consolidated leverage ratio, a consolidated interest coverage ratio, and a
consolidated debt service coverage ratio, as well as cross default
provisions. Under the cross default provisions, the Company is deemed to be
in default under the Credit Facility if the Company has defaulted under any
of the other material outstanding obligations, such as the 9 3/4% Senior
Notes or the 10 1/8% Senior Notes.
4. Related Party Transactions
In the normal course of business, the Company engages in various
transactions with Time Warner, generally on negotiated terms among the
affected units that, in management's opinion, result in reasonable
allocations.
The Company benefits from its strategic relationship with Time Warner
both through access to local right-of-way and construction cost-sharing.
The Company's networks have been constructed primarily through the use of
fiber capacity licensed from Time Warner. Under this licensing arrangement,
the Company paid Time Warner $1.2 million and $1.4 million for the nine
months ended September 30, 2001 and 2000, respectively. These costs have
been capitalized by the Company. The amortization expense of these costs
and fiber previously capitalized in the amount of $10.1 million and $9.6
million for the nine months ended September 30, 2001 and 2000,
respectively, has been classified as a component of depreciation and
amortization expense in the accompanying consolidated statements of
operations. In addition, under this licensing arrangement, the Company
reimburses Time Warner for facility maintenance and pole rental costs,
which aggregated $2.0 million for both the nine months ended September 30,
2001 and 2000.
The Company's operations, which in certain cases are co-located with
Time Warner's divisions, are allocated a charge for various overhead
expenses for services provided by these divisions. The Company is also
allocated rent based on the square footage of space occupied by the Company
at Time Warner's facilities. These costs are based on contracts with Time
Warner. These charges aggregated $1.2 million and $1.1 million for the nine
months ended September 30, 2001 and 2000, respectively.
Time Warner and related entities also purchase dedicated transport and
switched services from the Company. Revenue aggregated $18.1 million and
$7.0 million for the nine months ended September 30, 2001 and 2000,
respectively.
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TIME WARNER TELECOM INC.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued
5. Commitments and Contingencies
Pending legal proceedings are substantially limited to litigation
incidental to the business of the Company. In the opinion of management,
the ultimate resolution of these matters will not have a material adverse
effect on the Company's financial statements.
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TIME WARNER TELECOM INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis provides information concerning the
results of operations and financial condition of Time Warner Telecom Inc. (the
"Company") and should be read in conjunction with the accompanying financial
statements and notes thereto. Additionally, the following discussion and
analysis should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations and the consolidated financial
statements included in Part II of Time Warner Telecom Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2000.
Cautions Concerning Forward Looking Statements
This document contains some statements that are not historical fact, but
are "forward-looking statements," within the meaning of the Private Securities
Litigation Reform Act of 1995. The forward-looking statements include statements
regarding, among other items, the Company's expected financial position,
revenue, EBITDA and capital expenditures, as well as expansion plans, product
plans, the integration and development of the assets purchased from GST
Telecommunications, Inc., financing plans, liquidity and financial resources,
and the impacts of regulatory developments. These forward-looking statements are
based on management's current expectations about future events and are naturally
subject to risks, uncertainties, and changes in circumstances, many of which are
beyond the Company's control. Actual results may differ materially from those
expressed or implied by such forward-looking statements.
The words "believe," "expect," "plans," "intends," and "anticipate," and
similar expressions used in connection with any discussion of future performance
or events identify forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that those expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the expectations described in this report are set forth in the
Company's previous filings with the Securities and Exchange Commission,
especially those set forth under "Risk Factors" in Item 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2000 and elsewhere in
that report and this report. Other factors could also cause actual results to
differ from those contained in the forward-looking statements, including but not
limited to: increased customer financial difficulties or bankruptcies, adverse
regulatory decisions or unfavorable legislation that could increase the
Company's costs or limit its revenue, increased competitive pressure, further
economic slowdown, increased interest rates, failure to meet cash flow
expectations, and changes to the Company's plans or strategies. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligations to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
Overview
The Company is a leading fiber facilities-based integrated communications
provider offering local businesses "last-mile" broadband connections for data,
high-speed Internet access, local voice, and long distance services. On January
10, 2001, the Company expanded its geographic coverage by acquiring
substantially all of the assets of GST Telecommunications, Inc. ("GST") out of
bankruptcy. See "Acquisition" below. The Company now serves customers in 44
metropolitan markets in the United States.
The Company has two classes of common stock outstanding, Class A common
stock and Class B common stock. Holders of Class A common stock have one vote
per share and holders of Class B common stock have ten votes per share. Each
share of Class B common stock is convertible, at the option of the holder, into
one share of Class A common stock. The Class B common stock is collectively
owned by Time Warner Inc., a wholly owned subsidiary of the AOL Time Warner Inc.
("Time Warner"), Advance Telecom Holdings Corporation, and Newhouse Telecom
Holdings Corporation. Holders of Class A common stock and
13
TIME WARNER TELECOM INC.
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. During the second quarter of 2001, AT&T Corp. converted its remaining
Class B common stock into Class A common stock. As of September 30, 2001, the
Class B Stockholders had approximately 93.2% of the combined voting power of the
outstanding common stock.
On January 25, 2001, the Company completed a public offering of 7,475,000
shares of Class A common stock at a price of $74 7/16 per share (the
"Offering"). The Offering generated $532.2 million in proceeds for the Company,
net of underwriting discounts and expenses. Also on January 25, 2001, the
Company completed a private placement of $400 million principal amount of 10
1/8% Senior Notes due February 2011 (the "Old Notes"). Pursuant to an exchange
offer in March 2001, all of the holders of the Old Notes exchanged their Old
Notes for new 10 1/8% Senior Notes due February 2011 (the "10 1/8% Senior
Notes") with the same financial terms that were registered under the Securities
Act of 1933. The Company used all of the net proceeds from the Offering and a
portion of the net proceeds from the offering of the Old Notes to repay the $700
million senior unsecured bridge facility that initially financed the acquisition
of the GST assets. The remaining net proceeds from the offering of the Old Notes
will be used for capital expenditures, working capital, and general corporate
purposes.
Acquisition
On January 10, 2001, the Company completed the acquisition of substantially
all of the assets of GST for cash consideration of approximately $627 million,
plus the payment of certain liabilities and fees of approximately $42 million,
and the assumption of an approximate $21 million obligation to complete certain
fiber networks, for a total purchase price of $690 million. The acquisition
added to the Company's network approximately 4,210 route miles and approximately
227,674 fiber miles in the western United States.
The Company has completed the initial integration of former GST personnel
into the Company's organization and has implemented its corporate-wide financial
reporting system and front-end ordering system for the acquired operations. The
balance of the first phase of the integration, including integration of sales,
marketing, and operations, is expected to be complete by year-end 2001. The
Company has activated a 4,600-mile regional fiber network that was under
construction at the time of the acquisition and has begun expanding the
metropolitan networks in several of the acquired markets. The Company expects
that the integration of back office systems and network operations will be
complete by year-end 2002. As required under the Asset Purchase Agreement with
GST, the Company entered into a services agreement with GST to provide certain
support services with respect to GST assets that the Company did not purchase
for a period of up to six months for most services and up to a year for certain
limited services. The original six-month period for certain support services was
extended for an additional 6 months, but the volume of services being provided
during the extension period has been greatly reduced.
The Company announced in October 2001 a restructuring of its workforce in
the acquired operations to improve efficiencies. This restructuring eliminates
approximately 250 positions, primarily in Vancouver, Washington, and includes
the transition of the Company's Vancouver network operation center functions to
the Company's Greenwood Village, Colorado network operation center. This will
centralize billing, customer care, network surveillance, and maintenance. Since
the acquisition, the Company has operated the two network operation centers in
parallel, with the Vancouver network operation center handling only the acquired
operations. In connection with this restructuring, the Company expects to take a
one-time pre-tax restructuring charge of approximately $6-8 million in the
fourth quarter of 2001 for severance and benefits related to the elimination of
positions and a non-cash charge for the write-down of certain Vancouver-based
property and equipment. Annual EBITDA contribution from this restructuring is
expected to be approximately $10-14 million once the process is complete.
The Company's acquisition of the GST assets increases its geographic
presence, expands its products and services, and enlarges the capacity of its
networks. This transaction is considerably larger than the transactions the
Company has completed in the past and therefore presents risks related to the
successful
14
TIME WARNER TELECOM INC.
integration of the acquired assets into the Company's business including costs
related to integration and diversion of resources away from the Company's
existing operations. In addition, the Company purchased substantially all of the
assets of GST with the expectation that the asset purchase would result in
certain benefits, including expansion of the markets the Company already serves
and increasing its operational efficiencies. Achieving the benefits of the asset
purchase will depend upon the successful integration of the acquired businesses
into the Company's existing operations and the generation of new revenue from
the acquired markets. There is no assurance that the Company will be successful
in integrating the acquired GST assets into its current businesses or generating
significant additional revenue from those assets. In addition, there is a risk
that the costs of integration could have a material adverse effect on the
Company's operating results.
Results of Operations
The following table sets forth certain consolidated statements of
operations data of the Company, in thousands of dollars and expressed as a
percentage of total revenue, for each of the periods presented. This table
should be read together with the Company's financial statements, including the
notes thereto, appearing elsewhere in this report:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- --------------------------------
2001 2000 2001 2000
----------- ------------ ----------- ------------
(amounts in thousands, except per share amounts)
Statements of Operations Data:
Revenue (1):
Dedicated transport services $ 105,872 61 % 71,129 59 % 319,645 57 % 183,759 52 %
Switched services (2) 66,853 39 50,027 41 244,104 43 169,308 48
---------- --- ------- --- --------- --- ------- ---
172,725 100 121,156 100 563,749 100 353,067 100
---------- --- ------- --- --------- --- ------- ---
Costs and expenses (1):
Operating 77,505 45 48,299 40 237,872 42 130,846 37
Selling, general and administrative 58,238 34 44,475 36 180,170 32 122,663 35
Depreciation and amortization 51,951 30 23,994 20 150,848 27 68,793 19
---------- --- ------- --- --------- --- ------- ---
Total costs and expenses 187,694 109 116,768 96 568,890 101 322,302 91
---------- --- ------- --- --------- --- ------- ---
Operating income (loss) (14,969) (9) 4,388 4 (5,141) (1) 30,765 9
Interest expense (26,980) (15) (10,043) (8) (88,050) (16) (30,657) (9)
Interest income 3,795 2 2,220 1 16,370 3 9,016 2
Investment losses, net (1,464) (1) -- -- (1,464) -- -- --
---------- --- ------- --- --------- --- ------- ---
Net income (loss) before income taxes (39,618) (23) (3,435) (3) (78,285) (14) 9,124 2
Income tax expense (benefit) (15,295) (9) (1,110) (1) (29,640) (5) 4,542 1
---------- --- ------- --- --------- --- ------- ---
Net income (loss) $ (24,323) (14)% (2,325) (2)% (48,645) (9)% 4,582 1 %
========== === ======= === ========= === ======= ===
Basic and diluted earnings (loss) per
share (4) $ (0.21) (0.02) (0.43) 0.04
Weighted average shares outstanding (4):
Basic 114,340 105,531 113,466 105,262
Diluted 114,340 105,531 113,466 108,427
EBITDA (1) (3) $ 36,982 21 % 28,382 23 % 145,707 26 % 99,558 28 %
Net cash provided by (used in) operating
activities (10,310) 16,597 106,623 71,238
Net cash used in investing activities (76,204) (43,711) (997,911) (87,817)
Net cash provided by (used in) financing
activities 230 (3,952) 1,004,723 84
(1) Includes revenue and expenses resulting from transactions with
affiliates of $6.5 million, $4.6 million, $3.5 million, and $3.9
million for the three months ended September 30, 2001 and 2000,
respectively, and $18.1 million, $13.4 million, $7.0 million, and $11.5
million for the nine months ended September 30, 2001 and 2000,
respectively.
15
TIME WARNER TELECOM INC.
(2) Includes the recognition of $37.0 million and $27.3 million of
non-recurring reciprocal compensation for the nine months ended
September 30, 2001 and 2000, respectively.
(3) "EBITDA" is defined as operating income (loss) before depreciation and
amortization expense. It does not include charges for interest expense
or provision for income taxes. Accordingly, EBITDA is not intended to
replace operating income (loss), net income (loss), cash flow, and
other measures of financial performance and liquidity reported in
accordance with generally accepted accounting principles. Rather,
EBITDA is a measure of operating performance and liquidity that
investors may consider in addition to these measures. Management
believes that EBITDA is a standard measure of operating performance and
liquidity that is commonly reported and widely used by analysts,
investors, and other interested parties in the telecommunications
industry because it eliminates many differences in financial,
capitalization, and tax structures, as well as non-operating one-time
charges to earnings. EBITDA is used internally by the Company's
management to assess ongoing operations and is a component of a
covenant of the 9 3/4% Senior Notes and the 10 1/8% Senior Notes that
limits the Company's ability to incur certain additional future
indebtedness. However, EBITDA as used in this report may not be
comparable to similarly titled measures reported by other companies due
to differences in accounting policies.
(4) Basic earnings (loss) per share for all periods presented herein was
computed by dividing the net income (loss) by the weighted average
shares outstanding for the period. The diluted loss per common share
for the three and nine months ended September 30, 2001, and the three
months ended September 30, 2000 was computed by dividing the net loss
attributable to common shares by the weighted average outstanding
common shares for the period. Potential common shares related to stock
options were not included in the computation of weighted average shares
outstanding for the three and nine months ended September 30, 2001, and
the three months ended September 30, 2000, because their inclusion
would be anti-dilutive. The diluted earnings per share for the nine
months ended September 30, 2000 was computed by dividing the net income
by the weighted average number of common shares and dilutive potential
common shares related to stock options outstanding during the period.
General
The Company operates in metropolitan areas that have high
concentrations of medium- and large-sized businesses. Historically, the Company
has focused its sales and marketing efforts on such businesses, as they are
potentially high volume users of the Company's services. To drive revenue growth
in these markets, the Company has expanded its direct sales force to focus on
these business customers while it develops managed service offerings to meet
their voice, data, and Internet needs. The Company's revenue has been derived
primarily from business telephony services, including dedicated transport, local
switched, long distance, data and high-speed Internet access services. The
Company believes that data services will become increasingly important to the
Company's target customer base. In particular, the Company believes that the
demand for high-speed, high quality local area network and wide area network
connectivity will continue to grow over time.
The Company continues to expand its footprint within its existing
markets by expanding its network into new buildings. Through the acquisition of
the GST assets in the first quarter of 2001, the Company added 15 additional
western metropolitan markets. The Company activated three additional markets in
July 2001 and activated two additional markets in October 2001. The Company is
also interconnecting existing service areas within regional clusters with owned
or leased fiber optic facilities and has launched on-network inter-city switched
services that provide customers the ability to offer a virtual presence in a
remote city. The goal is to rapidly deploy new services and technologies when
technically proven and when customer demand is evident. As new technologies that
enable the switching of voice calls over an Internet Protocol and local area
network infrastructure are becoming commercially available, the Company is
integrating this soft switch technology into its infrastructure. There is no
assurance that the Company will bring any or all of these products to market
successfully or profitably.
The Company plans to continue expanding its revenue base by utilizing
available network capacity in its existing markets, by completing its new market
launches, and by continuing to develop and selectively
16
TIME WARNER TELECOM INC.
tailor new services in competitively-priced packages to meet the needs of its
medium- and large-sized business customers. The Company intends to expand its
product offerings on a continuous basis to achieve a diverse revenue base. As
part of that process, the Company is targeting the expansion of data and
Internet products that can be offered on the Company's existing network.
Due to the impacts of a slowing economy, which has resulted in customers
going out of business, filing bankruptcies, or looking for opportunities to cut
costs, the Company has experienced an acceleration of customers disconnecting
services, including network grooming, that has resulted in downward pressure on
revenue performance. In addition, retail customers are taking longer to make
buying decisions, lengthening the sales cycle. Recurring revenue of $4 million
for the third quarter and more than $7 million for the six-month period
comprising the second and third quarters of 2001 has been eliminated due to
customer disconnects and bankruptcies. Management believes that this pressure
may continue to negatively impact revenue performance for several quarters.
However, the dislocation in the telecommunications and Internet service provider
sectors may benefit the Company in the following respects:
. as some emerging providers go out of business, their customers may seek
to purchase services from the Company;
. the failure of some emerging telecommunications providers may reduce
some of the artificially low pricing of services that exists in the
market for certain telecommunications services; and
. the availability of experienced telecommunications personnel may
improve.
There is no assurance that the Company will realize any benefits from the
downturn in these sectors or that the Company will not be adversely affected by
conditions in its market sectors or the economy in general. As a result of these
economic trends, the Company expects modest to no growth in revenue for the
fourth quarter of 2001.
Factors that could negatively impact the Company's margins in a down
economy include below-cost pricing engaged in by some competitors to increase
short term revenue, especially in the sale of primary rate interface services to
ISPs and pressure on long distance rates, both of which represent a relatively
small percentage of the Company's revenue. In addition, pricing pressure from
long haul providers could impact pricing of inter-city point-to-point services,
and the Company has seen intense price competition in common Point-of-Presence
("POP") to POP locations in central business districts in certain cities.
However, the Company believes that its margins are improved by its ability to
sell services on its extensive networks that extend beyond these types of highly
competitive routes.
Since the GST assets were purchased out of bankruptcy and require
considerable integration work, and further build-out of networks before they
perform to the standards of the Company's other markets, the Company does not
expect significant revenue growth from the GST assets during 2001.
Reciprocal compensation revenue is an element of switched services revenue,
which represents compensation from local exchange carriers ("LECs") for local
exchange traffic terminated on the Company's facilities originated by other
LECs. Reciprocal compensation represented 6% of revenue for both the nine months
ended September 30, 2001 and 2000, respectively, excluding the effects of the
recognition of $37.0 million and $27.3 million of non-recurring reciprocal
compensation, primarily reflecting resolution of disputes, during the nine
months ended September 30, 2001 and 2000, respectively. Reciprocal compensation
is based on contracts between the Company and LECs. The Company recognizes
reciprocal compensation revenue as it is earned, except in those cases where the
revenue is under dispute or at risk. The payment of reciprocal compensation
under certain of the Company's interconnection agreements is, by the terms of
those agreements, subject to adjustment or repayment depending on prospective
federal or state generic rulings with respect to reciprocal compensation for ISP
traffic. The Company pays reciprocal compensation expense to the other LECs for
local exchange traffic it terminates on the LEC's facilities. These costs are
recognized as incurred.
On April 27, 2001, the Federal Communications Commission ("FCC") released
an order addressing a prior ruling of the U.S. Court of Appeals for the District
of Columbia Circuit in which the FCC reaffirmed
17
TIME WARNER TELECOM INC.
its jurisdiction over dial-up Internet-bound traffic, and adopted an interim
carrier-to-carrier cost recovery scheme for such traffic. The new scheme reduces
the maximum compensation rate for dial-up Internet-bound traffic in phases over
a three-year period. Simultaneously the FCC initiated a rulemaking to consider
whether it should replace all existing intercarrier compensation schemes with
some form of "bill and keep." Additionally, the ruling, once effective, will
require "bill and keep" payment arrangements for Internet-bound traffic as
carriers enter new markets. "Bill and keep" means that the carrier would neither
pay reciprocal compensation to other carriers nor receive reciprocal
compensation from other carriers for Internet-bound traffic in those markets.
The ruling was effective June 14, 2001. Historically, the Company has not relied
on generation of reciprocal compensation revenue to achieve payback when
entering new markets and therefore does not expect the ruling to impact its
ability to achieve its financial objective for its new markets. Effective with
the new rules, state commissions will no longer have authority over matters
pertaining to the compensation of Internet-bound traffic. However, state
commission decisions regarding this traffic for prior periods are not affected
by the order. The Company and several other CLECs have filed legal challenges to
the FCC's order in federal court. There is no assurance, however, that any legal
challenge will be successful or that a successful challenge will change the
trend toward reduced reciprocal compensation.
The Company expects that the ruling, if it stands, will result in
reciprocal compensation revenue decreasing over time. However, the Company
cannot predict whether the LECs will dispute reciprocal compensation charges for
ISP traffic even if the charges comply with the FCC's order. Because the ruling
is only interim in nature, is subject to further interpretation or could be
replaced with a different regulatory scheme, there is no assurance that the
Company's reciprocal compensation revenue will not be further decreased or
eliminated completely. The rate reductions resulting from the ruling, as well as
lower minutes of use and a drop-off in LEC cash collections are reflected in a
33% reduction in reciprocal compensation revenue from the second quarter to the
third quarter of 2001.
As of September 30, 2001, the Company had deferred recognition of $26.0
million in reciprocal compensation revenue for payments received associated with
pending disputes and agreements that are subject to future adjustments.
Switched access is the connection between a long distance carrier's point
of presence and an end-user's premises provided through the switching facilities
of a LEC. Historically, the FCC has regulated the access rates imposed by the
incumbent local exchange carriers ("ILECs"), while the competitive local
exchange carriers' ("CLEC") access rates have been less regulated. However, the
FCC released an order effective in June 2001 that subjects CLECs' interstate
switched access charges to regulation. Effective with that order, the Company's
rates were reduced and will continue to decline over a three-year period to
parity with the ILEC rates competing in each area. In addition, when a CLEC
enters a new market its access charges may be no higher than the ILEC's. This
order does not affect rates subject to contracts that the Company has entered
into with certain long distance carriers. The Company and several other CLECs
have filed petitions with the FCC for reconsideration of the provisions of the
order relating to new markets and expects that there will be other legal
challenges to the order filed in federal court. There is no assurance that any
legal challenge will be successful or that a successful challenge will change
the trend toward lower access charges. Switched access revenue represented 7%
and 10% of total revenue for the nine months ended September 30, 2001 and 2000,
respectively, excluding the effects of the recognition of $37.0 million and
$27.3 million of non-recurring reciprocal compensation during the nine months
ended September 30, 2001 and 2000, respectively. The Company expects, as it
previously anticipated, that switched access revenue will continue to decline as
a percentage of the Company's total revenue due to mandated or contracted rate
reductions. There is no assurance that the Company will be able to compensate
for reductions in switched access revenue resulting from the FCC order with
revenue from other sources.
The Company benefits from its strategic relationship with Time Warner both
through access to local right-of-way and construction cost-sharing. Except for
networks acquired from GST, most of the Company's networks have been constructed
primarily through the use of fiber capacity licensed from Time Warner. As of
September 30, 2001, the Company operated networks in 42 metropolitan areas that
spanned 16,325 route miles, contained 713,108 fiber miles, and offered service
to 10,081 on-net and off-net buildings.
18
TIME WARNER TELECOM INC.
Operating expenses consist of costs directly related to the operation and
maintenance of the networks and the provision of the Company's services. This
includes the salaries and related expenses of operations and engineering
personnel, as well as costs incurred from the ILECs, other competitors, and long
distance providers for facility leases and interconnection. These costs have
increased over time as the Company has increased its operations and revenue. The
Company expects these costs to correlate with changes in revenue. The fact that
a significant portion of the Company's traffic rides on its own fiber
infrastructure enhances the Company's ability to control its costs.
Selling, general, and administrative expenses consist of salaries and
related costs for employees other than those involved in operations and
engineering. These expenses include costs related to sales and marketing,
including bad debt expense, information technology, billing, regulatory, and
legal costs. These costs have increased over time as the Company has increased
its operations and revenue. The Company expects these costs to continue to
correlate with changes in revenue.
In the normal course of business, the Company engages in various
transactions with Time Warner, generally on negotiated terms among the affected
units that, in management's view, result in reasonable allocations. The Company
entered into several contracts with Time Warner with respect to certain of these
transactions. The Company's dedicated transport and switched services revenue
includes services provided to Time Warner. The Company's selling, general, and
administrative expenses include charges allocated from Time Warner for office
rent and overhead charges for limited administrative functions they perform for
the Company. These charges are required to reflect all costs of doing business
and are based on various methods, which management believes result in reasonable
allocations of those costs that are necessary to present the Company's
operations as if they are operated on a stand alone basis. In addition, the
Company licenses the right to use a significant portion of its local fiber
capacity from Time Warner through prepaid right-to-use agreements and reimburses
Time Warner for facility maintenance and pole rental costs. The maintenance and
pole rental costs are included in the Company's operating expenses.
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Revenue. Total revenue increased $51.6 million, or 43%, to $172.7 million
for the three months ended September 30, 2001, from $121.2 million for the
comparable period in 2000. Revenue from the provision of dedicated transport
services increased $34.7 million, or 49%, to $105.9 million for the three months
ended September 30, 2001, from $71.1 million for the comparable period in 2000.
Switched service revenue increased $16.8 million, or 34%, to $66.9 million for
the three months ended September 30, 2001, from $50.0 million for the comparable
period in 2000. Included in total revenue for the three months ended September
30, 2001 is $1.6 million in services provided to the GST bankruptcy estate and
to transitional customers, which is not expected to continue. Reciprocal
compensation represented 5% and 6% of total revenue for the three months ended
September 30, 2001 and 2000, respectively. At September 30, 2001, the Company
offered dedicated transport services in 42 metropolitan areas, all of which also
offered switched services. At September 30, 2000, the Company offered dedicated
transport services in 22 consolidated metropolitan areas, all of which also
offered switched services.
Exclusive of the effects of the GST asset acquisition during the three
months ended September 30, 2001, total revenue increased $27.5 million, or 23%
to $148.7 million, from $121.2 million for the comparable period in 2000.
Exclusive of the effects of the GST asset acquisition during the three months
ended September 30, 2001, dedicated transport service and switched service
revenue increased 31% and 11%, respectively. The increase in revenue from
dedicated transport services primarily reflects a 10% 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
55% 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. Although revenue from
switched access services and reciprocal compensation increased slightly, the
average rates have decreased and are expected to continue declining in the
foreseeable future, thereby placing continued downward pressure on revenue from
switched access services and reciprocal compensation. Revenue from switched
access services and recurring reciprocal compensation also declined from the
second quarter of 2001 by approximately $4.7 million, resulting from lower
minutes of use as well as lower rates. Since the Company records reciprocal
compensation revenue
19
TIME WARNER TELECOM INC.
when cash is received and is not subject to any significant disputes,
reciprocal compensation in the third quarter of 2001 was negatively impacted
by lower cash collections.
Operating Expenses. Operating expenses increased $29.2 million, or 60%, to
$77.5 million for the three months ended September 30, 2001, from $48.3 million
for the comparable period in 2000. Exclusive of the effects of the GST asset
acquisition, these expenses increased 17%. The increase in operating expenses
was primarily attributable to the Company's expansion of its business, the
ongoing development of existing markets resulting in higher LEC charges for
circuit leases and interconnection, and higher headcount for technical
personnel. As a percentage of total revenue, operating expenses increased to 45%
for the three months ended September 30, 2001 from 40% for the comparable period
in 2000, primarily as a result of the acquired assets and development of new
markets. However, operating expenses have decreased from the second quarter of
2001. This decrease is primarily due to reduced employee costs and related items
such as travel and training as well as reduced network operating costs.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased $13.8 million, or 31%, to $58.2 million for
the three months ended September 30, 2001, from $44.5 million for the comparable
period in 2000. Exclusive of the effects of the GST asset acquisition, these
expenses increased 6%. The increase in selling, general, and administrative
expenses was primarily attributable to an increase in employee headcount,
including training, and an increase in the provision for doubtful accounts
associated with the increase in revenue, partially offset by a decrease in
direct sales costs. As a percentage of total revenue, selling, general, and
administrative expenses decreased to 34% for the three months ended September
30, 2001 from 36% for the comparable period in 2000. Selling, general and
administrative costs have decreased from the second quarter of 2001. This
decrease is due to a reduction in costs directly related to revenue such as
commissions and bad debt expense as well as other administrative costs such as
recruiting.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $28.0 million, or 117%, to $52.0 million for the three months
ended September 30, 2001, from $24.0 million for the comparable period in 2000.
Exclusive of the effects of the GST asset acquisition, this expense increased
40%. This 40% increase in net depreciation and amortization expense was
primarily attributable to increased capital expenditures.
EBITDA. EBITDA for the three months ended September 30, 2001 increased $8.6
million to $37.0 million, from $28.4 million in 2000. The increase was $16.8
million, exclusive of the effects of the GST asset acquisition. This improvement
was primarily the result of economies of scale as more revenue was generated in
existing markets, increased utilization of networks and facilities, a more
skilled and productive workforce, and the implementation of cost reduction
efforts.
Interest Expense. On July 21, 1998, the Company issued $400 million in 9
3/4% Senior Notes in a public offering. During the first quarter of 2001, the
Company issued $400 million in 10 1/8% Senior Notes and drew $250 million on its
Credit Facility. Interest expense relating to the 9 3/4% Senior Notes, the 10
1/8% Senior Notes, and the Credit Facility was $28.0 million for the three
months ended September 30, 2001. Interest expense relating to the 9 3/4% Senior
Notes was $10.1 million for the three months ended September 30, 2000.
Capitalized interest was $1.9 million for both the three months ended September
30, 2001 and 2000.
Net Loss. Net loss increased $22.0 million to $24.3 million for the three
months ended September 30, 2001, from $2.3 million for the comparable period in
2000. The net loss change is primarily due to an increase in depreciation
expense and net interest expense related to the GST asset acquisition, partially
offset by an increase in the income tax benefit and an increase in EBITDA.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Revenue. Total revenue increased $210.7 million, or 60% to $563.7 million
for the nine months ended September 30, 2001, from $353.1 million for the
comparable period in 2000. Revenue from the provision of dedicated transport
services increased $135.9 million, or 74%, to $319.6 million for the nine months
ended September 30, 2001, from $183.8 million for the comparable period in 2000.
Switched service revenue increased $74.8 million, or 44%, to $244.1 million for
the nine months ended September 30, 2001, from $169.3 million for the comparable
period in 2000. Included in total revenue for the nine months ended September
30, 2001 is $8.0 million in services provided to the GST bankruptcy estate and
to transitional customers, which is not expected to continue. Reciprocal
compensation represented 6% of total revenue for
20
TIME WARNER TELECOM INC.
both the nine months ended September 30, 2001 and 2000, excluding the effects of
the recognition of $37.0 million and $27.3 million of non-recurring reciprocal
compensation during the nine months ended September 30, 2001 and 2000,
respectively. At September 30, 2001, the Company offered dedicated transport
services in 42 metropolitan areas, all of which also offered switched services.
At September 30, 2000, the Company offered dedicated transport services in 22
consolidated metropolitan areas, all of which also offered switched services.
Exclusive of the effects of the GST asset acquisition during the nine
months ended September 30, 2001 and the effects of the recognition of $37.0
million and $27.3 million of non-recurring reciprocal compensation during the
nine months ended September 30, 2001 and 2000, respectively, total revenue
increased $125.1 million, or 38% to $450.9 million, from $325.8 million for the
comparable period in 2000. Exclusive of the effects of the GST asset acquisition
during the nine months ended September 30, 2001 and the effects of the
recognition of $37.0 million and $27.3 million of non-recurring reciprocal
compensation during the nine months ended September 30, 2001 and 2000,
respectively, dedicated transport service and switched service revenue increased
52% and 21% respectively. The increase in revenue from dedicated transport
services primarily reflects a 17% 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 55% 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. Although revenue from switched access
services and reciprocal compensation increased over the prior year, the average
rates have decreased and are expected to continue declining in the foreseeable
future as a result of regulatory rulings.
Operating Expenses. Operating expenses increased $107.0 million, or 82%, to
$237.9 million for the nine months ended September 30, 2001, from $130.8 million
for the comparable period in 2000. Exclusive of the effects of the GST asset
acquisition, these expenses increased 33%. The increase in operating expenses is
primarily attributable to the Company's expansion of its business, the ongoing
development of existing markets resulting in higher LEC charges for circuit
leases and interconnection, and higher headcount for technical personnel. As a
percentage of total revenue, operating expenses increased to 42% for the nine
months ended September 30, 2001 from 37% for the comparable period in 2000,
primarily as a result of the acquired assets and development of new markets.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased $57.5 million, or 47%, to $180.2 million for
the nine months ended September 30, 2001, from $122.7 million for the comparable
period in 2000. Exclusive of the effects of the GST asset acquisition, these
expenses increased 21%. The increase in selling, general, and administrative
expenses was primarily attributable to an increase in employee headcount and an
increase in the provision for doubtful accounts related to the increase in
revenue. As a percentage of total revenue, selling, general, and administrative
expenses decreased to 32% for the nine months ended September 30, 2001 from 35%
for the comparable period in 2000.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $82.1 million, or 119%, to $150.8 million for the nine months
ended September 30, 2001, from $68.8 million for the comparable period in 2000.
Exclusive of the effects of the GST asset acquisition, this expense increased
51%. This 51% increase in net depreciation and amortization expense was
primarily attributable to increased capital expenditures and an impairment of
certain non-revenue generating assets.
EBITDA. EBITDA for the nine months ended September 30, 2001 increased $46.1
million to $145.7 million, from $99.6 million in 2000. The increase was $65.2
million, exclusive of the effects of the GST asset acquisition. This improvement
was primarily the result of a $9.7 million increase in the recognition of non-
recurring reciprocal compensation from $27.3 million in 2000 to $37.0 million in
2001, economies of scale as more revenue was generated in existing markets,
increased utilization of networks and facilities, a more skilled and productive
workforce, and the implementation of cost reduction efforts.
Interest Expense. On July 21, 1998, the Company issued $400 million in
9 3/4% Senior Notes in a public offering. During the first quarter of 2001, the
Company issued $400 million in 10 1/8% Senior Notes and drew $250 million on its
Credit Facility. Interest expense relating to the 9 3/4% Senior Notes, the
10 1/8%
21
TIME WARNER TELECOM INC.
Senior Notes, and the Credit Facility was $81.9 million for the nine months
ended September 30, 2001. Additionally, in connection with the repayment of the
senior unsecured bridge loan facility, the Company recorded $5.8 million of
deferred financing costs as a non-recurring expense as well as $3.5 million in
interest expense. Interest expense relating to the 9 3/4% Senior Notes was $30.1
million for the nine months ended September 30, 2000. Capitalized interest was
$6.2 million and $2.6 million for the nine months ended September 30, 2001 and
2000, respectively.
Net Loss. Net loss changed $53.2 million to a loss of $48.6 million for the
nine months ended September 30, 2001, from earnings of $4.6 million for the
comparable period in 2000. The earnings change is primarily due to an increase
in depreciation expense and net interest expense related to the GST asset
acquisition, partially offset by an increase in the deferred tax benefit and an
increase in EBITDA.
Liquidity and Capital Resources
Operations. The Company's cash provided by operating activities was $106.6
million for the nine months ended September 30, 2001, as compared to $71.2
million for the comparable period in 2000. This increase in cash provided by
operating activities of $35.4 million principally resulted from an increase in
EBITDA and a change in certain working capital items.
As the Company continues its expansion plan to enter new markets, the
expenditures incurred, together with initial operating expenses, will generally
result in negative EBITDA and operating losses from the new market until an
adequate customer base and revenue stream for the new market has been
established. Accordingly, the Company expects that the network constructed in
each new market will generally produce negative EBITDA from the new market for
at least two years after operations commence in that market. Additionally, the
Company currently expects the operations related to the assets purchased from
GST to generate negative EBITDA as a result of the Company's investment in
additional sales force for these networks and further build-out until an
adequate customer base and revenue stream for the networks have been
established. Although overall the Company expects to continue to have positive
EBITDA for the near future as it develops and expands its business, as well as
integrates the GST acquisition, there can be no assurance that the Company will
sustain sufficient positive EBITDA to meet its working capital requirements and
to service its indebtedness.
The Company expects that the restructuring of its Vancouver operations will
result in a one-time pre-tax restructuring charge of $6-8 million in the fourth
quarter of 2001 for severance and benefits related to the elimination of
positions and a non-cash charge for the write-down of certain Vancouver-based
property and equipment. The Company expects, consistent with its revenue
estimates, that EBITDA for the fourth quarter of 2001 will show modest to no
growth from the third quarter, before the impact of the one-time restructuring
charge.
Investing. Cash used in investing activities was $1.0 billion for the nine
months ended September 30, 2001, as compared to $87.8 million for the comparable
period in 2000. During the nine months ended September 30, 2001, the Company
used its proceeds from the issuance of common stock and a portion of the
proceeds from the issuance of debt to fund the GST acquisition, capital
expenditures, and net purchases of marketable securities. During the nine months
ended September 30, 2000, proceeds from the maturities of marketable securities
and cash flow from operating activities were primarily used to fund capital
expenditures.
During the nine months ended September 30, 2001, capital expenditures were
$337.1 million, an increase of $123.9 million from the comparable period in
2000. The largest commitment of capital was related to the installation of
transport and switch related electronics to support the increase in sales
activity and the addition of 2,316 route miles of fiber since December 31, 2000,
which is exclusive of 4,210 route miles of fiber acquired in connection with the
GST asset acquisition. Based on historic capital requirements for network
construction in relation to sales volumes and network expansion plans, the
Company anticipates that capital expenditures for the full year 2001 will be
$450-500 million. This target spending includes requirements for current
operating markets, the Company's expansion plans including markets acquired from
GST, and integrating the GST acquisition. However, if revenue growth slows, the
Company may further reduce its capital spending as a large portion of the
Company's capital spending is success-based.
22
TIME WARNER TELECOM INC.
The facilities-based telecommunications service business is a capital-
intensive business. The Company's operations have required and will continue to
require substantial capital investment for:
. the purchase and installation of switches, electronics, fiber, and
other technologies in existing networks and in additional networks to
be constructed in new service areas; and
. the evolution of the network to support new products, services, and
technologies.
The Company's expected capital expenditures for general corporate and
working capital purposes include expenditures with respect to the Company's
management information system and corporate service support infrastructure.
The Company plans to make substantial capital investments in connection
with plans to construct and develop new networks, as well as for technology
upgrades. Expansion of the Company's networks will include the geographic
expansion of the Company's existing operations, and the Company may consider
the development of new markets. In addition, the Company may acquire existing
networks in the future. The development and expansion of the Company's existing
and future networks and services will require significant capital expenditures.
The Company regularly evaluates potential acquisitions and joint ventures
that would extend its geographic markets, expand its products and services, or
enlarge the capacity of its networks. If the Company enters into a definitive
agreement with respect to any acquisition or joint venture, it may require
additional financing. If the Company enters into a definitive agreement with
respect to any material transaction, it could result in the Company increasing
its leverage or issuing additional common stock or both. There can be no
assurance, however, that the Company will enter into any transaction or, if it
does, on what terms.
While the Company intends to continue to leverage its relationship with
Time Warner in pursuing expansion opportunities, to the extent the Company seeks
to expand into service areas where Time Warner does not conduct cable
operations, the Company may incur additional costs in excess of those
historically incurred when expanding into existing Time Warner service areas. In
addition, Time Warner is not obligated to construct or provide additional fiber
optic capacity in excess of what is already licensed to the Company under
certain operating agreements. Accordingly, if the Company is unable to lease
additional capacity at the same rates as are currently provided for under
certain operating agreements, the Company may be required to obtain additional
capacity on more expensive terms.
In order to fund the GST asset acquisition, the development of those
assets, and its other capital expenditure needs, in December 2000 the Company
replaced its $475 million senior secured revolving credit facility with a $1
billion amended and restated senior secured credit facility which provides for
$525 million of senior secured term loan facilities and a $475 million senior
secured revolving credit facility. The Credit Facility has a final maturity of
December 31, 2007, with annual reductions in the principal amount available
under the $475 million senior secured credit facility commencing on December 31,
2004. In December 2000, the Company was required to draw and hold in escrow $179
million of the revolving credit facility until the closing of the GST asset
acquisition, at which time the draw increased to $250 million. See "Financing"
below.
In January 2001, the Company issued $400 million principal amount of 10
1/8% Senior Notes due 2011 and 7,475,000 shares of Class A common stock in a
public offering at an offering price of $74 7/16 per share, in part to repay a
senior unsecured bridge loan facility under which the Company borrowed $700
million to finance the purchase of the GST assets and pay related fees and
expenses. In connection with the repayment of the senior unsecured bridge loan
facility, the Company recorded $5.8 million of deferred financing costs as a
non-recurring expense as well as $3.5 million in interest expense for the nine
months ended September 30, 2001. In connection with the issuance of Class A
common stock, approximately $24.2 million of financing costs were charged to
additional paid-in capital in the first quarter of 2001.
23
TIME WARNER TELECOM INC.
The Company expects that the $380.1 million in cash, cash equivalents, and
marketable debt securities at September 30, 2001, borrowings under the $1
billion credit facility, along with internally generated funds, will provide
sufficient funds for the Company to meet its expected capital and liquidity
needs to expand its business and pay interest on the 9 3/4% Senior Notes, the
10 1/8% Senior Notes, and on current and future borrowings under the secured
revolving credit facility. In the event that the Company's plans or assumptions
change or prove to be inaccurate, or the foregoing sources of funds prove to be
insufficient to fund the Company's growth and operations, or if the Company
consummates acquisitions or joint ventures, the Company may be required to seek
additional capital. The Company's revenue and costs are partially dependent upon
factors that are not within the Company's control, such as regulatory changes,
changes in technology, and increased competition. Due to the uncertainty of
these and other factors, actual revenue and costs may vary from expected
amounts, possibly to a material degree, and these variations are likely to
affect the level of the Company's future capital expenditures and expansion
plans. Sources of any future financing may include public or private debt,
equity financing by the Company or its subsidiaries, or other financing
arrangements.
Financing. Net cash provided by financing activities for the nine months
ended September 30, 2001 was $1.0 billion and was primarily due to the net
proceeds from both the issuance of common stock and debt.
The $400 million principal amount in 9 3/4% Senior Notes that the Company
issued in July 1998 are unsecured, unsubordinated obligations of the Company.
Interest on the 9 3/4% Senior Notes is payable semiannually on January 15 and
July 15, beginning on January 15, 1999. Aggregate annual interest payments on
the 9 3/4% Senior Notes through 2008 are expected to be approximately $39
million. The 9 3/4% Senior Notes are required to be repaid on July 15, 2008.
The $400 million in principal amount of 10 1/8% Senior Notes that the
Company issued in the first quarter of 2001 are unsecured, unsubordinated
obligations of the Company. Interest on the 10 1/8% Senior Notes is payable
semiannually on February 1 and August 1, beginning on August 1, 2001. Aggregate
annual interest payments on the 10 1/8% Senior Notes through 2011 are expected
to be approximately $41 million.
The 9 3/4% Senior Notes and the 10 1/8% Senior Notes are governed by
indentures that contain certain restrictive covenants. These restrictions
affect, and in many respects significantly limit or prohibit, among other
things, the ability of the Company to incur indebtedness, make prepayments of
certain indebtedness, pay dividends, make investments, engage in transactions
with shareholders and affiliates, issue capital stock of subsidiaries, create
liens, sell assets, and engage in mergers and consolidations.
The Company is aware that its outstanding 9 3/4% and 10 1/8% Senior Notes
are currently trading at substantial discounts to their respective face amounts.
In order to reduce future cash interest payments, as well as future amounts due
at maturity or mandatory redemption, the Company or its affiliates may, from
time to time, purchase such securities for cash in open market or privately
negotiated transactions. The Company will evaluate any such transactions in
light of then existing market conditions, taking into account its present
liquidity and prospects for future access to capital and restrictions, if any,
under its existing financing documents. The amounts involved in any such
transactions, individually or in the aggregate, may or may not be material.
Interest on the $250 million drawn under the revolving credit facility is
computed utilizing a specified Eurodollar Rate plus 4.0%, which totaled 8.7% on
September 30, 2001. Interest is payable at least quarterly at the end of each
quarter, beginning in March 2001. Based on the rate in effect on September 30,
2001, aggregate annual interest payments are expected to be approximately $21.7
million through 2008. These anticipated payments will fluctuate with changes in
amounts borrowed and changes in the interest rate.
The obligations under the amended and restated senior secured credit
facility are secured by substantially all of the assets of the Company,
including the assets acquired from GST, except for certain assets with respect
to which the grant of a security interest is prohibited by governing agreements.
The senior secured credit facility requires the Company to prepay outstanding
loans when its cash flow exceeds certain levels and with the proceeds received
from a number of specified events or transactions, including certain
24
TIME WARNER TELECOM INC.
asset sales and insurance recoveries for assets not replaced. In addition,
obligations under the senior secured credit facility are subject to various
covenants that limit the Company's ability to:
. borrow and incur liens on its property;
. pay dividends or make other distributions; and
. make capital expenditures.
The senior secured credit facility also contains financial covenants,
including a consolidated leverage ratio, and a consolidated interest coverage
ratio, as well as cross default provisions. Under the cross default provisions,
the Company is deemed to be in default under the amended and restated facility
if it has defaulted under any of the other material outstanding obligations,
such as the 9 3/4% Senior Notes or the 10 1/8% Senior Notes.
25
TIME WARNER TELECOM INC.
Part II
Other Information
Item 1. Legal Proceedings
The Company has no material legal proceedings pending.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as part of this report and the Exhibit Index
is incorporated herein by reference.
(b) Reports on Form 8-K
Form 8-K dated August 14, 2001 furnishing investor presentation
materials.
26
TIME WARNER TELECOM INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
2.1 -- Reorganization Agreement among Time Warner Companies, Inc., MediaOne Group, Inc., Advance/Newhouse Partnership, Time
Warner Entertainment Company, L.P., and Time Warner Entertainment-Advance/Newhouse Partnership (filed as Exhibit 2.1
to Time Warner Telecom ("TWT") LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. *
2.2 -- Merger Agreement among the Company, TWT LLC, and TWT Inc. (filed as Exhibit 2.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-49439)). *
2.3 -- Asset Purchase Agreement dated as of September 11, 2000 among Time Warner Telecom Inc., GST Telecommunications, Inc.,
GST USA, Inc. and the other parties identified on Exhibit A thereto (filed as Exhibit 2.1 to the Company's Report on
Form 8-K dated September 18, 2000 and dated September 11, 2000). *
3.1 -- Restated Certificate of Incorporation of the Company (filed as Exhibit 2.2 to Company's Registration Statement on
Form S-1 (Registration No. 333-49439)). *
3.2 -- Restated By-Laws of the Company (filed as Exhibit 3.2 to Company's Registration Statement on Form S-1 (Registration
No. 333-49439)). *
4.1 -- Stockholders' Agreement, among the Company, Time Warner Companies, Inc., American Television and Communications
Corporation, Warner Communications Inc., TW/TAE Inc., FibrCOM Holdings, L.P., Paragon Communications, MediaOne Group,
Inc., Multimedia Communications, Inc. and Advance/Newhouse Partnership (filed as Exhibit 4.1 to Company's
Registration Statement on Form S-1 (Registration No. 333-49439)). *
4.2 -- Indenture, between TWT LLC, TWT Inc. and The Chase Manhattan Bank, as Trustee (filed as Exhibit 4.1 to TWT LLC's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). *
4.3 -- Indenture between Time Warner Telecom Inc. and The Chase Manhattan Bank, as Trustee (filed as Exhibit 4 to Amendment
No. 1 to the Company's Registration Statement on Form S-3. (Registration No. 333-49818)). *
* Incorporated by reference.
27
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIME WARNER TELECOM INC.
Date: November 13, 2001 By: /s/ Jill R. Stuart
--------------------------------
Jill R. Stuart
Vice President, Accounting and
Finance and Chief Accounting
Officer