Audit Report on the Compliance of TW Telecom with Its City Franchise Agreement January 1, 2006 – December 31, 2007

AUDIT REPORT IN BRIEF

TW Telecom is a leading provider of managed network services, including data, Internet access, and local and long distance telephone services. TW Telecom provides services under a 15-year franchise agreement with the City through the Department of Information Technology and Telecommunications (DoITT).

Under the franchise agreement, TW Telecom is required to pay the City a franchise fee consisting of the greater of either $200,000 or five percent of its annual gross revenue from telecommunication services. In addition, TW Telecom is required to maintain a minimum combined amount of $50 million in insurance for bodily injury and property damage, and maintain an unconditional letter of credit and surety bond deposit totaling $1 million.

For the audit period, January 1, 2006, through December 31, 2007, TW Telecom reported gross revenues to the City totaling $31.1 million and paid $1.5 million in related franchise fees.

Audit Findings and Conclusions

TW Telecom failed to report to the City a total of $10,120,278 in additional gross revenue and did not make all its payments on time, as required in the agreement. It therefore owes the City an additional $914,871 in franchise fees and related late interest charges. Specifically, TW Telecom did not report to the City $6,777,471 in revenue it collected by charging a five percent franchise fee to its customers from January 1, 2003 through December 31, 2007, did not report $1,162,083 for its third and fourth quarters of calendar year 2007, and inappropriately excluded $2,180,724 from the gross revenue amount it reported to the City. TW Telecom, however, complied with the other non-revenue-related requirements of its agreement with the City, such as maintaining the required $50 million property and liability insurance that named the City as an additional insured party, and maintained an unconditional letter of credit and surety bond deposit totaling $1 million.

Audit Recommendations

Based on our findings, we make five recommendations:

We recommend that TW Telecom:

• Pay the City $856,767 in additional franchise fees and late charges.

• Report to the City all revenue generated from franchise fees charged to customers.

• Submit the calculations of franchise fees in sufficient detail to the City.

We recommend that DoITT:

• Ensure that TW Telecom pays the $856,767 in additional franchise fees and late charges recommended in this report and complies with the report’s other recommendations.

• Ensure that franchise fee calculations and other financial reports are properly submitted and reviewed in a timely manner, and establish proper guidelines to monitor TW Telecom’s compliance with its City agreement.