<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER: 333-43339
KNOLOGY HOLDINGS, INC.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 58-2203141
- -------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
KNOLOGY HOLDINGS, INC.
1241 O.G. SKINNER DRIVE
WEST POINT, GEORGIA 31833
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 645-8553
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
--- ---
As of September 30, 1998, there were no shares of the registrants'
Common Stock outstanding and 49,851 shares of the registrants' Preferred Stock
outstanding.
* The Company does not have any class of equity securities registered
under the Securities Exchange Act of 1934 and files periodic reports
with the Securities and Exchange Commission pursuant to contractual
obligations with third parties.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF ITC HOLDING COMPANY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,235,186 $ 6,144,581
Marketable securities 96,084,231 227,880,923
Affiliate receivable 2,450,912
Accounts receivable, net 3,220,118 1,607,859
Prepaid expenses 246,833 37,060
------------- -------------
Total current assets 104,237,280 235,670,423
PROPERTY AND EQUIPMENT, net 161,025,092 62,567,736
INVESTMENT IN CLEARSOURCE, INC 825,072 --
COST IN EXCESS OF NET ASSETS ACQUIRED, net 46,107,176 9,433,385
DEBT ISSUANCE COSTS, net 7,664,537 7,761,655
ORGANIZATIONAL COSTS, net 569,998 701,106
OTHER 63,795 63,795
------------- -------------
Total assets $ 320,492,950 $ 316,198,100
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 25,094 $ 25,094
Accounts payable 3,611,654 5,817,733
Accounts payable - affiliate -- 452,346
Accrued liabilities 9,416,408 1,638,042
Unearned revenue 1,120,227 907,048
------------- -------------
Total current liabilities 14,173,383 8,840,263
NONCURRENT LIABILITIES:
Long-term notes payable 112,635 120,804
Long-term accrued interest payable 16,355,125 3,201,688
Bonds payable, net of discount 259,716,303 249,910,431
------------- -------------
Total liabilities 290,357,446 262,073,186
WARRANTS 2,486,960 2,486,960
STOCKHOLDERS' EQUITY
Convertible preferred stock 500 500
Additional paid-in capital 64,864,366 65,060,712
Accumulated deficit (37,214,570) (13,402,495)
Unrealized loss on marketable securities (Note 4) (1,752) (20,763)
------------- -------------
Total stockholders' equity 27,648,544 51,637,954
------------- -------------
Total liabilities and stockholders' equity $ 320,492,950 $ 316,198,100
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE> 3
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF ITC HOLDING COMPANY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES 7,038,178 2,753,872 16,196,831 7,044,686
OPERATING EXPENSES:
General and administrative 3,113,113 778,492 7,824,612 1,744,374
Programming and other charges 3,437,985 1,281,262 7,374,836 3,263,652
Depreciation and amortization 2,433,018 872,503 6,046,332 2,263,982
Customer service 931,972 242,112 1,984,653 624,151
Field and technical 1,444,305 386,138 3,051,911 988,435
Sales and marketing 1,420,100 394,625 3,294,347 947,284
------------ ------------ ------------ ------------
Total 12,780,493 3,955,132 29,576,691 9,831,878
------------ ------------ ------------ ------------
OPERATING LOSS (5,742,315) (1,201,260) (13,379,860) (2,787,192)
OTHER INCOME AND EXPENSES:
Interest income 2,232,814 12,947 8,366,231 79,428
Interest expense (7,422,979) (512,317) (21,477,167) (1,105,547)
Other income (expense), net 51,648 -- 227,812 (23,464)
------------ ------------ ------------ ------------
Total (5,138,517) (499,370) (12,883,124) (1,049,583)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (10,880,832) (1,700,630) (26,262,984) (3,836,775)
INCOME TAX BENEFIT 2,450,911 -- 2,450,911 --
------------ ------------ ------------ ------------
NET LOSS $ (8,429,921) $ (1,700,630) $(23,812,073) $ (3,836,775)
============ ============ ============ ============
NET LOSS PER SHARE:
Basic and diluted $ (168.88) $ (65.28) $ (476.75) $ (159.10)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 49,917 26,052 49,947 24,116
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 4
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF ITC HOLDING COMPANY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (23,812,073) $ (3,836,775)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 6,046,332 2,263,982
Loss on disposition of assets -- 56,316
Amortization of bond discount 9,805,872 --
Changes in current assets and liabilities:
Accounts receivable (1,612,259) (563,180)
Prepaid expenses and other (2,636,804) 176,439
Accounts payable (2,658,428) 927,922
Accrued liabilities and interest 20,931,803 520,360
Unearned revenue 213,179 134,082
------------- -------------
Total adjustments 30,089,695 3,515,921
------------- -------------
Net cash provided by (used in) operating activities 6,277,622 (320,854)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements (73,444,616) (22,034,377)
Acquisitions, net (67,203,131)
Investment in Clear Source, Inc. (825,072)
Organizational cost expenditures, net (216,122) (70,879)
Proceeds from sales of marketable securities, net 131,796,692 --
------------- -------------
Net cash used in investing activities (9,892,249) (22,105,256)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net of related offering expenses -- 10,705,402
Proceeds from issuances of debt and short-term borrowings -- 11,637,616
Expenditures related to issuance of debt (286,599) --
Principal payments on debt (8,169) --
------------- -------------
Net cash (used in) provided by financing activities (294,768) 22,343,018
------------- -------------
NET INCREASE (DECREASE) IN CASH (3,909,395) (83,092)
CASH AT BEGINNING OF PERIOD 6,144,581 83,092
------------- -------------
CASH AT END OF PERIOD $ 2,235,186 $ --
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 3,467 $ 835,669
Cash paid during the period for income taxes $ -- $ --
Details of acquisitions:
Property, plant and equipment $ 30,133,876 $ --
Intangible assets 37,069,255 --
------------- -------------
Net cash paid for acquisitions (Note 5) $ 67,203,131 $ --
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF ITC HOLDING COMPANY, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
KNOLOGY Holdings, Inc. ("KNOLOGY") and its subsidiaries (collectively,
the "Company") provides residential and business customers broadband
communications services ("Broadband Services"), including cable
television, local and long distance telephone and high-speed Internet
access service. The Company provides these Broadband Services using
high-capacity hybrid fiber-coaxial networks that are two-way
interactive ("Interactive Broadband Networks"). The Company currently
operates Interactive Broadband Networks in five cities, Montgomery,
Alabama, Columbus and Augusta, Georgia, Panama City, Florida and
Charleston, South Carolina. The Company is currently expanding these
Interactive Broadband Networks and upgrading portions of the networks
in Montgomery and Columbus. KNOLOGY also operates a broadband network
providing cable television service in Huntsville, Alabama (see Note 5 -
ACQUISITION OF CABLE ALABAMA CORPORATION) which the Company plans to
upgrade into an Interactive Broadband Network to provide additional
broadband communications services. The Company plans to expand to
additional mid-sized cities in the southeastern United States.
In July 1998, ITC Holding Company, Inc. ("ITC") acquired 43% of the
outstanding stock of KNOLOGY, increasing ITC's ownership in KNOLOGY to
approximately 85%. As a result of the transaction, KNOLOGY is a
consolidated subsidiary of ITC.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for the fair presentation of the financial
statements have been included, and the financial statements present
fairly the financial position and results of operations for the interim
periods presented. Operating results for the three months and nine
months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998.
These financial statements should be read in conjunction with the
Company's 1997 Annual Report on Form 10-K including the 1997
consolidated financial statements with footnotes. Certain prior year
amounts have been reclassified to conform with the current
presentation.
3. NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosure About
Segments of an Enterprise and Related Information" effective for fiscal
years beginning after December 15, 1997. Interim period reporting is
not required in the initial year of adoption. Management is currently
studying the impact that SFAS No. 131 will have on its financial
statement disclosures.
5
<PAGE> 6
The American Institute of Certified Public Accountants issued Statement
of Position ("SOP") No. 98-5 on "Reporting on the Costs of Start-up
Activities". SOP 98-5 requires that all nongovernmental entities
expense costs of start-up activities, including pre-opening and
organization activities, as the costs are incurred. SOP 98-5 must be
adopted in fiscal years beginning after December 15, 1998. The Company
will adopt SOP 98-5 effective January 1, 1999 at which time it will
write off any unamortized costs recorded as start-up activity. The
impact of adopting SOP 98-5 may have a material effect on the Company's
financial statements.
4. COMPREHENSIVE INCOME
During 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income", which the Company adopted as of
January 1, 1997. SFAS No. 130 requires the Company to report in their
financial statements, in addition to its net income (loss),
comprehensive income (loss), which includes all changes in equity
during a period from non-owner sources including, as applicable,
foreign currency items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities. The Company's unrealized loss on marketable securities for
the nine months ended September 30, 1998 and the year ended December
31, 1997 is reported in the Stockholders' Equity section of the
Company's Condensed Consolidated Balance Sheets.
5. ACQUISITION OF CABLE ALABAMA CORPORATION
On October 30, 1998, the Company acquired substantially all of the
assets of Cable Alabama Corporation ("Cable Alabama") for approximately
$60,733,000 in cash and also purchased for $5,000,000 in cash, certain
real property located in Huntsville, Alabama. Cable Alabama owned and
operated a cable television system serving the Huntsville, Alabama
area. KNOLOGY plans to upgrade the existing Cable Alabama plant into a
high-speed fiber-coaxial network that is two-way interactive to provide
additional broadband communications services such as local and
long-distance telephone service, digital television and high-speed
Internet access. The Acquisition has been accounted for under the
purchase method of accounting.
The assets acquired are held by KNOLOGY of Huntsville, Inc. and have
been included in the Company's consolidated financial statements
effective September 1, 1998. The following unaudited pro forma results
of operations for the nine months ended September 30, 1998 assumes the
Acquisition occurred on January 1, 1997. The pro forma information is
presented for informational purposes only and may not be indicative of
the actual results of operations had the Acquisition occurred on the
assumed date, nor is the information necessarily indicative of future
results of operations.
<TABLE>
<CAPTION>
Three Months Nine Months
Year Ended Ended Ended
December 31, 1997 September 30, 1998 September 30, 1998
------------------- ------------------ ------------------
<S> <C> <C> <C>
Operating revenues $ 23,789,953 $ 9,301,095 $ 25,070,119
Income before extraordinary items (20,813,647) (8,570,363) (24,728,737)
Net loss (20,813,647) (8,570,363) (24,728,737)
Earnings per share (a) (721.82) (171.69) (495.10)
</TABLE>
(a) Earnings per share is computed using 28,835, 49,917,
and 49,947 as number of shares outstanding for the
year ended December 31, 1997 and the three and nine
month periods ended September 30, 1998, respectively.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. IN ADDITION, MEMBERS OF THE COMPANY'S SENIOR MANAGEMENT MAY, FROM
TIME TO TIME, MAKE CERTAIN FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY'S
OPERATIONS, PERFORMANCE AND OTHER DEVELOPMENTS. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER THE
CAPTION "BUSINESS-RISK FACTORS" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
1997.
Unless otherwise indicated, dollar amounts over $1 million have been rounded to
one decimal place and dollar amounts less than $1 million have been rounded to
the nearest thousand.
The following analysis should be read in conjunction with the financial
statements and the notes thereto appearing elsewhere in this report.
Substantially all of the Company's revenues through September 30, 1998 come from
its cable television operations. In July 1997 the Company began to offer
Internet access and telephone service in Montgomery. In Columbus, high-speed
Internet access service was introduced in September 1997 and telephone service
was introduced in the fourth quarter of 1997. The Company began offering cable
television, telephone and Internet access services in Panama City, Florida,
Augusta, Georgia and Charleston, South Carolina during late September 1998.
Operating revenues include charges earned for providing cable television, local
and long distance telephone and Internet access services, as well as
miscellaneous revenues resulting principally from converter rentals,
installation fees, franchise fees and late payment charges. Cable television
revenues consist of fixed monthly fees for basic and premium cable television
services, as well as fees from pay-per-view movies and events, such as boxing
matches and concerts, which involve a charge for each viewing. Revenues from the
Company's telephone services consist primarily of fixed monthly fees for local
service and enhanced services such as call waiting and voice mail, and usage
fees for long distance service. Revenues from Internet access services consist
primarily of fixed monthly fees for service and rental of cable modems.
The Company's operating expenses through September 30, 1998 consisted of
programming and other charges for cable television, telephone and Internet
access services, general and administrative expenses, depreciation and
amortization expense, field and technical expenses, customer service expenses
and sales and marketing costs. Programming charges consist primarily of monthly
fees to the National Cable Television Cooperative and other programming
providers, and are generally based on the average number of subscribers to each
program. Operating expenses related to the Company's Internet access and
telephone services include primarily costs of Internet transport and telephone
switching, interconnect and transport charges payable to local and long distance
carriers. General and administrative expenses consist of corporate and
subsidiary general management and administrative costs. Depreciation and
amortization include depreciation of the Company's Interactive Broadband
Networks and equipment, and amortization of cost in excess of net assets and
other intangible assets related to acquisitions. Field and technical expenses
include payroll and departmental costs incurred for network design, maintenance,
monitoring and operations, including pole rental fees. Customer service expenses
include payroll and departmental costs incurred for customer service
representatives and management. Sales and marketing costs include the cost of
sales and marketing personnel and advertising and promotional expenses.
7
<PAGE> 8
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES. Operating revenues for the three months ended September 30, 1998
increased 156% to $7.0 million, compared to $2.8 million for the three months
ended September 30, 1997. The increased revenues are primarily due to a higher
number of cable subscribers during the three months ended September 30, 1998
compared to the same period in 1997, and from higher telephone and Internet
access revenues, which services were not introduced by the Company until the
third quarter in 1997. The additional subscribers are a result of the Company
extending its Broadband networks in the Montgomery and Columbus markets and the
acquisitions of Beach Cable in Panama City Beach, Florida in December 1997 and
Cable Alabama in Huntsville, Alabama effective September 1, 1998.
EXPENSES. The Company's operating expenses for the three months ended September
30, 1998 excluding depreciation and amortization, increased to $10.3 million,
compared to $3.1 million for the three months ended September 30, 1997.
Programming and other charges were $3.4 million and $1.3 million which represent
48.8% and 46.5% of revenues, respectively. General and administrative expenses
were $3.1 million and $778,000, field and technical expenses were $1.4 million
and $386,000, customer service expenses were $932,000 and $242,000, and sales
and marketing costs were $1.4 million and $395,000, respectively, for such
periods. The increases in the Company's programming charges are primarily a
result of the Company's increased number of cable subscribers. The increase in
general and administrative expenses, field and technical expenses, customer
service expenses and sales and marketing costs reflect the Company's build-up of
personnel, corporate infrastructure, customer service support and brand
development in connection with the planned growth of the business into Panama
City, Charleston, Augusta and additional new markets in the southeastern region
of the United States. The Beach Cable and Cable Alabama acquisitions also
contributed to higher expenses for the three months ended September 30, 1998
compared to the same period in 1997.
Depreciation and amortization for the three months ended September 30, 1998
increased to $2.4 million, compared to $873,000 for the same period in 1997. The
increase in depreciation expense reflects increased capital expenditures during
1997 and 1998 to expand the Montgomery and Columbus networks, to acquire Beach
Cable in Panama City Beach and to purchase buildings and computer and office
equipment at the corporate and subsidiary locations.
Interest income for the three months ended September 30, 1998 was $2.2 million,
compared to $13,000 for the same period in 1997 and reflects the interest earned
from the investment of certain proceeds received from the issuance of the Senior
Discount Notes (as defined herein) in October 1997.
Interest expense for the three months ended September 30, 1998 was $7.4 million,
compared to $512,000 for the same period in 1997 and reflects the accrual of
interest on the Senior Discount Notes issued in October 1997.
NET LOSS. The Company incurred a net loss for the three months ended September
30, 1998 of $8.4 million compared to a net loss of $1.7 million for the three
months ended September 30, 1997 as a result of the increase in expenses as noted
above. The Company expects its net losses to continue as the Company continues
to expand its business.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES. Total revenues for the nine months ended September 30, 1998 increased
130% to $16.2 million, compared to $7.0 million for the nine months ended
September 30, 1997. The increased revenues are primarily due to a higher number
of cable subscribers during the nine months ended September 30, 1998
8
<PAGE> 9
compared to the same period in 1997, and from higher telephone and Internet
access revenues, which services were not introduced by the Company until the
third quarter in 1997. The additional subscribers are a result of the Company
extending its Broadband networks in the Montgomery and Columbus markets and the
acquisitions of Beach Cable in Panama City Beach, Florida in December 1997 and
Cable Alabama in Huntsville, Alabama effective September 1, 1998.
EXPENSES. The Company's operating expenses for the nine months ended September
30, 1998 excluding depreciation and amortization, increased to $23.5 million,
compared to $7.6 million for the nine months ended September 30, 1997.
Programming and other charges were $7.4 million and $3.3 million which represent
45.5% and 46.3% of revenues, respectively. General and administrative expenses
were $7.8 million and $1.7 million, field and technical expenses were $3.1
million and $988,000, customer service expenses were $2.0 million and $624,000,
and sales and marketing costs were $3.3 million and $947,000, respectively, for
such periods. The increases in the Company's programming charges are primarily a
result of the Company's increased number of cable subscribers. The increase in
general and administrative expenses, field and technical expenses, customer
service expenses and sales and marketing costs reflect the Company's build-up of
personnel, corporate infrastructure, customer service support and brand
development in connection with the planned growth of the business into Panama
City, Charleston, Augusta and additional new markets in the southeastern region
of the United States. The Beach Cable and Cable Alabama acquisitions also
contributed to higher expenses for the three months ended September 30, 1998
compared to the same period in 1997.
Depreciation and amortization for the nine months ended September 30, 1998
increased to $6.0 million, compared to $2.3 million for the same period in 1997.
The increase in depreciation expense reflects increased capital expenditures
during 1997 and 1998 to expand the Montgomery and Columbus networks, to acquire
Beach Cable in Panama City Beach and to purchase buildings and computer and
office equipment at the corporate and subsidiary locations.
Interest income for the nine months ended September 30, 1998 was $8.4 million,
compared to $79,000 for the same period in 1997 and reflects the interest earned
from the investment of certain proceeds received from the issue of the Senior
Discount Notes (as defined herein) in October 1997.
Interest expense for the nine months ended September 30, 1998 was $21.5 million,
compared to $1.1 million for the same period in 1997 and reflects the accrual of
interest on the Senior Discount Notes issued in October 1997.
NET LOSS. The Company incurred a net loss for the nine months ended September
30, 1998 of $23.8 million compared to a net loss of $3.8 million for the nine
months ended September 30, 1997 as a result of the increase in expenses as noted
above. The Company expects its net losses to continue as the Company continues
to expand its business.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had net working capital of $90.1 million,
compared to $226.8 million at December 31, 1997.
The Company has required significant capital for operating and investing
activities in the development of its business. For the nine months ended
September 30, 1998, the Company provided approximately $6.3 million in cash
flows from operating activities and used approximately $9.9 million in cash
flows from investing activities. The Company's investing activities for the nine
months ended September 30, 1998 primarily consisted of $73.4 million of capital
expenditures and $67.2 million in business acquisitions which were funded
primarily by proceeds from the sale of marketable securities of $131.8 million.
9
<PAGE> 10
On October 22, 1997, the Company received net proceeds of approximately $242.4
million from the offering of Senior Discount Notes (the "Offering"). The Notes
were sold at a substantial discount from their principal amount at maturity and
there will not be any payment of interest on the Notes prior to April 15, 2003.
The Notes will fully accrete to face value of $444.1 million on October 15,
2002. From and after October 15, 2002, the Notes will bear interest, which will
be payable in cash, at a rate of 11-7/8% per annum on April 15 and October 15 of
each year, commencing April 15, 2003. The Indenture contains certain covenants
that affect, and in certain cases significantly limit or prohibit, among other
things, the ability of the Company to incur indebtedness, pay dividends, prepay
subordinated indebtedness, redeem capital stock, make investments, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations. If the Company fails to comply with these
covenants, the Company's obligation to repay the Notes may be accelerated.
However, these limitations are subject to a number of important qualifications
and exceptions. In particular, while the Indenture restricts the Company's
ability to incur additional indebtedness by requiring compliance with specified
leverage ratios, it permits the Company and its subsidiaries to incur an
unlimited amount of indebtedness to finance the acquisition of equipment,
inventory and network assets and to secure such indebtedness, and to incur up to
$50.0 million of additional secured indebtedness. Upon a "Change of Control" of
the Company (as defined in the Indenture), the Company will be required to make
an offer to purchase the Notes at a purchase price equal to 101% of the Accreted
Value thereof, plus accrued interest.
In connection with the Offering, the Company completed an equity private
placement, pursuant to which the Company issued approximately 21,400 additional
shares of Preferred Stock at $1,500 per share for aggregate proceeds of
approximately $32.2 million.
The Company's business requires substantial investment to finance capital
expenditures and related expenses to expand the Interactive Broadband Networks
in Montgomery and Columbus, to construct additional Interactive Broadband
Networks, to fund subscriber equipment, to fund operating deficits in new
systems until it builds its customer base and to maintain the quality of its
networks. The Company currently expects to spend at least $78.4 million during
1998 to expand and upgrade the Montgomery, Columbus and Panama City Beach
networks and to commence construction of networks in Augusta, Charleston and
Panama City. In addition, the Company estimates the cost of constructing
networks in additional cities and funding initial subscriber equipment at
approximately $35 million to $50 million per city. Actual costs may vary
significantly from this range and will depend in part on the number of miles of
network to be constructed, the geographic and demographic characteristics of the
city, other factors affecting construction costs, costs associated with the
cable franchise in each city, the number of subscribers, the mix of services
purchased, the cost of subscriber equipment paid for or financed by the Company
and other factors. The Company expects to enter into purchase agreements through
1998 in the ordinary course of business for programming services and
construction related services to expand its service offerings and to expand and
upgrade the Systems. Although there can be no assurance, the Company believes
that present cash reserves, cash flow from operations and amounts expected to be
available under a $50 million credit facility currently under negotiation will
provide sufficient funds to expand the Systems as currently planned and fund the
expansion into Panama City Beach/Panama City, Charleston and Augusta. The
Company may need to seek additional financing in the event the credit facility
is not entered into or actual costs vary. In addition, the Company will need
additional financing to expand into additional cities for new business
activities or in the event it decides to make additional acquisitions.
10
<PAGE> 11
YEAR 2000
Introduction
The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
State of Readiness
The Company has established a Year 2000 Program Office to coordinate
appropriate activity and report to the Company's Executive Management and Board
of Directors on a continuing basis with regard to the Year 2000 issue. The
Company's Year 2000 Program Office has developed and is implementing a
comprehensive plan (the "Year 2000 Plan") for the Company to become Year 2000
ready by the middle of the fourth quarter 1999. The Year 2000 Plan covers the
following Company systems (collectively, the "Systems"):
- the Company's business-critical information technology and
operating systems ("Critical IT Systems") which are comprised
substantially of commercial off-the-shelf software and other
third party software and hardware relating to, among others,
- billing of the Company's cable, telephone and
Internet services,
- customer service,
- financial operations and reporting, including
accounts payable,
- materials management, and
- network monitoring;
- the Company's non-critical information technology and
operating systems ("Non-Critical IT Systems") which also are
substantially comprised of commercial off-the-shelf software
and other third party software and hardware relating to, among
others, spreadsheet, word processing, Internet intracorporate
communications and supporting and related operating systems;
- the systems of the Company's major vendors, third party
network service providers and other material service and
content providers ("Third Party Systems") which include,
without limitation, cable content providers, network long
distance telephone carriage providers and telephony switching
services; and
- the Company's non-information technology systems, including
embedded technology ("Non-IT Systems") relating to, among
others, security systems and HVAC.
11
<PAGE> 12
The Year 2000 Plan consists of six phases: (i) awareness, (ii)
assessment, (iii) remediation (whether by upgrade or replacement), (iv) testing
and validation, (v) implementation and (vi) creation of contingency plans in the
event of year 2000 failures. The Company has completed the awareness phase of
its Year 2000 Plan for all of its Systems, and is well under way toward
completing the assessment phase of the Year 2000 Plan in connection with the
Company's Critical IT Systems and Non-Critical IT Systems. In addition, the
Company has begun the awareness phase of its Year 2000 Plan regarding its Third
Party Systems. As part of the assessment phase, the Company has polled
substantially all of the third parties who provide material hardware, software
or services to the Company as part of its Critical IT Systems, Non-Critical IT
Systems and Third Party Systems regarding each of such third party's Year 2000
compliance plan and state of readiness. The Company has received responses
regarding Year 2000 compliance from some of such third parties with respect to
the Company's Critical IT Systems and Non-Critical IT Systems. A majority of all
third parties that responded have assured the Company that their hardware and/or
software is or will be Year 2000 compliant. Interstate Telephone Company, Inc.
and Valley Telephone Company, however, have informed the Company that they are
in the early stages of their year 2000 programs and remain unable to predict
with certainty whether or when they will be Year 2000 ready. These companies
provide telephony carrier access billing, customer care and billing, and
switching services to the Company. The Company is actively seeking responses
from the remainder of such third parties and expects to have substantially all
of such responses by the middle of the first quarter of 1999. In addition, the
Company has begun the assessment phase of the Year 2000 Plan regarding the
Company's Non-IT Systems, which the Company believes are not as crucial to the
Company's business, financial condition and operations as the other systems. The
Company anticipates that the assessment phase will be completed by approximately
the end of the first quarter of 1999.
The initial actions in the remediation phase are being conducted, and
will be conducted, by the third parties who provide software, hardware or
services that comprise the Systems. The Company has scheduled certain upgrades
or replacements, and/ or demonstrations of Year 2000 compliance regarding its
Critical IT Systems during the fourth quarter of 1998. The Company intends to
schedule the remainder of required upgrades or replacements and/or
demonstrations of Year 2000 compliance regarding its Systems beginning in the
fourth quarter of 1998 and ending approximately during the second quarter of
1999.
The Company intends to commence testing of the individual software and
hardware components and, eventually, end-to-end testing of each of the Systems
as the remediation phase nears completion as to each of the Company's Systems.
The Company will start the tests with the Critical IT Systems and Third Party
Systems and finish with the Non-Critical IT Systems and Non-IT Systems. The
Company's Year 2000 Plan provides for completion of all testing regarding the
Systems during the beginning of the third quarter of 1999.
The Company's Year 2000 Plan provides that the implementation phase of
the Year 2000 Plan will be conducted during the second and third quarters of
1999.
The Company has formed a Year 2000 Contingency Planning Committee and
has started to consider possible general contingency plans for Year 2000
failures. However, until the Company has further identified and assessed the
risks of any such failures, the Company is unable to formulate and implement
such contingency plans. As the Company progresses in its Year 2000 Plan and
identifies specific material risks presented by the Year 2000 issue, the Company
will develop remedial and contingency plans to address such risks.
12
<PAGE> 13
In addition, the Company retained an outside consultant to assess the
Company's Year 2000 Plan to determine whether, if properly administered, it can
result in Year 2000 readiness, and to audit the Company's initial progress
through the first two phases. The Company intends to engage consultants to
assist in the project coordination and execution of the Year 2000 Plan until its
completion. The Company anticipates that the engagement of such consultants will
cost at least $300,000.
Interstate Telephone Company, Inc. and Valley Telephone Company, Inc.,
each a wholly-owned subsidiary of the Company's majority stockholder, ITC
Holding Company, Inc., have informed the Company that they are in the early
stages of their year 2000 programs and remain unable to predict with certainty
whether or when they will be Year 2000 ready. The Company depends on these
companies for its telephony carrier access billing, customer care and billing,
and switching services. These companies rely on third party vendors for the
telephony customer care and billing, and switching services and use a legacy
system for telephony carrier access billing services. These companies have
contacted such third party vendors and have scheduled demonstrations of Year
2000 compliance in the second quarter of 1999. The legacy system used in
connection with telephony carrier access billing is in remediation which is
scheduled for completion in the first quarter of 1999. The Company is working
with both companies to monitor their year 2000 plans and to prepare contingency
arrangements, if necessary. Although revenues derived from the Company's
telephony services currently comprise an immaterial percentage of the Company's
total revenues, the failure to timely remedy any year 2000 problems and/or
develop a viable contingency plan could result in the Company's temporary
inability to provide telephony services to its customers and have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, a material Year 2000 problem with any other of the
Company's material vendors could interrupt the Company's ability to provide
cable, telephone or Internet services to its customers. The Company's intends to
test, and have each such vendor demonstrate, the Year 2000 readiness of each
vendor's hardware, software or services that comprises a part of or affects the
Company's Systems. The Company and the Year 2000 Contingency Planning Committee
are unable to formulate or implement contingency plans regarding any of the
material vendor relationships until such tests and demonstrations are nearer
completion and the Company has identified the material risks to the Company, if
any.
The scheduled commencement and completion dates for each of the phases
of the Year 2000 Plan are based upon management's good faith estimates and may
be updated or revised as additional information becomes available.
Costs
To date, the Company has incurred costs of approximately $30,000 in
connection with its Year 2000 Plan. Future costs will include, among others, the
engagement of an outside consultant, development and execution of testing
Systems, upgrades or replacements of hardware and software, and implementation
of viable contingency plans. The Company has not completed an estimate of such
future costs. As the assessment phase of the Year 2000 nears completion.
13
<PAGE> 14
The Company expenses costs associated with the Year 2000 Plan as they are
incurred and anticipates funding the costs of the Year 2000 Plan from cash
flows. To date, the Company has not deferred any specific IT project due to the
costs of the Year 2000 Plan.
Risks
The failure to remediate a material Year 2000 problem or develop and
implement a viable contingency plan could result in an interruption in, or a
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect the Company's business, financial
condition and results of operations. Due to the general uncertainty inherent in
the Year 2000 issue and the current phase in which the Company is in of its Year
2000 Plan, the Company is currently unable to determine the most reasonably
likely worst case Year 2000 scenarios or whether the Year 2000 issue will have a
material impact on the Company. As the Company progresses in its Year 2000 Plan,
the Company should be better positioned to disclose the nature and extent of
material risks to the Company as a result of any failure to remediate a Year
2000 problem.
Contingency Plans
Due to the current phase in which the Company is in of its Year 2000
Plan, the Company is currently unable to fully assess its most reasonably likely
worst case Year 2000 scenarios and its material risks to determine the
appropriate contingency plans to implement to address such risks. The Company
has formed a Year 2000 Contingency Planning Committee which has started to
consider possible general contingency plans regarding year 2000 failures. As the
Company progresses in its Year 2000 Plan and identifies specific risk areas, the
Company and the Contingency Planning Committee will timely implement appropriate
remedial actions and contingency plans and will fully disclose such remedial
actions and contingency plans in the appropriate reports filed with the SEC.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
- -------------- ----------------------
<S> <C>
21.1 Subsidiaries of KNOLOGY Holdings, Inc.
27.1 Financial Data Schedule for the Nine Months Ended September
30, 1998 (for SEC use only)
</TABLE>
(b) Reports on Form 8-K
On November 9, 1998, the Company filed a Current Report on Form 8-K to report
the acquisition of the assets of Cable Alabama Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
KNOLOGY Holdings, Inc.
November 16, 1998 By: James K. McCormick
------------------------------
James K. McCormick
Chief Financial Officer and
Assistant Secretary
15
<PAGE> 1
EXHIBIT 21.1
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATEMENT OF INCORPORATION
------------------ --------------------------
<S> <C>
KNOLOGY of Montgomery, Inc. Alabama
KNOLOGY of Columbus, Inc. Delaware
KNOLOGY of Panama City, Inc. Florida
KNOLOGY of Augusta, Inc. Delaware
KNOLOGY of Charleston, Inc. Delaware
KNOLOGY of Alabama, Inc. Delaware
KNOLOGY of Georgia, Inc. Delaware
KNOLOGY of South Carolina, Inc. Delaware
KNOLOGY of Florida, Inc. Delaware
KNOLOGY of Louisiana, Inc. Delaware
KNOLOGY of Tennessee, Inc. Delaware
KNOLOGY of Huntsville, Inc. Delaware
KNOLOGY of Baton Rouge, Inc. Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE BALANCE SHEET OF KNOLOGY HOLDINGS, INC. AS OF SEPTEMBER 30, 1998 AND
THE RELATED COMBINED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998. THIS INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,235,186
<SECURITIES> 96,084,231
<RECEIVABLES> 3,315,359
<ALLOWANCES> 95,241
<INVENTORY> 27,714,467
<CURRENT-ASSETS> 104,237,280
<PP&E> 146,272,272
<DEPRECIATION> 12,961,647
<TOTAL-ASSETS> 320,492,950
<CURRENT-LIABILITIES> 14,173,383
<BONDS> 259,716,303
0
500
<COMMON> 0
<OTHER-SE> 27,648,044
<TOTAL-LIABILITY-AND-EQUITY> 320,492,950
<SALES> 16,196,831
<TOTAL-REVENUES> 16,196,831
<CGS> 7,374,836
<TOTAL-COSTS> 29,576,691
<OTHER-EXPENSES> 12,883,124
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,477,167
<INCOME-PRETAX> (26,262,984)
<INCOME-TAX> 2,450,911
<INCOME-CONTINUING> (23,812,073)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,812,073)
<EPS-PRIMARY> (476.38)
<EPS-DILUTED> (476.38)
</TABLE>
