<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 MARCH 31, 1999
COMMISSION FILE NUMBER: 333-43339
KNOLOGY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
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 March 31, 1999, there were 394 shares of the registrant's Common
Stock outstanding and 49,852 shares of the registrant's 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.
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KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
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<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C> <C> <C>
ITEM 1 FINANCIAL STATEMENTS.................................................................. 2
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998............................................................ 2
Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998...................................................... 3
Consolidated Statement of Cash Flows for the three months ended
March 31, 1999 and 1998...................................................... 4
Notes to Financial Statements......................................................... 5
ITEM 2 MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................ 7
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K...................................................... 14
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1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNOLOGY HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 4,859,508
Marketable securities 46,658,227 66,231,397
Affiliate receivable 8,245,182 6,785,691
Accounts receivable, net 4,675,418 5,108,491
Prepaid expenses 843,399 430,811
------------ ------------
Total current assets 60,422,226 83,415,898
PROPERTY AND EQUIPMENT, net 211,055,232 195,496,617
INVESTMENT IN CLEARSOURCE, INC 825,072 825,072
INTANGIBLE AND OTHER ASSETS, net 49,141,849 52,606,063
OTHER 207,000 207,000
------------ ------------
Total assets $321,651,379 $332,550,650
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 12,174 $ 12,174
Bank overdraft 6,894,336 --
Accounts payable 11,069,964 6,366,923
Accrued liabilities 5,584,261 22,215,281
Unearned revenue 2,144,835 2,116,083
------------ ------------
Total current liabilities 25,705,570 30,710,461
NONCURRENT LIABILITIES:
Long-term notes payable 119,138 122,070
Long-term accrued interest payable 25,807,645 21,036,541
Bonds payable, net of discount 266,763,143 263,206,292
------------ ------------
Total liabilities 318,395,496 315,075,364
WARRANTS 2,486,960 2,486,960
STOCKHOLDERS' EQUITY
Convertible preferred stock 499 499
Common Stock 4 4
Additional paid-in capital 64,864,366 64,864,366
Accumulated deficit (64,088,878) (49,878,931)
Unrealized gain (loss) on marketable securities (Note 4) (7,068) 2,388
------------ ------------
Total stockholders' equity 768,923 14,988,326
------------ ------------
Total liabilities and stockholders' equity $321,651,379 $332,550,650
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
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KNOLOGY HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
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<S> <C> <C>
OPERATING REVENUES 10,030,805 4,108,464
OPERATING EXPENSES:
Cost of services 4,837,541 1,773,053
Selling, operating, and administrative 8,524,017 3,941,848
Depreciation and amortization 7,733,899 1,696,820
------------ -----------
Total 21,095,457 7,411,721
------------ -----------
OPERATING LOSS (11,064,652) (3,303,257)
OTHER INCOME AND EXPENSES:
Interest income 722,159 3,198,507
Interest expense (7,795,748) (6,987,817)
Other income (expense), net 45,161 60,000
------------ -----------
Total (7,028,428) (3,729,310)
------------ -----------
LOSS BEFORE INCOME TAX BENEFIT (18,093,080) (7,032,567)
INCOME TAX BENEFIT 3,883,133 --
------------ -----------
NET LOSS $(14,209,947) $(7,032,567)
============ ===========
NET LOSS PER SHARE:
Basic and diluted $ (1.90) $ (0.94)
============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 7,478,194 7,497,750
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
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KNOLOGY HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,209,947) $ (7,032,567)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 7,733,899 1,696,820
Loss on disposition of assets (5,416) --
Amortization of bond discount 3,556,851 3,159,073
Changes in current assets and liabilities:
Accounts receivable 433,073 (99,412)
Accounts receivable - affiliate (1,459,491) --
Prepaid expenses and other (422,045) (88,374)
Accounts payable & bank overdraft 11,597,377 (1,574,438)
Accrued liabilities and interest (12,039,916) 4,951,947
Unearned revenue 28,752 54,329
------------ ------------
Total adjustments 9,423,084 8,099,945
------------ ------------
Net cash provided by (used in) operating activities (4,786,863) 1,067,378
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements (19,452,076) (14,075,955)
Acquisitions, net -- (76,788)
Organizational and franchise cost expenditures, net (264,891) --
Proceeds form sales of assets 54,361 --
Proceeds from sales of marketable securities, net 19,573,170 11,839,241
------------ ------------
Net cash used in investing activities (89,436) (2,313,502)
CASH FLOWS FROM FINANCING ACTIVITIES:
Expenditures related to issuance of debt 19,723 (124,923)
Principal payments on debt (2,932) (2,656)
------------ ------------
Net cash (used in) provided by financing activities 16,791 (127,579)
------------ ------------
NET INCREASE (DECREASE) IN CASH (4,859,508) (1,373,703)
CASH AT BEGINNING OF PERIOD 4,859,508 6,144,581
------------ ------------
CASH AT END OF PERIOD $ -- $ 4,770,878
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 7,124 $ 3,647
Cash paid during the period for income taxes $ -- $ --
</TABLE>
4
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KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
KNOLOGY offers residential and business customers broadband
communications services ("Broadband Services"), including analog and
digital cable television, local and long distance telephone, high-speed
Internet access service, and broadband carrier services ("BCS"). The
Company provides these Broadband Services using high capacity hybrid
fiber-coaxial networks that are two-way interactive ("Interactive
Broadband Networks"). The Company operates Interactive Broadband
Networks in five metropolitan areas (collectively the "Systems"):
Montgomery, Alabama; Columbus and Augusta, Georgia; Panama City;
Florida; and Charleston, South Carolina and plans to expand to
additional mid-sized cities in the southeastern United States. In
addition, KNOLOGY provides analog cable television services in
Huntsville, Alabama and is currently upgrading the Huntsville network
to an Interactive Broadband Network, which will allow the Company to
offer additional Broadband Services in the Huntsville market.
The Company has experienced operating losses as a result of the
expansion of the advanced broadband communications networks and
services into new and existing markets. The Company expects to continue
to focus on increasing its customer base and expand its broadband
operations. Accordingly, the Company expects that its operating
expenses and capital expenditures will continue to increase as it
extends its broadband communications networks in the existing and new
markets in accordance with its business plan. While management expects
its expansion plans to result in profitability, there can be no
assurance that growth in the Company's revenue or customer base will
continue or that the Company will be able to achieve or sustain
profitability and/or positive cash flow.
2. 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 ended March
31, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. These financial
statements should be read in conjunction with the Company's 1998 Annual
Report on Form 10-K including the 1998 consolidated financial
statements with footnotes. Certain prior year amounts have been
reclassified to conform with the current presentation.
5
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3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 ("SFAS 133"). This
statement, which establishes accounting and reporting standards for
derivative instruments and for hedging activities, is effective for the
first quarter of fiscal years beginning after June 15, 1999. The
Company does not currently have any items subject to disclosure
pursuant to SFAS 133.
During 1998, the Company adopted the provisions of AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities," which
requires that all non-governmental entities expense costs of start-up
activities, including pre-operating, pre-opening and organization
activities, as the costs are incurred. The Company expenses all startup
costs as they are incurred.
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 three months ended March 31, 1999 and the year ended December 31,
1998 is reported in the Stockholders' Equity section of the Company's
Condensed Consolidated Balance Sheets.
5. SEGMENT INFORMATION
Effective January 1998, the Company adopted SFAS 131, "Disclosures
about segments of an Enterprise and Related Information," which
established revised standards for the reporting of financial and
descriptive information about operating segments in financial
statements.
The Company owns and operates advanced hybrid fiber-coaxial networks
and provides residential and business customers broadband
communications services, including analog and digital cable television,
local and long distance telephone, data and broadband carrier services
("BCS"). Data services include high-speed Internet access via cable
modems. BCS includes local transport services such as local Internet
transport, special access, local private line, and local exchange
transport services.
While management of the Company monitors the revenue generated from
each of the various broadband services, operations are managed and
financial performance is evaluated based upon the delivery of a
multiple of the services to customers over a single network. As a
result of multiple services being provided over a single network, there
are many shared expenses and shared assets related to providing the
various broadband services to customers. Management believes that any
allocation of the shared expenses or assets to the broadband services
would be arbitrary and impractical.
6
<PAGE> 8
Revenues by broadband communications service are as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31,
1999 1998
----------- ----------
<S> <C> <C>
Cable Television $ 8,185,103 $3,998,833
Telephone 1,547,460 88,426
Data and BCS 298,242 21,208
----------- ----------
Consolidated Revenues $10,030,805 $4,108,464
=========== ==========
</TABLE>
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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 1998 ANNUAL REPORT ON FORM
10-K.
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three months ended March 31, 1999
and certain factors that are expected to affect the Company's prospective
financial condition. The following discussion and analysis should be read in
conjunction with the financial statements and notes thereto and other financial
data included elsewhere in this Form 10-Q.
GENERAL
KNOLOGY offers residential and business customers Broadband Services, including
analog and digital cable television, local and long distance telephone,
high-speed Internet access service, and broadband carrier services ("BCS"). The
Company provides these Broadband Services using high capacity hybrid
fiber-coaxial networks that are two-way interactive . The Company owns, operates
and manages Interactive Broadband Networks in five metropolitan areas:
Montgomery, Alabama; Columbus and Augusta, Georgia; Panama City, Florida and
Charleston, South Carolina and plans to expand to additional mid-sized cities in
the southeastern United States. In addition, KNOLOGY provides analog cable
television services in Huntsville, Alabama and is currently upgrading the
Huntsville network to an Interactive Broadband Network, which will allow the
Company to offer additional Broadband Services in the Huntsville market.
KNOLOGY has been providing cable television service since 1995 and commenced
providing telephone and high-speed Internet access services in 1997. BCS
services were initially offered by the Company in 1998. The Company believes its
ability to provide numerous services over the same network facilities and to
bundle the services at an attractive price, coupled with its emphasis on
customer service, provides it with a competitive advantage.
KNOLOGY commenced providing cable television service by acquiring cable
television systems in Montgomery, Alabama and Columbus, Georgia in 1995 and by
using those systems as a base for constructing new Interactive Broadband
Networks. Since acquiring the Montgomery and Columbus systems, the Company has
upgraded the acquired networks to allow the Company to offer additional
Broadband Services.
7
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The Company acquired a cable television system in Panama City Beach, Florida in
December 1997. Since the acquisition, the Company has begun upgrading the Beach
Cable system and extending the network into Panama City.
In early 1998, the Company began expansion into Augusta, Georgia and Charleston,
South Carolina by obtaining new franchise agreements with the local governments
and by constructing new Interactive Broadband Networks.
In June 1998, the Company acquired TTE Inc., a non-facilities based reseller of
local, long distance and operator services to small and medium-sized business
customers throughout South Carolina. As the Company expands its network in the
Charleston area, it plans to convert TTE Inc.'s customers to the Company's
Interactive Broadband Network.
On October 30, 1998, the Company acquired the Cable Alabama cable television
system which serves the Huntsville, Alabama area. The Company is currently
upgrading the existing Cable Alabama plant into an Interactive Broadband
Network.
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 includes cost of services to provide cable
television, telephone and Internet access services, selling, operating and
administrative expenses, and depreciation and amortization expense. Cable
television cost of services 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. Cost of services
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. Selling costs
include the cost of sales and marketing personnel and advertising and
promotional expenses. Operating expenses include payroll and departmental costs
incurred for network design, maintenance, monitoring and customer service
including payroll and departmental costs incurred for customer service
representatives and management. Administrative expenses consist of corporate and
subsidiary general management and administrative costs. Depreciation and
amortization includes 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.
The Company has been expanding its networks and adding corporate staffing
necessary to grow the business into new markets. Accordingly, the Company's
operating expenses and capital expenditures have increased significantly and are
expected to continue to increase as the Company continues to expand the existing
Systems and into new markets.
The Company has incurred net losses in each quarter since its inception, and as
of March 31, 1999, the Company had an accumulated deficit of $64.2 million. The
Company anticipates that it will continue to incur net losses during the next
several years as it continues to expand its operations as a result of
substantially increased depreciation and amortization from the construction of
new networks and operating expenses incurred as it builds its customer base.
There can be no assurance that growth in the Company's revenue or subscriber
base will continue or that the Company will be able to achieve or sustain
profitability or positive cash flow.
8
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
The following table sets forth certain operating and financial data for the
three months ended March 31, 1999 and 1998:
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998 CHANGE %
-------- -------- ------- -------
<S> <C> <C> <C> <C>
HOMES RELEASED TO SALES 246,575 139,959 106,616 76.2%
RGU'S
Cable Television 80,068 41,976 38,092 90.7%
Telephone
On - Net 3,904 623 3,281 526.6%
Off - Net (1) 5,864 0 5,864 100.0%
------- ------- ------- -------
9,768 623 9,145 1,467.9%
Internet/BCS 1,405 244 1,161 475.8%
------- ------- ------- -------
Total 91,241 42,843 48,398 88.5%
======= ======= ======= =======
</TABLE>
(1) Includes toll only lines serviced within the KNOLOGY footprint.
<TABLE>
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 10,030,805 $ 4,108,464 $ 5,922,341 144.1%
OPERATING EXPENSES
Cost of Services 4,837,541 1,773,053 3,064,488 172.8%
Selling, operating, and admin 8,524,017 3,941,848 4,582,169 116.2%
Depreciation & Amortization 7,733,899 1,696,820 6,037,079 355.8%
------------ ----------- ------------ ------
Total 21,095,457 7,411,721 13,683,736 184.6%
OPERATING LOSS (11,064,652) (3,303,257) (7,761,395) (235.0%)
OTHER INCOME AND EXPENSES (7,028,425) (3,729,310) (3,299,115) 88.5%
------------ ----------- ------------ ------
LOSS BEFORE INCOME TAX BENEFIT (18,093,080) (7,032,567) (11,060,513) (157.3%)
INCOME TAX BENEFIT 3,883,133 0 3,883,133 100.0%
------------ ----------- ------------ ------
NET LOSS $(14,209,947) $(7,032,567) $ 7,177,380 (102.1%)
============ =========== ============ ======
</TABLE>
REVENUES. Operating revenues for the three months ended March 31, 1999 increased
144% to $10.0 million, compared to $4.1 million for the three months ended March
31, 1998. The increased revenues are primarily due to a higher number of RGU's
during the three months ended March 31, 1999 compared to the same period in
1998. The additional RGU's resulted primarily from:
- the extension of the Company's Broadband networks in the
Montgomery, Columbus and Panama City Markets,
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- the initial offering of broadband services in the Augusta and
Charleston markets at the end of the third quarter of 1998,
and
- the acquisition of TTE and Cable Alabama systems in June 1998
and October 1998, respectively.
EXPENSES. The Company's operating expenses for the three months ended March 31,
1999, excluding depreciation and amortization, increased 134.4% to $13.4
million, compared to $5.7 million for the three months ended March 31, 1998.
Cost of services were $4.8 million in 1999 compared to $1.8 million in 1998.
Selling, operating, and administrative expenses were $8.5 million and $3.9
million, respectively, for such periods. The increase in the Company's cost of
services and selling, operating, and administrative expenses is consistent with
the growth in revenues and is due to the expansion of the Company's operations
and the increase in the number of employees in connection with such expansion
and growth into new markets.
Depreciation and amortization for the three months ended March 31, 1999
increased to $7.7 million, compared to $1.7 million for the three months ended
March 31, 1998 due to a significant increase in property, plant, equipment and
intangible assets resulting from the expansion of the Company's networks; the
acquisition of the TTE and Cable Alabama systems; and the purchase of buildings,
computers and office equipment at the corporate and subsidiary locations.
Interest expense for the year ended March 31, 1999 increased to $7.8 million,
compared to $7.0 million for the three months ended March 31, 1998. The increase
in interest expense reflects the accrual of the interest expense attributable to
the Senior Discount Notes issued in October 1997.
Interest income for the three months ended March 31, 1999 was $722,000, compared
to $3.2 million for the same period in 1998 and reflects the interest earned
from the investment of certain proceeds received from the issuance of the Senior
Discount Notes in October 1997. The decrease in interest income is due to the
draw down of cash to fund planned expansion and acquisitions.
NET LOSS. The Company incurred a net loss for the three months ended March 31,
1999 of $14.2 million compared to a net loss of $7.0 million for the three
months ended March 31, 1998. The Company expects its net losses to continue to
increase as the Company continues to expand its business.
LIQUIDITY AND CAPITAL RESOURCES.
As of March 31, 1999, the Company had net working capital of $34.7 million,
compared to $52.7 million at December 31, 1998.
The Company has required significant capital for operating and investing
activities in the development of its business. For the three months ended March
31, 1999, the Company used approximately $4.8 million in cash flows from
operating activities and used approximately $89,000 in cash flows from investing
activities. Operating activities consisted primarily of $14.2 million of net
loss and $1.9 million of changes in current assets and liabilities, which were
partially offset by $7.7 million of depreciation and amortization and $3.6
million of bond accretion on the Senior Discount Notes. The Company's investing
activities for the three months ended March 31, 1999 primarily consisted of
$19.5 million of capital expenditures which were funded primarily by proceeds
from the sale of short-term investments of $19.6 million. The short-term
investments sold represent a portion of the proceeds received from the
October 22, 1997 offering of Senior Discount Notes that were invested in
marketable securities.
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 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
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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 million of
additional secured indebtedness. Upon a "Change of Control" of the Company (as
defined in the Indenture), the Company would be required to make an offer to
purchase the Notes at a purchase price equal to 101% of their accreted value,
plus accrued interest.
In connection with the Senior Discount Notes Offering, the Company completed
an equity private placement, in 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.
On December 22, 1998, the Company entered into a $50 million four-year senior
secured credit facility with First Union National Bank and First Union Capital
Markets Corp. The Credit Facility may be used for working capital and other
purposes, including capital expenditures and permitted acquisitions. At the
Company's option, interest will accrue based on either the Alternate Base Rate
plus applicable margin or the LIBOR rate plus applicable margin. The
applicable margin may vary from .50% to 2.50% based on the leverage ratio of
the Company. The Credit Facility contains a number of covenants including,
among others, covenants limiting the ability of the Company and its
subsidiaries to incur debt, create liens, pay dividends, make distributions or
stock repurchases, make certain investments, engage in transactions with
affiliates, sell assets, and engage in mergers and acquisitions. The Credit
Facility also includes covenants requiring compliance with certain operating
and financial ratios on a consolidated basis including the number of revenue
generating units and average revenue per subscriber. Based on the Company's
current 1999 business plan, the Company expects to remain in compliance with
these covenants through the end of the year. However, there can be no
assurance that the Company will meet its current plan or that the Company will
remain in compliance with the Credit Facility covenants regarding business
performance. If the Company does not remain in compliance with the
covenants, the Company would not be able to draw any additional funds under the
Credit Facility, and would need to obtain a waiver from the lender to avoid
having to refinance or repay the amounts drawn under the Credit Facility. If
the Company does not have cash available to repay amounts drawn under the
Credit Facility, it would have to seek outside financing, and there is no
assurance that such outside financing could be obtained on terms favorable to
the Company. The Credit Facility allows the Company to borrow up to five times
certain individual subsidiary's annualized "consolidated adjusted cash flow"
(as defined in the Credit Facility agreement). The maximum amount currently
available under the Credit Facility is approximately $25 million, assuming
compliance with all of the operating and financial covenants. To date, no
funds have been drawn against the Credit Facility.
The Company's business requires substantial investment to finance capital
expenditures and related expenses to expand and/or upgrade the Interactive
Broadband Networks, to fund subscriber equipment, to fund operating losses and
to maintain the quality of its networks. The Company currently expects to
spend at least $80 million during 1999 for planned expansion and/or upgrade of
the Montgomery, Columbus, Panama City, Augusta, Charleston and Huntsville
networks. In addition, the Company currently expects to spend at least $22.5
million in 1999 for non-plant capital expenditures and to fund operating
losses. Failure to have access to sufficient funds for planned capital
expenditures during 1999 may require the Company to delay some of its plans.
However, the Company believes that funding needs in excess of current cash
reserves, internally generated cash flow and availability under the Credit
Facility could be obtained by raising additional capital in private equity,
public equity or debt transactions during 1999. The Company currently expects
to seek to raise additional capital in private or public equity and/or debt
transactions during 1999, although there is no assurance that such outside
financing could be obtained on terms favorable to the Company.
The Company presently estimates the cost of constructing networks and funding
initial subscriber equipment in additional new cities at approximately $45
million to $65 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 will need additional financing to
expand into additional cities for new business activities or in the event it
decides to make additional acquisitions.
YEAR 2000
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
11
<PAGE> 13
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.
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 and assessment phase of
its Year 2000 Plan for all the Company's Critical IT Systems and Non-Critical IT
Systems. In addition, the Company continues 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 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 testing stages of their year 2000 programs and are 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 has substantially all of
such responses and it is actively seeking responses from the remainder of
the third parties.
12
<PAGE> 14
In addition, the Company has completed 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 is currently upgrading systems that were
identified as non compliance during the assessment phase.
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 participated in 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
complete the remainder of required upgrades or replacements and/or
demonstrations of Year 2000 compliance regarding its Systems during the second
quarter of 1999.
The Company has commenced testing of the individual software and hardware
components and, eventually, it will conduct 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 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, third and fourth 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.
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 has also engaged 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 midst 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 has completed remediation and is in the process of being tested.
The Company is working with both companies on Year 2000 projects 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 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
13
<PAGE> 15
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 $200,000 in connection
with its Year 2000 Plan. Future costs will include, among others, the continue
use 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 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.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material market risk sensitive instruments.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
- -------------- ----------------------
<S> <C>
27.1 Financial Data Schedule for the three months ended March 31, 1999.
(for SEC use only)
</TABLE>
14
<PAGE> 16
SIGNATURE
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.
May 12, 1999 By: /s/ William E. Morrow
-----------------------------------------
William E. Morrow
Vice Chairman and Chief Executive Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF KNOLOGY HOLDINGS, INC. AS OF MARCH 31, 1999 AND THE RELATED COMBINED
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 46,658,227
<RECEIVABLES> 13,210,401
<ALLOWANCES> 289,801
<INVENTORY> 27,992,904
<CURRENT-ASSETS> 60,422,226
<PP&E> 200,754,589
<DEPRECIATION> 17,692,261
<TOTAL-ASSETS> 321,651,379
<CURRENT-LIABILITIES> 25,705,570
<BONDS> 292,689,926
0
499
<COMMON> 4
<OTHER-SE> 768,420
<TOTAL-LIABILITY-AND-EQUITY> 321,651,379
<SALES> 9,906,119
<TOTAL-REVENUES> 10,030,805
<CGS> 4,837,541
<TOTAL-COSTS> 28,123,885
<OTHER-EXPENSES> 7,028,428
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,795,748
<INCOME-PRETAX> (18,093,080)
<INCOME-TAX> 3,883,133
<INCOME-CONTINUING> (14,209,947)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,209,947)
<EPS-PRIMARY> (1.90)
<EPS-DILUTED> (1.90)
</TABLE>
