<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 JUNE 30, 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 June 30, 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.
<PAGE> 2
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
ITEM 1 FINANCIAL STATEMENTS............................................................ 2
Consolidated Balance Sheets..................................................... 2
Consolidated Statements of Operations........................................... 3
Consolidated Statement of Cash Flows............................................ 4
Notes to Consolidated 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
</TABLE>
1
<PAGE> 3
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 4,859,508
Marketable securities 16,954,564 66,231,397
Affiliate receivable 11,520,948 6,785,691
Accounts receivable, net 4,809,088 5,108,491
Prepaid expenses 607,160 430,811
------------ ------------
Total current assets 33,891,760 83,415,898
PROPERTY AND EQUIPMENT, net 231,482,131 195,496,617
INVESTMENT IN CLEARSOURCE, INC 825,072 825,072
INTANGIBLE AND OTHER ASSETS, net 46,013,567 52,606,063
OTHER 191,524 207,000
------------ ------------
Total assets $312,404,054 $332,550,650
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 12,174 $ 12,174
Bank overdraft 3,244,460 --
Accounts payable 14,243,331 6,366,923
Accrued liabilities 4,780,338 22,215,281
Unearned revenue 2,279,133 2,116,083
------------ ------------
Total current liabilities 24,559,436 30,710,461
NONCURRENT LIABILITIES:
Long-term notes payable 119,576 122,070
Long-term accrued interest payable 30,768,843 21,036,541
Bonds payable, net of discount 270,461,712 263,206,292
------------ ------------
Total liabilities 325,909,567 315,075,364
WARRANTS 2,486,960 2,486,960
STOCKHOLDERS' (DEFICIT) EQUITY
Convertible preferred stock 499 499
Common Stock 4 4
Additional paid-in capital 64,864,366 64,864,366
Accumulated deficit (80,830,874) (49,878,931)
Unrealized (loss) gain on marketable securities (Note 4) (26,468) 2,388
------------ ------------
Total stockholders' (deficit) equity (15,992,473) 14,988,326
------------ ------------
Total liabilities and stockholders' (deficit) equity $312,404,054 $332,550,650
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE> 4
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 10,601,310 $ 5,050,189 $ 20,632,115 $ 9,158,653
------------ ----------- ------------ ------------
OPERATING EXPENSES:
Cost of services 5,176,643 2,163,798 10,014,184 3,936,851
Selling, operating, and administrative 9,672,062 5,304,185 18,196,079 9,246,033
Depreciation and amortization 8,325,951 1,916,494 16,059,846 3,613,314
------------ ----------- ------------ ------------
Total 23,174,656 9,384,477 44,270,109 16,796,198
------------ ----------- ------------ ------------
OPERATING LOSS (12,573,346) (4,334,288) (23,637,994) (7,637,545)
OTHER INCOME AND EXPENSES:
Interest income 386,377 2,934,910 1,108,536 6,133,417
Interest expense (7,846,703) (7,066,371) (15,642,451) (14,054,188)
Other income (expense), net 47,695 116,164 92,844 176,164
------------ ----------- ------------ ------------
Total (7,412,631) (4,015,297) (14,441,071) (7,744,607)
------------ ----------- ------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (19,985,977) (8,349,585) (38,079,065) (15,382,152)
INCOME TAX BENEFIT 3,243,989 -- 7,127,122 --
------------ ----------- ------------ ------------
NET LOSS $(16,741,988) $(8,349,585) $(30,951,943) $(15,382,152)
============ =========== ============ ============
NET LOSS PER SHARE:
Basic and diluted $ (2.24) $ (1.11) $ (4.14) $ (2.05)
============ =========== ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 7,478,194 7,497,750 7,478,194 7,497,750
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 5
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(30,951,943) $(15,382,152)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 16,059,846 3,613,314
Loss on disposition of assets (5,416) --
Amortization of bond discount 7,255,420 6,449,607
Changes in operating assets and liabilities:
Accounts receivable 299,403 (1,080,665)
Accounts receivable - affiliate (4,735,257) --
Prepaid expenses and other (205,205) (216,299)
Accounts payable & bank overdraft 11,120,868 (2,770,993)
Accrued liabilities and interest (7,702,641) 14,205,302
Unearned revenue 163,050 250,439
------------ ------------
Total adjustments 22,250,068 20,450,705
------------ ------------
Net cash (used in) provided by operating activities (8,701,875) 5,068,553
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements (45,478,497) (43,037,330)
Organizational and franchise cost expenditures, net 43,695 (109,002)
Proceeds form sales of assets 54,361 --
Proceeds from sales of marketable securities, net 49,276,833 34,919,500
------------ ------------
Net cash provided by (used in) investing activities 3,896,392 (8,226,832)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Expenditures related to issuance of debt (51,531) (283,650)
Principal payments on debt (2,494) (2,656)
------------ ------------
Net cash used in financing activities (54,025) (286,306)
------------ ------------
NET DECREASE IN CASH (4,859,508) (3,444,585)
CASH AT BEGINNING OF PERIOD 4,859,508 6,144,581
------------ ------------
CASH AT END OF PERIOD $ -- $ 2,699,996
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 8,507 $ 3,647
Net cash paid for acquisition $ -- $ 1,178,958
</TABLE>
4
<PAGE> 6
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
KNOLOGY (the "Company") 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"), using high capacity hybrid fiber-coaxial networks
that are two-way interactive ("Interactive Broadband Networks") to
provide these Broadband Services. 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. Management expects to continue
the focus on increasing the customer base and expanding the broadband
operations. Accordingly, operating expenses and capital expenditures
will continue to increase with the extension of the broadband
communications networks in existing and new markets in accordance with
the 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 at June 30, 1999, and for
the three and six months then ended 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
consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and
results of operations contained in the Company's 1998 Annual Report on
Form 10-K for the year ended December 31, 1998.
5
<PAGE> 7
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 six months ended June 30, 1999 and the year ended December 31,
1998 is reported in the Stockholders' Equity section of the Company's
Condensed Consolidated Balance Sheets.
5. RECLASSIFICATIONS
Certain amounts included in the 1998 financial statements have been
reclassified to conform with the 1999 financial statements.
6. 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 loop 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 multiple
services to customers over a single network. As a result of multiple
services being provided over a single network, many expenses and
assets are shared 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 subjective and
impractical.
6
<PAGE> 8
Revenues by broadband communications service are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Cable Television $ 8,384,705 $ 4,527,285 $ 16,569,808 $ 8,527,225
Telephone 1,853,097 481,362 3,400,557 568,682
Data and BCS 363,508 41,542 661,750 62,746
------------ ----------- ------------ ------------
Consolidated Revenues $ 10,601,310 $ 5,050,189 $ 20,632,115 $ 9,158,653
============ =========== ============ ============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE MANAGEMENT'S DISCUSSION AND ANALYSIS AND OTHER PORTIONS OF THIS REPORT
INCLUDE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF THE FEDERAL
SECURITIES LAWS THAT ARE SUBJECT TO FUTURE EVENTS, RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED. IMPORTANT FACTORS THAT EITHER INDIVIDUALLY OR IN THE AGGREGATE COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED INCLUDE, WITHOUT
LIMITATION, (1) THAT THE COMPANY WILL NOT RETAIN OR GROW ITS CUSTOMER BASE, (2)
THAT THE COMPANY WILL FAIL TO BE COMPETITIVE WITH EXISTING AND NEW COMPETITORS,
(3) THAT THE COMPANY WILL NOT ADEQUATELY RESPOND TO TECHNOLOGICAL DEVELOPMENTS
IMPACTING ITS INDUSTRY AND MARKETS, (4) THAT NEEDED FINANCING WILL NOT BE
AVAILABLE TO THE COMPANY IF AND AS NEEDED, (5) THAT A SIGNIFICANT CHANGE IN THE
GROWTH RATE OF THE OVERALL U.S. ECONOMY WILL OCCUR SUCH THAT CONSUMER AND
CORPORATE SPENDING ARE MATERIALLY IMPACTED, (6) THAT THE COMPANY OR ITS VENDORS
AND SUPPLIERS MAY FAIL TO TIMELY ACHIEVE YEAR 2000 READINESS SUCH THAT THERE IS
A MATERIAL ADVERSE IMPACT ON THE BUSINESS, OPERATIONS OR FINANCIAL RESULTS OF
THE COMPANY, (7) THAT SOME OTHER UNFORESEEN DIFFICULTIES OCCUR. THIS LIST IS
INTENDED TO IDENTIFY ONLY CERTAIN OF THE PRINCIPAL FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN.
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three and six months ended June
30, 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 (the "Company") 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"). We provide 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, we provide analog cable
television services in Huntsville, Alabama and are currently upgrading the
Huntsville network to an Interactive Broadband Network, which will allow
additional Broadband Services to be offered in the Huntsville market.
7
<PAGE> 9
KNOLOGY has been providing cable television service since 1995. The Company
began providing telephone and high-speed Internet access services in 1997 and
it initially offered BCS services in 1998. We believe our ability to provide
numerous services over the same network facilities and to bundle the services
at an attractive price, coupled with emphasis on customer service, provides a
competitive advantage.
KNOLOGY began providing cable television service by acquiring cable television
systems in Montgomery, Alabama and Columbus, Georgia in 1995 and using those
systems as a base for constructing new Interactive Broadband Networks. Since
acquiring the Montgomery and Columbus systems, we have upgraded the acquired
networks allowing us to offer additional Broadband Services.
The Company acquired a cable television system in Panama City Beach, Florida in
December 1997. Since the acquisition, we have begun upgrading the Beach Cable
system and extending the network into the Panama City metro area.
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.
On October 30, 1998, the Company acquired the Cable Alabama cable television
system serving the Huntsville, Alabama area. The existing Cable Alabama plant
is being upgraded to 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, that 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 include 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 our 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. Administrative expenses
consist of corporate and subsidiary general management and administrative
costs. Depreciation and amortization includes depreciation of our 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, our operating
expenses and capital expenditures have increased significantly and are expected
to continue to increase with the continued expansion of the existing Systems
and into new markets.
The Company has incurred net losses in each quarter since its inception, and as
of June 30, 1999, the accumulated deficit had reached $80.8 million. Management
anticipates incurring net losses during the next several years while continuing
to expand operations, and as a result of substantially increased depreciation
and amortization from the construction of the new networks and operating
expenses incurred in building
8
<PAGE> 10
the customer base. There can be no assurance that growth in revenue or the
subscriber base will continue or that Knology will be able to achieve or
sustain profitability or positive cash flow.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
The following table sets forth certain operating and financial data for the
three months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
AS OF JUNE 30,
1999 1998 CHANGE %
------- ------- ------- -----
<S> <C> <C> <C> <C>
HOMES RELEASED TO SALES 265,511 147,916 117,595 79.5%
======= ======= ======= ====
RGU'S
Cable Television 82,459 45,215 37,244 82.4%
------ ------ ------ ----
Telephone
On - Net 6,415 1,475 4,940 334.9%
Off - Net (1) 6,357 5,601 756 13.5%
------ ------ ------ ----
12,772 7,076 5,696 80.5%
Internet/BCS 2,334 395 1,939 490.9%
------ ------ ------ ----
Total 97,565 52,686 44,879 85.2%
====== ====== ====== ====
</TABLE>
(1) Off-net lines include all resale lines sold within KNOLOGY's footprint.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 1998 CHANGE %
------------ ----------- ------------ -----
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 10,601,310 $ 5,050,189 $ 5,551,121 109.9%
------------ ----------- ------------ -----
OPERATING EXPENSES
Cost of Services 5,176,643 2,163,798 3,012,845 139.2%
Selling, operating, and admin. 9,672,062 5,304,185 4,367,877 82.3%
Depreciation & Amortization 8,325,951 1,916,494 6,409,457 334.4%
------------ ----------- ------------ -----
Total 23,174,656 9,384,477 13,790,179 146.9%
------------ ----------- ------------ -----
OPERATING LOSS (12,573,346) (4,334,288) 8,239,058 190.1%
OTHER INCOME AND EXPENSES (7,412,631) (4,015,297) 3,397,334 84.6%
------------ ----------- ------------ -----
LOSS BEFORE INCOME TAX BENEFIT (19,985,977) (8,349,585) 11,636,392 139.4%
INCOME TAX BENEFIT 3,243,989 -- 3,243,989 --
------------ ----------- ------------ -----
NET LOSS $(16,741,988) $(8,349,585) $ 8,392,403 100.5%
============ =========== ============ =====
</TABLE>
REVENUES. Operating revenues increased 109.9% from $5.1 million for the three
months ended June 30, 1998 to $10.6 million for the three months ended June 30,
1999. The increased revenues are primarily due
9
<PAGE> 11
to a higher number of RGU's during the three months ended June 30, 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,
- the continued growth of broadband services in the Augusta and
Charleston Markets, and
- the acquisition of TTE and Cable Alabama systems in June 1998
and October 1998, respectively.
EXPENSES. Operating expenses, excluding depreciation and amortization,
increased 98.8% from $7.5 million for the three months ended June 30, 1998 to
$14.8 million for the three months ended June 30, 1999. Cost of services
increased 139.2% from $2.2 million for the three months ended June 30, 1998 to
$5.2 million for the three months ended June 30, 1999. Selling, operating, and
administrative expenses increased 82.3% from $5.3 million for the three months
ended June 30, 1998 to $9.7 million for the three months ended June 30, 1999.
The increase in the Company's cost of services and operating expenses is
consistent with the growth in revenues and is a result of the expansion of the
operations and the increase in the number of employees associated with such
expansion and growth into new markets.
Depreciation and amortization increased from $1.9 million for the three months
ended June 30, 1998 to $8.3 million for the three months ended June 30, 1999.
The increase in depreciation and amortization is due to significant additions
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 increased from $7.1 million for the three months ended June
30, 1998 to $7.8 million for the three months ended June 30, 1999. The increase
in interest expense reflects the accrual of the interest attributable to the
Senior Discount Notes issued in October 1997.
Interest income was $2.9 million for the three months ended June 30, 1998,
compared to $386,000 for the same period in 1999 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 of $8.3 million for the three months
ended June 30, 1998 compared to a net loss of $16.7 million for the three
months ended June 30, 1999. Management expects net losses to continue to
increase as the Company continues to expand its business.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
The following table sets forth certain financial data for the six months ended
June 30, 1999 and 1998:
10
<PAGE> 12
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998 CHANGE %
------------ ----------- ------------ -----
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 20,632,115 $ 9,158,653 $ 11,473,462 125.3%
------------ ----------- ------------ -----
OPERATING EXPENSES
Cost of Services 10,014,184 3,936,851 6,077,333 154.4%
Selling, operating, and admin. 18,196,079 9,246,033 8,950,046 96.8%
Depreciation & Amortization 16,059,846 3,613,314 12,446,532 344.5%
------------ ----------- ------------ -----
Total 44,270,109 16,796,198 27,473,911 163.6%
------------ ----------- ------------ -----
OPERATING LOSS (23,637,994) (7,637,545) 16,000,449 209.5%
OTHER INCOME AND EXPENSES (14,441,071) (7,744,607) 6,696,464 86.5%
------------ ----------- ------------ -----
LOSS BEFORE INCOME TAX BENEFIT (38,079,065) (15,382,152) 22,696,913 147.6%
INCOME TAX BENEFIT 7,127,122 -- 7,127,122 --
------------ ----------- ------------ -----
NET LOSS $(30,951,943) $(15,382,152) $ 15,569,791 101.2%
============ ============ ============ =====
</TABLE>
REVENUES. Operating revenues increased 125.3% from $9.2 million for the six
months ended June 30, 1998 to $20.6 million for the six months ended June 30,
1999. The increased revenues are primarily due to a higher number of RGU's
during the six months ended June 30, 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,
- the continued growth of broadband services in the Augusta and
Charleston markets, and
- the acquisition of TTE and Cable Alabama systems in June 1998
and October 1998, respectively.
EXPENSES. Operating expenses, excluding depreciation and amortization,
increased 114.0% from $13.2 million for the six months ended June 30, 1998 to
$28.2 million for the six months ended June 30, 1999. Cost of services
increased 154.4% from $3.9 million for the six months ended June 30, 1998 to
$10.0 million for the six months ended June 30, 1999. Selling, operating, and
administrative expenses increased 96.8% from $9.2 million for the six months
ended June 30, 1998 to $18.2 million for the six months ended June 30, 1999.
The increase in the Company's cost of services and operating expenses is
consistent with the growth in revenues and is a result of the expansion of the
operations and the increase in the number of employees associated with such
expansion and growth into new markets.
Depreciation and amortization increased from $3.6 million for the six months
ended June 30, 1998 to $16.1 million for the six months ended June 30, 1999.
The increase in depreciation and amortization is due to significant additions
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 increased from $14.1 million for the six months ended June 30,
1998 to $15.6 million for the six months ended June 30, 1999. The increase in
interest expense reflects the accrual of the interest attributable to the
Senior Discount Notes issued in October 1997.
Interest income was $6.1 million for the six months ended June 30, 1998,
compared to $1.1 million for the same period in 1999 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 of $15.4 million for the six months
ended June 30, 1998 compared to a net loss of $31.0 million for the six months
ended June 30, 1999. Management expects net losses to continue to increase as
the Company continues to expand its business.
LIQUIDITY AND CAPITAL RESOURCES.
As of June 30, 1999, the Company had net working capital of $9.3 million,
compared to $52.7 million at December 31, 1998.
11
<PAGE> 13
The Company has required significant capital for operating and investing
activities in the development of its business. The Company's operating
activities provided cash of $5.1 million and used cash of $8.7 million for the
six months ended June 30, 1998 and 1999, respectively. Cash used in operating
activities in the 1999 period was primarily due to a net loss and changes in
receivables, partially offset by depreciation and amortization and bond
accretion on the Senior Discount Notes. The Company's investing activities used
cash of $8.2 million and provided cash of $3.9 million for the six months ended
June 30, 1998 and 1999, respectively. The Company's investing activities in the
1999 period primarily consisted of $45.5 million of capital expenditures
principally funded by $49.3 million in proceeds from the sale of short-term
investments. 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 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 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. 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. The
Company is currently in compliance with these covenants, however, there are no
assurances that the Company will remain in compliance through the end of the
year. Should the Company not be in compliance with the covenants, the Company
will not be able to draw funds under the Credit Facility without a waiver from
the lender. To date, no funds have been drawn against the Credit Facility.
12
<PAGE> 14
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
approximately $88 million for capital expenditures during 1999, including the
planned expansion and/or upgrade of the Montgomery, Columbus, Panama City,
Augusta, Charleston and Huntsville networks, and approximately $9 million to
fund operating losses. Failure to have access to additional funds during 1999
could require the Company to delay some of its construction plans and possibly
require the Company to constrain certain operations. However, the Company
believes that funding needed in excess of current cash reserves, internally
generated cash flow and any funds available under the Credit Facility may be
obtained by raising capital with additional equity or debt transactions during
1999. The Company currently expects to seek to raise capital, in addition to
any funds available under the Credit Facility, 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 $50 to
$75 million per city. The 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 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 established a Year 2000 Program Office to coordinate appropriate
activity and report to the executive management and the Board of Directors on a
continuing basis with regard to the Year 2000 issue. The Year 2000 Program
Office has implemented 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"):
- 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 cable, telephone and Internet services;
- customer service;
- financial operations and reporting, including accounts
payable;
- materials management;
- network monitoring;
- 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
13
<PAGE> 15
processing, Internet intra-corporate communications and
supporting and related operating systems;
- the systems of the 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
carrier providers and telephony switching services; and
- non-information technology systems, including the external
customer network, cable and telephone delivery systems
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,
assessment and contingency plan phases of its Year 2000 Plan for all the
Critical IT Systems, the Non-Critical IT Systems, and the Non-IT Systems. The
Company has substantially completed the remediation, the testing and the
validation, and the implementation phases for the Critical IT Systems, the
Non-Critical IT Systems and the Non-IT Systems. Certain actions in the
remediation phase have been conducted by the third parties who provide
software, hardware or services that comprise the Systems. The Company has
polled all the third parties who provide material hardware, software, or
services as part of its Critical and Non-Critical IT Systems, with regard to
each of such third party's Year 2000 compliance plan and state of readiness.
Responses have been actively sought from all vendors and third parties as to
Year 2000 compliance, status of plans and readiness. All key vendors have
responded and most of the third parties have assured the Company that their
hardware and/or software is currently, or will be Year 2000 compliant before
the end of the year. The Company expects to have any remaining non-compliant
systems in compliance before the end of 1999.
A Year 2000 Contingency Planning Committee was formed and developed Y2K
Contingency plans for all Critical IT and Non-IT Systems and for each of the
Company's Locations. Key business risks were identified and used to drive the
development of these plans. Additionally, an outside consulting service has
been retained to assist in Year 2000 readiness, project coordination and the
execution of the Year 2000 Plan to completion.
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 Knology's management that with the exception of
the one critical IT system still being tested, that each will be Y2K ready by
the 4th quarter. The Company depends on Interstate Telephone Company, Inc. and
Valley Telephone Company, Inc. for its telephony carrier access billing,
customer care and billing, and switching services. Both companies rely on third
party vendors for the telephony customer care and billing, and switching
services and both use a legacy system for telephony carrier access billing
services. The legacy system used in connection with telephony carrier access
billing has completed the remediation phase and is in the process of being
tested. Knology 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 a small
percentage of total revenues, the failure to timely remedy any year 2000
problems and/or develop a viable contingency plan could result in the temporary
inability to provide telephony services to customers, and have a material
adverse effect on the business, operations or financial results of the Company.
In addition, a material Year 2000 problem with any of the Company's major
vendors could interrupt its ability to provide cable, telephone or Internet
services to its customers.
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.
14
<PAGE> 16
COSTS
To date, approximately $450,000 of costs have been incurred in connection with
the Year 2000 Plan and the Company anticipates spending approximately $150,000
in additional funds on costs related to the Year 2000 Plan. Future costs will
include, among others, upgrades or replacements of hardware and software, and
implementation of contingency plans. The Company expenses all 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, no specific IT project has been
deferred due to the costs of the Year 2000 Plan.
RISKS
The failure to remediate a material Year 2000 problem or 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.
CONTINGENCY PLANS
The Company has developed complete contingency plans that address its most
reasonably likely worst case Year 2000 scenarios and has determined the
material risks associated with this scenario.
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
Exhibit Number Description of Exhibit
27.1 Financial Data Schedule for the six months ended June 30, 1999.
(for SEC use only)
- -----------------------
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.
August 13, 1999 By: /s/ Rodger L. Johnson
---------------------
Rodger L. Johnson
President and Chief Executive Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE BALANCE SHEET OF KNOLOGY HOLDINGS AS OF JUNE 30, 1999 AND THE RELATED
COMBINED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999. THIS
INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<SECURITIES> 16,954,564
<RECEIVABLES> 16,615,561
<ALLOWANCES> 285,525
<INVENTORY> 31,237,966
<CURRENT-ASSETS> 33,891,760
<PP&E> 222,929,535
<DEPRECIATION> 22,685,370
<TOTAL-ASSETS> 312,404,054
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