<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
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.
<PAGE> 2
EXPLANATORY NOTE
Our parent company, KNOLOGY, Inc., has filed a registration statement on
Form S-1 with the Securities and Exchange Commission (Registration No.
333-89179). We are amending our quarterly report on Form 10-Q for the quarter
ended March 31, 1999 to make conforming changes.
This Form 10-Q/A presents information relating to our quarter ended March
31, 1999 and does not include any updated information or discuss any recent
developments occurring after the original filing of our Form 10-Q for the
quarter ended March 31, 1999 in May 1999.
<PAGE> 3
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<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
</TABLE>
1
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNOLOGY HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<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
<PAGE> 5
KNOLOGY HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------ -----------
<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
<PAGE> 6
KNOLOGY HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
------------ ------------
<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
<PAGE> 7
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
<PAGE> 8
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> 9
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>
- ----------
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 OUR SENIOR MANAGEMENT MAY, FROM
TIME TO TIME, MAKE CERTAIN FORWARD-LOOKING STATEMENTS CONCERNING OUR OPERATIONS,
PERFORMANCE AND OTHER DEVELOPMENTS. OUR 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
OUR 1998 ANNUAL REPORT ON FORM 10-K.
The following is a discussion of our consolidated financial condition
and results of operations for the three months ended March 31, 1999 and certain
factors that are expected to affect our 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
We offer our customers broadband communications services, including:
- traditional and digital cable television;
- local and long distance telephone; and
- high-speed Internet access service.
Our customers have the choice of receiving these services individually
or as part of a bundle of services. In addition, we sell access to our network
and provide various network-related services to other telecommunications
companies, such as long distance telephone companies and Internet service
providers.
We provide all of these services using high-speed broadband networks
that are two-way interactive. Broadband networks are high-capacity, which means
they can handle large volumes of voice, video and data. Two-way interactive
networks give customers the ability to send and receive signals at the same
time. Two-way interactive networks are required for telephone service and
provide for higher speed Internet connections than traditional one-way networks.
It is important to our strategy to provide bundled high-speed communications
services that our networks are broadband and two-way interactive.
We have been providing cable television service since 1995, telephone
and high-speed Internet access services since 1997 and broadband carrier
services since 1998. We own, operate and manage interactive broadband networks
in the five metropolitan areas of Montgomery, Alabama; Columbus and Augusta,
Georgia; Panama City, Florida and Charleston, South Carolina; and we plan to
expand to additional mid-sized cities in the southeastern United States. In
addition, we provide traditional analog and digital cable television services in
Huntsville, Alabama. Our Huntsville facilities are being upgraded to provide
local and long distance telephone and high-speed Internet access services.
We began providing cable television service by acquiring cable
television systems in Montgomery, Alabama and Columbus, Georgia in 1995 and
using these systems as a base for constructing new interactive broadband
networks. Since acquiring the Montgomery and Columbus systems, we have
significantly expanded these networks and upgraded the acquired networks to
offer additional broadband communications services.
In December 1997, we acquired a cable television system in Panama City
Beach, Florida. We are currently upgrading this cable system and extending the
network into the Panama City metro area. We expect to complete this upgrade in
2000.
In early 1998, we began expanding into Augusta, Georgia and
Charleston, South Carolina by obtaining new franchise agreements with the local
governments and by constructing new interactive broadband networks. We expect to
complete construction of these networks by 2003.
7
<PAGE> 10
In June 1998, we 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.
In October 1998, we 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 which will be completed by 2001.
REVENUES AND EXPENSES
We can group our revenues into four categories: video revenues,
telephone revenues, Internet revenues and other revenues.
- Video revenues. Our video revenues consist of fixed monthly
fees for basic, premium and digital 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. Video revenues accounted
for approximately 81.1% of our consolidated revenues for the three months
ended March 31, 1999.
- Telephone revenues. Our telephone revenues consist primarily of
fixed monthly fees for local service, enhanced services such as call
waiting and voice mail and usage fees for long distance service. Telephone
revenues accounted for approximately 15.4% of our consolidated revenues for
the three months ended March 31, 1999.
- Internet revenues and other revenues. Our Internet revenues
consist primarily of fixed monthly fees for Internet access service and
rental of cable modems. Other revenues resulted principally from broadband
carrier services and video production services. These combined revenues
accounted for approximately 3.5% of our consolidated revenues for the
three months ended March 31, 1999.
Our operating expenses include cost of services expenses, selling,
operations and administrative expenses and depreciation and amortization
expenses.
Cost of services expenses include:
- Video cost of services. Video 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. Programming costs accounted for
approximately 73.2% of our operating expenses for the three months ended
March 31, 1999. Programming costs is our largest single cost and we expect
this to continue. Since this cost is based on numbers of subscribers, it
will increase as we add more subscribers.
- Telephone and Internet access services. Cost of services
related to our telephone and Internet access services include costs of
Internet transport and telephone switching, and interconnection and
transport charges payable to local and long distance carriers.
Selling, operations and administrative expenses include:
- Sales and marketing costs. Sales and marketing costs include
the cost of sales and marketing personnel and advertising and promotional
expenses.
- Network operations and maintenance expenses. Network operations
and maintenance expenses include payroll and departmental costs incurred
for network design and maintenance monitoring.
- Customer service expenses. Customer service expenses include
payroll and departmental costs incurred for customer service
representatives and management.
- General and administrative expenses. General and administrative
expenses consist of corporate and subsidiary general management and
administrative costs.
Depreciation and amortization expenses include:
8
<PAGE> 11
- Depreciation and amortization expenses. Depreciation and
amortization expenses include depreciation of our interactive broadband
networks and equipment, and amortization of cost in excess of net assets
and other intangible assets related to acquisitions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
The following table sets forth financial data as a percentage of
operating revenues for the three months ended March 31, 1998 and 1999.
<TABLE>
<CAPTION>
Three Months
ended
March 31,
---------------
1998 1999
---- ----
<S> <C> <C>
Operating revenues........................................ 100% 100%
--- ---
Operating expenses:
Cost of services........................................ 43 48
Selling, operating and administrative................... 96 85
Depreciation and amortization........................... 41 77
--- ---
Total........................................... 180 210
--- ---
Operating income (loss)................................... (80) (110)
Other income and expenses................................. (90) (70)
--- ---
Income (loss) before minority interest and income tax
(provision) benefit..................................... (170) (180)
Income tax (provision) benefit............................ 0 39
--- ---
Net income (loss)......................................... (170)% (141)%
=== ===
</TABLE>
The following table sets forth certain operating data
for the three months ended March 31, 1999 and 1998. The information provided
in the table reflects revenue-generating connections as of the dates
indicated. Please see the footnotes provided for information regarding revenue-
generating connections.
<TABLE>
<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%
Connections (1)
Video 80,068 41,976 38,092 90.7%
Telephone
On - Net (2) 3,904 623 3,281 526.6%
Off - Net (3) 5,864 0 5,864 100.0%
------- ------- ------- -------
9,768 623 9,145 1,467.9%
High-speed Internet 1,405 244 1,161 475.8%
------- ------- ------- -------
Total 91,241 42,843 48,398 88.5%
======= ======= ======= =======
</TABLE>
(1) Connections represent revenue-generating connections. For video and high-
speed Internet, connections represent the number of customers subscribing
to the service. For telephone, connections represent the number of lines
connected. For example, a telephone customer that has two lines would be
counted as two connections.
(2) On-net refers to lines provided over our broadband networks.
(3) Off-net consists of all telephone connections provided within our
broadband network area over telephone lines leased from third parties.
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 connections during the three months ended March 31, 1999 compared to
the same period in 1998. The additional connections resulted primarily from:
- the extension of our broadband networks in the Montgomery,
Columbus and Panama City markets,
- 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. Our 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 our cost of services
and selling, operating, and administrative expenses is consistent with the
9
<PAGE> 12
growth in revenues and is due to the expansion of our 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. This increase is due to a significant increase in
property, plant, equipment and intangible assets resulting from the expansion of
our 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. We 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. We expect our net losses to continue to increase as
we continue to expand our business.
LIQUIDITY AND CAPITAL RESOURCES.
As of March 31, 1999, we had net working capital of $34.7 million,
compared to $52.7 million at December 31, 1998.
We have required equity infusions and debt proceeds to finance a
significant portion of our operating, investing and financing activities in the
development of our business. For the three months ended March 31, 1999, we used
approximately $4.8 million in cash flows from operating activities and used
approximately $89,000 in cash flows from investing activities. Our 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
our senior discount notes. Our 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.
FUNDING TO DATE
On October 22, 1997, we received net proceeds of approximately $242.4
million from the offering of units consisting of senior discount notes due 2007
and warrants to purchase preferred stock. 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, our ability 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.
10
<PAGE> 13
If we fail to comply with these covenants, our 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 our ability to incur additional indebtedness by requiring compliance
with specified leverage ratios, it permits us and our 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, as
defined in the indenture, we 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.
Each unit in the offering also consisted of a warrant to purchase
0.003734 shares of our preferred stock at an exercise price of $0.01 per share.
In connection with the units offering, we completed an equity private
placement, in which we issued approximately 21,400 additional shares of
Preferred Stock at $1,500 per share to ITC Holding, Century Telephone
Enterprises, Inc., SCANA Communications, Inc., South Atlantic Venture Fund III,
Limited Partnership and AT&T venture funds for aggregate proceeds of
approximately $32.2 million. ITC Holding, Century Telephone, South Atlantic,
AT&T venture funds and SCANA Communications, Inc. purchased approximately $10.0
million, $2.5 million, $5.5 million, $5.0 million and $5.0 million of preferred
stock, respectively, in this private placement. A portion of the proceeds from
this private placement were used to repay approximately $11.0 million in
borrowings from SCANA and an additional $11.0 million of debt we incurred to
finance the purchase of our cable television systems in Montgomery, Alabama and
Columbus, Georgia in 1995. ITC Holding subsequently repurchased all shares of
our preferred stock owned by Century Telephone, South Atlantic and SCANA during
1998.
On December 22, 1998, we 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 us to borrow up to five times a certain
individual subsidiary's annualized consolidated adjusted cash flow, as defined
in the credit facility agreement. The credit facility may be used for working
capital and other purposes, including capital expenditures and permitted
acquisitions. At our option, interest will accrue based on either the prime or
federal funds rate plus applicable margin or the LIBOR rate plus applicable
margin. The applicable margin may vary from .50% to 2.50% based on our leverage
ratio. The credit facility contains a number of covenants including, among
others, covenants limiting our ability and the ability of our 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. We are
currently in compliance with these covenants. Should we not be in compliance
with the covenants in the future, we would be in default and would require a
waiver from the lender. In the event the lender would not provide a waiver,
amounts outstanding against the facility could be payable to the lender on
demand. A change of control of our company, as defined in the credit facility
agreement, would constitute a default under the covenants. To date, no funds
have been drawn against the credit facility.
FUTURE FUNDING
Our business requires substantial investment to finance capital
expenditures and related expenses, to expand and/or upgrade the interactive
broadband networks, to fund subscriber equipment and to maintain the quality of
our networks. We currently expect to spend approximately $94 million for capital
expenditures during 1999, including the planned expansion and/or upgrade of the
Montgomery, Columbus, Panama City, Augusta, Charleston and Huntsville networks.
We currently expect to spend approximately $9 million to fund operating losses
and approximately $131 million for capital expenditures during 2000. The $131
million includes approximately $70 million related to the construction of
networks in our existing markets. The remainder primarily relates to the
purchase of equipment for customer premises, such as set-top cable boxes,
information systems and the commencement of the construction of networks in
additional markets. Failure to have access to additional funds during 2000 could
require us to delay some of our construction plans, delay preliminary efforts in
new markets and possibly require us to restrict or reduce the level of
operations in some markets.
11
<PAGE> 14
We presently estimate the cost to complete construction of the
networks in our existing markets to be approximately $170 million, of which
approximately $70 million would be expended during 2000. We currently expect
that if sufficient funds are raised, the construction of our networks in our
existing markets would be substantially completed during 2002.
We presently expect that present cash reserves, cash flow from
operations, funding obtained through our existing credit facility and the
private offering discussed below will be sufficient to fund our 2000 capital
expenditures. We will need additional capital to complete construction of our
networks through 2002. We expect to raise this capital through private and
public debt offerings and private and public equity offerings, although there is
no assurance that this financing will be available on terms favorable to us. If
we are not successful in raising additional capital, we may not be able to
complete the construction of our networks throughout our current markets. This
may cause us to violate our franchises agreements, which could adversely affect
us, or may just limit our growth within these markets.
We plan to expand to additional mid-sized cities in the southeastern
United States. We estimate the cost of constructing networks and funding initial
subscriber equipment in additional new cities at approximately $50 to $75
million per city, though our costs could be as much as $85 million to $90
million per city for larger markets. The actual costs of each new market may
vary significantly from this range and will depend on the number of miles of
network to be constructed, the geographic and demographic characteristics of the
city, costs associated with the cable franchise in each city, the number of
subscribers in each city, the mix of services purchased, the cost of subscriber
equipment we pay for or finance and other factors. We will need additional
financing to expand into additional cities, for new business activities or in
the event we decide to make additional acquisitions. We expect to raise this
capital through private and public debt offerings and private and public equity
offerings, although there is no assurance that this financing will be available
on terms favorable to us. If we are not successful in raising additional
capital, we will not be able to expand to additional cities as planned. The
schedule for our planned expansion will depend upon the availability of
sufficient capital. Definitive decisions on which cities will be chosen for
expansion are not expected to be made until this capital has been raised.
THE YEAR 2000 ISSUE
General
The year 2000 issue is a general term used to describe the various
problems that may result in computers and other machinery as we reach the year
2000. These problems generally arise from the fact that most of the world's
computers 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 are expected to increase in frequency and severity as
the year 2000 approaches. This issue impacts our owned or licensed computer
systems and equipment used in connection with internal operations.
Third Parties
We also rely directly and indirectly, in the regular course of
business, on the proper operation and compatibility of third party systems. The
year 2000 problem could cause these systems to fail, err, or become incompatible
with our systems.
Certain of our suppliers and vendors could have a material affect on
our business if they fail to become year 2000 ready. In these cases, we are
relying on the determination by an outside testing company that these vendors
and suppliers are ready for the year 2000. Also, we have conducted our own
testing of certain major components of the systems provided to us by third
parties. Nonetheless, if we or a significant third party on which we rely fails
to become year 2000 ready, or if the year 2000 problem causes our systems to
become internally incompatible or incompatible with such third party systems,
our business could suffer from material disruptions, including the inability to
process transactions, send invoices, accept customer orders or provide customers
with our services. We could also face similar disruptions if the year 2000
problem causes general widespread problems or an economic crisis. We cannot now
estimate the extent of these potential disruptions.
Our State of Readiness
We established a year 2000 program office to coordinate activity and
report to our executive management and board of directors with regard to the
year 2000 issue. Our year 2000 program office developed a plan for us to become
year 2000 ready. This plan covered:
- our technology and operating systems;
- billing of our cable, telephone and Internet services;
- customer service;
- financial operations and reporting;
- network monitoring; and
- the systems of our major vendors, third party service providers and other
material service and content providers.
12
<PAGE> 15
We addressed our year 2000 plan with respect to our internal
operations in six phases:
- an awareness phase, in which we inventoried and evaluated our systems,
components and other significant infrastructure;
- an assessment phase, in which we identified those elements that
reasonably could be expected to be affected by year 2000 problems;
- a remediation phase, in which we remediated or replaced equipment that we
believe would fail to operate properly in the year 2000;
- a testing and validation phase, in which we tested the remediation and
replacement conducted and validated its ability;
- an implementation phase, in which we added our new or updated equipment
to our current systems; and
- a contingency phase, in which we developed contingency plans for our
at-risk business functions.
We have completed all phases of our plan for all of our services and systems.
Certain actions in the remediation phase have been conducted by the
third parties who provide hardware, software, or services that comprise our
systems. We have polled all the third parties who provide material hardware,
software, or services as part of our information technology and operating
systems with regard to each of such third party's year 2000 compliance plan and
state of readiness. We have actively sought responses 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 us that their
hardware and/or software is currently or will be year 2000 compliant before the
end of the year. We expect to have any remaining non-compliant systems in
compliance before the end of 1999.
Costs
To date, we have incurred approximately $450,000 of costs in
connection with our year 2000 plan, and we anticipate spending approximately
$150,000 in additional funds. We expense all costs associated with our Year 2000
plan as we incur them and anticipate funding the costs of our plan from cash
flows. To date, we have not deferred any specific information technology
projects because of the costs of our plan.
Risks
The failure to correct a material year 2000 problem or to implement a
contingency plan could result in system failures leading to a disruption in, or
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect our business, profitability and operating
results.
Contingency Plans
We have a year 2000 contingency planning committee, which has
developed year 2000 contingency plans for all of our information technology and
operating systems and for each of our locations. This committee identified key
business risks which were used to drive the development of these plans.
Additionally, we use an outside consulting service to assist in our year 2000
readiness, project coordination and execution of the year 2000 plan.
Contingency planning to maintain and restore service in the event of
natural disasters, power failures and systems-related problems is a routine part
of our operations. We believe that such contingency plans will assist us in
responding to any failure by outside service providers to successfully address
year 2000 issues. In addition, we have developed complete contingency plans that
address our most reasonably likely worst case year 2000 scenarios including
identification of alternate vendors and service providers and manual
alternatives to system operations.
Our contingency plans for the components of our operations that are
provided by third parties and are of greatest concern to us in the event of a
year 2000 problem are:
- Network. To prepare for potential year 2000 problems affecting our
network, we have leased more facilities to provide greater redundancy. We
have also received vendor assurances with regard to our network.
- Billing. We have conducted our own testing of our billing systems. In
addition, we are relying on third-party verification that these systems are
ready for the year 2000.
- Switching. A switch is a device that directs voice and data traffic over
a network. Switching is the process of connecting the calling party with
the called party through one or more switches. We have only one switch,
through which we route all of our telephone data transmissions. A team of
specialists from an outside consulting service will be on call to provide
backup support in the event of any year 2000 problems. The switching
functions have also been tested by us and by third-parties for year 2000
readiness.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. We
manage our exposure to this market risk through our regular operating and
financing activities. Derivative instruments are not currently used and, if
utilized, are employed as risk management tools and not for trading purposes.
We have no derivative financial instruments outstanding to hedge
interest rate risk. To date, no funds have been drawn against our credit
facility. However, any borrowings under our credit facility which are based on
either prime rate or federal funds rate plus applicable margin or LIBOR plus
applicable margin would be subject to market conditions. Any changes in these
rates would affect the rate at which we could borrow funds under our credit
facility. A hypothetical 10% increase in interest rates on our variable rate
bank debt for a duration of one year would increase interest expense by an
immaterial amount.
13
<PAGE> 16
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>
- ------------
* Previously filed with KNOLOGY Holdings, Inc.'s Form 10-Q for the quarter ended
March 31, 1999.
14
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, KNOLOGY
Holdings, Inc. has duly caused this Amendment No. 2 to KNOLOGY Holdings, Inc.'s
Form 10-Q for the quarter ended March 31, 1999 to be signed on its behalf by the
undersigned thereunto duly authorized.
KNOLOGY Holdings, Inc.
December 27, 1999 By: /s/ Rodger L. Johnson
----------------------------------------
Rodger L. Johnson
President and Chief Executive Officer
15
