<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER: 333-43339
KNOLOGY HOLDINGS, INC.
(Exact name of registrant as specified in its
charter)
DELAWARE 58-2203141
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1241 O.G. SKINNER DRIVE
WEST POINT, GEORGIA 31833
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 645-8553
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]* No [ ]
As of September 30, 1999, there were 394 shares of the registrant's
Common Stock outstanding and 49,851 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 SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE
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................................................. 8
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K............................................... 18
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 20,169,283 $ 4,859,508
Marketable securities -- 66,231,397
Affiliate receivable 8,636,849 6,785,691
Accounts receivable, net 5,846,291 5,108,491
Prepaid expenses 791,706 430,811
------------ ------------
Total current assets 35,444,129 83,415,898
PROPERTY AND EQUIPMENT, net 241,653,471 195,496,617
INVESTMENT IN CLEARSOURCE, INC. 1,412,064 825,072
INTANGIBLE AND OTHER ASSETS, net 42,691,153 52,606,063
OTHER 151,914 207,000
------------ ------------
Total assets $321,352,731 $332,550,650
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 12,174 $ 12,174
Accounts payable 13,491,352 6,366,923
Accrued liabilities 4,838,182 22,215,281
Unearned revenue 2,468,867 2,116,083
------------ ------------
Total current liabilities 20,810,575 30,710,461
NONCURRENT LIABILITIES:
Long-term notes payable 19,116,496 122,070
Long-term accrued interest payable 35,825,088 21,036,541
Bonds payable, net of discount 274,231,140 263,206,292
------------ ------------
Total liabilities 349,983,299 315,075,364
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 (95,958,747) (49,878,931)
Unrealized (loss) gain on marketable
securities (Note 4) (23,650) 2,388
------------ ------------
Total stockholders' (deficit) equity (31,117,528) 14,988,326
------------ ------------
Total liabilities and stockholders'
(deficit) equity $321,352,731 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 11,884,458 $ 7,038,178 $ 32,516,573 $ 16,196,831
------------ ----------- ------------ ------------
OPERATING EXPENSES:
Cost of services 5,555,464 3,437,985 15,569,648 7,374,836
Selling, operating, and administrative 9,174,379 6,909,490 27,370,458 16,155,523
Depreciation and amortization 9,248,774 2,433,018 25,308,624 6,046,332
------------ ----------- ------------ ------------
Total 23,978,617 12,780,493 68,248,730 29,576,691
------------ ----------- ------------ ------------
OPERATING LOSS (12,094,159) (5,742,315) (35,732,157) (13,379,860)
OTHER INCOME AND EXPENSES:
Interest income 142,655 2,232,814 1,251,191 8,366,231
Interest expense (8,002,238) (7,422,979) (23,644,689) (21,477,167)
Other income (expense), net 91,470 51,648 184,326 227,812
------------ ----------- ------------ ------------
Total (7,768,113) (5,138,517) (22,209,172) (12,883,124)
------------ ----------- ------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (19,862,272) (10,880,832) (57,941,329) (26,262,984)
INCOME TAX BENEFIT 4,734,388 2,450,911 11,861,510 2,450,911
------------ ----------- ------------ ------------
NET LOSS $(15,127,884) $(8,429,921) $(46,079,819) $(23,812,073)
============ =========== ============ ============
NET LOSS PER SHARE:
Basic and diluted $ (2.02) $ (1.13) $ (6.16) $ (3.18)
============ =========== ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 7,478,044 7,487,905 7,478,044 7,492,170
============ =========== ============ ============
</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>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (46,079,819) $ (23,812,073)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 25,308,624 6,046,332
Gain on disposition of assets (7,809) --
Amortization of bond discount 11,024,848 9,805,872
Changes in operating assets and liabilities:
Accounts receivable (737,800) (1,612,259)
Accounts receivable - affiliate (1,851,158) --
Prepaid expenses and other (331,844) (2,636,804)
Accounts payable 7,124,429 (2,658,428)
Accrued liabilities and interest (2,588,552) 20,931,803
Unearned revenue 352,784 213,179
------------- -------------
Total adjustments 38,293,522 30,089,695
------------- -------------
Net cash (used in) provided by operating activities (7,786,297) 6,277,622
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements (61,159,325) (73,444,616)
Acquisitions, net -- (67,203,131)
Investment in Clear Source, Inc. (586,992) (825,072)
Organizational and franchise cost expenditures, net (406,535) (216,122)
Proceeds from sales of assets 74,632 --
Proceeds from sales of marketable securities, net 66,231,397 131,796,692
------------- -------------
Net cash provided by (used in) investing activities 4,153,177 (9,892,249)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility 19,000,000 --
Expenditures related to issuance of debt (51,531) (286,599)
Principal payments on debt (5,574) (8,169)
------------- -------------
Net cash provided by (used in) financing activities 18,942,895 (294,768)
------------- -------------
NET INCREASE (DECREASE) IN CASH 15,309,775 (3,909,395)
CASH AT BEGINNING OF PERIOD 4,859,508 6,144,581
------------- -------------
CASH AT END OF PERIOD $ 20,169,283 $ 2,235,186
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 132,675 $ 3,647
Details of acquisitions:
Property, plant and equipment -- $ 30,133,876
Intangible assets -- 37,069,255
------------- -------------
Net cash paid for acquisitions -- 67,203,131
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE> 6
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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"). 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 September 30, 1999, and
for the three and nine 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. NET LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." This statement requires the disclosure of basic net income
(loss) per share and diluted net income (loss) per share. Basic net
income (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted-average number of
common shares outstanding during the period. As the Company has no
significant common stock outstanding, the convertible preferred stock
is assumed to be converted for purposes of this calculation. Diluted
net loss per share gives effect to all potentially dilutive securities.
The Company's potentially dilutive securities are not included in the
computation of diluted net loss per share as their effect is
antidilutive.
4. COMPREHENSIVE INCOME
During 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income", which the Company
adopted as of January 1, 1997. SFAS No. 130 requires the Company to
report in their financial statements, in addition to its net income
(loss), comprehensive income (loss), which includes all changes in
equity during a period from non-owner sources including, as applicable,
foreign currency items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities. The Company's unrealized loss on marketable securities for
the nine months ended September 30, 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Cable Television $ 8,642,090 $5,544,917 $24,966,345 $14,032,666
Telephone 2,433,604 1,430,008 5,834,161 1,998,690
Data and BCS 808,764 63,253 1,716,067 165,475
----------- ---------- ----------- -----------
Consolidated Revenues $11,884,458 $7,038,178 $32,516,573 $16,196,831
=========== ========== =========== ===========
</TABLE>
7. SUBSEQUENT EVENTS
The Company's parent company and majority stockholder, ITC
Holding Company, Inc. ("ITC Holding") intends to complete a
reorganization of certain of its wholly owned and majority owned
subsidiaries during the fourth quarter of 1999 or early 2000 ("the
Reorganization"), as follows:
a) ITC Holding plans to contribute its approximately 85%
interest in the Company to KNOLOGY, Inc. ("New
KNOLOGY"), an entity incorporated under the laws of
the State of Delaware in September 1998 to enable ITC
Holding to complete the Reorganization.
b) ITC Holding plans to contribute all of the
outstanding capital stock of Interstate Telephone,
Inc.; Valley Telephone Inc.; Globe Telephone Inc.;
and ITC Globe Inc. to New KNOLOGY, (collectively
"Telephone Operations Group").
c) ITC Holding plans to contribute its 222,832 shares of
Series A preferred stock and 50,000 shares of Series
B preferred stock, and its subscription rights to
purchase an additional 610,501 shares of Series A
preferred stock and 200,000 shares of Series B
preferred stock (together with approximately
$5,663,000 in cash to be used by New KNOLOGY to make
the subscription payment) in ClearSource, Inc. to New
KNOLOGY.
d) The Company expects that its minority shareholders
will exchange the remaining approximately 15% of its
shares for shares of New KNOLOGY.
As a result of the planned Reorganization, the Company and the
Telephone Operations Group will be wholly owned subsidiaries of New
KNOLOGY.
7
<PAGE> 9
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 WE WILL NOT RETAIN OR GROW OUR CUSTOMER BASE, (2) THAT WE
WILL FAIL TO BE COMPETITIVE WITH EXISTING AND NEW COMPETITORS, (3) THAT WE WILL
NOT ADEQUATELY RESPOND TO TECHNOLOGICAL DEVELOPMENTS IMPACTING OUR INDUSTRY AND
MARKETS, (4) THAT NEEDED FINANCING WILL NOT BE AVAILABLE 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 WE OR OUR VENDORS AND SUPPLIERS MAY FAIL TO TIMELY ACHIEVE YEAR 2000
READINESS SUCH THAT THERE IS A MATERIAL ADVERSE IMPACT ON OUR BUSINESS,
OPERATIONS OR FINANCIAL RESULTS, AND (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 our consolidated financial condition
and results of operations for the three and nine months ended September 30, 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 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.
We provide these Broadband Services using high capacity hybrid fiber-coaxial
networks that are two-way interactive. We own, operate and manage Interactive
Broadband Networks in five metropolitan areas: Montgomery, Alabama; Columbus and
Augusta, Georgia; Panama City, Florida and Charleston, South Carolina, and plan
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.
We have been providing cable television service since 1995. We began
providing telephone and high-speed Internet access services in 1997 and
initially offered broadband carrier 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 our emphasis on customer service,
provides a competitive advantage.
We 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.
We 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.
8
<PAGE> 10
In early 1998, we 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, 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.
On October 30, 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.
Our 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 our
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.
Our 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.
We have been expanding our 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.
We have incurred net losses in each quarter since our inception, and as
of September 30, 1999, the accumulated deficit had reached approximately $96
million. We anticipate 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 the customer base. There can be no
assurance that growth in revenue or the subscriber base will continue or that we
will be able to achieve or sustain profitability or positive cash flow.
9
<PAGE> 11
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998
The following table sets forth certain operating and financial data for
the three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1999 1998 CHANGE %
------- ------- ------ -----
<S> <C> <C> <C> <C>
HOMES RELEASED TO SALES 277,401 222,238 55,163 24.8%
======= ======= ====== =====
RGU'S
Video 84,922 75,990 8,932 11.8%
------- ------- ------ -----
Telephone
On - Net 9,782 2,230 7,552 338.7%
Off - Net (1) 6,568 5,911 657 11.1%
------- ------- ------ -----
16,350 8,141 8,209 100.8%
High-Speed Internet 3,419 523 2,896 553.7%
------- ------- ------ -----
Total 104,691 84,654 20,037 23.7%
======= ======= ====== =====
</TABLE>
(1) Off-net lines include all resale lines sold within KNOLOGY's network
footprint.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998 CHANGE %
------------ ------------ ----------- -----
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 11,884,458 $ 7,038,178 $ 4,846,280 68.9%
------------ ------------ ----------- -----
OPERATING EXPENSES
Cost of Services 5,555,464 3,437,985 2,117,479 61.6%
Selling, Operating, and Administration 9,174,379 6,909,490 2,264,889 32.8%
Depreciation and Amortization 9,248,774 2,433,018 6,815,756 280.1%
------------ ------------ ----------- -----
Total 23,978,617 12,780,493 11,198,124 87.6%
------------ ------------ ----------- -----
OPERATING LOSS (12,094,159) (5,742,315) 6,351,844 110.6%
OTHER INCOME AND EXPENSES (7,768,113) (5,138,517) 2,629,596 51.2%
------------ ------------ ----------- -----
LOSS BEFORE INCOME TAX BENEFIT (19,862,272) (10,880,832) 8,981,440 82.5%
INCOME TAX BENEFIT 4,734,388 2,450,911 2,283,477 93.2%
------------ ------------ ----------- -----
NET LOSS $(15,127,884) $ (8,429,921) $ 6,697,963 79.5%
============ ============ =========== =====
</TABLE>
10
<PAGE> 12
REVENUES. Operating revenues increased 68.9% from $7.0 million for the
three months ended September 30, 1998 to $11.9 million for the three months
ended September 30, 1999. The increased revenues are primarily due to a higher
number of RGU's during the three months ended September 30, 1999 compared to the
same period in 1998. The additional RGU's resulted primarily from:
- the extension and/or buildout of our Broadband networks in the
Montgomery, Columbus, Panama City, Augusta and Charleston, and
- the acquisition of Cable Alabama (approximately 32,000 video
RGU's) effective September 1, 1998.
EXPENSES. Operating expenses, excluding depreciation and amortization,
increased 42.4% from $10.3 million for the three months ended September 30, 1998
to $14.7 million for the three months ended September 30, 1999. Cost of services
increased 61.6% from $3.4 million for the three months ended September 30, 1998
to $5.6 million for the three months ended September 30, 1999. Selling,
operating, and administrative expenses increased 32.8% from $6.9 million for the
three months ended September 30, 1998 to $9.2 million for the three months ended
September 30, 1999. The increase in our 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 $2.4 million for the three
months ended September 30, 1998 to $9.2 million for the three months ended
September 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 our networks; the acquisition of the Cable
Alabama system; and the purchase of buildings, computers and office equipment at
the corporate and subsidiary locations.
INTEREST EXPENSE increased from $7.4 million for the three months ended
September 30, 1998 to $8.0 million for the three months ended September 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 $2.2 million for the three months ended September
30, 1998, compared to $143,000 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.
INCOME TAX BENEFIT. The income tax benefit was $2.5 million for the
three months ended September 30, 1998, compared to $4.7 million for the same
period in 1999. Effective August 1998, when our parent company acquired majority
interest, we have participated in a tax sharing agreement with the parent
company. The tax sharing agreement allows us to receive a benefit for federal
taxable losses incurred.
NET LOSS. We incurred a net loss of $8.4 million for the three months
ended September 30, 1998 compared to a net loss of $15.1 million for the three
months ended September 30, 1999. We expect net losses to continue to increase as
we continue to expand our business.
11
<PAGE> 13
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
The following table sets forth certain financial data for the nine
months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998 CHANGE %
------------ ------------ ----------- -----
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 32,516,573 $ 16,196,831 $16,319,742 100.8%
------------ ------------ ----------- -----
OPERATING EXPENSES
Cost of Services 15,569,648 7,374,836 8,194,812 111.1%
Selling, Operating, and Administration 27,370,458 16,155,523 11,214,935 69.4%
Depreciation and Amortization 25,308,624 6,046,332 19,262,292 318.6%
------------ ------------ ----------- -----
Total 68,248,730 29,576,691 38,672,039 130.8%
------------ ------------ ----------- -----
OPERATING LOSS (35,732,157) (13,379,860) 22,352,297 167.1%
OTHER INCOME AND EXPENSES (22,209,172) (12,883,124) 9,326,048 72.4%
------------ ------------ ----------- -----
LOSS BEFORE INCOME TAX BENEFIT (57,941,329) (26,262,984) 31,678,345 120.6%
INCOME TAX BENEFIT 11,861,510 2,450,911 9,410,599 384.0
------------ ------------ ----------- -----
NET LOSS $(46,079,819) $(23,812,073) $22,267,746 93.5%
============ ============ =========== =====
</TABLE>
REVENUES. Operating revenues increased 100.8% from $16.2 million for
the nine months ended September 30, 1998 to $32.5 million for the nine months
ended September 30, 1999. The increased revenues are primarily due to a higher
number of RGU's during the nine months ended September 30, 1999 compared to the
same period in 1998. The additional RGU's resulted primarily from:
- the extension and/or buildout of our Broadband networks in the
Montgomery, Columbus, Panama City, Augusta and Charleston, and
- the acquisition of Cable Alabama (approximately 32,000 video
RGU's) effective September 1, 1998.
EXPENSES. Operating expenses, excluding depreciation and amortization,
increased 82.5% from $23.5 million for the nine months ended September 30, 1998
to $42.9 million for the nine months ended September 30, 1999. Cost of services
increased 111.1% from $7.4 million for the nine months ended September 30, 1998
to $15.6 million for the nine months ended September 30, 1999. Selling,
operating, and administrative expenses increased 69.4% from $16.2 million for
the nine months ended September 30, 1998 to $27.4 million for the nine months
ended September 30, 1999. The increase in our 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 $6.0 million for the nine
months ended September 30, 1998 to $25.3 million for the nine months ended
September 30, 1999. The increase in depreciation and
12
<PAGE> 14
amortization is due to significant additions in property, plant, equipment and
intangible assets resulting from the expansion of our networks; the acquisition
of the Cable Alabama system; and the purchase of buildings, computers and office
equipment at the corporate and subsidiary locations.
INTEREST EXPENSE increased from $21.5 million for the nine months ended
September 30, 1998 to $23.6 million for the nine months ended September 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 $8.4 million for the nine months ended September
30, 1998, compared to $1.3 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.
INCOME TAX BENEFIT. The income tax benefit was $2.5 million for the
nine months ended September 30, 1998, compared to $11.9 million for the same
period in 1999. Effective August 1998, when our parent company acquired majority
interest, we participated in a tax sharing agreement with our parent company.
The tax sharing agreement allows us to receive a benefit for federal taxable
losses incurred.
NET LOSS. We incurred a net loss of $23.8 million for the nine months
ended September 30, 1998 compared to a net loss of $46.1 million for the nine
months ended September 30, 1999. We expect net losses to continue to increase as
we continue to expand our business.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had net working capital of $14.6 million,
compared to $52.7 million at December 31, 1998. The decrease in working capital
is principally due to the draw down of cash to fund expansion and operating
losses.
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. Operating activities provided cash of $6.3 million
and used cash of $7.8 million for the nine months ended September 30, 1998 and
1999, respectively. Net cash used in operating activities in the 1999 period was
primarily due to a net loss of $46.1 million offset by a $2.0 million change in
working capital and depreciation and amortization and bond accretion on the
Senior Discount Notes of $25.3 million and $11.0 million, respectively.
Investing activities used cash of $9.9 million and provided cash of $4.2 million
for the nine months ended September 30, 1998 and 1999, respectively. Investing
activities in the 1999 period primarily consisted of $61.2 million of capital
expenditures principally funded by $66.2 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. Financing activities used
cash of $295,000 and provided cash of $18.9 million for the nine months ended
September 30, 1998 and 1999, respectively. The Company borrowed $19.0 million
against its credit facility during the 1999 period.
FUNDING TO DATE
On October 22, 1997, we received net proceeds of approximately $242.4
million from the offering of Senior Discount Notes. These 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 until 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, our ability
to incur indebtedness, pay dividends, prepay subordinated indebtedness, redeem
capital stock, make investments, engage in
13
<PAGE> 15
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations. 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 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 KNOLOGY, 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.
In connection with the Senior Discount Notes Offering, we completed an
equity private placement, in which we 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, 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 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 $23 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 our 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 our leverage ratio. The
credit facility contains a number of covenants including, among others,
covenants limiting our ability 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, however, there are no
assurances that we will remain in compliance through the end of the year. Should
we not be in compliance with the covenants, we will not be able to draw funds
under the credit facility without a waiver from the lender. To date, $19 million
has 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, to fund operating losses and
to maintain the quality of its networks. We currently expect to spend
approximately $88 million for capital expenditures during 1999, of which
approximately $61 million has been expended in the first nine months of 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 us to delay some of its construction plans and
possibly require us to constrain certain operations.
We presently estimate the cost to complete construction of the networks
in the existing markets to be approximately $177 million and 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 we paid for or financed 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 enter into purchase agreements for programming services
and construction related services to expand our service offerings and to expand
and upgrade our current systems, which will commit
14
<PAGE> 16
us to make some of these planned expenditures. We believe that present cash
reserves, cash flow from operations, amounts available under our credit
facility, and proceeds from loan agreements with affiliated companies will
provide us with sufficient funds to expand our current networks as planned
through 1999. A subsidiary of our parent company, ITC Holding Company, Inc. has
agreed to lend us approximately $13 million and we expect to obtain these
proceeds in November 1999.
ITC Holding intends to complete a reorganization of certain of its
wholly owned and majority owned subsidiaries during the fourth quarter of 1999
or early 2000 as follows:
e) ITC Holding plans to contribute its approximately 85% interest
in us to KNOLOGY, Inc. ("New KNOLOGY").
f) ITC Holding plans to contribute all of the outstanding capital
stock of Interstate Telephone, Inc.; Valley Telephone Inc.;
Globe Telephone Inc.; and ITC Globe Inc. to New KNOLOGY,
(collectively "Telephone Operations Group").
g) ITC Holding plans to contribute its 222,832 shares of Series A
preferred stock and 50,000 shares of Series B preferred stock,
and its subscription rights to purchase an additional 610,501
shares of Series A preferred stock and 200,000 shares of
Series B preferred stock (together with approximately
$5,663,000 in cash to be used by New KNOLOGY to make the
subscription payment) in ClearSource, Inc. to New KNOLOGY.
h) We expect that our minority shareholders will exchange the
remaining approximately 15% of their shares for shares of New
KNOLOGY.
As a result of the planned reorganization, we and the Telephone
Operations Group will be wholly owned subsidiaries of New KNOLOGY. A subsidiary
of ITC Holding is expected to lend New KNOLOGY up to $30 million during the
fourth quarter with an expected March 31, 2000 maturity date. The ITC Holding
subsidiary may elect, in lieu of repayment, to convert the amounts outstanding
under this loan and the previously mentioned $13 million loan into New KNOLOGY
common stock or stock options.
ITC Holding proposes to distribute all of its stock, and any stock
options it holds in New KNOLOGY to ITC's stockholders and optionholders during
the fourth quarter of 1999 or in early 2000. Shortly thereafter, New KNOLOGY
intends to sell capital stock to a small group of institutional investors in a
private placement of approximately $100 million. The proceeds are expected to be
used to complete the buildout of our existing markets and to launch additional
markets. We will continue to need additional financing to fund further expansion
and to make potential acquisitions.
THE YEAR 2000 ISSUE
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.
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,
15
<PAGE> 17
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 by the middle of the fourth quarter 1999. This plan covers:
- 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.
We are addressing our year 2000 plan with respect to our internal
operations in six phases:
- an awareness phase, in which we inventory and evaluate our
systems, components and other significant infrastructure;
- an assessment phase, in which we identify those elements that
reasonably could be expected to be affected by year 2000
problems;
- a remediation phase, in which we remediate or replace
equipment that we believe will fail to operate properly in the
year 2000;
- a testing and validation phase, in which we test the
remediation and replacement conducted and validate its
ability;
- an implementation phase, in which we add our new or updated
equipment to our current systems; and
- a contingency phase, in which we develop contingency plans for
our at-risk business functions.
We have completed the awareness, assessment, remediation and
contingency phases of our plan for all of our services and systems. We have
substantially completed the testing and validation and implementation phases for
all of these 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
16
<PAGE> 18
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.
Interstate Telephone Company, Inc. and Valley Telephone Company, Inc.,
each a wholly-owned subsidiary of our parent company and majority shareholder,
have informed us that they will be year 2000 ready by December 1999. We depend
on these companies for our 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.
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.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in trading market-risk-sensitive instruments and do
not purchase as investments, as hedges, or for purposes "other than trading"
instruments that are likely to expose us to market risk, whether it be from
interest rate, foreign currency exchange, commodity price or equity price risk.
We have entered into no forward or futures contracts, purchased no options and
entered into no swaps.
Our primary market risk exposure is that of interest rate risk. A
change in LIBOR or the Prime Rate as set by First Union National Bank would
affect the rate at which we could borrow funds under our credit facility.
17
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
- -------------- ----------------------
<S> <C>
27.1 Financial Data Schedule for the nine months ended
September 30, 1999.
</TABLE>
- ----------
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.
November 13, 1999 By: /s/ Rodger L. Johnson
-----------------------------------
Rodger L. Johnson
President and Chief Executive Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE BALANCE SHEET OF KNOLOGY HOLDINGS AS OF SEPTEMBER 30, 1999 AND THE
RELATED COMBINED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999. THIS INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 14,831,972
<ALLOWANCES> 348,832
<INVENTORY> 25,830,645
<CURRENT-ASSETS> 35,444,129
<PP&E> 244,430,796
<DEPRECIATION> 28,607,970
<TOTAL-ASSETS> 321,352,731
<CURRENT-LIABILITIES> 20,810,575
<BONDS> 329,172,724
0
499
<COMMON> 4
<OTHER-SE> (31,118,031)
<TOTAL-LIABILITY-AND-EQUITY> 321,352,731
<SALES> 32,516,573
<TOTAL-REVENUES> 32,516,573
<CGS> 15,569,648
<TOTAL-COSTS> 68,248,730
<OTHER-EXPENSES> 22,209,172
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,644,689
<INCOME-PRETAX> (57,941,329)
<INCOME-TAX> 11,861,510
<INCOME-CONTINUING> (46,079,819)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46,079,819)
<EPS-BASIC> (6.16)
<EPS-DILUTED> (6.16)
</TABLE>
