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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER: 333-43339
KNOLOGY HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-2203141
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 645-8553
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated herein by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
is not applicable as no public market exists for the voting stock of the
registrant.
As of February 29, 2000, we had 619 shares of Common Stock
outstanding and 50,604 shares of Preferred Stock outstanding; all shares are
owned indirectly by Registrants's parent, KNOLOGY, Inc.
The registrant meets the conditions set forth in General Instructions
I(1)(a) and (b) of Form 10-K and is filing this Form with the reduced
disclosure format.
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* The registrant 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.
(i)
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TABLE OF CONTENTS
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Page
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PART I
ITEM 1. BUSINESS ......................................................................... 1
ITEM 2. PROPERTIES......................................................................... 2
ITEM 3. LEGAL PROCEEDINGS.................................................................. 2
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................ 2
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS............................................................. 2
ITEM 6. SELECTED FINANCIAL DATA............................................................ 2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................. 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................ 4
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING FINANCIAL DISCLOSURE................................................. 5
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................. 5
ITEM 11. EXECUTIVE COMPENSATION............................................................. 5
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................................. 5
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................... 5
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K............................................................. 5
SIGNATURES................................................................................... 9
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................... F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT
SCHEDULES.............................................................................. S-1
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PART I
ITEM 1. BUSINESS
OUR STRUCTURE.
ITC Holding formed KNOLOGY Holdings, Inc. in 1995. Its percentage
ownership fell below 50% during 1996. ITC Holding acquired additional stock in
KNOLOGY Holdings, Inc. in 1998, becoming the holder of approximately 85% of
KNOLOGY Holdings, Inc. In November 1999, ITC Holding contributed its 85%
interest in KNOLOGY Holdings to KNOLOGY, Inc. in exchange for shares of KNOLOGY,
Inc. stock. Additionally, other minority shareholders exchanged the remaining
15% of KNOLOGY Holdings for shares of KNOLOGY, Inc. stock. KNOLOGY Holdings,
Inc. is a wholly-owned subsidiary of KNOLOGY, Inc.
KNOLOGY Holdings, Inc. has 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 six metropolitan areas of Montgomery and Huntsville,
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 1995 we began providing cable television service by acquiring cable
television systems in Montgomery, Alabama and Columbus, Georgia and using those
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.
In June 1998, TTE Inc., a reseller of local, long distance and operator
services to small and medium-sized business customers throughout South Carolina
was acquired and was accounted for as a purchase.
In October 1998, we acquired the Cable Alabama cable television system
serving the Huntsville, Alabama area which was accounted for as a purchase. The
existing Cable Alabama plant is being upgraded to an interactive broadband
network which will be completed by 2001.
In 1995 KNOLOGY Holdings, Inc. was originally formed as a limited
liability company and later was incorporated in the State of Delaware. The
Company's principal executive offices are located at 1241 O.G. Skinner Drive,
West Point, Georgia 31833 and its telephone number is (706)645-8553.
OVERVIEW OF OUR SERVICES.
We offer our customers broadband communications services, including:
o traditional and digital cable television;
o local and long distance telephone; and
o high-speed Internet access service.
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ITEM 2. PROPERTIES
We own or lease property in the following locations:
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Location Address Lease/Own Primary Use
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West Point, GA. 1241 O.G. Skinner Drive Own Corporate Admin. Offices
West Point, GA. 206 West 9th Street Lease Network Operations Center
Montgomery, AL. 1450 Ann Street Lease Headend & Technical Offices
Columbus, GA 1701 Boxwood Place Lease Admin. Offices & Headend
Panama City, FL. 13200 P.C.B. Pkwy. Lease Admin. Offices & Headend
Augusta, GA 3714 Wheeler Road Own Admin. Offices & Headend
Charleston, SC 4506 Dorchester Road Own Admin. Offices and Headend
Huntsville, AL 2401 10th Street Own Admin. Offices and Headend
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In addition to these properties, we also hold operating leases for hub
sites along our network in each market. Our principal physical assets consist of
fiber optic and coaxial broadband network and equipment, located either at the
equipment site or along the network. Our distribution equipment along the
network is generally attached to utility poles we own or use under standard pole
rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches. Under our pole
attachment agreements, local public utilities and other pole owners rent us
space on utility poles to attach our network cables and equipment. The rate a
pole owner charges us for space varies, but the rate is generally based upon the
amount of space we rent. Our franchises give us rights of way for our network.
The physical components of the networks require maintenance and periodic
upgrading to keep pace with technological advances. We believe that our
properties, taken as a whole, are in good operating condition and are suitable
for our business operations.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are subject to litigation.
However, in our opinion, there is no legal proceeding pending against us which
would have a material adverse effect on our financial position, results of
operations, or liquidity. We are also party to regulatory proceedings affecting
the relevant segments of the communications industry generally.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required under reduced disclosure format.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our stock is not traded on any exchange or quoted on the Nasdaq Stock
Market or any other established trading market. No market makers currently make
a market in our stock and we do not plan to engage a market maker. Therefore,
there is no established public trading market and no high and low bid
information or quotations available.
As of February 29, 2000, we had 619 shares of common stock, and 50,604
shares of preferred stock, outstanding; all shares are owned indirectly by the
registrant's parent, KNOLOGY, Inc.
We have never declared or paid any cash dividends on our capital stock
and do not anticipate paying cash dividends on our capital stock in the
foreseeable future. It is the current policy of our board of directors to retain
earnings to finance the expansion of our operations. Future declaration and
payment of dividends, if any, will be determined based on the then-current
conditions, including our earnings, operations, capital requirements, financial
condition, and other factors the board of directors deems relevant. In addition,
our ability to pay dividends is limited by the terms of the indenture governing
our outstanding notes and by the terms of our credit facility.
ITEM 6. SELECTED FINANCIAL DATA
Not required under reduced disclosure format.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVENUES AND EXPENSES
We can group our revenues into four categories: video revenues, telephone
revenues, Internet revenues and other revenues.
o 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 86% and 76% of our consolidated revenues
for the years ended December 31, 1998 and December 31, 1999,
respectively.
o 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 13% and 18% of our consolidated
revenues for the years ended December 31, 1998 and December 31, 1999,
respectively.
o 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 1% and 6% of our consolidated revenues for
the years ended December 31, 1998 and December 31, 1999, respectively.
Our operating expenses include cost of services expenses, selling, operations
and administrative expenses and depreciation and amortization expenses.
Cost of services expenses include:
o 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 18.4% and 15.5% of our operating expenses for the years
ended December 31, 1998 and December 31, 1999, respectively.
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.
o 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:
o SALES AND MARKETING COSTS. Sales and marketing costs include the cost
of sales and marketing personnel and advertising and promotional
expenses.
o NETWORK OPERATIONS AND MAINTENANCE EXPENSES. Network operations and
maintenance expenses include payroll and departmental costs incurred
for network design and maintenance monitoring.
o CUSTOMER SERVICE EXPENSES. Customer service expenses include payroll
and departmental costs incurred for customer service representatives
and management.
o GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses consist of corporate and subsidiary general management and
administrative costs.
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.
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Operating revenues increased 74.0% from $25.8 million for the
year ended December 31, 1998 to $44.9 million for the year ended December 31,
1999. Our increased revenues are primarily due to a higher number of connections
during the year ended December 31, 1999 compared to 1998. The additional
connections resulted primarily from:
o the extension of our broadband networks in the Montgomery,
Columbus and Panama City markets;
o the continued growth of broadband services in the Augusta and
Charleston markets; and
o the acquisition of the TTE and Cable Alabama systems in June
1998 and October 1998, respectively.
EXPENSES. Our operating expenses, excluding depreciation and
amortization, increased 57.3%, from $37.2 million for the year ended December
31, 1998 to $58.6 million for the year ended December 31, 1999. The cost of
services component of operating expenses increased 79.8%, from $11.9 million for
1998 to $21.4 million for 1999. Our selling, operations, and administration
expenses increased 46.5% million, from $25.4 million for 1998 to $37.2 million
for 1999. The increase in our cost of services and other operating expenses is
consistent with the growth in revenues and is a result of the expansion of our
operations and the increase in the number of subscribers and the number of
employees associated with such expansion and growth into new markets.
Our depreciation and amortization expenses increased 184.6% from $12.4
million for the year ended December 31, 1998 to $35.3 million for the year ended
December 31, 1999. The increase in depreciation is primarily due to the
expansion of our networks and growth in to new markets
OTHER INCOME AND EXPENSES. Our interest income was $9.6 million for the
year ended December 31, 1998, compared to $1.5 million for the year ended
December 31, 1999. The interest income 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 marketable securities to fund planned expansion and acquisitions.
Our interest expense increased from $28.7 million for the year ended
December 31, 1998 to $33.5 million for the year ended December 31, 1999. The
increase in interest expense reflects the accrual of the interest attributable
to the senior discount notes issued in October 1997.
INCOME TAX BENEFIT. We recorded an income tax benefit of
$6.8 million for the year ended December 31, 1998 compared to an income tax
benefit of $20.7 million for the year ended December 31, 1999. The income tax
benefit resulted from our utilizing net tax losses under a tax sharing
agreement with ITC Holding, which became effective in August 1998.
NET LOSS. We incurred a net loss of $36.5 million for the year ended
December 31, 1998 compared to a net loss of $60.3 million for the year ended
December 31, 1999. The increase in net loss is a result of the expansion of our
operations and the increase in the number of employees associated with such
expansion and growth into new markets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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. Our only borrowings subject to market conditions are our
borrowings under our credit facility which are based on either a prime or
federal funds rate plus applicable margin or LIBOR plus applicable margin. Any
changes in these rates would affect the rate at which we could borrow funds
under our bank 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8 is incorporated by reference to pages F-1 through F-15 and S-1
through S-2 herein.
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ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Not required under reduced disclosure format.
ITEM 11. EXECUTIVE COMPENSATION
Not required under reduced disclosure format.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not required under reduced disclosure format.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not required under reduced disclosure format.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following Consolidated Financial Statements of the
Company and independent auditor's report are included in Item 8 of
this Form 10-K.
Report of Independent Public Accountants.
Company's Consolidated Balance Sheets as of December 31,
1998 and 1999.
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999.
Consolidated Statements of Stockholders' (Deficit) Equity for
the Years Ended December 31, 1997, 1998 and 1999.
Notes to Consolidated Financial Statements.
(a)(2) The following financial statement schedule is filed as part
of this report and is attached hereto as pages S-1 and S-2.
Independent Auditor's Report on the Financial Statement
Schedules.
Schedule II--Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission either have been included
in the Consolidated Financial Statements of the Company or the notes thereto,
are not required under the related instructions or are inapplicable, and
therefore have been omitted.
(a)(3) The following exhibits are either provided with this Form
10-K or are incorporated herein by reference:
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Exhibit
Number Exhibit Description
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2.1 Purchase Agreement between Cable Alabama Corporation and
KNOLOGY of Huntsville, Inc., dated as of October 19, 1998
(Incorporated herein by reference from Exhibit 2.2 to KNOLOGY
Holdings, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998).
3.1 Certificate of Incorporation of KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 3.1 to KNOLOGY
Holdings, Inc.'s Registration Statement on Form S-4 (File No.
333-43339)).
3.2 Certificate of Amendment of Certificate of Incorporation of
KNOLOGY Holdings, Inc. (Incorporated herein by reference from
Exhibit 3.1 to KNOLOGY Holdings, Inc.'s Form 10-Q for the
quarter ended March 31, 1998)).
3.3 Certificate of Amendment to Certificate of Designation of
Preferred Stock. (Incorporated herein by reference from
Exhibit 3.2 to KNOLOGY Holdings, Inc.'s Form 10-Q for the
quarter ended March 31, 1998)).
3.4 Amended and Restated Bylaws of KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 3.2 to KNOLOGY
Holdings, Inc.'s Registration Statement on Form S-4 (File No.
333-43339)).
4.1 Indenture dated as of October 22, 1997 between KNOLOGY
Holdings, Inc. and United States Trust Company of New York, as
Trustee, relating to the 11 7/8% Senior Discount Notes Due
2007 of KNOLOGY Holdings, Inc. (Incorporated herein by
reference from Exhibit 4.1 to KNOLOGY Holdings, Inc.'s
Registration Statement on Form S-4 (File No. 333-43339)).
4.2 Form of Senior Discount Note (contained in Exhibit 4.1).
4.3 Form of Exchange Note (contained in Exhibit 4.1).
10.1 Unit Purchase Agreement, dated as of October 16, 1997 between
KNOLOGY Holdings, Inc. and SCANA Communications, Inc.
(Incorporated herein by reference from Exhibit 10.1 to KNOLOGY
Holdings, Inc.'s Registration Statement on Form S-4 (File No.
333-43339)).
10.2 Lease Agreement dated April 15, 1996 by and between D.L.
Jordan and American Cable Company, Inc. (Incorporated herein
by reference from Exhibit 10.5 to KNOLOGY Holdings, Inc.'s
Registration Statement on Form S-4 (File No. 333-43339)).
10.3 Pole Attachment Agreement dated January 1, 1998 by and between
Gulf Power Company and Beach Cable, Inc. (Incorporated herein
by reference from Exhibit 10.7 to KNOLOGY Holdings, Inc.'s
Registration Statement on Form S-4 (File No. 333-43339)).
10.4 Telecommunications Facility Lease and Capacity Agreement,
dated September 10, 1996, by and between Troup EMC
Communications, Inc. and Cybernet Holding, Inc. (Incorporated
herein by reference from Exhibit 10.16 to KNOLOGY Holdings,
Inc.'s Registration Statement on Form S-4 (File No.
333-43339)).
10.5 Master Pole Attachment Agreement dated January 12, 1998 by and
between South Carolina Electric and Gas and KNOLOGY Holdings,
Inc. d/b/a/ KNOLOGY of Charleston (Incorporated herein by
reference from Exhibit 10.17 to KNOLOGY Holdings, Inc.'s
Registration Statement on Form S-4 (File No. 333-43339)).
10.6 Lease Agreement, dated December 5, 1997 by and between The
Hilton Company and KNOLOGY of Panama City, Inc. (Incorporated
herein by reference from Exhibit 10.25 to KNOLOGY Holdings,
Inc.'s Registration Statement on Form S-4 (File No.
333-43339)).
10.7 Certificate of Membership with National Cable Television
Cooperative, dated January 29, 1996, of Cybernet Holding, Inc.
(Incorporated herein by reference from Exhibit 10.34 to
KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4
(File No. 333-43339)).
10.8 Ordinance No. 99-16 effective March 16, 1999 between Columbus
consolidated Government and KNOLOGY of Columbus Inc.
(Incorporated herein by reference from Exhibit 10.18 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.9 Ordinance No. 16-90 (Montgomery, Alabama) dated March 6, 1990
(Incorporated herein by reference from Exhibit 10.44 to
KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4
(File No. 333-43339)).
10.10 Ordinance No. 50-76 (Montgomery, Alabama) (Incorporated herein
by reference from Exhibit 10.45 to KNOLOGY Holdings, Inc.'s
Registration Statement on Form S-4 (File No. 333-43339)).
10.11 Ordinance No. 9-90 (Montgomery, Alabama) dated January 16,
1990 (Incorporated herein by reference from Exhibit 10.45.1 to
KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4
(File No. 333-43339)).
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10.12 Resolution No. 58-95 (Montgomery, Alabama) dated April 6, 1995
(Incorporated herein by reference from Exhibit 10.46 to
KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4
(File No. 333-43339)).
10.13 Resolution No. 97-22 (Panama City Beach, Florida) dated
December 3, 1997 (Incorporated herein by reference from
Exhibit 10.49 to KNOLOGY Holdings, Inc.'s Registration
Statement on Form S-4 (File No. 333-43339)).
10.14 Ordinance No. 5999 (Augusta, Georgia) dated January 20, 1998
(Incorporated herein by reference from Exhibit 10.53 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1997).
10.15 Ordinance No. 1723 (Panama City, Florida) dated March 10, 1998
(Incorporated herein by reference from Exhibit 10.54 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1997).
10.16 Franchise Agreement (Charleston County, South Carolina) dated
December 15, 1998 (Incorporated herein by reference from
Exhibit 10.31 to KNOLOGY Holdings, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998).
10.17 Ordinance No. 1998-47 (North Charleston, South Carolina) dated
May 28, 1998 (Incorporated herein by reference from Exhibit
10.32 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998).
10.18 Ordinance No. 1998-77 (Charleston, South Carolina) dated April
28, 1998 (Incorporated herein by reference from Exhibit 10.33
to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.19 Ordinance No. 98-5 (Columbia County, Georgia) dated August18,
1998 (Incorporated herein by reference from Exhibit 10.34 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.20 Network Access Agreement dated July 1, 1998 between SCANA
Communications, Inc., f/k/a MPX Systems, Inc. and KNOLOGY
Holdings, Inc. (Incorporated herein by reference from Exhibit
10.36 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998).
10.21 Internet Access Contract dated September 1, 1998 between
ITC DeltaCom, Inc. and KNOLOGY Holdings, Inc. (Incorporated
herein by reference from Exhibit 10.37 to KNOLOGY Holdings,
Inc.'s Annual Report on Form 10-K for the year ended December
31, 1998).
10.22 Collocation Agreement for Multiple Sites dated on or about
June 1998 between Interstate FiberNet, Inc. and KNOLOGY
Holdings, Inc. (Incorporated herein by reference from Exhibit
10.38 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998).
10.23 Lease Agreement dated October 12, 1998 between Southern
Company Services, Inc. and KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 10.39 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.24 Facilities Transfer Agreement dated February 11, 1998 between
South Carolina Electric and Gas Company and KNOLOGY Holdings,
Inc., d/b/a KNOLOGY of Charleston (Incorporated herein by
reference from Exhibit 10.40 to KNOLOGY Holdings, Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1998).
10.25 License Agreement dated March 3, 1998 between BellSouth
Telecommunications, Inc. and KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 10.41 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
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10.26 Pole Attachment Agreement dated February 18, 1998 between
KNOLOGY Holdings, Inc. and Georgia Power Company
(Incorporated herein by reference from Exhibit 10.44 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.27 Assignment Agreement dated March 4, 1998 between Gulf Power
Company and KNOLOGY of Panama City, Inc. (Incorporated
herein by reference from Exhibit 10.46 to KNOLOGY Holdings,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998).
10.28 Adoption Agreements dated March 1, 1999 between KNOLOGY
Holdings, Inc. and BellSouth Telecommunications, Inc.
(Incorporated herein by reference from Exhibit 10.47 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.29 Carrier Services Agreement dated September 30, 1998 between
Business Telecom, Inc. and KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 10.50 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.30 Reseller Services Agreement dated September 9, 1998 between
Business Telecom, Inc. and KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 10.51 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.31 Private Line Services Agreement dated September 10, 1998
between BTI Communications Corporation and KNOLOGY
Holdings, Inc. (Incorporated herein by reference from
Exhibit 10.52 to KNOLOGY Holdings, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998).
10.32 Credit Facility Agreement between First Union National
Bank, First Union Capital Markets Corp. and KNOLOGY
Holdings, Inc. dated December 22, 1998 (Incorporated herein
by reference from Exhibit 10.53 to KNOLOGY Holdings, Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1998).
10.33 Registration Rights Agreement, dated October 22, 1997,
between KNOLOGY Holdings, Inc., the Placement Agents and
SCANA Communications, Inc. (Incorporated herein by
reference from Exhibit 4.2 to KNOLOGY Holdings, Inc.'s
Registration Statement on Form S-4 (File No. 333-43339)).
10.34 Right of First Refusal and Option Agreement, dated November
19, 1999 by and between KNOLOGY of Columbus, Inc. and ITC
Service Company, Inc. (Incorporated herein by reference
from Exhibit 10.60 to KNOLOGY, Inc.'s Registration
Statement on Form S-1 (File No. 333-89179)).
10.35 Joint Ownership Agreement dated as of December 8, 1998,
among ITC Service Company, Powertel, Inc., ITC-DeltaCom
Communications, Inc. and KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 10.48 to
KNOLOGY, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1999).
10.36 On/Line Operating and License Agreement dated March 18,
1998 between KNOLOGY Holdings, Inc. and CableDate, Inc.
(Incorporated herein by reference from Exhibit 10.49 to
KNOLOGY, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1999).
10.37 Dedicated Capacity Agreement between ITC-DeltaCom and
KNOLOGY, Inc. dated August 22, 1997. (Incorporated
herein by reference from Exhibit 10.50 to KNOLOGY Holdings,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999).
10.38 Agreement for Telecommunications Services dated April 28,
1999 between ITC-DeltaCom Communications, Inc. and KNOLOGY
Holdings, Inc. (Incorporated herein by reference from
Exhibit 10.51 to KNOLOGY, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1999).
10.39 Amendment to Master Capacity Lease dated November 1, 1999
between Interstate Fibernet, Inc. and KNOLOGY Holdings,
Inc. (Incorporated herein by reference from Exhibit 10.52
to KNOLOGY, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1999).
10.40 Duct Sharing Agreement dated July 27, 1999, between KNOLOGY
Holdings, Inc. and Interstate Fiber Network. (Incorporated
herein by reference from Exhibit 10.53 to KNOLOGY, Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1999).
10.41 Assumption of Lease Agreement dated November 9, 1999
between KNOLOGY Holdings, Inc., ITC Holding Company, Inc.
and J. Smith Lanier II. (Incorporated herein by reference
from Exhibit 10.54 to KNOLOGY, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1999).
10.42 Assumption of Lease Agreement dated November 9, 1999 among
KNOLOGY Holdings, Inc., ITC Holding Company, Inc. and
Midtown Realty, Inc. (Incorporated herein by reference from
Exhibit 10.55 to KNOLOGY, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1999).
27.1 Financial Data Schedule for year ended 1999 (for SEC use
only).
(b) REPORTS ON FORM 8-K.
None
(c) EXHIBITS
We hereby file as part of this Form 10-K the Exhibits listed in the
Index to Exhibits.
(d) FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule is filed herewith:
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are
inapplicable or the information required to be set forth therein is
provided in our Consolidated Financial Statements or notes thereto.
8
<PAGE> 11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of the 27th day of
March, 2000.
KNOLOGY HOLDINGS, INC.
By: /s/ RODGER L. JOHNSON
-------------------------------------
Rodger L. Johnson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
9
<PAGE> 12
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Campbell B. Lanier, III Chairman of the Board and Director March 27, 2000
- --------------------------------------
Campbell B. Lanier, III
/s/ Rodger L. Johnson President, Chief Executive Officer March 27, 2000
- -------------------------------------- and Director (Principal executive officer)
Rodger L. Johnson
/s/ William H. Scott, III
- -------------------------------------- Director March 27, 2000
William H. Scott, III
</TABLE>
<PAGE> 13
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
KNOLOGY Holdings, Inc.
<TABLE>
<S> <C>
Report of Independent Public Accountants......................................................................... F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999..................................................... F-2
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998 and 1999....................... F-3
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Loss for the Years Ended
December 31, 1997, 1998 and 1999................................................................................. F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999....................... F-5
Notes to Consolidated Financial Statements....................................................................... F-7
</TABLE>
10
<PAGE> 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To KNOLOGY Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of KNOLOGY
Holdings, Inc. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1998
and 1999 and the related consolidated statements of operations, stockholders'
equity and comprehensive loss, and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of KNOLOGY
Holdings, Inc. and subsidiaries as of December 31, 1998 and 1999 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 25, 2000
F-1
<PAGE> 15
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 4,859,508 $ 6,249,756
Marketable securities ............................................ 66,231,397 6,069,461
Accounts receivable, net of allowance for doubtful accounts
of $393,766 and $579,694 at December 31, 1998 and 1999,
respectively ................................................... 5,108,491 5,514,724
Accounts receivable-- affiliates ................................. 6,785,691 18,334,038
Prepaid expenses ................................................. 430,811 750,246
------------- -------------
Total current assets ....................................... 83,415,898 36,918,225
------------- -------------
PROPERTY, PLANT, AND EQUIPMENT:
System and installation equipment ................................ 153,878,352 238,936,010
Test and office equipment ........................................ 5,784,363 10,768,414
Automobiles and trucks ........................................... 2,952,912 4,278,397
Production equipment ............................................. 857,028 869,264
Land ............................................................. 2,449,269 2,449,269
Buildings ........................................................ 10,239,696 12,069,972
Inventory ........................................................ 32,142,503 21,460,113
Leasehold improvements ........................................... 599,441 758,789
------------- -------------
208,903,564 291,590,228
Less accumulated depreciation and amortization ................... (13,406,947) (35,291,868)
------------- -------------
Property, plant, and equipment, net ........................ 195,496,617 256,298,360
------------- -------------
OTHER LONG-TERM ASSETS:
Intangible and other assets, net ................................. 43,872,260 31,389,069
Deferred issuance costs, net ..................................... 8,733,803 7,878,034
Investments ...................................................... 825,072 1,412,064
Other ............................................................ 207,000 136,696
------------- -------------
Total assets ............................................... $ 332,550,650 $ 334,032,448
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of notes payable ................................. $ 12,174 $ 12,174
Accounts payable ................................................. 17,140,226 13,395,068
Accrued liabilities .............................................. 11,441,978 5,587,863
Advances from parent ............................................. 0 14,975,753
Unearned revenue ................................................. 2,116,083 2,624,308
------------- -------------
Total current liabilities .................................. 30,710,461 36,595,166
NONCURRENT LIABILITIES:
Notes payable .................................................... 122,070 19,110,520
Accrued interest payable ......................................... 21,036,541 41,082,791
Bonds payable, net of discount ................................... 263,206,292 278,150,754
------------- -------------
Total liabilities .......................................... 315,075,364 374,939,231
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 5) ............................
------------- -------------
WARRANTS (NOTE 3) ................................................. 2,486,960 0
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $.01 par value per share; 100,000
shares authorized, 49,851 and 50,604 shares issued
and outstanding at December 31, 1998 and 1999, respectively ... 499 507
Common stock, $.01 par value per share; 16,000,000 shares
authorized, 394 and 619 shares issued and outstanding at
December 31, 1998 and 1999, respectively ...................... 4 6
Additional paid-in capital ....................................... 64,864,366 69,277,784
Accumulated deficit .............................................. (49,878,931) (110,154,381)
Unrealized gains (losses) ........................................ 2,388 (30,699)
------------- -------------
Total stockholders' equity (deficit)....................... 14,988,326 (40,906,783)
------------- -------------
Total liabilities and stockholders' equity (deficit)........ $ 332,550,650 $ 334,032,448
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-2
<PAGE> 16
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES:
Telephone .................................... $ 16,489 $ 3,289,660 $ 8,158,101
Video ........................................ 10,319,492 22,193,992 33,991,141
Internet services and other .................. 19,087 286,775 2,781,368
------------ ------------ ------------
Total operating revenues ............... 10,355,068 25,770,427 44,930,610
------------ ------------ ------------
OPERATING EXPENSES:
Cost of services ............................. 4,758,730 11,854,733 21,359,541
Selling, operations, and administrative ...... 7,392,540 25,393,015 37,229,344
Depreciation and amortization ................ 3,715,184 12,367,374 35,323,992
------------ ------------ ------------
Total operating expenses ............... 15,866,454 49,615,122 93,912,877
------------ ------------ ------------
OPERATING LOSS ................................. (5,511,386) (23,844,695) (48,982,267)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income .............................. 2,774,909 9,639,050 1,478,998
Interest expense ............................. (6,226,023) (28,676,035) (33,452,189)
Other (expense) income, net .................. (129,033) 202,094 (39,720)
------------ ------------ ------------
Total other expense .................... (3,580,147) (18,834,891) (32,012,911)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ..... (9,091,533) (42,679,586) (80,995,178)
INCOME TAX BENEFIT ............................. 0 6,785,691 20,719,728
------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE ...................... (9,091,533) (35,893,895) (60,275,450)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NOTE 2) ........................... 0 (582,541) 0
------------ ------------ ------------
NET LOSS ....................................... $ (9,091,533) $(36,476,436) $(60,275,450)
============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE ........... $ (2.10) $ (4.87) $ (8.06)
============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING ........................... 4,325,250 7,488,450 7,477,800
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-3
<PAGE> 17
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------------ ---------------------------- Paid-in
Shares Amount Shares Amount Capital
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 .......... 17,092 $ 171 0 $ 0 $ 18,509,218
Comprehensive Loss:
Net loss .......................... 0 0 0 0 0
Unrealized loss on marketable
securities ...................... 0 0 0 0 0
Comprehensive Loss ..........
Issuance of preferred stock, net of
related offering expenses of
$99,677 ......................... 30,408 304 0 0 42,824,019
Purchase of Beach Cable ............. 2,485 25 0 0 3,727,475
------------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1997 .......... 49,985 500 0 0 65,060,712
Comprehensive Loss:
Net loss .......................... 0 0 0 0 0
Unrealized gain on marketable
securities ...................... 0 0 0 0 0
Comprehensive Loss ..........
Issuance of common stock under option
plan .............................. 0 0 394 4 3,148
Beach Cable purchase price
adjustment ..................... (134) (1) 0 0 (199,494)
------------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1998 .......... 49,851 499 394 4 64,864,366
Comprehensive Loss:
Net loss .......................... 0 0 0 0 0
Unrealized loss on marketable
securities ...................... 0 0 0 0 0
Comprehensive Loss ..........
Exercise of SCANA warrants .......... 753 8 0 0 1,924,660
Reclass of bond warrants to parent
company ........................... 0 0 0 0 2,486,960
Stock options exercised ............. 0 0 225 2 1,798
------------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1999 .......... 50,604 $ 507 619 $ 6 69,277,784
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Unrealized Total
Accumulated Gains Stockholders'
Deficit (Losses) Equity (Deficit)
------------- ------------- ----------------
<S> <C> <C> <C>
BALANCE, December 31, 1996 .......... $ (4,310,962) $ 0 $ 14,198,427
Comprehensive Loss:
Net loss .......................... (9,091,533) 0 (9,091,533)
Unrealized loss on marketable
securities ...................... 0 (20,763) (20,763)
-------------
Comprehensive Loss .......... (9,112,296)
-------------
Issuance of preferred stock, net of
related offering expenses of
$99,677 ......................... 0 0 42,824,323
Purchase of Beach Cable ............. 0 0 3,727,500
------------- ------------- -------------
BALANCE, December 31, 1997 .......... (13,402,495) (20,763) 51,637,954
Comprehensive Loss:
Net loss .......................... (36,476,436) 0 (36,476,436)
Unrealized gain on marketable
securities ...................... 0 23,151 23,151
-------------
Comprehensive Loss .......... (36,453,285)
-------------
Issuance of common stock under option
plan............................. 0 0 3,152
Beach Cable purchase price
adjustment ....................... 0 0 (199,495)
------------- ------------- -------------
BALANCE, December 31, 1998 .......... (49,878,931) 2,388 14,988,326
Comprehensive Loss:
Net loss .......................... (60,275,450) 0 (60,275,450)
Unrealized loss on marketable
securities ...................... 0 (33,087) (33,087)
-------------
Comprehensive Loss .......... (60,308,537)
-------------
Exercise of SCANA warrants .......... 0 0 1,924,668
Reclass of bond warrants to parent
company ........................... 0 0 2,486,960
Stock options exercised ............. 0 0 1,800
------------- ------------- -------------
BALANCE, December 31, 1999 .......... $(110,154,381) $ (30,699) $ (40,906,783)
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-4
<PAGE> 18
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (9,091,533) $ (36,476,436) $ (60,275,450)
------------- ------------- -------------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization .............................. 3,715,184 12,367,374 35,323,992
Amortization of bond discount .............................. 2,386,856 13,295,861 14,944,462
Gain (loss) on disposition of assets ....................... 23,464 61,559 (7,086)
Cumulative effect of change in accounting
principle ................................................ 0 582,541 0
Interest related to exercise of warrants ................... 0 0 795,168
Changes in operating assets and liabilities:
Accounts receivable ...................................... (721,396) (10,286,323) (5,855,649)
Prepaid expenses ......................................... 244,199 (393,750) (319,435)
Accounts payable ......................................... 4,302,245 10,870,147 (3,745,158)
Accrued liabilities and interest ......................... 163,317 27,638,789 14,192,135
Unearned revenue ......................................... 243,007 1,209,035 508,225
Other .................................................... 1,345 0 37,217
------------- ------------- -------------
Total adjustments ...................................... 10,358,221 55,345,233 55,873,871
------------- ------------- -------------
Net cash provided by (used in) operating
activities ........................................... 1,266,688 18,868,797 (4,401,579)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................................... (39,625,408) (111,272,219) (82,967,869)
Purchase of investments and acquisitions, net of
cash acquired .............................................. 0 (67,732,864) 0
Organizational cost expenditures ............................. (470,923) (251,815) 0
Purchase of investments ...................................... (227,956,301) 0 0
Proceeds from sale of investments ............................ 0 161,649,526 60,161,936
Investment in ClearSource .................................... 0 (825,072) (586,992)
Proceeds from sale of property ............................... 69,152 32,075 75,357
Other ........................................................ 0 (246,182) 164,439
------------- ------------- -------------
Net cash used in investing
activities ........................................... (267,983,480) (18,646,551) (23,153,129)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and short-term borrowings ......... (29,903,385) (11,654) (11,550)
Expenditures related to issuance of debt and credit
facility .................................................... 0 (1,498,817) (51,616)
Proceeds from the issuance of common stock ................... 0 3,152 1,800
Proceeds from the issuance of debt and short-term
borrowings .................................................. 257,370,383 0 19,000,000
Proceeds from the issuance of preferred stock ................ 42,824,323 0 0
Proceeds from the exercise of warrants ....................... 2,486,960 0 1,129,500
Advances from parent ......................................... 0 0 14,975,753
Advances to affiliate ........................................ 0 0 (6,098,931)
------------- ------------- -------------
Net cash provided by (used in) financing activities .... 272,778,281 (1,507,319) 28,944,956
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .................................................. 6,061,489 (1,285,073) 1,390,248
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR ......................................................... 83,092 6,144,581 4,859,508
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ...................... $ 6,144,581 $ 4,859,508 $ 6,249,756
============= ============= =============
</TABLE>
F-5
<PAGE> 19
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
<S> <C> <C> <C>
Cash paid during the year for interest ............... $ 1,543,125 $ 10,911 $ 529,836
============ ============ ============
Cash received during the year for income taxes ....... $ 0 $ 0 $(10,010,346)
============ ============ ============
Detail of investments and acquisitions:
Property, plant, and equipment ..................... $ 4,756,005 $ 30,133,876 $ 0
Intangible assets .................................. 2,796,139 37,598,988 0
Liabilities Assumed ................................ (3,824,644) 0 0
Common and/or Preferred Stock issued ............... (3,727,500) 0 0
------------ ------------ ------------
Net cash paid for acquisitions ..................... $ 0 $ 67,732,864 $ 0
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-6
<PAGE> 20
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998, and 1999
1. ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION
ORGANIZATION
KNOLOGY Holdings, Inc. (the "Company") was incorporated in Delaware in
November 1995 under the name CyberNet Holding, Inc. In April 1997, the Company
formally changed its name to KNOLOGY Holdings, Inc.
In November 1999, the Company and its subsidiaries were reorganized, in
which ITC Holding, Inc. ("ITC Holding") contributed its 85% interest (Note 7) in
the Company to KNOLOGY, Inc. The minority stockholders exchanged the remaining
15% of the Company for shares in KNOLOGY, Inc. KNOLOGY, Inc., a wholly owned
subsidiary of ITC Holding Company, Inc., was incorporated under the laws of the
State of Delaware in September 1998. The purpose of incorporating KNOLOGY, Inc.
was to enable ITC Holding to complete a reorganization (the "Reorganization") of
certain of its wholly owned and majority owned subsidiaries. As a result of the
Reorganization, the Company is now a wholly owned subsidiary of KNOLOGY, Inc.
NATURE OF BUSINESS
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, high-speed Internet access and broadband carrier services to various
markets in the southeastern United States. 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 expanding 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.
BASIS OF PRESENTATION
The consolidated financial statements are prepared on the accrual basis of
accounting and include the accounts of the Company and all subsidiaries. All
significant intercompany balances have been eliminated. Certain prior year
amounts have been reclassified to conform with the current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates fair value.
MARKETABLE SECURITIES
The Company's marketable securities are categorized as available-for-sale
securities, as defined by Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Unrealized holding gains and losses are reflected as a net amount in a separate
component of comprehensive income until realized. For the purpose of computing
realized gains and losses, cost is identified on a specific identification
basis. Securities available for sale at December 31, 1998 and 1999 are primarily
comprised of commercial paper.
F-7
<PAGE> 21
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation and
amortization are calculated using the straight-line method over the estimated
useful lives of the assets, commencing when the asset is installed or placed in
service. Maintenance, repairs, and renewals are charged to expense as incurred.
The cost and accumulated depreciation of property and equipment disposed of are
removed from the related accounts, and any gain or loss is included in or
deducted from income. Depreciation and amortization are provided over the
estimated useful lives as follows:
Years
-----
Buildings..................... 25
System and installation
equipment................... 7-10
Production equipment.......... 7
Test and office equipment..... 3-7
Automobiles and trucks........ 5
Leasehold improvements........ 5
Inventories are valued at the lower of cost or market (determined on a
weighted average basis) and include customer premise equipment and certain plant
construction materials. These items are transferred to system and installation
equipment when installed.
Interest is capitalized in connection with the construction of the Company's
broadband networks. The capitalized interest is recorded as part of the asset to
which it relates and is amortized over the asset's estimated useful life.
Approximately $2,469,000 and $3,040,000 of interest cost was capitalized in 1998
and 1999, respectively.
INTANGIBLE ASSETS
Intangible assets include the excess of the purchase price of acquisitions
over the fair value of net assets acquired as well as various other acquired
intangible assets. Intangible assets and the related useful lives and
accumulated amortization at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Amortization
Period
1998 1999 (Years)
----------- ------------ -------------
<S> <C> <C> <C>
Goodwill................... $10,914,834 $ 10,914,834 10-40
Subscriber base............ 34,863,072 34,429,332 3
Noncompete agreement....... 1,500,000 1,500,000 3
Other...................... 102,979 405,202 10-15
----------- ------------
47,380,885 47,249,368
Less accumulated amortization 3,508,625 15,860,299
----------- ------------
Intangibles, net........... $43,872,260 $ 31,389,069
=========== ============
</TABLE>
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 nongovernmental entities expense costs of start-up activities,
including pre-operating, preopening, and organization activities, as the costs
are incurred. Adoption of this statement resulted in a cumulative effect of
change in accounting principle of $582,541.
DEFERRED ISSUANCE COSTS
Deferred issuance costs include costs associated with the issuance of debt
and the consummation of a credit facility (Note 3). Deferred issuance costs and
the related useful lives and accumulated amortization at December 31, 1998 and
1999 are as follows:
<TABLE>
<CAPTION>
Amortization
Period
1998 1999 (Years)
----------- ----------- -------------
<S> <C> <C> <C>
Deferred issuance costs ........... $ 9,382,124 $ 9,433,742 4-10
Accumulated amortization .......... (648,321) (1,555,708)
----------- -----------
Deferred issuance costs, net ...... $ 8,733,803 $ 7,878,034
=========== ===========
</TABLE>
LONG-LIVED ASSETS
In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and cost in excess of net assets acquired
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The effect of adopting SFAS
No. 121 was not material to the Company's consolidated financial statements.
F-8
<PAGE> 22
The Company reviews its long-lived assets such as property and equipment,
goodwill, and other intangible assets for impairment at each balance sheet date
or whenever events or changes in circumstances indicate that the carrying amount
of an asset should be assessed. Management evaluates the tangible and intangible
assets related to each acquisition individually to determine whether an
impairment has occurred. An impairment is recognized when the undiscounted
future cash flows estimated to be generated by the assets are not sufficient to
recover the unamortized balance of the asset. Estimates of future cash flows are
based on many factors, including current operating results, expected market
trends, and competitive influences. If an impairment has occurred, a loss equal
to the difference between the carrying value of the asset and its fair value is
recognized. The resulting reduced carrying amount of the asset is accounted for
as its new cost and depreciated over the asset's remaining useful life.
Management believes that the long-lived assets in the accompanying consolidated
balance sheets are appropriately valued.
INVESTMENTS
Investments and equity ownership in associated companies consisted of the
following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Nonmarketable investments, at cost:
ClearSource common and preferred stock,
333,444 and 544,554 shares in
1998 and 1999, respectively ............... $ 825,072 $1,412,064
---------- ----------
</TABLE>
At December 31, 1999, the Company, through its wholly-owned subsidiaries,
owned approximately 18% of ClearSource, Inc. ("ClearSource"). ClearSource was
formed during 1998 to build and operate advanced broadband networks offering a
bundle of communications services to residential and business customers. The
Company's investment in ClearSource is accounted for under the cost method of
accounting.
REVENUE RECOGNITION
The Company's revenues are recognized when services are provided,
regardless of the period in which they are billed. Fees billed in advance are
included in the accompanying consolidated balance sheets as unearned revenue and
are deferred until the month the service is provided.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Approximately
$158,000, $576,000, and $1,298,000 of advertising expense are recorded in the
Company's consolidated statements of operations for the years ended December 31,
1997, 1998, and 1999, respectively.
INSTALLATION FEES
The Company recognizes installation revenue when the customer is initially
billed for the connection of services as the installation direct costs exceed
installation revenue on a per customer basis.
SOURCES OF SUPPLIES
The Company purchases customer premise equipment and plant materials from
outside vendors. Although numerous suppliers market and sell customer premise
equipment and plant materials, the Company currently purchases each customer
premise component from a single vendor and has several suppliers for plant
materials. If the suppliers are unable to meet the Company's needs as it
continues to build out its network infrastructure, then delays and increased
costs in the expansion of the Company's network could result, which would
adversely affect operating results.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The potential for material credit loss
is mitigated by the large number of customers with relatively small receivable
balances.
F-9
<PAGE> 23
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes, as
set forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred taxes are determined based on the difference between the
financial and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Deferred
tax benefit represents the change in the deferred tax asset and liability
balances (Note 6).
Effective August 1998, the Company was included in the consolidated
federal income tax return of ITC Holding. The Company and its subsidiaries file
separate state income tax returns. Under a tax sharing arrangement, the Company
recorded an income tax benefit of $6,785,691 and $20,719,728 and an affiliate
receivable in the amount of $6,785,691 and $12,205,546 at December 31, 1998 and
1999, respectively, for the utilization of net operating losses included in the
consolidated tax return of ITC Holding. For the period from January 1, 1998 to
July 31, 1998, the Company filed a separate federal income tax return.
COMPREHENSIVE LOSS
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
loss and its components in a full set of general purpose financial statements.
The Company has chosen to disclose comprehensive loss, which consists of net
loss and unrealized gains (losses) on marketable securities, in the consolidated
statements of stockholders' equity (deficit) and comprehensive loss. Prior years
have been restated to conform to the SFAS No. 130 requirements.
NET LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." That
statement requires the disclosure of basic and diluted net loss per share. Basic
net loss per share is computed by dividing net 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 did not have any potentially dilutive securities during
the period presented.
3. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1999 consists of the following:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Senior Discount Notes, with a face value of
$444,100,000, bearing interest at 11.875%
beginning October 15, 2002, payable semiannually
beginning April 15, 2003 with principal and any unpaid
interest due October 15, 2007 ............................ $263,206,292 $278,150,754
Senior secured credit facility, at a rate of
LIBOR plus 2.5%, interest payable quarterly with
principal and any unpaid interest due November 15, 2002... 0 19,000,000
Capitalized lease obligation, at a rate of 10%,
payable in quarterly installments of $6,304 through
December 2006, secured ................................... 134,244 122,694
------------ ------------
263,340,536 297,273,448
Less current maturities .................................... 12,174 12,174
------------ ------------
$263,328,362 $297,261,274
============ ============
</TABLE>
Following are maturities of long-term debt for each of the next five years
as of December 31, 1999:
2000........... $ 12,174
2001........... 16,098
2002........... 19,016,374
2003........... 18,074
2004........... 19,950
Thereafter..... 444,140,024
-------------
Total........ $ 463,222,694
=============
The fair value of the Senior Discount Notes at December 31, 1999 was
estimated to be approximately $297,547,000, based on the closing bond price at
year-end.
On December 22, 1998, the Company entered into a $50 million four-year
senior secured credit facility with First Union National Bank and First Union
Capital Markets Corp., which may be used for working capital and other purposes,
including capital
F-10
<PAGE> 24
expenditures and permitted acquisitions. At the Company's option, interest will
accrue based on either the Alternate Base Rate plus applicable margin or the
LIBOR rate plus applicable margin as defined. Obligations under the credit
facility will be secured by substantially all tangible and intangible assets of
the Company and its current and future subsidiaries. The credit facility
includes a number of covenants, including, among others, covenants limiting the
ability of the Company and its subsidiaries and their present and future
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 certain mergers and acquisitions. The
credit facility also includes covenants requiring compliance with certain
operating and financial ratios on a consolidated basis. The credit facility
allows the Company to borrow up to five times certain individual subsidiary's
"consolidated adjusted cash flow" as defined in the credit facility. In
connection with the initiation of the revolving credit facility, the Company
incurred approximately $1,256,000 in related costs which are being amortized on
a straight-line basis over the five-year term.
In the fourth quarter of 1997, the Company issued units consisting of
senior discount notes due in 2007 and warrants (the "Bond Warrants") to
purchase Preferred Stock for gross proceeds of approximately $250 million.
The notes were offered at a substantial discount from face value, with no
interest payable for the first five years. Approximately $2.5 million of the
gross proceeds has been allocated to the warrants. Each warrant allows the
holder to purchase .003734 shares of the Company's preferred stock. The
Company incurred approximately $7.9 million in costs to issue the senior
discount notes. These costs are being amortized at an effective rate over the
life of the notes. The indenture relating to the notes contains certain
covenants that, among other things, limit the ability of the Company to incur
indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, make investments, engage in transactions with stockholders and
affiliates, create liens, sell assets, and engage in mergers and
consolidations. The proceeds from the offering of the units have been, and
will be, used to repay certain indebtedness of the Company, to fund expansion
of the Company's business, and for additional working capital and general
corporate purposes.
In connection with the Reorganization (Note 1), the Company's warrant
holders elected to exchange the Bond Warrants of the Company for warrants in
KNOLOGY, Inc.'s preferred stock. The Company's Bond Warrants were
subsequently cancelled.
On June 2, 1997, the Company borrowed $3 million under a promissory note
from SCANA Communications, Inc. ("SCANA") at 12% interest with an original
maturity of June 30, 1997. In July 1997, and again in September 1997, the
Company and SCANA amended the promissory note agreement to increase the
borrowings to $10 million and to extend the maturity date until January 1, 1998.
On September 29, 1997, the Company borrowed an additional $1 million at 12%
interest under an oral agreement with SCANA with similar terms. In October 1999,
the Company issued to SCANA warrants to purchase 753 shares of the Company's
preferred stock in connection with these loans. SCANA exercised these warrants
in November 1999. The weighted average exercise price of the warrant was $1,500
per share of preferred stock. The Company received net proceeds of $1.1 million
and recorded the fair value of the warrants, as determined by the Black-Scholes
option pricing model, of $1.9 million to additional paid in capital. Related
interest expense of $0.8 million was recorded in the accompanying consolidated
statements of operations. SCANA elected to exchange its 753 shares of KNOLOGY
Holdings preferred stock for 451,800 shares of KNOLOGY, Inc. preferred stock in
connection with the Reorganization (Note 1).
4. OPERATING LEASES
The Company leases office space, utility poles, and other assets for varying
periods. Leases that expire are generally expected to be renewed or replaced by
other leases.
Future minimum rental payments required under the operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1999 are as follows:
2000................................ $ 429,618
2001................................ 222,264
2002................................ 149,725
2003................................ 134,044
2004................................ 134,044
Thereafter.......................... 457,747
----------
Total minimum lease payments.... $1,527,442
==========
Total rental expense for all operating leases was approximately $75,000,
$181,000, and $213,000 for the years ended December 31, 1997, 1998, and 1999,
respectively.
5. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into contracts with various entities to provide
programming. The Company pays a monthly fee as cost for the programming
services, generally based on the number of average subscribers to the
program, although some fees are adjusted based on the total number of
subscribers to the system and/or the system penetration percentage. Certain
contracts have minimum monthly fees. The Company estimates that it will pay
approximately $18 million in programming fees under these contracts during
2000.
LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to various
litigation; however, in management's opinion, there are no legal proceedings
pending against the Company which would have a material adverse effect on the
financial position, results of operations, or liquidity of the Company.
F-11
<PAGE> 25
6. INCOME TAXES
The benefit for income taxes from continuing operations consisted of the
following for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Current .................. $ 0 $ 6,785,691 $20,719,728
Deferred ................. 1,843,000 5,315,000 9,467,782
Increase in valuation
allowance ............. (1,843,000) (5,315,000) (9,467,782)
------------ ------------ ------------
Income tax benefit ....... $ 0 $ 6,785,691 $20,719,728
============ ============ ============
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities as of December 31, 1998 and
1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards ................. $ 8,923,583 $ 10,889,593
Deferred bond interest ........... 12,919,184 26,117,681
Other ............................ 1,395,245 394,171
Valuation allowance .............. (14,588,371) (24,056,153)
------------ ------------
Total deferred tax
assets ............. 8,649,641 13,345,292
Deferred tax liabilities:
Depreciation and amortization .... 8,649,641 13,345,292
------------ ------------
Net deferred income taxes ........... $ 0 $ 0
============ ============
</TABLE>
The Company has available, at December 31, 1999, unused net operating loss
carryforwards of approximately $85,140,510 expiring in various years from 2005
to 2019, unless utilized. Management has recorded a total valuation allowance of
$24,056,153 in 1999 on these operating loss carryforwards, the majority of which
contain limitations on utilization.
A reconciliation of the income tax provision computed at statutory tax rates
to the income tax provision for the years ended December 31, 1997, 1998, and
1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Income tax benefit at
statutory rate .................... 34% 34% 34%
State income taxes, net of federal
benefit ........................... 4 5 3
Other ............................... (4) 12 0
Increase in valuation allowance ..... (34) (35) (12)
-------- -------- --------
Income Tax Benefit............... 0% 16% 25%
======== ======== ========
</TABLE>
7. EQUITY INTERESTS
CAPITAL TRANSACTIONS
The Company has authorized 16,000,000 shares of $.01 par value common stock
and 100,000 shares of $.01 par value convertible preferred stock at December 31,
1999. In February 1998, the Company completed a 150-for-1 stock split of the
Company's common stock, par value $.01 per share, which was effected in the form
of a stock dividend of new shares of common stock. In connection with the stock
split, the Company increased the number of shares of authorized common stock
from 200,000 to 16,000,000 and changed the conversion ratio between the common
stock and the preferred stock from 1 to 1 to a ratio of 150 to 1.
In August 1999, the Company issued 225 shares of common stock, valued at $8
per share, to two employees under the Company's 1995 stock option plan. In May
1998, the Company issued 394 shares of common stock, valued at $8 per share, to
an employee under the Company's 1995 stock option plan. In February 1997, the
Company offered and accepted 8,960 shares of preferred stock for subscription at
$1,200 per share. Additionally, in October 1997, the Company offered and
accepted 21,448 shares of preferred stock for subscription at $1,500 per share.
In December 1997, in conjunction with the acquisition of KNOLOGY of Panama City,
Inc., the Company issued 2,485
F-12
<PAGE> 26
shares of preferred stock valued at $1,500 per share. During 1998, 134 shares of
preferred stock issued in connection with the acquisition was returned to the
Company as part of a purchase price adjustment. The amount of the consideration
paid in excess of the par value, net of expenses incurred in connection with
each issuance, is included in additional paid-in capital on the accompanying
balance sheets. Each share of convertible preferred stock is automatically
convertible into common stock on a 150-for-1 basis at the earlier of either the
effective date of a public offering of common stock by the Company or on
December 8, 2005. In the event of liquidation of the Company, whether voluntary
or involuntary, the holders of convertible preferred stock are entitled to
receive preferential distributions of $1,000, $1,200, or $1,500 per share
(depending on when the stock was issued) before any distributions to common
stockholders. The holders of the preferred stock are not entitled to any other
preferences, including dividends.
STOCK OPTION PLAN
In November 1999, Knology, Inc. assumed the Company's 1995 stock option
plan.
F-13
<PAGE> 27
8. RELATED-PARTY TRANSACTIONS
ITC Holding occasionally provides certain administrative services, such as
legal and tax planning services, for the Company. The costs of these services
are charged to the Company based primarily on the salaries and related expenses
for certain of the ITC Holding executives and an estimate of their time spent on
projects specific to the Company. For the years ended December 31, 1997, 1998,
and 1999, the Company recorded approximately $31,000, $102,000, and $29,000,
respectively, in selling, operations, and administrative expenses related to
these services. In the opinion of management, amounts charged to the Company are
consistent with costs that would be incurred from third party providers.
Certain of ITC Holding's affiliates provide the Company with various
services and/or receive services provided by the Company. These entities include
InterCall, Inc., which provides conference calling services. In addition, the
Company receives services from ITC DeltaCom, Inc., an affiliate of ITC Holding
which provides wholesale long-distance and related services and which leases
capacity on certain of its fiber routes. ITC Holding also holds equity
investments in the following entities which do business with the Company:
Powertel, Inc., which provides cellular services, and MindSpring Enterprises,
Inc., which is a national provider of Internet access. In management's opinion,
the Company's transactions with these affiliated entities are representative of
arm's-length transactions.
For the years ended December 31, 1997, 1998, and 1999, the Company received
services from these affiliated entities in the amounts of approximately $247,000
$1,681,000 and $1,984,000, respectively, which are reflected in cost of services
and selling, operations, and administrative expenses in the Company's
consolidated statements of operations.
The Company also provides switching, programming, and other services for
various affiliated companies on a contracted or time and materials basis. Total
amounts paid by the affiliated companies for these services approximated
$322,000 for the year ended December 31, 1999 and are reflected in operating
revenues in the Company's consolidated statements of operations.
During 1998 and 1999, the Company leased office space to ITC DeltaCom, Inc.
and Powertel, Inc. Approximately $234,000 and $152,000 of lease income related
to these transactions is recorded as other income in the Company's consolidated
statements of operations for the years ended December 31, 1998 and 1999,
respectively.
Relatives of the stockholders of ITC Holding are stockholders and employees
of the Company's insurance provider. The costs charged to the Company for
insurance services were approximately $134,000, $386,000, and $977,000 for the
years ended December 31, 1997, 1998, and 1999, respectively.
9. BUSINESS ACQUISITIONS
CABLE ALABAMA ACQUISITION
On October 30, 1998, the Company acquired substantially all of
the assets of Cable Alabama Corporation ("Cable Alabama") for approximately
$60,733,000 in cash and also purchased for $5,000,000 in cash certain real
property located in Huntsville, Alabama. Cable Alabama owned and operated a
cable television system serving the Huntsville, Alabama area. The Company plans
to upgrade the existing Cable Alabama plant to provide local and long-distance
telephone service and high-speed Internet access services. The acquisition has
been accounted for under the purchase method of accounting.
F-14
<PAGE> 28
TTE, INC. ACQUISITION
On June 1, 1998, the Company acquired TTE, Inc., a non-facilities based
reseller of local, long distance, and operator services to small and
medium-sized business customers throughout South Carolina, for a purchase price
of $1.3 million. The acquisition has been accounted for under the purchase
method of accounting.
UNAUDITED PRO FORMA RESULTS OF OPERATIONS
The assets of TTE, Inc. and Cable Alabama have been included in the
Company's consolidated financial statements effective June 1, 1998 and September
1, 1998, respectively. The following unaudited pro forma results of operations
for the year ended December 31, 1998 assume that the acquisitions occurred on
January 1, 1998. The unaudited pro forma information is presented for
informational purposes only and may not be indicative of the actual results of
operations had the acquisitions occurred on the assumed date, nor is the
information necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Operating revenues .......................... $ 35,987,109
Loss before extraordinary items ............. (45,959,350)
Net loss..................................... (46,541,891)
Net loss per share (a) ...................... (6.22)
</TABLE>
(a) Loss per share is computed using 7,488,450 as the number of shares
outstanding in 1998.
10. SEGMENT INFORMATION
Effective January 1998, the Company adopted SFAS No. 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. Management has identified the
reportable segments based on broadband services offered.
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.
The Company owns and operates advanced hybrid fiber-coaxial networks and
provides residential and business customers broadband communications services,
including video analog and digital cable television and local and long-distance
telephone. Internet services include high-speed Internet access via cable
modems, local transport services, such as local Internet transport, special
access, local private line, and local exchange transport services.
<TABLE>
<CAPTION>
INTERNET SERVICES
VIDEO TELEPHONE AND OTHER
----------- ----------- -----------------
<S> <C>
1997
Operating revenues ...... $10,319,494 $ 16,489 $ 19,087
Cost of services ........ 4,671,762 51,516 35,452
----------- ----------- -----------
Gross margin ............ $ 5,647,732 $ (35,027) $ (16,365)
=========== =========== ===========
1998
Operating revenues ...... $22,193,992 $ 3,289,660 $ 286,775
Cost of services ........ 9,150,974 2,603,044 100,715
----------- ----------- -----------
Gross margin ............ $13,043,018 $ 686,616 $ 186,060
=========== =========== ===========
1999
Operating revenues ...... $33,991,141 $ 8,158,101 $ 2,781,368
Cost of services ........ 14,527,771 6,534,910 296,860
----------- ----------- -----------
Gross margin ............ $19,463,370 $ 1,623,191 $ 2,484,508
=========== =========== ===========
</TABLE>
F-15
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing
standards, the financial statements of KNOLOGY Holdings, Inc. included in this
Annual Report on Form 10-K and have issued our report thereon dated February 25,
2000. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule II--Valuation
and Qualifying Accounts ("Schedule II") is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic financial statements.
The Schedule II has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth in relation to
the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 25, 2000
S-1
<PAGE> 30
SCHEDULE II
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Allowance for doubtful accounts,
balance at beginning of year $ 23,342 $ 108,528 $ 393,766
Addition charged to cost and expense 367,527 1,303,372 1,144,505
Deductions (282,341) (1,018,134) (958,577)
----------- ----------- -----------
Allowance for doubtful accounts,
balance at end of year $ 108,528 $ 393,766 $ 579,694
=========== =========== ===========
</TABLE>
S-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF KNOLOGY HOLDINGS, INC. AS OF DECEMBER 31, 1999 AND THE RELATED COMBINED
STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999. THIS
INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,249,756
<SECURITIES> 6,069,461
<RECEIVABLES> 24,428,456
<ALLOWANCES> 579,694
<INVENTORY> 21,460,113
<CURRENT-ASSETS> 36,918,225
<PP&E> 270,130,115
<DEPRECIATION> 35,291,868
<TOTAL-ASSETS> 334,032,448
<CURRENT-LIABILITIES> 36,595,166
<BONDS> 319,233,545
0
507
<COMMON> 6
<OTHER-SE> (40,907,296)
<TOTAL-LIABILITY-AND-EQUITY> 334,032,448
<SALES> 44,839,089
<TOTAL-REVENUES> 44,930,610
<CGS> 21,359,541
<TOTAL-COSTS> 93,912,877
<OTHER-EXPENSES> 32,012,911
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,452,189
<INCOME-PRETAX> (80,995,178)
<INCOME-TAX> (20,719,728)
<INCOME-CONTINUING> (60,275,450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60,275,450)
<EPS-BASIC> (8.06)
<EPS-DILUTED> (8.06)
</TABLE>
