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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
COMMISSION FILE NUMBER: 333-50475
KMC TELECOM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3545325
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1545 ROUTE 206, SUITE 300
BEDMINSTER, NEW JERSEY 07921
(Address, including zip code, of principal executive offices)
(908) 470-2100
(Registrant's telephone number, including area code)
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. [X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING
----- -----------
Common Stock, par value $0.01 861,145 shares,
per share. as of November 8, 2000
================================================================================
<PAGE>
KMC TELECOM HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
------- --------------------- --------
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets, December
31, 1999 and September 30, 2000....................................2
Unaudited Condensed Consolidated Statements of Operations,
Three Months Ended September 30, 1999 and 2000 and Nine
Months Ended September 30, 1999 and 2000...........................3
Unaudited Condensed Consolidated Statements of Cash Flows,
Nine Months Ended September 30, 1999 and 2000......................4
Notes to Unaudited Condensed Consolidated Financial
Statements.........................................................5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..........21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...................................................22
ITEM 2. Changes in Securities and Use of Proceeds...........................22
ITEM 3. Defaults Upon Senior Securities.....................................22
ITEM 4. Submission of Matters to a Vote of Security Holders.................22
ITEM 5. Other Information...................................................24
ITEM 6. Exhibits and Reports on Form 8-K....................................24
SIGNATURES....................................................................26
<PAGE>
PART I - FINANCIAL INFORMATION
KMC TELECOM HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $85,966 $128,520
Restricted investments.................................................. 37,125 37,125
Accounts receivable, net of allowance
for doubtful accounts of $5,551 and
$7,665 in 1999 and 2000, respectively................................ 27,373 48,733
Prepaid expenses and other current assets............................... 1,375 176,865
-------- -----------
Total current assets........................................................ 151,839 391,243
Long term restricted investments............................................ 51,446 81,490
Networks, property and equipment, net....................................... 639,324 842,861
Intangible assets, net...................................................... 3,602 4,369
Deferred financing costs, net............................................... 38,816 42,248
Other assets................................................................ 1,013 1,569
-------- -----------
$886,040 $ 1,363,780
======== ===========
LIABILITIES, REDEEMABLE AND NONREDEEMABLE
EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable........................................................ $167,490 $233,587
Accrued expenses........................................................ 37,047 92,003
Deferred revenue........................................................ 4,309 19,101
-------- -----------
Total current liabilities................................................... 208,846 344,691
Notes payable............................................................... 235,000 616,121
Senior discount notes payable............................................... 301,137 329,933
Senior notes payable........................................................ 275,000 275,000
--------- -----------
Total liabilities...........................................................1,019,983 1,565,745
Commitments and contingencies
Redeemable equity:
Senior redeemable, exchangeable, PIK preferred stock, par value $.01 per
share; authorized:
630 shares in 1999 and 2000; shares issued and outstanding:
Series E, 65 shares in 1999 and 72 shares in 2000
($72,312 liquidation preference).................................... 50,770 59,031
Series F, 44 shares in 1999 and 46 shares in 2000
($46,178 liquidation preference)...................................... 41,370 45,308
Redeemable cumulative convertible preferred stock, par value $.01 per
share; 499 shares authorized; shares issued and outstanding:
Series A, 124 shares in 1999 and 2000 ($12,380 liquidation preference) 71,349 103,032
Series C, 175 shares in 1999 and 2000 ($17,500 liquidation preference) 40,301 68,263
Redeemable cumulative convertible preferred stock, par value $.01 per share;
2,500 shares authorized; shares issued and outstanding:
Series G-1, -0- shares in 1999, 59 shares in 2000 ($19,900
liquidation preference)............................................. - 19,395
Series G-2, -0- shares in 1999, 481 shares in 2000
($162,600 liquidation preference) - 158,471
Redeemable common stock, 224 shares issued and outstanding.............. 33,755 43,657
Redeemable common stock warrants........................................ 12,925 16,039
-------- -----------
Total redeemable equity..................................................... 250,470 513,196
-------- -----------
Nonredeemable equity (deficiency):
Common stock, par value $.01 per share; 3,000 shares
authorized,629 shares and 637 shares issued and outstanding
in 1999 and 2000, respectively........................................ 6 6
Unearned compensation................................................... (9,163) (23,113)
Accumulated deficit..................................................... (375,256) (692,054)
-------- -----------
Total nonredeemable equity (deficiency)................................. (384,413) (715,161)
-------- -----------
$886,040 $ 1,363,780
======== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
KMC TELECOM HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------------
1999 2000 1999 2000
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue................................................ $ 15,572 $ 60,949 $ 42,284 $ 129,025
Operating expenses:
Network operating costs:
Non-cash stock compensation.................. (557) 482 1,059 2,335
Other network operating costs................ 23,631 46,944 56,191 112,234
Selling, general and administrative:
Non-cash stock compensation.................. (6,404) 6,402 12,181 27,221
Other selling, general and administrative costs 22,479 41,058 60,698 120,108
Depreciation and amortization..................... 7,593 20,431 19,230 51,549
--------------------------------------------------------
Total operating expenses..................... 46,742 115,317 149,359 313,447
--------------------------------------------------------
Loss from operations................................... (31,170) (54,368) (107,075) (184,422)
Other expense.......................................... - - (4,297) -
Interest income........................................ 3,980 3,782 7,035 8,290
Interest expense....................................... (21,834) (36,073) (47,848) (94,473)
--------------------------------------------------------
Net loss before cumulative effect of change in
accounting principle................................ (49,024) (86,659) (152,185) (270,605)
Cumulative effect of change in accounting
principle........................................... - - - (1,705)
--------------------------------------------------------
Net loss............................................... (49,024) (86,659) (152,185) (272,310)
Dividends and accretion on redeemable preferred stock.. 1,330 (13,229) (42,085) (72,210)
--------------------------------------------------------
Net loss applicable to common shareholders............. $ (47,694) $(99,888) $ (194,270) $ (344,520)
========================================================
Net loss per common share before cumulative effect of
change in accounting principle...................... $ (55.93) $(116.06) $ (228.20) $ (400.52)
Cumulative effect of change in accounting principle.... - - - (1.99)
--------------------------------------------------------
Net loss per common share.............................. $ (55.93) $(116.06) $ (228.20) $ (402.51)
========================================================
Weighted average number of common shares outstanding... 852,676 860,639 851,321 855,932
========================================================
Proforma amounts assuming the change in accounting
principle was applied retroactively:
Net loss applicable to common shareholders............. $(48,226) $(99,888) $ (195,421) $ (342,815)
========================================================
Net loss per common share.............................. $ (56.56) $(116.06) $ (229.55) $ (400.52)
========================================================
</TABLE>
See accompanying notes.
3
<PAGE>
KMC TELECOM HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 2000
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ..................................................................... $ (152,185) $ (272,310)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................... 19,230 51,549
Non-cash interest expense............................................... 40,174 41,368
Non-cash stock option compensation expense.............................. 13,240 29,556
Changes in assets and liabilities:
Accounts receivable.................................................. (16,271) (21,360)
Prepaid expenses and other current assets............................ 239 (7,154)
Other assets......................................................... 1,065 (30,680)
Accounts payable..................................................... 14,707 (18,113)
Accrued expenses..................................................... 10,837 34,228
Deferred revenue..................................................... 1,748 14,792
-------------------------------
Net cash used in operating activities......................................... (67,216) (178,124)
-------------------------------
INVESTING ACTIVITIES
Construction of networks and purchases of equipment........................... (216,508) (328,678)
Acquisitions of franchises, authorizations and related assets................. (1,221) (1,239)
Purchases of investments, net................................................. (47,080) -
-------------------------------
Net cash used in investing activities......................................... (264,809) (329,917)
-------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock and related warrants,
net of issuance costs...................................................... 91,235 177,500
Proceeds from exercise of stock options....................................... 333 562
Proceeds from issuance of senior notes, net of issuance costs and
purchase of portfolio of restricted investments............................ 159,942 -
Repurchase and retirement of Series F preferred stock......................... - (3,329)
Proceeds from credit facilities, net of issuance costs........................ 80,541 375,862
-------------------------------
Net cash provided by financing activities..................................... 332,051 550,595
-------------------------------
Net increase (decrease) in cash and cash equivalents.......................... 26 42,554
Cash and cash equivalents, beginning of period................................ 21,181 85,966
-------------------------------
Cash and cash equivalents, end of period...................................... $ 21,207 $ 128,520
===============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of amounts capitalized.......... $ 5,751 $ 43,010
==============================
</TABLE>
See accompanying notes.
4
<PAGE>
KMC TELECOM HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION AND ORGANIZATION
KMC Telecom Holdings, Inc. and its subsidiaries are collectively
referred to herein as the Company. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The Company is a fiber-based integrated communications provider
providing data and voice services to its customers, principally business,
government and institutional end-users, as well as Internet service providers,
long distance companies and wireless service providers, primarily in the South,
Southeast, Midwest and Mid-Atlantic United States.
The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting. Accordingly, they do not include certain information and
note disclosures required by generally accepted accounting principles for annual
financial reporting and should be read in conjunction with the financial
statements and notes thereto of KMC Telecom Holdings, Inc. as of and for the
year ended December 31, 1999.
The unaudited interim financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which management considers
necessary for a fair presentation of the results of operations for these
periods. The results of operations for the interim periods are not necessarily
indicative of the results for the full year.
The balance sheet of KMC Telecom Holdings, Inc. at December 31, 1999
was derived from the audited consolidated balance sheet at that date.
Certain reclassifications have been made to the 1999 unaudited
condensed consolidated financial statements to conform with the 2000
presentation.
2. ACCOUNTING CHANGE
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB 101 provides additional guidance in applying generally accepted
accounting principles to revenue recognition in financial statements. Through
December 31, 1999, the Company recognized installation revenue upon completion
of the installation. Effective January 1, 2000, in accordance with the
provisions of SAB 101, the Company is recognizing installation revenue over the
average contract period. The cumulative effect of this change in accounting
principle resulted in a charge of approximately $1.7 million which was recorded
in the quarter ended March 31, 2000. For the nine months ended September 30,
2000, the net effect of adopting this change in accounting principle was a
deferral of the recognition of $3.5 million of revenue, which increased net loss
for the period by $4.10 per share. Revenue for the nine months ended September
30, 2000 includes $1.6 million of revenues that, prior to the accounting change,
had been recognized through December 31, 1999.
5
<PAGE>
3. NETWORKS, PROPERTY AND EQUIPMENT
Networks and equipment are comprised of the following:
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(IN THOUSANDS)
Fiber optic systems....................... $ 164,985 $ 242,454
Telecommunications equipment.............. 421,718 531,981
Furniture and fixtures.................... 21,397 26,832
Leasehold improvements.................... 1,811 2,344
Construction-in-progress.................. 66,380 127,149
-----------------------------------
676,291 930,760
Less accumulated depreciation............. (36,967) (87,899)
-----------------------------------
$ 639,324 $ 842,861
===================================
Costs capitalized during the development of the Company's networks
include amounts incurred related to network engineering, design and construction
and capitalized interest. Capitalized interest related to the construction of
the networks for the nine months ended September 30, 1999 and 2000 amounted to
$3.5 million and $10.1 million, respectively.
4. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
DECEMBER 31, SEPTEMBER 30,
1999 2000
---------------------------------
(IN THOUSANDS)
Franchise costs............................... $ 2,015 $ 2,807
Authorizations and rights-of-way.............. 2,052 2,565
Building access agreements and other costs.... 1,038 972
---------------------------------
5,105 6,344
Less accumulated amortization................. (1,503) (1,975)
---------------------------------
$ 3,602 $ 4,369
=================================
5. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(IN THOUSANDS)
Accrued compensation............................ $ 11,423 $ 21,101
Accrued costs related to financing activities... 7,316 11,498
Accrued interest payable........................ 8,544 27,396
Accrued telecommunications costs................ 3,794 8,094
Other accrued expenses.......................... 5,970 23,914
--------------------------------
$ 37,047 $ 92,003
================================
6
<PAGE>
6. SENIOR SECURED CREDIT FACILITIES
AMENDED SENIOR SECURED CREDIT FACILITY
During the quarter ended March 31, 2000, our subsidiaries, KMC Telecom,
Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc. and KMC Telecom III,
Inc. (collectively, the "Borrowers"), amended, restated and combined the Senior
Secured Credit Facility and the Lucent Facility, into a single facility by
entering into a $700 million Loan and Security Agreement (the "Amended Senior
Secured Credit Facility") with a group of lenders led by Newcourt Commercial
Finance Corporation, GE Capital Corporation, Canadian Imperial Bank of Commerce,
First Union National Bank and Lucent Technologies Inc. (collectively, the
"Lenders").
The Amended Senior Secured Credit Facility includes a $175 million
reducing revolver facility (the "Revolver"), a $75 million term loan (the "Term
Loan") and a $450 million term loan facility (the "Lucent Term Loan"). At
September 30, 2000, the outstanding loan balances on the Revolver, the Term Loan
and the Lucent Term Loan, were approximately $165 million, $75 million, and $341
million, respectively.
The Revolver will mature on April 1, 2007. Proceeds from the Revolver
can be used to finance the purchase of certain equipment, transaction costs and,
upon attainment of certain financial conditions, for working capital and other
general corporate purposes. The aggregate commitment of the Lenders under the
Revolver will be reduced on each quarterly payment date beginning April 1, 2003.
The initial quarterly commitment reduction is 5.0%, reducing to 3.75% on July 1,
2003, then increasing to 6.25% on July 1, 2004, and further increasing to 7.50%
on July 1, 2006. Commencing with the fiscal year ending December 31, 2001, the
aggregate Revolver commitment will be further reduced by an amount equal to 50%
of excess operating cash flows (as defined in the Amended Senior Secured Credit
Facility) for the prior fiscal year until the Borrowers achieve certain
financial conditions. The Borrowers must pay an annual commitment fee on the
unused portion of the Revolver ranging from .75% to 1.25%.
The Term Loan is payable in twenty consecutive quarterly installments
of $188,000 beginning on April 1, 2002 and two final installments of $35.6
million each on April 1, 2007 and July 1, 2007. Proceeds from the Term Loan can
be used to finance the purchase of certain equipment, transaction costs, working
capital and other general corporate purposes.
The Lucent Term Loan provides for an aggregate commitment of up to $450
million. Proceeds from the Lucent Term Loan can be used to purchase Lucent
products or to reimburse the Borrowers for Lucent products previously purchased
with cash or other sources of liquidity. The Lucent Term Loan will mature on
July 1, 2007 and requires quarterly principal payments beginning on July 1, 2003
of 5%. The principal payment decreases to 3.75% per quarter beginning on October
1, 2003, increases to 6.25% on October 1, 2004 and further increases to 7.50% on
October 1, 2006. An annual commitment fee of 1.50% is payable for any unused
portion of the Lucent Term Loan.
Borrowings under the Amended Senior Secured Credit Facility will bear
interest payable, at the Borrowers' option, at either (a) the "Applicable Base
Rate Margin" (which generally ranges from 2.00% to 3.25%) plus the greater of
(i) the administrative agent's prime rate or (ii) the overnight federal funds
rate plus .5% or (b) the "Applicable LIBOR Margin" (which generally ranges from
3.00% to 4.25%) plus LIBOR, as defined. "Applicable Base Rate Margin" interest
is payable quarterly while "Applicable LIBOR Margin" interest is payable at the
end of each applicable interest period or at least every three months. Under the
Amended Senior Secured Credit Facility the Borrowers were being charged a
weighted average interest rate of 11.87% at September 30, 2000. If a payment
default were to occur, the interest rate will be increased by four percentage
points. If any other event of default were to occur, the interest rate will be
increased by two percentage points.
7
<PAGE>
KMC Holdings has unconditionally guaranteed the repayment of the
Amended Senior Secured Credit Facility when such repayment is due, whether at
maturity, upon acceleration, or otherwise. KMC Holdings has pledged the shares
of each of the Borrowers to the Lenders to collateralize its obligations under
the guaranty. In addition, the Borrowers have each pledged all of their assets
to the Lenders.
The amended senior secured credit facility contains a number of
affirmative and negative covenants, one of which requires us to make additional
cash capital contributions to our subsidiaries which are the borrowers
thereunder of at least $35 million prior to August 31, 2001. The original
covenant required $185 million in cash capital contributions by April 1, 2001.
However, because we contributed $150 million of the proceeds of our Series G
private equity financing toward fulfilling this requirement, the lenders amended
this covenant by extending the due date on the remaining $35 million of cash
capital contributions to August 31, 2001. Because the entire $185 million cash
capital contribution was not made by July 31, 2000, however, the applicable
interest rate associated with the facility has increased by 100 basis points
until the remaining $35 million amount is contributed. Additional affirmative
and negative covenants include, among others, covenants restricting the ability
of the Borrowers to consolidate or merge with any person, sell or lease assets
not in the ordinary course of business, sell or enter into long term leases of
dark fiber, redeem stock, pay dividends or make any other payments (including
payments of principal or interest on loans) to KMC Holdings, create
subsidiaries, transfer any permits or licenses, or incur additional indebtedness
or act as guarantor for the debt of any person, subject to certain conditions.
The Borrowers are required to comply with certain financial tests and
maintain certain financial ratios, including, among others, a ratio of total
debt to contributed capital, certain minimum revenues, maximum EBITDA losses and
minimum EBITDA, maximum capital expenditures and minimum access lines, a maximum
total leverage ratio, a minimum debt service coverage ratio, a minimum fixed
charge coverage ratio and a maximum consolidated leverage ratio. The covenants
become more restrictive upon the earlier of (i) March 31, 2002 and (ii) after
the Borrowers achieve positive EBITDA on a combined basis for two consecutive
fiscal quarters and a total leverage ratio (as defined) equal to or less than 9
to 1.
Failure to satisfy any of the financial covenants will constitute an
event of default under the Amended Senior Secured Credit Facility permitting the
Lenders, after notice, to terminate the commitment and/or accelerate payment of
outstanding indebtedness thereunder. The Amended Senior Secured Credit Facility
also includes other customary events of default, including, without limitation,
a cross-default to other material indebtedness, material undischarged judgments,
bankruptcy, loss of a material franchise or material license, breach of
representations and warranties, a material adverse change, and the occurrence of
a change of control.
TELECOM IV SENIOR SECURED TERM LOAN
During the quarter ended June 30, 2000, our subsidiary, KMC Telecom,
IV, Inc., closed a new senior secured term loan (the "Telecom IV Loan") from
Lucent Technologies Inc. The Telecom IV Loan initially provides up to $35
million of principal borrowings, plus accrued interest, until certain conditions
are met and then provides for additional principal borrowings up to a ceiling of
$50 million, plus accrued interest. Proceeds from the Telecom IV Loan can be
used to purchase or install Lucent products and will be used to purchase
equipment for future expansion. The Telecom IV Loan will mature on October 1,
2007 and requires quarterly principal payments beginning on January 1, 2003 of
2.5% of the outstanding principal balance, with the percentage increasing to 5%
on January 1, 2005, 6.25% on October 1, 2005, and 7.5% on October 1, 2006, with
the balance due on October 1, 2007. As of September 30, 2000, the outstanding
principal loan balance on this term loan was approximately $35 million.
8
<PAGE>
Borrowings under the Telecom IV Loan will bear interest payable, at
the Company's option, at either (a) the Applicable Base Rate Margin (which
generally ranges from 2.25% to 3.50% based on the Company's total debt to total
contributed capital ratio) plus the greater of (i) the administrative agent's
prime rate or (ii) the overnight federal funds rate plus .5% or (b) the LIBOR
Rate plus the Applicable Margin (which generally ranges from 3.25% to 4.50%
based on the Company's debt to contributed capital ratio). "Applicable Base Rate
Margin" interest is payable quarterly while "Applicable LIBOR Margin" interest
is payable at the end of each applicable interest period, or at least every
three months. Under the Telecom IV Loan, the Company was being charged a
weighted average interest rate of 11.31% at September 30, 2000. There are no
financial covenants on this loan. However, there are affirmative and negative
covenants that, generally, are no more restrictive to the Company than the
Company's other debt agreements. If any events of default were to occur, the
interest rate would increase by two percentage points.
7. SERVICE REVENUES
The Company provides on-network services and resells switched services
previously purchased from the incumbent local exchange carrier. On-network
services include services provided through direct connections to our own
networks, services provided by means of unbundled network elements leased from
the incumbent local exchange carrier and dedicated circuits. The Company's
service revenues consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
-------------------------- ----------------------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
On-network.............................. $ 10,778 $ 58,408 $ 25,498 $ 120,298
Resale.................................. 4,794 2,541 16,786 8,727
------------- ------------- -------------- -------------
Total................................... $ 15,572 $ 60,949 $ 42,284 $ 129,025
============= ============= ============== =============
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
As of September 30, 2000, the Company has outstanding commitments
aggregating approximately $96.5 million related to purchases of
telecommunications equipment and fiber optic cable and its obligations under its
agreements with certain suppliers.
REDEMPTION RIGHTS
Pursuant to a stockholders agreement, certain of the Company's
stockholders and warrant holders have "put rights" entitling them to have the
Company repurchase their preferred and common shares and redeemable common stock
warrants for the fair value of such securities if no Liquidity Event (defined as
(i) an initial public offering with gross proceeds of at least $40 million, (ii)
the sale of substantially all of the stock or assets of the Company or (iii) the
merger or consolidation of the Company with one or more other corporations) has
taken place by the later of (x) October 22, 2003 or (y) 90 days after the final
maturity date of the Senior Discount Notes. The restrictive covenants of the
Senior Discount Notes limit the Company's ability to repurchase such securities.
All of the securities subject to such "put rights" are presented as redeemable
equity in the accompanying balance sheets.
The redeemable preferred stock, redeemable common stock and redeemable
common stock warrants, which are subject to the stockholders agreement, are
being accreted up to their fair market values from their respective issuance
dates to their earliest potential redemption date (October 22, 2003). At
9
<PAGE>
September 30, 2000, the aggregate redemption value of the redeemable equity was
approximately $580 million, reflecting per share redemption amounts of $1,454
for the Series A Preferred Stock, $711 for the Series C Preferred Stock, $338
for the Series G Preferred Stock and $300 for the redeemable common stock and
redeemable common stock warrants.
9. NET LOSS PER COMMON SHARE
The following table sets forth the computation of net loss per common
share-basic (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------
1999 2000 1999 2000
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net loss before cumulative effect of change in accounting $ (49,024) $ (86,659) $ (152,185) $ (270,605)
Cumulative effect of change in accounting principle....... - - - (1,705)
------------- ------------ ------------- -----------
Net loss.................................................. (49,024) (86,659) (152,185) (272,310)
Dividends and accretion on redeemable preferred stock..... 1,330 (13,229) (42,085) (72,210)
------------- ------------ ------------- -----------
Numerator for net loss applicable to common shareholders.. $ (47,694) $ (99,888) $ (194,270) $ (344,520)
============= ============ ============= ===========
Denominator:
Denominator for net loss per common share-weighted average
number of common shares outstanding....................... 852,676 860,639 851,321 855,932
Net loss per common share before cumulative effect of change
in accounting principle - basic........................... $ (55.93) $ (116.06) $ (228.20) $ (400.52)
Cumulative effect of change in accounting principle.......... - - - (1.99)
------------- ------------ ------------- -----------
Net loss per common share - basic............................ $ (55.93) $ (116.06) $ (228.20) $ (402.51)
============= ============ ============= ===========
</TABLE>
Options and warrants to purchase an aggregate of 483,273 and 666,730
shares of common stock were outstanding as of September 30, 1999 and 2000,
respectively, but a computation of diluted net loss per common share has not
been presented, as the effect would be anti-dilutive.
10. SIGNIFICANT CONTRACTS AND CUSTOMERS
In March 2000, the Company entered into an agreement with Qwest
Communications Corporation ("Qwest"), pursuant to which (i) the Company took
delivery of approximately $134 million of Internet infrastructure equipment from
Qwest and (ii) the Company agreed to install and maintain this equipment, in
over 90 cities throughout the United States, principally to handle Internet
service provider traffic on behalf of Qwest. As amended, the services agreement
is for a term of 51 months, commencing November 2000 and expiring January 2005.
The Company entered into a lease financing transaction in June 2000 to fund the
entire cost of this equipment.
In June 2000, the Company entered into a second agreement with Qwest,
pursuant to which (i) the Company took delivery of approximately $168 million of
Internet infrastructure equipment from Qwest and (ii) the Company agreed to
install and maintain this equipment throughout the United States, principally to
handle Internet service provider traffic on behalf of Qwest. The second services
agreement commences in November 2000 and expires in July 2005. The Company
entered into a financing transaction to fund the cost of this equipment in
November 2000 (see Note 15).
Contracts with Qwest accounted for approximately 30% of the Company's
total revenue during the nine months ended September 30, 2000. A significant
portion of the Qwest business was generated from long term guaranteed revenue
contracts. For the nine months ended September 30, 1999, no one customer
accounted for more than 10% of revenue.
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11. INTEREST RATE SWAP AGREEMENTS
AMENDED AND RESTATED INTEREST RATE SWAP AGREEMENT
In April 2000, the Company entered into an amended and restated
interest rate swap agreement (the "Amended Swap") with a commercial bank to
reduce the impact of changes in interest rates on its outstanding variable rate
debt. The Amended Swap effectively fixes the Company's interest rate on $325
million of outstanding variable rate borrowings under the Amended Senior Secured
Credit Facility (see Note 6) through April 2003 after which time the Amended
Swap is reduced to $225 million through January 2004 and then finally reduced to
$100 million until termination of the Amended Swap in April 2005. The Company is
exposed to credit loss in the event of nonperformance by the other party to the
interest rate swap agreement. However, the Company does not anticipate
nonperformance by the counterparty.
JUNE 2000 SWAP
In June 2000, the Company entered into an interest rate swap agreement
(the "June 2000 Swap") with a commercial bank to reduce the impact of changes in
interest rates on its outstanding variable rate debt. The June 2000 Swap
effectively fixes the Company's interest rate on an additional $90 million of
its long-term debt for a period of 5 years. The Company is exposed to credit
loss in the event of nonperformance by the other party to the interest rate swap
agreement. However, the Company does not anticipate nonperformance by the
counterparty.
12. BELLSOUTH RECIPROCAL COMPENSATION SETTLEMENT
In May 2000, the Company reached a resolution of its claims for payment
of certain reciprocal compensation charges, previously disputed by BellSouth
Corporation. Under the agreement, BellSouth made a one-time payment that
resolved all amounts billed through March 31, 2000. In addition, BellSouth and
the Company agreed to future rates for reciprocal compensation, setting new
contractual terms for payment. Under the terms of the agreement, the rates for
reciprocal compensation will be reduced, and will apply to all local traffic,
including ISP-bound traffic, thereby eliminating the principal area of dispute
between the parties. The reduction will be phased in over a three-year period
beginning with a rate of $.002 per minute of use in year 2000, $.00175 per
minute of use for 2001 and $.0015 per minute of use for 2002.
13. EQUITY TRANSACTIONS
SERIES G PREFERRED EQUITY
In July 2000, the Company issued 58,881 and 481,108 shares of Series
G-1 Voting and G-2 Non-Voting Convertible Preferred Stock (the "Series G
Preferred Stock"), respectively, to Lucent Technologies, Dresdner Kleinwort
Benson Private Equity Partners, CIT Lending Services, Nassau Capital Partners
and Harold N. Kamine, its Chairman of the Board, for aggregate gross proceeds of
$182.5 million. The Series G Preferred Stock has a liquidation preference of
$337.97 per share and an annual cumulative dividend equal to 7% of the
liquidation preference. Payment of the unpaid dividends is triggered by (i) an
initial public offering in which the Company receives aggregate gross proceeds
of at least $80 million or (ii) a merger, consolidation or sale of substantially
all assets.
Each share of Series G Preferred Stock is convertible into a number of
shares of common stock equal to the liquidation preference of each share divided
by the conversion price then in effect. Initially, the conversion price is
$337.97. However, this price is adjustable, subject to certain exceptions, upon
the occurrence of certain events including (i) the issuance or sale of common
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stock for a consideration per share less than the conversion price, (ii) the
issuance of rights or options to acquire common stock or convertible securities
with an exercise price less than the conversion price and (iii) the issuance or
sale of other convertible securities with a conversion or exchange price lower
than the conversion price. The Series G Preferred Stock will be automatically
converted into common stock upon (i) a Qualified Public Offering, defined as
sale of common stock pursuant to a registration statement in which the Company
receives aggregate gross proceeds of at least $80 million, provided that the per
share price at which such shares are sold in such offering is not less than the
liquidation preference then in effect, or (ii) the election of holders of at
least two-thirds of the outstanding shares of Series G Preferred Stock.
The Series G Preferred Stock ranks senior to the common stock, Series A
Convertible Preferred Stock and Series C Convertible Preferred Stock, on a
parity with the Series F Senior Redeemable, Exchangeable, PIK Preferred Stock
and junior to the Series E Senior Redeemable, Exchangeable, PIK Preferred Stock.
The Series G-1 shareholders are entitled to vote on all matters before the
common holders, as a single class with the common, on an as if converted basis.
Subject to certain limitations and conditions, at the request of the
holders of at least two-thirds of the Series G Preferred Stock, the Company may
be required to redeem the Series G Preferred Stock upon (i) a change of control
or sale of the Company, or (ii) August 15, 2009.
REPURCHASE AND RETIREMENT OF SERIES F PREFERRED STOCK
In September 2000, the Company repurchased and retired 2,965 shares of
Series F preferred stock at 110% of its liquidation preference plus accrued and
unpaid dividends for approximately $3.3 million in accordance with the
provisions of the certificate of designation applicable to the Series F
preferred stock.
14. INITIAL PUBLIC OFFERING FILING
On September 19, 2000, the Company filed a Form S-1 registration
statement with the Securities and Exchange Commission covering an initial public
offering of the Company's common stock. As of the date hereof, the Form S-1 has
not become effective and the Company's equity securities are not publicly
traded.
15. SUBSEQUENT EVENTS
QWEST INTERNET INFRASTRUCTURE EQUIPMENT FINANCING
In November 2000, our subsidiary, KMC Telecom Funding Corporation, entered
into an agreement with Dresdner Kleinwort Benson North American Leasing, Inc. to
finance the $168 million of Internet infrastructure equipment purchased from
Qwest in June 2000 (See Note 10). The Loan will be paid back over a term of 48
months at a rate of 200 basis points above LIBOR through October 15, 2001 and
600 basis points over LIBOR thereafter.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This form 10-Q contains forward-looking statements. These statements
reflect our current estimates, expectations and projections about our future
results, performance, prospects and opportunities. In some cases, you can
identify these statements by forward-looking words such as "anticipate",
"believe", "could", "estimate", "expect", "intend", "may", "should", "will",
"would" and similar expressions. These forward-looking statements are based on
all information currently available to us and subject to a number of risks,
uncertainties and other factors that could cause our actual results,
performance, prospects or opportunities to differ materially from these
expressed in, or implied by, these forward-looking statements. These risks,
uncertainties and other factors include matters related to:
o our operations and prospects,
o our expected financial position,
o our funding needs and financing sources,
o the possibility that changes in financial
performance may affect our compliance with
financial covenants under our amended senior
secured credit facility,
o our network construction and development plans,
o the ability of tier iii markets to profitably
support one or more competitive telecommunications
companies,
o regulatory matters, and
o expected competitors in our markets.
All subsequent written and oral forward-looking statements by or
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these factors. Except as otherwise required to be disclosed in
periodic reports required to be filed by public companies with the securities
and exchange commission pursuant to the commission's rules, we have no duty to
update these statements.
OVERVIEW
We are a rapidly growing fiber-based integrated communications provider
offering data, voice and Internet infrastructure services. We offer these
services to businesses, governments and institutional end-users, Internet
service providers, long distance carriers and wireless service providers. Our
business has two distinct components: serving communications-intensive customers
in Tier III markets, and providing data services on a nationwide basis.
We provide a full suite of broadband communications services in 35 Tier
III markets, which we define as markets with a population between 100,000 and
750,000. We own and operate robust fiber-based networks and Lucent switching
equipment in all of our Tier III markets, which are predominantly located in the
South, Southeast, Midwest and Mid-Atlantic United States. We will continue to
expand in Tier III markets because we believe that these markets have attractive
growth attributes and are typically less competitive than larger markets. Our
customers in these markets include: AT&T, Boeing, City of Augusta, Columbia
Hospital, NASA, Pillsbury, State of Wisconsin, Texas A&M University and
Wal-Mart.
We also provide nationwide data services under long-term guaranteed
revenue contracts with Qwest and Broadwing. Under these contracts, we provide
local Internet access infrastructure and other enhanced data services.
Currently, we have contracts representing approximately $250 million in
annualized revenues in approximately 140 markets. We expect these markets to be
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operational by the first half of 2001. The Internet infrastructure we are
deploying includes technologically advanced platforms from Cisco and Nortel,
which we believe will result in a cost-effective and technologically superior
solution for our customers.
TIER III MARKETS. We have installed fiber-based SONET networks, or
self-healing synchronous optical networks, using a Lucent 5ESS(R) switch in each
of our 35 operational markets, and are currently constructing networks in two
additional Tier III markets using a similar architecture. Our fiber optic
networks are initially designed and built to reach approximately 80% of the
business access lines in each of our markets, typically requiring a local fiber
loop of about 30 to 40 miles.
As our switches have become operational, our operating margins have
improved meaningfully. Our operating margins have also improved due to increased
on-network revenues relative to resale revenues. On-network revenues are
revenues earned from services provided on our network, including by direct
connection to our switch, unbundled network element or dedicated circuit. Resale
revenues are generated when traffic is carried completely on the incumbent local
exchange carriers' facilities. Resale revenues have declined from approximately
56% of our revenues during the first quarter of 1999 to approximately 4% of our
total revenues during the third quarter of 2000.
NATIONWIDE DATA PLATFORM. We currently provide Internet access
infrastructure for Qwest and Broadwing. We provide this service using remote
access servers manufactured by Cisco and Nortel which we are deploying in our
supernodes. Supernodes are concentration points for high-speed connectivity to
the Internet. We will have 44 supernodes, including nine in our existing
markets.
Under the terms of our existing guaranteed revenue contracts, we
provide the routing and ancillary equipment for each supernode, as well as data
transport service from the incumbent local exchange carrier to our supernode
location. Our customers pay us a fixed price per port and compensate us for
certain expenses, including space, power and transport, that we may incur above
an agreed level. This structure provides highly predictable revenues and costs
over the life of each contract, currently ranging from 51 to 57 months. One of
these contracts began generating revenues during the third quarter of 2000.
Revenues will continue to increase as the contracts are phased in through the
second quarter of 2001. We expect these contracts to provide positive margins
and cash flow beginning with the commencement of revenues in the third quarter
of 2000.
We purchased approximately $134.4 million of equipment relating to
these contracts during the first quarter of 2000. We sold this equipment to
General Electric Credit Corporation and CIT Lending Services Corporation, and
leased it back from them, during the second quarter of 2000. The term of this
sale-leaseback, including renewal periods, matches the initial term of these
data contracts. We purchased an additional $168.6 million of equipment relating
to these contracts during the second quarter of 2000, and in November 2000
obtained financing for this balance from Dresdner Kleinwort Benson North
American Leasing, Inc.
REVENUE. Our revenue is derived from the sale of local switched
services, long distance services, Centrex-type services, private line services,
special access services and Internet access infrastructure. Historically, a
significant portion of our revenue has been derived from the resale of switched
services. We have transitioned the majority of our customers on-network and as a
result the portion of our revenue related to the resale of switched services has
decreased to 7% of total revenue for the nine months ended September 30, 2000.
We expect that the revenue recognized related to the nationwide data platform
guaranteed revenue contracts will continue to increase through the first quarter
of 2001 as we begin providing services under these contracts.
RECIPROCAL COMPENSATION. We recognized reciprocal compensation revenue
of approximately $9.7 million, or 15.1% of our total revenue for 1999 and
approximately $14.3 million or 11.1% of our total revenue for the nine months
ended September 30, 2000. In May 2000, we reached a resolution of our claims for
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payment of certain reciprocal compensation charges, previously disputed by
BellSouth Corporation (see Note 12 of the Notes to Unaudited Condensed
Consolidated Financial Statements included in Item 1). Under the agreement,
BellSouth made a one-time payment that resolved all amounts billed through March
31, 2000. In addition, we agreed with BellSouth on future rates for reciprocal
compensation, setting new contractual terms for payment. Our prior agreement
with BellSouth provided for a rate of $.009 per minute of use for reciprocal
compensation. Under the terms of the new agreement, the rates for reciprocal
compensation which will apply to all local traffic, including ISP-bound traffic,
will decrease over time. The reduction will be phased in over a three-year
period beginning with a rate of $.002 per minute of use in year 2000, $.00175
per minute of use in year 2001 and $.0015 per minute of use in year 2002.
We are currently pursuing resolution of this issue with other incumbent
local exchange carriers. Our goal is to reach mutually acceptable terms for both
outstanding and future reciprocal compensation amounts for all traffic. We
cannot assure you that we will reach new agreements with these carriers on
favorable terms.
As of September 30, 2000, we have provided reserves which we believe
are sufficient to cover any amounts which may not be collected, but we cannot
assure you that this will be the case. Our management will continue to consider
the circumstances surrounding this dispute periodically in determining whether
additional reserves against unpaid balances are warranted.
OPERATING EXPENSES. Our principal operating expenses consist of network
operating costs, selling, general and administrative expenses, stock option
compensation expense and depreciation and amortization. Network operating costs
include charges for termination and unbundled network element charges; charges
from incumbent local exchange carriers for resale services; charges from long
distance carriers for resale of long distance services; salaries and benefits
associated with network operations, billing and information services and
customer care personnel; franchise fees and other costs. Network operating costs
also include a percentage of both our intrastate and interstate revenues which
we pay as universal service fund charges. National data platform operating
expenses include space, power, transport, maintenance, staffing, sales, general
and administrative and rental expenses under our operating lease agreement.
Certain of these costs are passed through to the carrier customer, which allows
us to limit our maintenance and servicing costs to a predetermined level, and to
receive offsetting revenues for any costs in excess of that level. Selling,
general and administrative expenses consist of sales personnel and support
costs, corporate and finance personnel and support costs and legal and
accounting expenses. Depreciation and amortization includes charges related to
plant, property and equipment and amortization of intangible assets, including
franchise acquisition costs. Depreciation and amortization expense will increase
as we place additional networks into service or expand existing networks.
INTEREST EXPENSE. Interest expense includes interest charges on our
senior notes, senior discount notes and our senior secured credit facilities.
Interest expense also includes amortization of deferred financing costs.
RESULTS OF OPERATIONS
As a result of the development and rapid growth of the Company's
business during the periods presented, the period-to-period comparisons of the
Company's results of operations are not necessarily meaningful and should not be
relied upon as an indication of future performance.
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THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1999
REVENUE. Revenue increased 290% from $15.6 million for the three months
ended September 30, 1999 (the "1999 Third Quarter") to $60.9 million for the
three months ended September 30, 2000 (the "2000 Third Quarter"). This increase
is attributable to our Tier III business deriving revenues from 35 markets
during the 2000 Third Quarter compared to 23 markets during the 1999 Third
Quarter, as well as to the fact that our data services business began to
generate revenues for the first time in the 2000 Third Quarter.
On-network local switched services, long distance services,
Centrex-type services, private line services, special access services and
Internet access infrastructure revenues ("On-network revenues") represented 96%
of total revenue in the 2000 Third Quarter, compared to 69% of total revenue in
the 1999 Third Quarter; while revenue derived from the resale of switched
services ("Resale revenue") represented 4% and 31% of total revenue,
respectively, during those periods. On-network revenues are revenues earned from
services provided on our network, including by direct connection to our switch,
unbundled network element or dedicated circuit. In addition, we recognized
reciprocal compensation revenue of $4.0 million, or 7% of our total revenues
during the 2000 Third Quarter.
NETWORK OPERATING COSTS. Network operating costs, excluding non-cash
stock compensation expense, increased 99% from $23.6 million for the 1999 Third
Quarter to $46.9 million for the 2000 Third Quarter. This increase of
approximately $23.3 million was due primarily to the increase in the number of
markets in which we operated in the 2000 Third Quarter as compared to the 1999
Third Quarter and that we began making operating lease payments in the 2000
Third Quarter related to the equipment utilized in the data services business.
The detailed components of this increase are $12.6 million in direct costs
associated with providing on-network services, resale services, leasing
unbundled network element services and operating lease payments, $3.9 million in
personnel costs, $3.1 million in consulting and professional services costs,
$2.4 million in network support services, $600,000 in telecommunications costs,
and $700,000 in other direct operating costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, excluding non-cash stock compensation expense,
increased 83% from $22.5 million for the 1999 Third Quarter to $41.1 million in
the 2000 Third Quarter. This increase of approximately $18.6 million is due
primarily to the increase in the number of markets in which we operated in the
2000 Third Quarter as compared to the 1999 Third Quarter. The detailed
components of this increase are $8.3 million in personnel costs, $3.9 million in
consulting and professional services costs, $1.8 million in facility costs,
$800,000 in telecommunications costs, $600,000 in travel related costs, as well
as increases in other marketing and general and administrative costs aggregating
approximately $3.2 million.
STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense, a
non-cash charge, increased from an aggregate of negative $7.0 million in the
1999 Third Quarter to an aggregate of $6.9 million for the 2000 Third Quarter.
This increase is due primarily to a more stable estimated fair value of the
Company's common stock in the 2000 Third Quarter compared to the 1999 Third
Quarter when the estimated fair value of the Company's common stock had
decreased.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 168% from $7.6 million for the 1999 Third Quarter to $20.4 million for
the 2000 Third Quarter. This increase is due primarily to depreciation expense
associated with the greater number of networks in commercial operation during
the 2000 Third Quarter.
INTEREST INCOME. Interest income decreased 5% from $4.0 million in the
1999 Third Quarter to $3.8 million in the 2000 Third Quarter. The decrease is
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due primarily to larger average cash, cash equivalent and restricted cash
balances during the 1999 Third Quarter as compared to the 2000 Third Quarter.
INTEREST EXPENSE. Interest expense increased 66% from $21.8 million in
the 1999 Third Quarter to $36.1 million in the 2000 Third Quarter. Of this
increase, $13.1 million is attributable to higher borrowings under the Amended
Senior Secured Credit Facility and $1.2 million is due to the additional
accretion on the Senior Discount Notes. We capitalized interest of $2.2 million
related to network construction projects during the 1999 Third Quarter and $4.2
million during the 2000 Third Quarter.
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.
For the reasons stated above, net loss before cumulative effect of change in
accounting principle increased from $49.0 million for the 1999 Third Quarter to
$86.7 million for the 2000 Third Quarter.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1999
REVENUE. Revenue increased 205% from $42.3 million for the nine months
ended September 30, 1999 (the "1999 Nine Months") to $129.0 million for the nine
months ended September 30, 2000 (the "2000 Nine Months"). This increase is
attributable to the fact that our Tier III business derived revenues from 35
markets during the 2000 Nine Months compared to 23 markets during the 1999 Nine
Months as well to the fact that our data services business began to generate
revenues for the first time in the 2000 Third Quarter.
On-network local switched services, long distance services,
Centrex-type services, private line services, special access services and
Internet access infrastructure revenues ("On-network revenues") represented 93%
of total revenue in the 2000 Nine Months, compared to 60% of total revenue in
the 1999 Nine Months; while revenue derived from the resale of switched services
("Resale revenue") represented 7% and 40% of total revenue, respectively, during
those periods. On-network revenues include revenues derived from services
provided through direct connections to our own networks, services provided by
means of unbundled network elements leased from the incumbent local exchange
carrier and services provided by dedicated circuit. In addition, we recognized
reciprocal compensation revenue of approximately $14.3 million or 11.1% of our
total revenue for the nine months ended September 30, 2000.
NETWORK OPERATING COSTS. Network operating costs, excluding non-cash
stock compensation expense, increased 100% from $56.2 million for the 1999 Nine
Months to $112.2 million for the 2000 Nine Months. This increase of
approximately $56.0 million was due primarily to the increase in the number of
markets in which we operated in the 2000 Nine Months as compared to the 1999
Nine Months and to the fact that we first began to make operating lease payments
in the 2000 Third Quarter related to the equipment utilized in the data services
business. The detailed components of this increase are $24.8 million in direct
costs associated with providing on-network services, resale services, leasing
unbundled network element services and operating lease payments, $15.3 million
in personnel costs, $7.0 million in network support services, $4.6 million in
consulting and professional services costs, $2.1 million in telecommunications
costs and $2.2 million in other direct operating costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, excluding non-cash stock compensation expense,
increased 98% from $60.7 million for the 1999 Nine Months to $120.1 million in
the 2000 Nine Months. This increase of approximately $59.4 million is due
primarily to the increase in the number of markets in which we operated in the
2000 Nine Months as compared to the 1999 Nine Months. The detailed components of
this increase are $30.5 million in personnel costs, $5.1 million in consulting
and professional services, $4.1 million in facility costs, $2.5 million in
telecommunications costs, $2.2 million in travel related costs, as well as
increases in other marketing and general and administrative costs aggregating
approximately $15.0 million.
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STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense, a
non-cash charge, in aggregate increased 124% from $13.2 million in the 1999 Nine
Months to $29.6 million for the 2000 Nine Months. This increase is due primarily
to an increase in the estimated fair value of the Company's Common Stock, as
well as the grant of additional option awards, in the 2000 Nine Months, as
compared to the 1999 Nine Months.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 168% from $19.2 million for the 1999 Nine Months to $51.5 million for
the 2000 Nine Months. This increase is due primarily to depreciation expense
associated with the greater number of networks in commercial operation during
the 2000 Nine Months.
OTHER EXPENSE. During the 1999 Second Quarter, the Company recorded a
$4.3 million charge to other expense in connection with an unfavorable
arbitration award. The net amount due under the terms of the award was paid in
full in June 1999.
INTEREST INCOME. Interest income increased 19% from $7.0 million in the
1999 Nine Months to $8.3 million in the 2000 Nine Months. The increase is due
primarily to larger average cash, cash equivalent and restricted cash balances
during the 2000 Nine Months as compared to the 1999 Nine Months as well as
receiving interest at a higher average rate.
INTEREST EXPENSE. Interest expense increased 98% from $47.8 million in
the 1999 Nine Months to $94.5 million in the 2000 Nine Months. Of this increase
$27.4 million is attributable to higher borrowings under the Amended Senior
Secured Credit Facility, $14.9 million is related to the issuance of $275
million of 13 1/2 % Senior Notes in May 1999 and $4.4 million is due to the
additional accretion on the Senior Discount Notes. We capitalized interest of
$3.5 million related to network construction projects during the 1999 Nine
Months and $10.1 million during the 2000 Nine Months.
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.
For the reasons stated above, net loss before cumulative effect of change in
accounting principle increased from $152.2 million for the 1999 Nine Months to
$270.6 million for the 2000 Nine Months.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant operating and net losses as a result of
the development and operation of our networks. We expect that such losses will
continue as we emphasize the development, construction and expansion of our
networks and build our customer base. As a result, we do not expect there to be
any cash provided by operations in the near future. We will also need to fund
the expansion of our existing networks and the building of new networks as well
as to fund our capital expenditures related to our nationwide data platform
business. To date, we have financed our operating losses and capital
expenditures with equity invested by our founders, preferred stock placements,
credit facility borrowings, operating leases and the 12 1/2% Senior Discount
Notes and the 13 1/2% Senior Notes.
During the first quarter of 2000, we amended, restated and combined our
prior Senior Secured Credit Facility and our prior Lucent Facility in a single
$700.0 million facility (See Note 6 of the Notes to Unaudited Condensed
Consolidated Financial Statements). Under the amended senior secured credit
facility, our subsidiaries which own our 35 existing networks and the 2 Tier III
networks which are to be completed during 2000 are permitted to borrow up to an
aggregate of $700.0 million, subject to certain conditions, for the purchase of
fiber optic cable, switches and other telecommunications equipment and, once
certain financial conditions are met, for working capital and other general
corporate purposes.
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During the quarter ended June 30, 2000, our subsidiary, KMC Telecom,
IV, Inc., closed a new senior secured term loan (the "Telecom IV Senior Secured
Term Loan") from Lucent Technologies Inc. Proceeds from this loan can be used to
purchase or install Lucent products. The loan is initially capped at $35.0
million of principal borrowings (plus accrued interest) until certain conditions
are met that allow for additional borrowings up to a ceiling of $50.0 million
(plus accrued interest). This loan will be used to purchase equipment for future
expansion.
In July 2000, we issued shares of Series G Convertible Preferred Stock
to Lucent Technologies, Dresdner Kleinwort Benson Private Equity Partners, CIT
Lending Services, Nassau Capital Partners and Harold N. Kamine, our Chairman,
for aggregate gross proceeds of $182.5 million (See Note 13 of the Notes to
Unaudited Condensed Consolidated Financial Statements). The Series G Convertible
Preferred Stock has an aggregate liquidation preference of $182.5 million and an
annual cumulative dividend equal to 7% of the liquidation preference. Payment of
the unpaid dividends is triggered by an initial public offering in which we
receive aggregate gross proceeds of at least $80.0 million or a merger,
consolidation or sale of substantially all of our assets. In such event, we may
elect to pay these dividends with additional shares of our common stock.
As of November 8, 2000, we had $581.3 million and $34.8 million of
indebtedness outstanding under the amended senior secured credit facility and
the Telecom IV senior secured term loan, respectively. Subject to certain
conditions, as of November 8, 2000, we had an additional $118.7 million and
$200,000 in borrowing capacity available under these facilities, respectively.
The amended senior secured credit facility contains a number of affirmative and
negative covenants, one of which requires us to make additional cash capital
contributions to our subsidiaries which are the borrowers thereunder of at least
$35.0 million prior to August 31, 2001. The original covenant required $185.0
million in cash capital contributions by April 1, 2001. However, because we
contributed $150.0 million of the proceeds of our Series G private equity
financing toward fulfilling this requirement, the lenders amended this covenant
by extending the due date on the remaining $35.0 million of cash capital
contributions to August 31, 2001. Because the entire $185.0 million cash capital
contribution was not made by July 31, 2000, however, the applicable interest
rate associated with the facility has increased by 100 basis points until the
remaining $35.0 million amount is contributed.
Net cash provided by financing activities from borrowings was $550.6
million and our net cash used in operating and investing activities was $508.0
million for the 2000 Nine Months.
We made capital expenditures of $218.5 million in the 1999 Nine Months
versus $254.5 million in the 2000 Nine Months. As of September 30, 2000 we had
outstanding purchase commitments aggregating approximately $96.5 million related
to the purchase of fiber optic cable and telecommunication equipment under our
agreements with certain suppliers and service providers. Continued significant
capital expenditures are expected to be made during the remainder of 2000 and
thereafter. The majority of these expenditures are expected to be made for
network construction and the purchase of switches and related equipment to
facilitate the offering of our services. We expect to continue to incur
operating losses while we expand our business and build our customer base.
Actual capital expenditures and operating losses will depend on numerous
factors, including the nature of future expansion and acquisition opportunities
and factors beyond our control, including economic conditions, competition,
regulatory developments and the availability of capital.
In addition to the capital expenditures above, we took delivery of
approximately $134.4 million and $168.6 million of Internet infrastructure
equipment in March and June 2000, respectively, in association with entering
into agreements with Qwest Communications Corporation (see Note 10 of the Notes
to Unaudited Condensed Consolidated Financial Statements). We entered into a
lease financing transaction in the 2000 Second Quarter to fund the cost of the
$134.4 million of equipment purchased in March 2000 and in November 2000 we
19
<PAGE>
entered into a financing transaction to fund the cost of the $168.6 million of
equipment purchased in June 2000.
We believe that our cash and borrowings available under the amended
senior secured credit facility will be sufficient to meet our liquidity needs
through the completion of our remaining two networks currently planned for
completion during 2000, as well as operating losses and capital expenditure
requirements for all of our 37 Tier III markets and other existing commitments
into the second quarter of 2001. However, our liquidity and financial position
will continue to be impacted by our financial performance.
In addition, in the event that our plans change, the assumptions upon
which our plans are based prove inaccurate, we expand or accelerate our business
plan or we determine to consummate acquisitions, the foregoing sources of funds
may prove insufficient and we may be required to seek additional financing
sooner than we currently expect. Additional sources of financing may include
public or private equity or debt financings, leases and other financing
arrangements. We can give no assurance that additional financing will be
available to us or, if available, that it can be obtained on a timely basis and
on acceptable terms.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes
in interest rates. A substantial portion of our long-term debt bears interest at
a fixed rate. However, the fair market value of the fixed rate debt is sensitive
to changes in interest rates. We are subject to the risk that market interest
rates will decline and the interest expense due under the fixed rate debt will
exceed the amounts due based on current market rates. We have entered into two
interest rate swap agreements with commercial banks to reduce the impact of
changes in interest rates on a portion of our outstanding variable rate debt.
The agreements effectively fix the interest rate on $415.0 million of our
outstanding variable rate borrowings under the amended senior secured credit
facility due 2007. A $325 million interest rate swap agreement entered into in
April 2000 terminates in April 2004 and a $90 million interest rate swap
agreement entered into in June 2000 terminates in June 2005. For other
information regarding the swap agreements, see Note 11 of the Notes to Unaudited
Condensed Consolidated Financial Statements contained in Item 1.
The following table provides information about our significant
financial instruments that are sensitive to changes in interest rates (in
millions):
<TABLE>
<CAPTION>
Fair Value
on Future Principal Payments
September
30,
2000 2000 2001 2002 2003 2004 Thereafter Total
------- ------ ------ ------ ------ ----- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt:
Fixed Rate:
Senior Discount Notes,
interest payable at 12 1/2%,
maturing 2008 $180.0 $ - $ - $ - $ - $ - $329.9 $329.9
Senior Notes, interest
payable at 13 1/2%, maturing
2009 243.6 - - - - - 275.0 275.0
Variable rate:
Amended Senior Secured
Credit Facility,
interest variable (11.87%
at September 30,2000)(a) 581.3 - - .6 51.2 93.5 436.0 581.3
Telecom IV Senior Secured
Term Loan, interest
variable (11.31% at
September 30,2000)(a) 34.8 - - - 3.5 3.5 27.8 34.8
--------- ------ ------ ------ ------ ----- --------- --------
Interest rate swaps:
Variable rate for fixed rate (2.6) - - - - - - -
--------- ------ ------ ------ ------ ----- --------- --------
Total $1,037.1 $ - $ - $.6 $ 54.7 $97.0 $1,068.7 $1,221.0
</TABLE>
--------------------------------------------------------------------------------
(a) Interest is based on a variable rate, which at our option, is determined by
either a base rate or LIBOR, plus, in each case, a specified margin.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Applicable.
(b) Not Applicable.
(c) On July 12, 2000, one entity exercised stock options to purchase
7,500 shares of common stock previously granted to that entity under the 1998
Stock Purchase and Option Plan for Key Employees of KMC Telecom Holdings, Inc.
and Affiliates for aggregate gross proceeds of $562,500. The sale was made in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act, on the basis that the transaction did not involve a public
offering. A Stockholder's Agreement executed by the entity contains
representations as to its investment intent and imposes substantial restrictions
upon transfer of the securities.
On September 8, 2000, the Company granted options to purchase an
aggregate of 18,200 shares of common stock to its employees and employees of
certain of its affiliates under the 1998 Stock Purchase and Option Plan for Key
Employees of KMC Telecom Holdings, Inc. and Affiliates. No consideration was
received by the Company for the issuance of the options. Options to purchase
6,000 shares are exercisable at an exercise price of $250 per share and options
to purchase 12,200 shares are exercisable at an exercise price of $300 per
share. The issuance of the options was made in reliance upon the exemption from
the registration requirements of the Securities Act provided by Section 4(2) of
that Act, on the basis that the transaction did not involve a public offering.
(d) Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a)(i) Written consents of the holders of the Company's Common Stock,
Series A Cumulative Convertible Preferred Stock and Series C Cumulative
Convertible Preferred Stock, voting as a single class, dated as of July 5, 2000,
were executed by such holders in lieu of a Special Meeting of such holders.
(a)(ii) Written consents of the holders of the Company's Series A
Cumulative Convertible Preferred Stock, voting as a class, dated as of July 7,
2000, were executed by such holders in lieu of a Special Meeting of such
holders.
(a)(iii) Written consents of the holders of the Company's Series C
Cumulative Convertible Preferred Stock, voting as a class, dated as of July 5,
2000, were executed by such holders in lieu of a Special Meeting of such
holders.
22
<PAGE>
(a)(iv) Written consents of the holders of the Company's Series E
Senior Redeemable, Exchangeable, PIK Preferred Stock, voting as a class, dated
as of July 5, 2000, were executed by such holders in lieu of a Special Meeting
of such holders.
(a)(v) Written consents of the holders of the Company's Series F Senior
Redeemable, Exchangeable, PIK Preferred Stock, voting as a class, dated as of
July 6, 2000, were executed by such holders in lieu of a Special Meeting of such
holders.
(b) Not Applicable.
(c)(i) By written consent, the holders of the Company's Common Stock,
Series A Cumulative Convertible Preferred Stock and Series C Cumulative
Convertible Preferred Stock, voting as a single class, approved and adopted
amendments to the Company's Amended and Restated Certificate of Incorporation
(A) to effect an increase in the aggregate number of authorized shares of the
Company's capital stock from 4,128,800 to 7,950,000 shares, composed of an
increase in the aggregate number of authorized shares of the Company's common
stock from 3,000,000 to 4,250,000 and an increase in the aggregate number of
authorized shares of the Company's preferred stock from 1,128,800 to 3,700,000,
and (B) to delete Articles Eighth and Ninth from the Amended and Restated
Certificate of Incorporation. Out of the 1,152,574.9 shares of Common Stock,
Series A Cumulative Convertible Preferred Stock and Series C Cumulative
Convertible Preferred Stock issued and outstanding, consents were obtained from
the holders of 1,107,372 shares.
(c)(ii) By unanimous written consent, the holders of the Company's
Series A Cumulative Convertible Preferred Stock, voting as a class, approved (A)
a Certificate of Amendment to the Certificate of the Powers, Designations,
Preferences and Rights of the Series A Cumulative Convertible Preferred Stock,
par value $.01 per share, as required by the Certificate of Designations
governing the rights of the holders of the Series A Cumulative Convertible
Preferred Stock, (B) a Certificate of the Powers, Designations, Preferences and
Rights of the Series G-1 Voting Convertible Preferred Stock and the Series G-2
Non-Voting Convertible Preferred Stock and the issuance of up to an aggregate of
1,250,000 shares of Series G-1 Preferred Stock and Series G-2 Preferred Stock,
and (C) the amendments to the Company's Amended and Restated Certificate of
Incorporation (x) to effect an increase in the aggregate number of authorized
shares of the Company's capital stock from 4,128,800 to 7,950,000 shares,
composed of an increase in the aggregate number of authorized shares of the
Company's common stock from 3,000,000 to 4,250,000 and an increase in the
aggregate number of authorized shares of the Company's preferred stock from
1,128,800 to 3,700,000, and (y) to delete Articles Eighth and Ninth from the
Amended and Restated Certificate of Incorporation.
(c)(iii) By unanimous written consent, the holders of the Company's
Series C Cumulative Convertible Preferred Stock, voting as a class, approved (A)
a Certificate of Amendment to the Certificate of the Powers, Designations,
Preferences and Rights of the Series C Cumulative Convertible Preferred Stock,
par value $.01 per share, as required by the Certificate of Designations
governing the rights of the holders of the Series C Cumulative Convertible
Preferred Stock, (B) a Certificate of the Powers, Designations, Preferences and
Rights of the Series G-1 Voting Convertible Preferred Stock and the Series G-2
Non-Voting Convertible Preferred Stock and the issuance of up to an aggregate of
1,250,000 shares of Series G-1 Preferred Stock and Series G-2 Preferred Stock,
and (C) the amendments to the Company's Amended and Restated Certificate of
Incorporation (x) to effect an increase in the aggregate number of authorized
shares of the Company's capital stock from 4,128,800 to 7,950,000 shares,
composed of an increase in the aggregate number of authorized shares of the
Company's common stock from 3,000,000 to 4,250,000 and an increase in the
aggregate number of authorized shares of the Company's preferred stock from
1,128,800 to 3,700,000, and (y) to delete Articles Eighth and Ninth from the
Amended and Restated Certificate of Incorporation.
23
<PAGE>
(c)(iv) By written consent, the holders of the Company's Series E
Senior Redeemable, Exchangeable, PIK Preferred Stock, voting as a class,
approved (A) a Certificate of Amendment to the Certificate of the Powers,
Designations, Preferences and Rights of the Series E Senior Redeemable,
Exchangeable, PIK Preferred Stock, par value $.01 per share, as required by the
Certificate of Designations governing the rights of the holders of the Series E
Senior Redeemable, Exchangeable, PIK Preferred Stock, (B) a Certificate of the
Powers, Designations, Preferences and Rights of the Series G-1 Voting
Convertible Preferred Stock and the Series G-2 Non-Voting Convertible Preferred
Stock and the issuance of up to an aggregate of 1,250,000 shares of Series G-1
Preferred Stock and Series G-2 Preferred Stock, and (C) the amendments to the
Company's Amended and Restated Certificate of Incorporation (x) to effect an
increase in the aggregate number of authorized shares of the Company's capital
stock from 4,128,800 to 7,950,000 shares, composed of an increase in the
aggregate number of authorized shares of the Company's common stock from
3,000,000 to 4,250,000 and an increase in the aggregate number of authorized
shares of the Company's preferred stock from 1,128,800 to 3,700,000, and (y) to
delete Articles Eighth and Ninth from the Amended and Restated Certificate of
Incorporation. Out of the 69,815.46 shares of Series E Senior Redeemable,
Exchangeable, PIK Preferred Stock issued and outstanding, consents were obtained
from the holders of 63,980.32 shares.
(c)(v) By unanimous written consent, the holders of the Company's
Series F Senior Redeemable, Exchangeable, PIK Preferred Stock, voting as a
class, approved (A) a Certificate of Amendment to the Certificate of the Powers,
Designations, Preferences and Rights of the Series F Senior Redeemable,
Exchangeable, PIK Preferred Stock, par value $.01 per share, as required by the
Certificate of Designations governing the rights of the holders of the Series F
Senior Redeemable, Exchangeable, PIK Preferred Stock, (B) a Certificate of the
Powers, Designations, Preferences and Rights of the Series G-1 Voting
Convertible Preferred Stock and the Series G-2 Non-Voting Convertible Preferred
Stock and the issuance of up to an aggregate of 1,250,000 shares of Series G-1
Preferred Stock and Series G-2 Preferred Stock, and (C) the amendments to the
Company's Amended and Restated Certificate of Incorporation (x) to effect an
increase in the aggregate number of authorized shares of the Company's capital
stock from 4,128,800 to 7,950,000 shares, composed of an increase in the
aggregate number of authorized shares of the Company's common stock from
3,000,000 to 4,250,000 and an increase in the aggregate number of authorized
shares of the Company's preferred stock from 1,128,800 to 3,700,000, and (y) to
delete Articles Eighth and Ninth from the Amended and Restated Certificate of
Incorporation.
(d) Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
3.1 Certificate of Amendment of the Amended and Restated Certificate
of Incorporation of KMC Telecom Holdings, Inc. dated July 7, 2000
(incorporated herein by reference to Exhibit 3.5 to KMC Telecom
Holdings, Inc.'s Registration Statement on Form S-1 filed on
September 19, 2000 (hereinafter referred to as the "KMC Holdings'
S-1")).
3.2 Certificate of Amendment to the Certificate of the Powers,
Designations, Preferences and Rights of the Series A Cumulative
24
<PAGE>
Convertible Preferred Stock, Par Value $.01 Per Share, dated July
7, 2000 (incorporated herein by reference to Exhibit 3.10 to KMC
Holdings' S-1).
3.3 Certificate of Amendment to the Certificate of the Powers,
Designations, Preferences and Rights of the Series C Cumulative
Convertible Preferred Stock, Par Value $.01 Per Share, dated July
7, 2000 (incorporated herein by reference to Exhibit 3.14 to KMC
Holdings' S-1).
3.4 Certificate of Amendment to the Certificate of Voting Powers,
Designations, Preferences and Relative Participating, Optional or
Other Special Rights and Qualifications, Limitations and
Restrictions Thereof of the Series E Senior Redeemable,
Exchangeable, PIK Preferred Stock, dated July 7, 2000
(incorporated herein by reference to Exhibit 3.20 to KMC
Holdings' S-1).
3.5 Certificate of Amendment to the Certificate of Voting Powers,
Designations, Preferences and Relative Participating, Optional or
Other Special Rights and Qualifications, Limitations and
Restrictions Thereof of the Series F Senior Redeemable,
Exchangeable, PIK Preferred Stock, dated July 7, 2000
(incorporated herein by reference to Exhibit 3.24 to KMC
Holdings' S-1).
3.6 Amendment No. 1 to the Amended and Restated By-Laws of KMC
Telecom Holdings, Inc., amended as of July 5, 2000 (incorporated
herein by reference to Exhibit 3.27 to KMC Holdings' S-1).
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
(b)(i)A report on Form 8-K was filed by the Registrant on July
12, 2000 pursuant to Item 5 thereof reporting certain information with respect
to the issuance of Series G Convertible Preferred Stock. Such information was
disclosed in a Press Release, dated July 12, 2000, filed as an exhibit to such
report.
25
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Dated: November 14, 2000
KMC TELECOM HOLDINGS, INC.
(Registrant)
By: /S/ WILLIAM F. LENAHAN
------------------------
William F. Lenahan
Chief Executive Officer
(Principal Executive Officer)
By: /S/ WILLIAM H. STEWART
------------------------
William H. Stewart
Chief Financial Officer
(Principal Financial Officer)
26
<PAGE>
EXHIBIT INDEX
NO. DESCRIPTION
3.1 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of KMC Telecom Holdings, Inc.
dated July 7, 2000 (incorporated herein by reference to
Exhibit 3.5 to KMC Telecom Holdings, Inc.'s Registration
Statement on Form S-1 filed on September 19, 2000 (hereinafter
referred to as the "KMC Holdings' S-1")).
3.2 Certificate of Amendment to the Certificate of the Powers,
Designations, Preferences and Rights of the Series A
Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, dated July 7, 2000 (incorporated herein by reference to
Exhibit 3.10 to KMC Holdings' S-1).
3.3 Certificate of Amendment to the Certificate of the Powers,
Designations, Preferences and Rights of the Series C
Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, dated July 7, 2000 (incorporated herein by reference to
Exhibit 3.14 to KMC Holdings' S-1).
3.4 Certificate of Amendment to the Certificate of Voting Powers,
Designations, Preferences and Relative Participating, Optional
or Other Special Rights and Qualifications, Limitations and
Restrictions Thereof of the Series E Senior Redeemable,
Exchangeable, PIK Preferred Stock, dated July 7, 2000
(incorporated herein by reference to Exhibit 3.20 to KMC
Holdings' S-1).
3.5 Certificate of Amendment to the Certificate of Voting Powers,
Designations, Preferences and Relative Participating, Optional
or Other Special Rights and Qualifications, Limitations and
Restrictions Thereof of the Series F Senior Redeemable,
Exchangeable, PIK Preferred Stock, dated July 7, 2000
(incorporated herein by reference to Exhibit 3.24 to KMC
Holdings' S-1).
3.6 Amendment No. 1 to the Amended and Restated By-Laws of KMC
Telecom Holdings, Inc., amended as of July 5, 2000
(incorporated herein by reference to Exhibit 3.27 to KMC
Holdings' S-1).
27 Financial Data Schedule.
27
