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 June 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 Identification No.)
incorporation or organization)
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 $0.01 853,775 shares,
per share. as of August 10, 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 June 30, 2000.................................................. 2
Unaudited Condensed Consolidated Statements of Operations,
Three Months Ended June 30, 1999 and 2000 and Six Months Ended
June 30, 1999 and 2000............................................. 3
Unaudited Condensed Consolidated Statements of Cash Flows, Six Months
Ended June 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.......... 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................... 20
ITEM 2. Changes in Securities and Use of Proceeds........................... 20
ITEM 3. Defaults Upon Senior Securities..................................... 21
ITEM 4. Submission of Matters to a Vote of Security Holders................. 21
ITEM 5. Other Information................................................... 22
ITEM 6. Exhibits and Reports on Form 8-K.................................... 22
SIGNATURES.................................................................. 24
<PAGE>
PART I - FINANCIAL INFORMATION
KMC TELECOM HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $85,966 $60,297
Restricted investments........................... 37,125 37,125
Accounts receivable, net of allowance for
doubtful accounts of $5,551 and $6,401 in 1999
and 2000, respectively......................... 27,373 36,906
Prepaid expenses and other current assets........ 1,375 171,529
----------- ----------
Total current assets................................. 151,839 305,857
Long term restricted investments..................... 51,446 40,623
Networks, property and equipment, net................ 639,324 785,874
Intangible assets, net............................... 3,602 4,045
Deferred financing costs, net........................ 38,816 44,486
Other assets......................................... 1,013 1,242
----------- ----------
$886,040 $1,182,127
=========== ==========
LIABILITIES, REDEEMABLE AND NONREDEEMABLE EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable................................. $167,490 $235,870
Accrued expenses................................. 37,047 58,511
Deferred revenue................................. 4,309 14,465
----------- ----------
Total current liabilities............................ 208,846 308,846
Notes payable........................................ 235,000 575,190
Senior discount notes payable........................ 301,137 320,013
Senior notes payable................................. 275,000 275,000
----------- ----------
Total liabilities.................................... 1,019,983 1,479,049
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 69 shares in 2000
($69,815 liquidation preference) ........... 50,770 56,217
Series F, 44 shares in 1999 and 48 shares in 2000
($47,447 liquidation preference)............ 41,370 45,936
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 96,792
Series C, 175 shares in 1999 and 2000 ($17,500
liquidation preference)..................... 40,301 63,826
Redeemable cumulative convertible Series G
preferred stock, 540 shares subscribed ........ - 182,500
Less: Redeemable cumulative convertible Series G
preferred stock subscription receivable........ - (182,500)
Redeemable common stock, 224 shares issued and
outstanding.................................... 33,755 41,752
Redeemable common stock warrants................. 12,925 15,262
----------- ------------
Total redeemable equity.............................. 250,470 319,785
----------- ------------
Nonredeemable equity (deficiency):
Common stock, par value $.01 per share; 3,000 shares
authorized, 629 shares and 630 shares issued and
outstanding in 1999 and 2000, respectively..... 6 6
Additional paid-in capital....................... - 1,561
Unearned compensation............................ (9,163) (30,638)
Accumulated deficit.............................. (375,256) (587,636)
----------- ------------
Total nonredeemable equity (deficiency).............. (384,413) (616,707)
----------- ------------
$886,040 $1,182,127
=========== ============
</TABLE>
See accompanying notes.
<PAGE>
KMC TELECOM HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------------
1999 2000 1999 2000
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue............................... $15,634 $38,925 $26,712 $68,076
Operating expenses:
Network operating costs:
Non-cash stock compensation........ 1,307 655 1,616 1,853
Other network operating costs...... 17,533 36,483 32,560 65,290
Selling, general and administrative:
Non-cash stock compensation......... 15,025 8,709 18,585 20,819
Other selling, general and
administrative costs.............. 21,586 39,724 38,219 79,050
Depreciation and amortization........ 6,113 17,381 11,636 31,118
-------- -------- ----------- -----------
Total operating expenses............ 61,564 102,952 102,616 198,130
-------- -------- ----------- -----------
Loss from operations.................. (45,930) (64,027) (75,904) (130,054)
Other expense......................... (4,297) - (4,297) -
Interest income....................... 2,113 2,539 3,055 4,508
Interest expense...................... (15,687) (31,236) (26,014) (58,400)
--------- -------- ----------- -----------
Net loss before cumulative effect of
change in accounting principle...... (63,801) (92,724) (103,160) (183,946)
Cumulative effect of change in
accounting principle................ - - - (1,705)
--------- -------- ----------- -----------
Net loss.............................. (63,801) (92,724) (103,160) (185,651)
Dividends and accretion on redeemable
preferred stock..................... (31,971) (25,454) (43,415) (58,981)
--------- -------- ----------- -----------
Net loss applicable to common
shareholders........................ $(95,772) $(118,178) $(146,575) $(244,632)
========= ========= =========== ===========
Net loss per common share before
cumulative effect of change in
accounting principle................ $(112.32) $(138.42) $(172.31) $(284.60)
Cumulative effect of change in
accounting principle................ - - - (2.00)
-------- -------- ----------- -----------
Net loss per common share............. $(112.32) $(138.42) $(172.31) $(286.60)
========= ========= =========== ===========
Weighted average number of common
shares outstanding.................. 852,676 853,765 850,632 853,553
======== ======== =========== ===========
Pro forma amounts assuming the change
in accounting principle was applied
retroactively:
Net loss applicable to common
shareholders........................ $(96,211)$(118,178) $(147,195) $(242,927)
======== ======== =========== ===========
Net loss per common share............. $(112.83) $(138.42) $(173.04) $(284.60)
======== ======== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
KMC TELECOM HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 2000
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $(103,160) $(185,651)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.................... 11,636 31,118
Non-cash interest expense........................ 22,834 17,150
Non-cash stock option compensation expense....... 20,201 22,672
Changes in assets and liabilities:
Accounts receivable............................ (11,950) (9,533)
Prepaid expenses and other current assets...... (228) (1,818)
Other assets................................... 653 10,525
Accounts payable............................... 6,888 (60,696)
Accrued expenses............................... 4,999 16,972
Deferred revenue............................... 2,922 10,156
----------- -----------
Net cash used in operating activities................ (45,205) (149,105)
----------- -----------
INVESTING ACTIVITIES
Construction of networks and purchases of equipment.. (83,725) (210,720)
Acquisitions of franchises, authorizations and (230) (751)
related assets.....................................
Purchases of investments, net........................ (36,080) -
----------- -----------
Net cash used in investing activities................ (120,035) (211,471)
----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock and related 91,235 -
warrants, net of issuance costs....................
Proceeds from exercise of stock options.............. 333 -
Proceeds from issuance of senior notes, net of
issuance costs and purchase of portfolio of
restricted investments............................. 159,942 -
Proceeds from credit facilities, net of issuance costs 80,541 334,907
----------- -----------
Net cash provided by financing activities............ 332,051 334,907
----------- -----------
Net increase (decrease) in cash and cash equivalents. 166,811 (25,669)
Cash and cash equivalents, beginning of period....... 21,181 85,966
----------- -----------
Cash and cash equivalents, end of period............. $187,992 $60,297
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of $3,180 $35,779
amounts capitalized................................ =========== ===========
See accompanying notes.
</TABLE>
4
<PAGE>
KMC TELECOM HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. BASIS OF PRESENTATION AND ORGANIZATION
KMC Telecom Holdings, Inc. and its subsidiaries, KMC Telecom Inc., KMC
Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom IV, Inc., KMC Telecom IV
Holdings, Inc., KMC Telecom of Virginia, Inc., KMC Telecom IV of Virginia, Inc.,
KMC Telecom V, Inc., KMC Telecom V of Virginia, Inc., KMC Telecom VI, Inc., KMC
Telecom VI of Virginia, Inc., KMC Telecom Financial Services LLC, KMC
Telecom.com, Inc. and KMC Telecom Financing, Inc., are collectively referred to
herein as the Company. All significant intercompany accounts and transactions
have been eliminated in consolidation.
The Company is a facilities-based competitive local exchange carrier
("CLEC") providing telecommunications and data 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 Southeastern and Midwestern 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 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 six months ended June 30, 2000, the
net effect of adopting this change in accounting principle was a deferral of the
recognition of $322,000 of revenue, which increased net loss for the period by
$0.38 per share. Revenue for the six months ended June 30, 2000 includes
$543,000 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, JUNE 30,
1999 2000
------------ -----------
(IN THOUSANDS)
Fiber optic systems............................... $164,985 $227,314
Telecommunications equipment...................... 421,718 470,846
Furniture and fixtures............................ 21,397 25,399
Leasehold improvements............................ 1,811 1,866
Construction-in-progress.......................... 66,380 128,226
------------ -----------
676,291 853,651
Less accumulated depreciation..................... (36,967) (67,777)
------------ -----------
$639,324 $785,874
============ ===========
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 six months ended June 30, 1999 and 2000 amounted to $1.3
million and $5.9 million, respectively.
4. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(IN THOUSANDS)
Franchise costs................................... $2,015 $2,472
Authorizations and rights-of-way.................. 2,052 2,355
Building access agreements........................ 637 624
Other............................................. 401 402
---------- -----------
5,105 5,853
Less accumulated amortization..................... (1,503) (1,808)
---------- -----------
$3,602 $4,045
========== ===========
6
<PAGE>
5. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
DECEMBER 31, JUNE 30,
1999 2000
------------- ------------
(IN THOUSANDS)
Accrued compensation................................ $11,423 $17,020
Accrued costs related to financing activities....... 7,316 10,156
Accrued interest payable............................ 8,544 10,741
Accrued telecommunications costs.................... 3,794 5,361
Other accrued expenses.............................. 5,970 15,233
============= ============
$37,047 $58,511
============= ============
6. SENIOR SECURED CREDIT FACILITIES
TELECOM IV SENIOR SECURED TERM LOAN
During the quarter ended June 30, 2000, KMC Telecom, IV, Inc., closed a new
senior secured term loan (the "Telecom IV Loan") from Lucent Technologies Inc.
The Telecom IV Loan is initially capped at $35 million until certain conditions
are met that allow for additional borrowings up to a ceiling of $50 million.
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, 7.5% on October 1, 2006, with the balance due on October 1,
2007. As of June 30, 2000, the outstanding loan balance on this term loan was
approximately $35 million.
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. The Company was being charged a weighted average interest rate of
11.31% at June 30, 2000. There are no financial covenants on the 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
event of default were to occur, the interest rate will increase by two
percentage points.
AMENDED SENIOR SECURED CREDIT FACILITY
During the quarter ended March 31, 2000, 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, in 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
7
<PAGE>
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 June 30,
2000, the outstanding loan balances on the Revolver, the Term Loan and the
Lucent Term Loan, were approximately $164 million, $75 million, and $301
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. The
Borrowers were being charged a weighted average interest rate of 10.76% at June
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.
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.
8
<PAGE>
The Amended Senior Secured Credit Facility contains a number of affirmative
and negative covenants, including a covenant requiring the Borrowers to obtain
cash capital contributions from KMC Holdings of at least $185 million prior to
April 1, 2001. KMC Holdings has agreed to contribute $150 million of the
proceeds of its Series G private equity financing (see Note 13) towards
fulfilling this requirement, and the Lenders have amended this covenant by
extending the due date on the remaining $35 million of cash capital
contributions to August 31, 2001. KMC Holdings anticipates raising this
additional capital through private or public sales of securities in the capital
markets. Because the entire $185 million cash capital contribution was not made
by July 31, 2000, the applicable interest rate associated with the facility
increases by 100 basis points until the $185 million amount is fully funded.
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) June 30, 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.
7. SERVICE REVENUES
The Company provides on-net switched and dedicated services and resells
switched services previously purchased from the incumbent local exchange
carrier. On-net services include both services provided through direct
connections to our own networks and services provided by means of unbundled
network elements leased from the incumbent local exchange carrier.
The Company's service revenues consist of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 2000 1999 2000
---------------------- ---------------------
(IN THOUSANDS) (IN THOUSANDS)
On-net...................... $9,595 $36,149 $14,721 $61,890
Resale...................... 6,039 2,776 11,991 6,186
---------- ---------- --------- ----------
Total....................... $15,634 $38,925 $26,712 $68,076
========== ========== ========= ==========
9
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
As of June 30, 2000, the Company has outstanding commitments aggregating
approximately $59 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 June
30, 2000, the aggregate redemption value of the redeemable equity was
approximately $415 million, reflecting per share redemption amounts of $1,454
for the Series A Preferred Stock, $711 for the Series C 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 2000 1999 2000
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net loss before cumulative effect of
change in accounting principle........ $(63,801) $(92,724) $(103,160) $(183,946)
Cumulative effect of change in
accounting principle.................. - - - (1,705)
--------- -------- ---------- ----------
Net loss................................ (63,801) (92,724) (103,160) (185,651)
Dividends and accretion on redeemable
preferred stock....................... (31,971) (25,454) (43,415) (58,981)
--------- -------- ---------- ----------
Numerator for net loss applicable to
common shareholders................... $(95,772) $(118,178) $(146,575) $(244,632)
========= ======== ========== ==========
Denominator:
Denominator for net loss per common
share - weighted average number of
common shares outstanding............. 852,676 853,765 850,632 853,553
Net loss per common share before
cumulative effect of change in
accounting principle - basic............ $(112.32) $(138.42) $(172.31) $(284.60)
Cumulative effect of change in accounting
principle............................... - - - (2.00)
--------- -------- ---------- ----------
Net loss per common share - basic......... $(112.32) $(138.42) $(172.31) $(286.60)
========= ========= ========== ==========
</TABLE>
10
<PAGE>
Options and warrants to purchase an aggregate of 483,273 and 655,819 shares
of common stock were outstanding as of June 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
In March 2000, the Company entered into an agreement with Qwest
Communications Corporation, pursuant to which (i) the Company took delivery of
approximately $134 million of internet infrastructure equipment from the
provider 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 the provider. The services agreement is
for a term of 42 months, commencing August 1, 2000 and expiring on January 31,
2004. 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
Communications Corporation, pursuant to which (i) the Company took delivery of
approximately $168 million of internet infrastructure equipment from the
provider 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 the provider. The services agreement commences in November
2000 and expires in August 2004. The Company expects to enter into a financing
transaction to fund the cost of this equipment. This equipment is recorded in
other current assets and accounts payable in the accompanying balance sheet at
June 30, 2000.
11. INTEREST RATE SWAP AGREEMENTS
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 $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.
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.
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.
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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. SERIES G PREFERRED EQUITY
The Company agreed, as of June 30, 2000, to issue 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 transaction closed and the proceeds were received in early
July 2000. 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
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.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE FOLLOWING DISCUSSION
SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS
FORM 10-Q.
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.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1999
REVENUE. On an as reported basis, revenue increased 149% from $15.6 million
for the three months ended June 30, 1999 (the "1999 Second Quarter") to $38.9
million for the three months ended June 30, 2000 (the "2000 Second Quarter").
This increase is primarily attributable to the fact that we derived revenues
from 35 markets during the 2000 Second Quarter compared to 23 markets during the
1999 Second Quarter. In addition, each of our systems that generated revenues
during the 1999 Second Quarter generated increased revenues during the 2000
Second Quarter.
Although incumbent local exchange carriers have generally withheld payments
of amounts due for reciprocal compensation to competitive local exchange
carriers such as the Company for calls to Internet service providers and
disputed the entitlement of competitive local exchange carriers to reciprocal
compensation for such calls, we have determined to continue to recognize amounts
due to us for reciprocal compensation for such calls because we have concluded,
based upon all of the facts and circumstances, including the settlement we
reached with BellSouth during the 2000 Second Quarter (see Note 12 of the Notes
to Unaudited Condensed Consolidated Financial Statements included in Item 1),
numerous state public service commission and state and federal court decisions
upholding competitive local exchange carriers entitlement to reciprocal
compensation for such calls, that realization of such amounts is reasonably
assured.
As a result of the settlement with BellSouth, we now recognize reciprocal
compensation in all cities where BellSouth is the incumbent local exchange
carrier (including cities in Louisiana and South Carolina) at a rate
significantly lower than our previous agreement with BellSouth. We are currently
in negotiations with other incumbent local exchange carriers to reach mutually
acceptable terms for both uncollected and future reciprocal compensation
amounts.
Our management will continue to consider the circumstances surrounding this
dispute periodically in determining whether reserves against unpaid balances are
warranted. As of June 30, 2000, we have provided reserves which we believe are
sufficient to cover any amounts which may not be collected. We recognized
reciprocal compensation revenue of $3.9 million, or 10% of our total revenues,
during the 2000 Second Quarter.
On an as reported basis, On-net special access, private line and switched
services revenue ("On-net revenues") increased 276% from $9.6 million in the
1999 Second Quarter to $36.1 million in the 2000 Second Quarter, while revenue
derived from the resale of switched services ("Resale revenue") decreased 53%
from $6.0 million to $2.8 million over the same period. On-net revenues include
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<PAGE>
both services provided through direct connections to our own networks and
services provided by means of unbundled network elements leased from the
incumbent local exchange carrier. On-net revenues represented 93% of total
revenue in the 2000 Second Quarter, compared to 61% of total revenue in the 1999
Second Quarter.
NETWORK OPERATING COSTS. Network operating costs, excluding non-cash stock
compensation expense, increased 109% from $17.5 million for the 1999 Second
Quarter to $36.5 million for the 2000 Second Quarter. This increase of
approximately $19.0 million was due primarily to the increase in the number of
markets in which we operated in the 2000 Second Quarter as compared to the 1999
Second Quarter. The detailed components of this increase are $7.0 million in
personnel costs, $6.1 million in direct costs associated with providing on-net
services, resale services and leasing unbundled network element services, $3.8
million in network support services, $800,000 in telecommunications costs,
$600,000 in consulting and professional services 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 84% from $21.6 million for the 1999 Second Quarter to $39.7 million in
the 2000 Second Quarter. This increase of approximately $18.1 million is due
primarily to the increase in the number of markets in which we operated in the
2000 Second Quarter as compared to the 1999 Second Quarter. The detailed
components of this increase are $10.1 million in personnel costs, $1.4 million
in facility costs, $800,000 in telecommunications costs, $700,000 in travel
related costs, as well as increases in other marketing and general and
administrative costs aggregating approximately $5.1 million.
STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense, a
non-cash charge, decreased 42% from an aggregate of $16.3 million in the 1999
Second Quarter to an aggregate of $9.4 million for the 2000 Second Quarter. This
decrease is due primarily to a larger increase in the estimated fair value of
the Company's common stock in the 1999 Second Quarter, compared with a more
stable estimated fair value of the Company's common stock in the 2000 Second
Quarter.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 184% from $6.1 million for the 1999 Second Quarter to $17.4 million
for the 2000 Second Quarter. This increase is due primarily to depreciation
expense associated with the greater number of networks in commercial operation
during the 2000 Second Quarter.
INTEREST INCOME. Interest income increased 20% from $2.1 million in the
1999 Second Quarter to $2.5 million in the 2000 Second Quarter. The increase is
due primarily to larger average cash, cash equivalent and restricted cash
balances during the 2000 Second Quarter as compared to the 1999 Second Quarter
as well as receiving interest at a higher average rate.
INTEREST EXPENSE. Interest expense increased 99% from $15.7 million in the
1999 Second Quarter to $31.2 million in the 2000 Second Quarter. The increase is
due primarily to the issuance of the Senior Notes in May 1999, higher borrowings
under the Amended Senior Secured Credit Facility and additional accretion on the
Senior Discount Notes. We capitalized interest related to network construction
projects of $700,000 during the 1999 Second Quarter and $3.7 million during the
2000 Second 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 $63.8 million for the 1999 Second Quarter to
$92.7 million for the 2000 Second Quarter.
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<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1999
REVENUE. On an as reported basis, revenue increased 155% from $26.7 million
for the six months ended June 30, 1999 (the "1999 Six Months") to $68.1 million
for the six months ended June 30, 2000 (the "2000 Six Months"). This increase is
primarily attributable to the fact that we derived revenues from 35 markets
during the 2000 Six Months compared to 23 markets during the 1999 Six Months. In
addition, each of our systems that generated revenues during the 1999 Six Months
generated increased revenues during the 2000 Six Months.
On an as reported basis, On-net special access, private line and switched
services revenue ("On-net revenues") increased 321% from $14.7 million in the
1999 Six Months to $61.9 million in the 2000 Six Months, while revenue derived
from the resale of switched services ("Resale revenue") decreased 48% from $12.0
million to $6.2 million over the same period. On-net revenues include both
services provided through direct connections to our own networks and services
provided by means of unbundled network elements leased from the incumbent local
exchange carrier. On-net revenues represented 91% of total revenue in the 2000
Six Months, compared to 55% of total revenue in the 1999 Six Months. In
addition, we recognized reciprocal compensation revenue of $10.3 million, or 15%
of our total revenues during the 2000 Six Months.
NETWORK OPERATING COSTS. Network operating costs, excluding non-cash stock
compensation expense, increased 100% from $32.6 million for the 1999 Six Months
to $65.3 million for the 2000 Six Months. This increase of approximately $32.7
million was due primarily to the increase in the number of markets in which we
operated in the 2000 Six Months as compared to the 1999 Six Months. The detailed
components of this increase are $12.2 million in direct costs associated with
providing on-net services, resale services and leasing unbundled network element
services, $11.5 million in personnel costs, $4.7 million in network support
services, $1.6 million in consulting and professional services costs, $1.5
million in telecommunications costs and $1.2 million in other direct operating
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, excluding non-cash stock compensation expense,
increased 107% from $38.2 million for the 1999 Six Months to $79.0 million in
the 2000 Six Months. This increase of approximately $40.8 million is due
primarily to the increase in the number of markets in which we operated in the
2000 Six Months as compared to the 1999 Six Months. The detailed components of
this increase are $22.0 million in personnel costs, $2.3 million in facility
costs, $1.6 million in telecommunications costs, $1.6 million in travel related
costs, $1.2 million in professional costs, as well as increases in other
marketing and general and administrative costs aggregating approximately $12.1
million.
STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense, a
non-cash charge, in aggregate increased 12% from $20.2 million in the 1999 Six
Months to $22.7 million for the 2000 Six 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 as compared to the 1999 Six
Months.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 167% from $11.6 million for the 1999 Six Months to $31.1 million for
the 2000 Six Months. This increase is due primarily to depreciation expense
associated with the greater number of networks in commercial operation during
the 2000 Six Months.
INTEREST INCOME. Interest income increased 47% from $3.1 million in the
1999 Six Months to $4.5 million in the 2000 Six Months. The increase is due
primarily to larger average cash, cash equivalent and restricted cash balances
during the 2000 Six Months as compared to the 1999 Six Months as well as
receiving interest at a higher average rate.
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<PAGE>
INTEREST EXPENSE. Interest expense increased 124% from $26.0 million in the
1999 Six Months to $58.4 million in the 2000 Six Months. The increase is due
primarily to the issuance of the Senior Notes in May 1999, higher borrowings
under the Amended Senior Secured Credit Facility and additional accretion on the
Senior Discount Notes. We capitalized interest related to network construction
projects of $1.3 million during the 1999 Six Months and $5.9 million during the
2000 Six 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 $103.2 million for the 1999 Six Months to
$183.9 million for the 2000 Six 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, there will not be any cash
provided by operations in the near future and we will need to fund the expansion
of our networks. We have financed our operating losses and capital expenditures
with equity invested by our founders, preferred stock placements, credit
facility borrowings 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 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.
During the quarter ended June 30, 2000, 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 until certain
conditions are met that allow for additional borrowings up to a ceiling of $50.0
million. This loan will be used to purchase equipment for future expansion.
We agreed, as of June 30, 2000, to issue 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, our Chairman of the Board, for aggregate gross proceeds of
$182.5 million. The transaction closed and the proceeds were received in early
July 2000. The proceeds are expected to be used to further fund our existing
business plan of building and operating robust fiber optic networks in 37 U.S.
cities and to advance our deployment of a nationwide data footprint. 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
16
<PAGE>
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 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 holders of
at least two-thirds of the Series G, 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.
At August 10, 2000, we had $561.4 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, we
currently have an additional $138.6 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 (See Note 6 of the Notes to Unaudited Condensed Consolidated
Financial Statements). The original covenant required $185.0 million in cash
capital contributions by April 1, 2001. However, as we agreed to contribute
$150.0 million of the proceeds of our Series G private equity financing (see
Note 13) toward fulfilling this requirement, the Lenders have amended this
covenant by extending the due date on the remaining $35.0 million of cash
capital contributions to August 31, 2001. We anticipate raising this additional
capital through private or public sales of securities in the capital markets.
Because the entire $185.0 million cash capital contribution was not made by July
31, 2000, the applicable interest rate associated with the facility increases by
100 basis points until the remaining $35.0 million amount is contributed.
Net cash provided by financing activities from borrowings was $334.9
million and our net cash used in operating and investing activities was $360.6
million for the 2000 Six Months.
We made capital expenditures of $170.7 million in the 1999 Six Months
versus $177.4 million for the 2000 Six Months. 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 $168.3 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
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of equipment purchased in March and we expect to enter into a financing
transaction to fund the $168.3 million of equipment. However, we can give no
assurance that we will be able to obtain such financing.
At June 30, 2000, we had outstanding commitments aggregating approximately
$59.0 million related to the purchase of fiber optic cable and
telecommunications equipment under our agreements with certain suppliers and
service providers.
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 2 networks currently planned for completion
during 2000, as well as operating losses and capital expenditure requirements
for all of our 37 markets and other existing commitments at least through the
end of the second quarter of 2001.
However, 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 to complete all such networks, 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 by the
Company, 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. Failure to obtain such financing could result in the delay or abandonment
of some or all of our development and expansion plans and expenditures, which
would have a material adverse effect on our business, financial condition and
results of operations. Such a failure could also limit our ability to make
principal and interest payments on our indebtedness, and meet our dividend and
redemption obligations with respect to our preferred stock.
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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 terminates in
April 2004 and the $90 million interest rate swap agreement 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
June 30, Future Principal Payments
2000 2000 2001 2002 2003 2004 Thereafter Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt:
Fixed Rate:
Senior Discount
Notes, Interest
payable at 12 1/2%,
Maturing 2008....... $ 205.9 $- $- $- $- $- $320.0 $320.0
Senior Notes,
Interest payable at
13 1/2%, Maturing
2009................ 266.0 - - - - - 275.0 275.0
Variable rate:
Amended Senior Secured
Credit Facility,
interest variable
(10.76% at June 30,
2000)(a)............ 540.4 - - .6 47.6 86.3 405.9 540.4
Telecom IV Senior
Secured Term Loan,
interest variable
(11.31% at June 30,
2000)(a)............ 34.8 - - - 3.5 3.5 27.8 34.8
-------------------------------------------------------------------
Interest rate swaps:
Variable rate for
fixed rate............ (3.6) - - - - - - -
-------------------------------------------------------------------
Total............... $1,043.5 $- $- $.6 $51.1 $89.8 $1,028.7 $1,170.2
--------------------------------
(a) Pay interest rate 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.
</TABLE>
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not Applicable.
(b) Not Applicable.
(c) On June 30, 2000, we agreed to issue an aggregate of 58,881.0180
shares of Series G-1 Voting Convertible Preferred Stock, par value $.01 per
share ("Series G-1 Preferred Stock") and 481,108.2176 shares of Series G-2
Non-Voting Convertible Preferred Stock, par value $.01 per share ("Series G-2
Preferred Stock"), for aggregate gross proceeds of $182.5 million. We paid a fee
of $2 million to Dresdner Kleinwort Benson Private Equity LLC and a fee of $1
million to Nassau Capital Partners IV, L.P. in connection with the offering.
Nassau Capital Partners IV, L.P. acquired 29,177.5006 shares of the Series G-2
Preferred Stock. NAS Partners I L.L.C. acquired 410.9507 shares of the Series
G-2 Preferred Stock. Dresdner Kleinwort Benson Private Equity Partners LP
acquired 44,086.7924 shares of the Series G-1 Preferred Stock and 89,061.2382
shares of the Series G-2 Preferred Stock. 75 Wall Street Associates acquired
14,794.2256 shares of the Series G-1 Preferred Stock. Harold N. Kamine acquired
7,397.1128 shares of the Series G-2 Preferred Stock. CIT Lending Services
Corporation acquired 59,176.9025 shares of the Series G-2 Preferred Stock.
Lucent Technologies Inc. acquired 295,884.5127 shares of the Series G-2
Preferred Stock.
The sale of the Series G-1 and Series G-2 Preferred Stock was made in
reliance on the exemption from registration provided by Rule 506 of Regulation D
and Section 4(2) of the Securities Act, on the basis that the transaction did
not involve a public offering. The offer and sale was made only to accredited
investors. In the Securities Purchase Agreement applicable to the transaction,
each investor made representations as to their investment intent. The Securities
Purchase Agreement places substantial restrictions upon transfer of the
securities and the certificates representing the securities have been legended
to that effect.
Each share of Series G-1 and Series G-2 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 $337.9697. Subject to certain exceptions set forth in the
Certificate of the Powers, Designations, Preferences and Rights of the Series
G-1 Preferred Stock and Series G-2 Preferred Stock, the conversion price is
adjustable upon the occurrence of certain events including (i) the issuance or
sale of common 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. There will be an automatic
conversion upon (i) a Qualified Public Offering, defined as the sale of common
stock pursuant to a registration statement in which the Registrant 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. At any
time prior to a Qualified Public Offering, each holder of Series G-1 or Series
G-2 Preferred Stock has the right to convert its shares into shares of common
stock, plus the right to receive an amount in cash equal to the accumulated but
unpaid dividends on the shares so converted, subject to certain exceptions.
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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 Series A
Cumulative Convertible Preferred Stock, voting as a class, dated as of June 29,
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 C
Cumulative Convertible Preferred Stock, voting as a class, dated as of June 29,
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 E
Senior Redeemable, Exchangeable, PIK Preferred Stock, voting as a class, dated
as of June 30, 2000, were executed by such holders in lieu of a Special Meeting
of such holders.
(a)(iv) Written consents of the holders of the Company's Series F
Senior Redeemable, Exchangeable, PIK Preferred Stock, voting as a class, dated
as of June 30, 2000, were executed by such holders in lieu of a Special Meeting
of such holders.
(b) Not Applicable.
(c)(i) The holders of the Company's Series A Cumulative Convertible
Preferred Stock, by unanimous written consent, approved the Certificate of
Amendment to the Certificate of Powers, Designations, Preferences and Rights of
the Series A Cumulative Convertible Preferred Stock, as required by the
Certificate of Designations governing the rights of the holders of the Series A
Cumulative Convertible Preferred Stock.
(c)(ii) The holders of the Company's Series C Cumulative Convertible
Preferred Stock, by written consent, approved the Certificate of Amendment to
the Certificate of Powers, Designations, Preferences and Rights of the Series C
Cumulative Convertible Preferred Stock, as required by the Certificate of
Designations governing the rights of the holders of the Series C Cumulative
Convertible Preferred Stock. Out of the 175,000 shares of Series C Cumulative
Convertible Preferred Stock issued and outstanding, consents were obtained from
the holders of 125,000 shares.
(c)(iii) The holders of the Company's Series E Senior Redeemable,
Exchangeable, PIK Preferred Stock, by written consent, approved the 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, as required by the Certificate of
Designations governing the rights of the holders of the Series E Senior
Redeemable, Exchangeable, PIK Preferred Stock. Out of the 67,379.64 shares of
Series E Senior Redeemable, Exchangeable, PIK Preferred Stock issued and
outstanding, consents were obtained from the holders of 57,784.82 shares.
(c)(iv) The holders of the Company's Series F Senior Redeemable,
Exchangeable, PIK Preferred Stock, by written consent, approved the 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, as required by the Certificate of
Designations governing the rights of the holders of the Series F Senior
Redeemable, Exchangeable, PIK Preferred Stock. Out of the 45,791.96 shares of
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Series F Senior Redeemable, Exchangeable, PIK Preferred Stock issued and
outstanding, consents were obtained from the holders of 34,343.98 shares.
(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 to the Certificate of the Powers,
Designations, Preferences and Rights of the Series A
Cumulative Convertible Preferred Stock, Par Value $.01 Per
Share, dated as of June 29, 2000.
3.2 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 as of June 29, 2000.
3.3 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 as of June 30, 2000.
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 F Senior Redeemable, Exchangeable, PIK Preferred
Stock, dated as of June 30, 2000.
3.5 Certificate of the Powers, Designations, Preferences and
Rights of the Series G-1 Voting Convertible Preferred Stock
and Series G-2 Non-Voting Convertible Preferred Stock, Par
Value $.01 Per Share, dated as of July 5, 2000.
3.6 Amended and Restated By-Laws of KMC Telecom Holdings, Inc.,
adopted as of April 1, 2000.
4.1 Amendment No. 8 dated as of April 1, 2000 to the Amended and
Restated Stockholders Agreement, dated as of October 31,
1997, among KMC Telecom Holdings, Inc., Nassau Capital
Partners L.P., NAS Partners I L.L.C., Harold N. Kamine,
General Electric Capital Corporation, First Union National
Bank (as successor to CoreStates Bank, N.A.), CoreStates
Holdings, Inc., Dresdner Kleinwort Benson Private Equity
Partners LP, 75 Wall Street Associates, LLC, Lucent
Technologies Inc. and CIT Lending Services Corporation
(formerly known as Newcourt Commercial Finance Corporation).
4.2 Amendment No. 9 dated as of June 30, 2000 to the Amended and
Restated Stockholders Agreement, dated as of October 31,
1997, among KMC Telecom Holdings, Inc., Nassau Capital
Partners L.P., NAS Partners I L.L.C., Harold N. Kamine,
General Electric Capital Corporation, First Union National
22
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Bank (as successor to CoreStates Bank, N.A.), CoreStates
Holdings, Inc., Dresdner Kleinwort Benson Private Equity
Partners LP, 75 Wall Street Associates, LLC, Lucent
Technologies Inc. and CIT Lending Services Corporation
(formerly known as Newcourt Commercial Finance Corporation).
4.3 Securities Purchase Agreement dated as of June 30, 2000
among KMC Telecom Holdings, Inc., Nassau Capital Partners
IV, L.P., NAS Partners I L.L.C., Dresdner Kleinwort Benson
Private Equity Partners LP, 75 Wall Street Associates,
Harold N. Kamine, CIT Lending Services Corporation and
Lucent Technologies Inc.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
(b)(i) A report on Form 8-K was filed by the Registrant on
May 1, 2000 pursuant to Item 5 thereof reporting certain information with
respect to a change in the Registrant's management. Such information was
disclosed in a Press Release, dated May 1, 2000, filed as an exhibit to such
report.
(b)(ii) A report on Form 8-K was filed by the Registrant on
May 18, 2000 pursuant to Item 5 thereof reporting certain information with
respect to its resolution of a dispute with BellSouth Corporation with respect
to the Registrant's entitlement to reciprocal compensation. Such information was
disclosed in a Press Release, dated May 18, 2000, filed as an exhibit to such
report.
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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: August 11, 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)
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EXHIBIT INDEX
NO. DESCRIPTION
3.1 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 as of
June 29, 2000.
3.2 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 as of
June 29, 2000.
3.3 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 as of June 30, 2000.
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 F Senior Redeemable,
Exchangeable, PIK Preferred Stock, dated as of June 30, 2000.
3.5 Certificate of the Powers, Designations, Preferences and Rights of
the Series G-1 Voting Convertible Preferred Stock and Series G-2
Non-Voting Convertible Preferred Stock, Par Value $.01 Per Share,
dated as of July 5, 2000.
3.6 Amended and Restated By-Laws of KMC Telecom Holdings, Inc., adopted
as of April 1, 2000.
4.1 Amendment No. 8 dated as of April 1, 2000 to the Amended and
Restated Stockholders Agreement, dated as of October 31, 1997, among
KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS
Partners I L.L.C., Harold N. Kamine, General Electric Capital
Corporation, First Union National Bank (as successor to CoreStates
Bank, N.A.), CoreStates Holdings, Inc., Dresdner Kleinwort Benson
Private Equity Partners LP, 75 Wall Street Associates, LLC, Lucent
Technologies Inc. and CIT Lending Services Corporation (formerly
known as Newcourt Commercial Finance Corporation).
4.2 Amendment No. 9 dated as of June 30, 2000 to the Amended and
Restated Stockholders Agreement, dated as of October 31, 1997, among
KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS
Partners I L.L.C., Harold N. Kamine, General Electric Capital
Corporation, First Union National Bank (as successor to CoreStates
Bank, N.A.), CoreStates Holdings, Inc., Dresdner Kleinwort Benson
Private Equity Partners LP, 75 Wall Street Associates, LLC, Lucent
Technologies Inc. and CIT Lending Services Corporation (formerly
known as Newcourt Commercial Finance Corporation).
4.3 Securities Purchase Agreement dated as of June 30, 2000 among KMC
Telecom Holdings, Inc., Nassau Capital Partners IV, L.P., NAS
Partners I L.L.C., Dresdner Kleinwort Benson Private Equity Partners
LP, 75 Wall Street Associates, Harold N. Kamine, CIT Lending
Services Corporation and Lucent Technologies Inc.
27 Financial Data Schedule.
25
