<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
COMMISSION FILE NUMBER: 333-43339
KNOLOGY HOLDINGS, INC.
----------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-2203141
------------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
KNOLOGY HOLDINGS, INC.
1241 O.G. SKINNER DRIVE
WEST POINT, GEORGIA 31833
------------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (706) 645-8553
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X*] No [ ]
As of June 30, 1999, there were 394 shares of the registrant's Common
Stock outstanding and 49,852 shares of the registrant's Preferred Stock
outstanding.
* The Company does not have any class of equity securities registered
under the Securities Exchange Act of 1934 and files periodic reports
with the Securities and Exchange Commission pursuant to contractual
obligations with third parties.
<PAGE> 2
EXPLANATORY NOTE
Our parent company, KNOLOGY, Inc., has filed a registration statement on
Form S-1 with the Securities and Exchange Commission (Registration No.
333-89179). We are amending our quarterly report on Form 10-Q for the quarter
ended June 30, 1999 to make conforming changes.
This Form 10-Q/A presents information relating to our quarter ended
June 30, 1999 and does not include any updated information or discuss any recent
developments occurring after the original filing of our Form 10-Q for the
quarter ended June 30, 1999 in August 1999.
<PAGE> 3
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
ITEM 1 FINANCIAL STATEMENTS............................................................ 2
Consolidated Balance Sheets..................................................... 2
Consolidated Statements of Operations........................................... 3
Consolidated Statement of Cash Flows............................................ 4
Notes to Consolidated Financial Statements...................................... 5
ITEM 2 MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................. 7
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K................................................ 14
</TABLE>
1
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 4,859,508
Marketable securities 16,954,564 66,231,397
Affiliate receivable 11,520,948 6,785,691
Accounts receivable, net 4,809,088 5,108,491
Prepaid expenses 607,160 430,811
------------ ------------
Total current assets 33,891,760 83,415,898
PROPERTY AND EQUIPMENT, net 231,482,131 195,496,617
INVESTMENT IN CLEARSOURCE, INC 825,072 825,072
INTANGIBLE AND OTHER ASSETS, net 46,013,567 52,606,063
OTHER 191,524 207,000
------------ ------------
Total assets $312,404,054 $332,550,650
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 12,174 $ 12,174
Bank overdraft 3,244,460 --
Accounts payable 14,243,331 6,366,923
Accrued liabilities 4,780,338 22,215,281
Unearned revenue 2,279,133 2,116,083
------------ ------------
Total current liabilities 24,559,436 30,710,461
NONCURRENT LIABILITIES:
Long-term notes payable 119,576 122,070
Long-term accrued interest payable 30,768,843 21,036,541
Bonds payable, net of discount 270,461,712 263,206,292
------------ ------------
Total liabilities 325,909,567 315,075,364
WARRANTS 2,486,960 2,486,960
STOCKHOLDERS' (DEFICIT) EQUITY
Convertible preferred stock 499 499
Common Stock 4 4
Additional paid-in capital 64,864,366 64,864,366
Accumulated deficit (80,830,874) (49,878,931)
Unrealized (loss) gain on marketable securities (Note 4) (26,468) 2,388
------------ ------------
Total stockholders' (deficit) equity (15,992,473) 14,988,326
------------ ------------
Total liabilities and stockholders' (deficit) equity $312,404,054 $332,550,650
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE> 5
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 10,601,310 $ 5,050,189 $ 20,632,115 $ 9,158,653
------------ ----------- ------------ ------------
OPERATING EXPENSES:
Cost of services 5,176,643 2,163,798 10,014,184 3,936,851
Selling, operating, and administrative 9,672,062 5,304,185 18,196,079 9,246,033
Depreciation and amortization 8,325,951 1,916,494 16,059,846 3,613,314
------------ ----------- ------------ ------------
Total 23,174,656 9,384,477 44,270,109 16,796,198
------------ ----------- ------------ ------------
OPERATING LOSS (12,573,346) (4,334,288) (23,637,994) (7,637,545)
OTHER INCOME AND EXPENSES:
Interest income 386,377 2,934,910 1,108,536 6,133,417
Interest expense (7,846,703) (7,066,371) (15,642,451) (14,054,188)
Other income (expense), net 47,695 116,164 92,844 176,164
------------ ----------- ------------ ------------
Total (7,412,631) (4,015,297) (14,441,071) (7,744,607)
------------ ----------- ------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (19,985,977) (8,349,585) (38,079,065) (15,382,152)
INCOME TAX BENEFIT 3,243,989 -- 7,127,122 --
------------ ----------- ------------ ------------
NET LOSS $(16,741,988) $(8,349,585) $(30,951,943) $(15,382,152)
============ =========== ============ ============
NET LOSS PER SHARE:
Basic and diluted $ (2.24) $ (1.11) $ (4.14) $ (2.05)
============ =========== ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 7,478,194 7,497,750 7,478,194 7,497,750
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 6
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(30,951,943) $(15,382,152)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 16,059,846 3,613,314
Loss on disposition of assets (5,416) --
Amortization of bond discount 7,255,420 6,449,607
Changes in operating assets and liabilities:
Accounts receivable 299,403 (1,080,665)
Accounts receivable - affiliate (4,735,257) --
Prepaid expenses and other (205,205) (216,299)
Accounts payable & bank overdraft 11,120,868 (2,770,993)
Accrued liabilities and interest (7,702,641) 14,205,302
Unearned revenue 163,050 250,439
------------ ------------
Total adjustments 22,250,068 20,450,705
------------ ------------
Net cash (used in) provided by operating activities (8,701,875) 5,068,553
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements (45,478,497) (43,037,330)
Organizational and franchise cost expenditures, net 43,695 (109,002)
Proceeds form sales of assets 54,361 --
Proceeds from sales of marketable securities, net 49,276,833 34,919,500
------------ ------------
Net cash provided by (used in) investing activities 3,896,392 (8,226,832)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Expenditures related to issuance of debt (51,531) (283,650)
Principal payments on debt (2,494) (2,656)
------------ ------------
Net cash used in financing activities (54,025) (286,306)
------------ ------------
NET DECREASE IN CASH (4,859,508) (3,444,585)
CASH AT BEGINNING OF PERIOD 4,859,508 6,144,581
------------ ------------
CASH AT END OF PERIOD $ -- $ 2,699,996
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 8,507 $ 3,647
Net cash paid for acquisition $ -- $ 1,178,958
</TABLE>
4
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KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
KNOLOGY (the "Company") offers residential and business customers
broadband communications services ("Broadband Services"), including
analog and digital cable television, local and long distance
telephone, high-speed Internet access service, and broadband carrier
services ("BCS"), using high capacity hybrid fiber-coaxial networks
that are two-way interactive ("Interactive Broadband Networks") to
provide these Broadband Services. The Company operates Interactive
Broadband Networks in five metropolitan areas (collectively the
"Systems"): Montgomery, Alabama; Columbus and Augusta, Georgia; Panama
City, Florida; and Charleston, South Carolina and plans to expand to
additional mid-sized cities in the southeastern United States. In
addition, KNOLOGY provides analog cable television services in
Huntsville, Alabama and is currently upgrading the Huntsville network
to an Interactive Broadband Network, which will allow the Company to
offer additional Broadband Services in the Huntsville market.
The Company has experienced operating losses as a result of the
expansion of the advanced broadband communications networks and
services into new and existing markets. Management expects to continue
the focus on increasing the customer base and expanding the broadband
operations. Accordingly, operating expenses and capital expenditures
will continue to increase with the extension of the broadband
communications networks in existing and new markets in accordance with
the business plan. While management expects its expansion plans to
result in profitability, there can be no assurance that growth in the
Company's revenue or customer base will continue or that the Company
will be able to achieve or sustain profitability and/or positive cash
flow.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for the fair presentation of the financial
statements have been included, and the financial statements present
fairly the financial position and results of operations for the
interim periods presented. Operating results at June 30, 1999, and for
the three and six months then ended are not necessarily indicative of
the results that may be expected for the year ended December 31, 1999.
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and
results of operations contained in the Company's 1998 Annual Report on
Form 10-K for the year ended December 31, 1998.
5
<PAGE> 8
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 ("SFAS 133"). This
statement, which establishes accounting and reporting standards for
derivative instruments and for hedging activities, is effective for
the first quarter of fiscal years beginning after June 15, 1999. The
Company does not currently have any items subject to disclosure
pursuant to SFAS 133.
During 1998, the Company adopted the provisions of AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities," which
requires that all non-governmental entities expense costs of start-up
activities, including pre-operating, pre-opening and organization
activities, as the costs are incurred. The Company expenses all
startup costs as they are incurred.
4. COMPREHENSIVE INCOME
During 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income", which the Company adopted as of
January 1, 1997. SFAS No. 130 requires the Company to report in their
financial statements, in addition to its net income (loss),
comprehensive income (loss), which includes all changes in equity
during a period from non-owner sources including, as applicable,
foreign currency items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities. The Company's unrealized loss on marketable securities for
the six months ended June 30, 1999 and the year ended December 31,
1998 is reported in the Stockholders' Equity section of the Company's
Condensed Consolidated Balance Sheets.
5. RECLASSIFICATIONS
Certain amounts included in the 1998 financial statements have been
reclassified to conform with the 1999 financial statements.
6. SEGMENT INFORMATION
Effective January 1998, the Company adopted SFAS 131, "Disclosures
about segments of an Enterprise and Related Information," which
established revised standards for the reporting of financial and
descriptive information about operating segments in financial
statements.
The Company owns and operates advanced hybrid fiber-coaxial networks
and provides residential and business customers broadband
communications services, including analog and digital cable
television, local and long distance telephone, data and broadband
carrier services ("BCS"). Data services include high-speed Internet
access via cable modems. BCS includes local transport services such as
local Internet transport, special access, local private line, and
local loop services.
While management of the Company monitors the revenue generated from
each of the various broadband services, operations are managed and
financial performance is evaluated based upon the delivery of multiple
services to customers over a single network. As a result of multiple
services being provided over a single network, many expenses and
assets are shared related to providing the various broadband services
to customers. Management believes that any allocation of the shared
expenses or assets to the broadband services would be subjective and
impractical.
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<PAGE> 9
Revenues by broadband communications service are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Cable Television $ 8,384,705 $ 4,527,285 $ 16,569,808 $ 8,527,225
Telephone 1,853,097 481,362 3,400,557 568,682
Data and BCS 363,508 41,542 661,750 62,746
------------ ----------- ------------ ------------
Consolidated Revenues $ 10,601,310 $ 5,050,189 $ 20,632,115 $ 9,158,653
============ =========== ============ ============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE MANAGEMENT'S DISCUSSION AND ANALYSIS AND OTHER PORTIONS OF THIS
REPORT INCLUDE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF THE FEDERAL
SECURITIES LAWS THAT ARE SUBJECT TO FUTURE EVENTS, RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED.
IMPORTANT FACTORS THAT EITHER INDIVIDUALLY OR IN THE AGGREGATE COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED INCLUDE, WITHOUT
LIMITATION:
- THAT WE WILL NOT RETAIN OR GROW OUR CUSTOMER BASE;
- THAT WE WILL FAIL TO BE COMPETITIVE WITH EXISTING AND
NEW COMPETITORS;
- THAT WE WILL NOT ADEQUATELY RESPOND TO TECHNOLOGICAL
DEVELOPMENTS IMPACTING OUR INDUSTRY AND MARKETS;
- THAT NEEDED FINANCING WILL NOT BE AVAILABLE TO US IF
AND AS NEEDED;
- THAT A SIGNIFICANT CHANGE IN THE GROWTH RATE OF THE
OVERALL U.S. ECONOMY WILL OCCUR SUCH THAT CONSUMER
AND CORPORATE SPENDING ARE MATERIALLY IMPACTED;
- THAT WE OR OUR VENDORS AND SUPPLIERS MAY FAIL TO
TIMELY ACHIEVE YEAR 2000 READINESS SUCH THAT THERE IS
A MATERIAL ADVERSE IMPACT ON OUR BUSINESS, OPERATIONS
OR FINANCIAL RESULT; AND
- THAT SOME OTHER UNFORESEEN DIFFICULTIES OCCUR.
THIS LIST IS INTENDED TO IDENTIFY ONLY CERTAIN OF THE PRINCIPAL FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE
FORWARD-LOOKING STATEMENTS INCLUDED HEREIN.
The following is a discussion of our consolidated financial condition
and results of operations for the three and six months ended June 30, 1999 and
certain factors that are expected to affect our prospective financial condition.
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto and other financial data included
elsewhere in this Form 10-Q.
GENERAL
We offer our customers broadband communications services, including:
- traditional and digital cable television;
- local and long distance telephone; and
- high-speed Internet access service.
Our customers have the choice of receiving these services individually or as
part of a bundle of services. In addition, we sell access to our network and
provide various network-related services to other telecommunications companies,
such as long distance telephone companies and Internet service providers.
We provide all of these services using high-speed broadband networks that
are two-way interactive. Broadband networks are high-capacity, which means they
can handle large volumes of voice, video and data. Two-way interactive networks
give customers the ability to send and receive signals at the same time. Two-way
interactive networks are required for telephone service and provide for higher
speed Internet connections than traditional one-way networks. It is important to
our strategy to provide bundled high-speed communications services that our
networks are broadband and two-way interactive.
We have been providing cable television service since 1995, telephone
and high-speed Internet access services since 1997 and broadband carrier
services since 1998. We own, operate and manage interactive broadband networks
in the five metropolitan areas of Montgomery, Alabama; Columbus and Augusta,
Georgia; Panama City, Florida and Charleston, South Carolina; and we plan to
expand to additional mid-sized cities in the southeastern United States. In
addition, we provide traditional analog and digital cable television
7
<PAGE> 10
services in Huntsville, Alabama. Our Huntsville facilities are being upgraded to
provide local and long distance telephone and high-speed Internet access
services.
We began providing cable television service by acquiring cable
television systems in Montgomery, Alabama and Columbus, Georgia in 1995 and
using these systems as a base for constructing new interactive broadband
networks. Since acquiring the Montgomery and Columbus systems, we have
significantly expanded these networks and upgraded the acquired networks to
offer additional broadband communications services.
In December 1997, we acquired a cable television system in Panama City
Beach, Florida. We are currently upgrading this cable system and extending the
network into the Panama City metro area. We expect to complete this upgrade in
2000.
In early 1998, we began expanding into Augusta, Georgia and Charleston,
South Carolina by obtaining new franchise agreements with the local governments
and by constructing new interactive broadband networks. We expect to complete
construction of these networks by 2003.
In June 1998, we acquired TTE Inc., a non-facilities based reseller of
local, long distance and operator services to small and medium-sized business
customers throughout South Carolina.
In October 1998, we acquired the Cable Alabama cable television system
serving the Huntsville, Alabama area. The existing Cable Alabama plant is being
upgraded to an interactive broadband network which will be completed by 2001.
REVENUES AND EXPENSES
We can group our revenues into four categories: video revenues,
telephone revenues, Internet revenues and other revenues.
- Video revenues. Our video revenues consist of fixed monthly fees for
basic, premium and digital cable television services, as well as fees
from pay-per-view movies and events such as boxing matches and
concerts, that involve a charge for each viewing. Video revenues
accounted for approximately 79.1% of our consolidated revenues the six
months ended June 30, 1999.
- Telephone revenues. Our telephone revenues consist primarily of fixed
monthly fees for local service, enhanced services such as call waiting
and voice mail and usage fees for long distance service. Telephone
revenues accounted for approximately 16.5% of our consolidated revenues
for the six months ended June 30, 1999.
- Internet revenues and other revenues. Our Internet revenues consist
primarily of fixed monthly fees for Internet access service and rental
of cable modems. Other revenues resulted principally from broadband
carrier services and video production services. These combined revenues
accounted for approximately 4.4% of our consolidated revenues for the
six months ended June 30, 1999.
Our operating expenses include cost of services expenses, selling,
operations and administrative expenses and depreciation and amortization
expenses.
Cost of services expenses include:
- Video cost of services. Video cost of services consist primarily of
monthly fees to the National Cable Television Cooperative and other
programming providers, and are generally based on the average number of
subscribers to each program. Programming costs accounted for
approximately 70.4% of our operating expenses for the six months ended
June 30, 1999. Programming costs is our largest single cost and we
expect this to continue. Since this cost is based on numbers of
subscribers, it will increase as we add more subscribers.
- Telephone and Internet access services. Cost of services related to
our telephone and Internet access services include costs of Internet
transport and
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telephone switching, and interconnection and transport charges payable
to local and long distance carriers.
Selling, operations and administrative expenses include:
- Sales and marketing costs. Sales and marketing costs include the cost
of sales and marketing personnel and advertising and promotional
expenses.
- Network operations and maintenance expenses. Network operations and
maintenance expenses include payroll and departmental costs incurred
for network design and maintenance monitoring.
- Customer service expenses. Customer service expenses include payroll
and departmental costs incurred for customer service representatives
and management.
- General and administrative expenses. General and administrative
expenses consist of corporate and subsidiary general management and
administrative costs.
Depreciation and amortization expenses include:
- Depreciation and amortization expenses. Depreciation and amortization
expenses include depreciation of our interactive broadband networks and
equipment, and amortization of cost in excess of net assets and other
intangible assets related to acquisitions.
RESULTS OF OPERATIONS
The following table sets forth certain operating and financial data for
the three months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
AS OF JUNE 30,
1999 1998 CHANGE %
------- ------- ------- -----
<S> <C> <C> <C> <C>
HOMES RELEASED TO SALES 265,511 147,916 117,595 79.5%
======= ======= ======= ====
Connections
Video 82,459 45,215 37,244 82.4%
------ ------ ------ ----
Telephone
On - Net 6,415 1,475 4,940 334.9%
Off - Net (1) 6,357 5,601 756 13.5%
------ ------ ------ ----
12,772 7,076 5,696 80.5%
High-Speed Internet 2,334 395 1,939 490.9%
------ ------ ------ ----
Total Connections 97,565 52,686 44,879 85.2%
====== ====== ====== ====
</TABLE>
(1) Off-net lines include all resale lines sold within KNOLOGY's footprint.
The following table sets forth financial data as a percentage
of operating revenues for the three months ended June 30, 1998 and 1999 and the
six months ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- --------------
1998 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues........................................ 100% 100% 100% 100%
--- --- --- ----
Operating expenses:
Cost of services........................................ 43 49 43 49
Selling, operating and administrative................... 105 91 100 88
Depreciation and amortization........................... 38 79 40 78
--- --- --- ----
Total........................................... 186 219 183 215
--- --- --- ----
Operating income (loss)................................... (86) (119) (83) (115)
Other income and expenses................................. (79) (70) (85) (70)
--- --- --- ----
Income (loss) before minority interest and income tax
(provision) benefit .................................... (165) (189) (168) (185)
Income tax (provision) benefit............................ 0 0 0 63
--- --- --- ----
Net income (loss)......................................... (165)% (189)% (168)% (122)%
=== === === ====
</TABLE>
9
<PAGE> 12
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998.
REVENUES. Operating revenues increased 109.9% from $5.1 million for the
three months ended June 30, 1998 to $10.6 million for the three months ended
June 30, 1999. The increased revenues are primarily due to a higher number of
connections during the three months ended June 30, 1999 compared to the same
period in 1998. The additional connections resulted primarily from:
- the extension of the Company's Broadband networks in the Montgomery,
Columbus and Panama City markets,
- the continued growth of broadband services in the Augusta and
Charleston markets, and
- the acquisition of TTE and Cable Alabama systems in June 1998 and
October 1998, respectively.
EXPENSES. Our operating expenses, excluding depreciation and
amortization, increased 98.8% from $7.5 million for the three months ended June
30, 1998 to $14.8 million for the three months ended June 30, 1999. Our cost of
services increased 139.2% from $2.2 million for the three months ended June 30,
1998 to $5.2 million for the three months ended June 30, 1999. Our selling,
operating, and administrative expenses increased 82.3% from $5.3 million for the
three months ended June 30, 1998 to $9.7 million for the three months ended June
30, 1999. The increase in our cost of services and operating expenses is
consistent with the growth in revenues and is a result of the expansion of our
operations and the increase in the number of employees associated with such
expansion and growth into new markets.
Depreciation and amortization increased from $1.9 million for the three
months ended June 30, 1998 to $8.3 million for the three months ended June 30,
1999. The increase in depreciation and amortization is due to significant
additions in property, plant, equipment and intangible assets resulting from the
expansion of our networks; the acquisition of the TTE and Cable Alabama systems;
and the purchase of buildings, computers and office equipment at the corporate
and subsidiary locations.
Interest expense increased from $7.1 million for the three months ended
June 30, 1998 to $7.8 million for the three months ended June 30, 1999. The
increase in interest expense reflects the accrual of the interest attributable
to the senior discount notes issued in October 1997.
Interest income was $2.9 million for the three months ended June 30,
1998, compared to $386,000 for the same period in 1999 and reflects the interest
earned from the investment of certain proceeds received from the issuance of the
senior discount notes in October 1997. The decrease in interest income is due to
the draw down of cash to fund planned expansion and acquisitions.
NET LOSS. We incurred a net loss of $8.3 million for the three months
ended June 30, 1998 compared to a net loss of $16.7 million for the three months
ended June 30, 1999. We expect our net losses to continue to increase as we
continue to expand our business.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
REVENUES. Our operating revenues increased 125.3% from $9.2 million for
the six months ended June 30, 1998 to $20.6 million for the six months ended
June 30, 1999. The increased revenues are primarily due to a higher number of
connections during the six months ended June 30, 1999 compared to the same
period in 1998. The additional connections resulted primarily from:
- the extension of our broadband networks in the Montgomery,
Columbus and Panama City markets,
- the continued growth of broadband services in the Augusta and
Charleston markets, and
- the acquisition of TTE and Cable Alabama systems in June 1998
and October 1998, respectively.
EXPENSES. Our operating expenses, excluding depreciation and
amortization, increased 114.0% from $13.2 million for the six months ended June
30, 1998 to $28.2 million for the six months ended June 30, 1999. Our cost of
services increased 154.4% from $3.9 million for the six months ended June 30,
1998 to $10.0 million for the six months ended June 30, 1999. Our selling,
operating, and administrative expenses increased 96.8% from $9.2 million for the
six months ended June 30, 1998 to $18.2 million for the six months ended June
30, 1999. The increase in our cost of services and operating expenses is
consistent with the growth in revenues and is a result of the expansion of our
operations and the increase in the number of employees associated with such
expansion and growth into new markets.
Depreciation and amortization increased from $3.6 million for the six
months ended June 30, 1998 to $16.1 million for the six months ended June 30,
1999. The increase in depreciation and amortization is due to significant
additions in property, plant, equipment and intangible assets resulting from the
expansion of our networks; the acquisition of the TTE and Cable Alabama systems;
and the purchase of buildings, computers and office equipment at the corporate
and subsidiary locations.
Interest expense increased from $14.1 million for the six months ended
June 30, 1998 to $15.6 million for the six months ended June 30, 1999. The
increase in interest expense reflects the accrual of the interest attributable
to the senior discount notes issued in October 1997.
Interest income was $6.1 million for the six months ended June 30,
1998, compared to $1.1 million for the same period in 1999 and reflects the
interest earned from the investment of certain proceeds received from the
issuance of the senior discount notes in October 1997. The decrease in interest
income is due to the draw down of cash to fund planned expansion and
acquisitions.
NET LOSS. We incurred a net loss of $15.4 million for the six months
ended June 30, 1998 compared to a net loss of $31.0 million for the six months
ended June 30, 1999. We expect our net losses to continue to increase as we
continue to expand our business.
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LIQUIDITY AND CAPITAL RESOURCES.
As of June 30, 1999, we had net working capital of $9.3 million,
compared to $52.7 million at December 31, 1998.
We have required significant equity infusions and debt proceeds to
finance a significant portion of our operating, investing and financing
activities in the development of our business. Our operating activities provided
cash of $5.1 million and used cash of $8.7 million for the six months ended June
30, 1998 and 1999, respectively. Cash used in operating activities in the 1999
period was primarily due to a net loss and changes in receivables, partially
offset by depreciation and amortization and bond accretion on the senior
discount notes. Our investing activities used cash of $8.2 million and provided
cash of $3.9 million for the six months ended June 30, 1998 and 1999,
respectively. Our investing activities in the 1999 period primarily consisted of
$45.5 million of capital expenditures principally funded by $49.3 million in
proceeds from the sale of short-term investments. The short-term investments
sold represent a portion of the proceeds received from the October 22, 1997
offering of senior discount notes that were invested in marketable securities.
FUNDING TO DATE
On October 22, 1997, we received net proceeds of approximately $242.4
million from the offering of units consisting of senior discount notes due 2007
and warrants to purchase preferred stock. The notes were sold at a substantial
discount from their principal amount at maturity and there will not be any
payment of interest on the notes prior to April 15, 2003. The notes will fully
accrete to face value of $444.1 million on October 15, 2002.
From and after October 15, 2002, the notes will bear interest, which
will be payable in cash, at a rate of 11 7/8% per annum on April 15 and October
15 of each year, commencing April 15, 2003. The indenture contains covenants
that affect, and in certain cases significantly limit or prohibit, our ability
to:
- incur indebtedness;
- pay dividends;
- prepay subordinated indebtedness;
- redeem capital stock;
- make investments;
- engage in transactions with stockholders and affiliates;
- create liens;
- sell assets; and
- engage in mergers and consolidations.
If we fail to comply with these covenants, our obligation to repay the
notes may be accelerated. However, these limitations are subject to a number of
important qualifications and exceptions. In particular, while the indenture
restricts our ability to incur additional indebtedness by requiring compliance
with specified leverage ratios, it permits us and our subsidiaries to incur an
unlimited amount of indebtedness to finance the acquisition of equipment,
inventory and network assets and to secure such indebtedness, and to incur up
to $50 million of additional secured indebtedness. Upon a change of control, as
defined in the indenture, we would be required to make an offer to purchase the
notes at a purchase price equal to 101% of their accreted value, plus accrued
interest.
Each unit in the offering also consisted of a warrant to purchase
0.003734 shares of our preferred stock at an exercise price of $0.01 per share.
In connection with the units offering, we completed an equity private
placement, in which we issued approximately 21,400 additional shares of
Preferred Stock at $1,500 per share to ITC Holding, Century Telephone
Enterprises, Inc., SCANA Communications, Inc., South Atlantic Venture Fund III,
Limited Partnership and AT&T venture funds for aggregate proceeds of
approximately $32.2 million. ITC Holding, Century Telephone, South Atlantic,
AT&T venture funds and SCANA Communications, Inc. purchased approximately $10.0
million, $2.5 million, $5.5 million, $5.0 million and $5.0 million of preferred
stock, respectively, in this private placement. A portion of the proceeds from
this private placement were used to repay approximately $11.0 million in
borrowings from SCANA and an additional $11.0 million of debt we incurred to
finance the purchase of our cable television systems in Montgomery, Alabama and
Columbus, Georgia in 1995. ITC Holding subsequently repurchased all shares of
our preferred stock owned by Century Telephone, South Atlantic and SCANA during
1998.
On December 22, 1998, we entered into a $50 million four-year senior
secured credit facility with First Union National Bank and First Union Capital
Markets Corp. The credit facility allows us to borrow up to five times a
certain individual subsidiary's annualized consolidated adjusted cash flow, as
defined in the credit facility agreement. The credit facility may be used for
working capital and other purposes, including capital expenditures and
permitted acquisitions. At KNOLOGY Holdings' option, interest will accrue based
on either the prime or federal funds rate plus applicable margin or the LIBOR
rate plus applicable margin. The applicable margin may vary from .50% to 2.50%
based on our leverage ratio. The credit facility contains a number of covenants
including, among others, covenants limiting our ability and the ability of our
subsidiaries to:
- incur debt;
- create liens;
- pay dividends;
- make distributions or stock repurchases;
- make certain investments;
- engage in transactions with affiliates;
- sell assets; and
- engage in mergers and acquisitions.
The credit facility also includes covenants requiring compliance with
certain operating and financial ratios on a consolidated basis, including the
number of revenue generating units and average revenue per subscriber. We are
currently in compliance with these covenants. Should we not be in compliance
with the covenants in the future, we would be in default and would require a
waiver from the lender. In the event the lender would not provide a waiver,
amounts outstanding against the facility could be payable to the lender on
demand. A change of control of our company, as defined in the credit facility
agreement, would constitute a default under the covenants. To date, no funds
have been drawn against the credit facility.
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FUTURE FUNDING
Our business requires substantial investment to finance capital
expenditures and related expenses, to expand and/or upgrade the interactive
broadband networks, to fund subscriber equipment and to maintain the quality of
our networks. We currently expect to spend approximately $94 million for
capital expenditures during 1999, including the planned expansion and/or
upgrade of the Montgomery, Columbus, Panama City, Augusta, Charleston and
Huntsville networks. We currently expect to spend approximately $9 million to
fund operating losses and approximately $131 million for capital expenditures
during 2000. The $131 million includes approximately $70 million related to the
construction of networks in our existing markets. The remainder primarily
relates to the purchase of customer premise equipment, information systems and
the commencement of the construction of networks in additional markets. Failure
to have access to additional funds during 2000 could require us to delay some
of our construction plans, delay preliminary efforts in new markets and
possibly require us to restrict or reduce the level of operations in some
markets.
We presently estimate the cost to complete construction of the
networks in our existing markets to be approximately $170 million, of which
approximately $70 million would be expended during 2000. We currently expect
that if sufficient funds are raised, the construction of our networks in our
existing markets would be substantially completed during 2002.
We presently expect that present cash reserves, cash flow from
operations, funding obtained through our existing credit facility and the
private offering discussed below will be sufficient to fund our 2000 capital
expenditures. We will need additional capital to complete construction of our
networks through 2002. We expect to raise this capital through private and
public debt offerings and private and public equity offerings, although there
is no assurance that this financing will be available on terms favorable to us.
If we are not successful in raising additional capital, we may not be able to
complete the construction of our networks throughout our current markets. This
may cause us to violate our franchises agreements, which could adversely affect
us, or may just limit our growth within these markets.
We plan to expand to additional mid-sized cities in the southeastern
United States. We estimate the cost of constructing networks and funding
initial subscriber equipment in additional new cities at approximately $50 to
$75 million per city, though our costs could be as much as $85 million to $90
million per city for larger markets. The actual costs of each new market may
vary significantly from this range and will depend on the number of miles of
network to be constructed, the geographic and demographic characteristics of
the city, costs associated with the cable franchise in each city, the number of
subscribers in each city, the mix of services purchased, the cost of subscriber
equipment we pay for or finance and other factors. We will need additional
financing to expand into additional cities, for new business activities or in
the event we decide to make additional acquisitions. We expect to raise this
capital through private and public debt offerings and private and public equity
offerings, although there is no assurance that this financing will be available
on terms favorable to us. If we are not successful in raising additional
capital, we will not be able to expand to additional cities as planned. The
schedule for our planned expansion will depend upon the availability of
sufficient capital. Definitive decisions on which cities will be chosen for
expansion are not expected to be made until this capital has been raised.
THE YEAR 2000 ISSUE
General
The year 2000 issue is a general term used to describe the various
problems that may result in computers and other machinery as we reach the year
2000. These problems generally arise from the fact that most of the world's
computers have historically used only two digits to identify the year in a
date, often meaning that the computer will fail to distinguish dates in the
2000's from dates in the 1900's.
These problems are expected to increase in frequency and severity as
the year 2000 approaches. This issue impacts our owned or licensed computer
systems and equipment used in connection with internal operations.
Third Parties
We also rely directly and indirectly, in the regular course of
business, on the proper operation and compatibility of third party systems. The
year 2000 problem could cause these systems to fail, err, or become
incompatible with our systems.
Certain of our suppliers and vendors could have a material affect on
our business if they fail to become year 2000 ready. In these cases, we are
relying on the determination by an outside testing company that these vendors
and suppliers are ready for the year 2000. Also, we have conducted our own
testing of certain major components of the systems provided to us by third
parties. Nonetheless, if we or a significant third party on which we rely fails
to become year 2000 ready, or if the year 2000 problem causes our systems to
become internally incompatible or incompatible with such third party systems,
our business could suffer from material disruptions, including the inability to
process transactions, send invoices, accept customer orders or provide
customers with our services. We could also face similar disruptions if the year
2000 problem causes general widespread problems or an economic crisis. We
cannot now estimate the extent of these potential disruptions.
Our State of Readiness
We established a year 2000 program office to coordinate activity and
report to our executive management and board of directors with regard to the
year 2000 issue. Our year 2000 program office developed a plan for us to become
year 2000 ready by the middle of the fourth quarter 1999. This plan covers:
- our technology and operating systems;
- billing of our cable, telephone and Internet services;
- customer service;
- financial operations and reporting;
- network monitoring; and
- the systems of our major vendors, third party service
providers and other material service and content providers.
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We are addressing our year 2000 plan with respect to our internal
operations in six phases:
- an awareness phase, in which we inventory and evaluate our
systems, components and other significant infrastructure;
- an assessment phase, in which we identify those elements that
reasonably could be expected to be affected by year 2000
problems;
- a remediation phase, in which we remediate or replace
equipment that we believe will fail to operate properly in the
year 2000;
- a testing and validation phase, in which we test the
remediation and replacement conducted and validate its
ability;
- an implementation phase, in which we add our new or updated
equipment to our current systems; and
- a contingency phase, in which we develop contingency plans for
our at-risk business functions.
We have completed the awareness, assessment, remediation and contingency phases
of our plan for all of our services and systems. We have substantially completed
the testing and validation and implementation phases for all of these services
and systems.
Certain actions in the remediation phase have been conducted by the
third parties who provide hardware, software, or services that comprise our
systems. We have polled all the third parties who provide material hardware,
software, or services as part of our information technology and operating
systems with regard to each of such third party's year 2000 compliance plan and
state of readiness. We have actively sought responses from all vendors and third
parties as to year 2000 compliance, status of plans and readiness. All key
vendors have responded and most of the third parties have assured us that their
hardware and/or software is currently or will be year 2000 compliant before the
end of the year. We expect to have any remaining non-compliant systems in
compliance before the end of 1999.
Interstate Telephone Company and Valley Telephone Company will be year
2000 ready by December 1999. We depend on these companies for our telephone
carrier access billing, customer care and billing and switching services. Both
companies rely on third party vendors for the telephony customer care and
billing and switching services, and both use a legacy system for telephony
carrier access billing services.
Costs
To date, we have incurred approximately $450,000 of costs in connection with our
year 2000 plan, and we anticipate spending approximately $150,000 in additional
funds. We expense all costs associated with our Year 2000 plan as we incur them
and anticipate funding the costs of our plan from cash flows. To date, we have
not deferred any specific information technology projects because of the costs
of our plan.
Risks
The failure to correct a material year 2000 problem or to implement a
contingency plan could result in system failures leading to a disruption in, or
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect our business, profitability and operating
results.
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Contingency Plans
We have a year 2000 contingency planning committee, which has developed
year 2000 contingency plans for all of our information technology and operating
systems and for each of our locations. This committee identified key business
risks which were used to drive the development of these plans. Additionally, we
use an outside consulting service to assist in our year 2000 readiness, project
coordination and execution of the year 2000 plan.
Contingency planning to maintain and restore service in the event of
natural disasters, power failures and systems-related problems is a routine part
of our operations. We believe that such contingency plans will assist us in
responding to any failure by outside service providers to successfully address
year 2000 issues. In addition, we have developed complete contingency plans that
address our most reasonably likely worst case year 2000 scenarios including
identification of alternate vendors and service providers and manual
alternatives to system operations.
Our contingency plans for the components of our operations that are
provided by third parties and are of greatest concern to us in the event of a
year 2000 problem are:
- Network. To prepare for potential year 2000 problems affecting our
network, we have leased more facilities to provide greater redundancy.
We have also received vendor assurances with regard to our network.
- Billing. We have conducted our own testing of our billing systems. In
addition, we are relying on third-party verification that these systems
are ready for the year 2000.
- Switching. We have only one switch, through which we route all of our
telephone data transmissions. A team of specialists from an outside
consulting service will be on call to provide backup support in the
event of any year 2000 problems. The switching functions have also been
tested by us and by third-parties for year 2000 readiness.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. We
manage our exposure to this market risk through our regular operating and
financing activities. Derivative instruments are not currently used and, if
utilized, are employed as risk management tools and not for trading purposes.
We have no derivative financial instruments outstanding to hedge
interest rate risk. To date, no funds have been drawn against our credit
facility. However, any borrowings under our credit facility which are based on
either prime rate or federal funds rate plus applicable margin or LIBOR plus
applicable margin would be subject to market conditions. Any changes in these
rates would affect the rate at which we could borrow funds under our credit
facility. A hypothetical 10% increase in interest rates on our variable rate
bank debt for a duration of one year would increase interest expense by an
immaterial amount.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit Number Description of Exhibit
27.1* Financial Data Schedule for the six months ended June 30,
1999. (for SEC use only)
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* Previously filed with KNOLOGY Holdings, Inc.'s Form 10-Q for the quarter
ended June 30, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, KNOLOGY
Holdings, Inc. has duly caused this Amendment No. 1 to KNOLOGY Holdings, Inc.'s
Form 10-Q for the quarter ended June 30, 1999 to be signed on its behalf by the
undersigned thereunto duly authorized.
KNOLOGY Holdings, Inc.
December 8, 1999 By: /s/ Rodger L. Johnson
---------------------
Rodger L. Johnson
President and Chief Executive Officer
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