<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER: 333-89179
KNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2424258
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
KNOLOGY, Inc.
1241 O.G. SKINNER DRIVE
WEST POINT, GEORGIA 31833
---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 645-8553
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates
is not applicable as no public market exists for the voting stock of the
registrant.
As of October 31, 2000, we had 443,301 shares of common stock,
50,912,155 shares of Series A preferred stock and 21,180,131 shares of Series B
preferred stock outstanding.
<PAGE> 2
KNOLOGY, INC. AND SUBSIDIARIES
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS.................................................... 2
Condensed Consolidated Balance Sheets................................... 2
Condensed Consolidated Statements of Operations......................... 3
Condensed Consolidated Statement of Cash Flows.......................... 4
Notes to Condensed Consolidated Financial Statements.................... 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................... 6
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK............... 15
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS....................................................... 15
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS............................... 15
ITEM 3 DEFAULTS UPON SENIOR SECURITIES......................................... 15
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................... 15
ITEM 5 OTHER INFORMATION....................................................... 15
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K........................................ 15
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 46,276,840 $ 7,818,462
Marketable securities -- 6,069,461
Affiliate receivable 14,425,437 18,244,232
Accounts receivable, net 10,392,083 9,037,451
Prepaid expenses 1,097,357 796,708
------------- -------------
Total current assets 72,191,717 41,966,314
PROPERTY AND EQUIPMENT, net 341,535,915 273,896,831
INVESTMENTS 10,976,678 3,249,056
INTANGIBLE AND OTHER ASSETS, net 68,345,173 81,063,813
OTHER 315,405 157,796
------------- -------------
Total assets $ 493,364,888 $ 400,333,810
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,547,424 $ 12,174
Accounts payable 19,461,837 15,138,408
Accounts payable - affiliate -- 337,964
Accrued liabilities 7,690,030 7,033,444
Unearned revenue 4,156,249 3,779,841
------------- -------------
Total current liabilities 34,855,540 26,301,831
NONCURRENT LIABILITIES:
Long-term notes payable 15,565,316 19,110,520
Bonds payable, net of discount 341,533,372 311,901,661
Unamortized credits 316,661 370,373
------------- -------------
Total non-current liabilities 357,415,349 331,382,554
Total liabilities 392,270,889 357,684,385
WARRANTS 4,726,065 4,726,065
STOCKHOLDERS' EQUITY
Convertible preferred stock 720,647 480,355
Common Stock 4,390 65
Additional paid-in capital 247,641,871 117,066,988
Accumulated deficit (151,998,974) (79,593,349)
Unrealized loss on marketable securities (Note 4) -- (30,699)
------------- -------------
Total stockholders' equity 96,367,934 37,923,360
------------- -------------
Total liabilities and stockholders' (deficit) equity $ 493,364,888 $ 400,333,810
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE> 4
KNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 20,885,312 $ 17,702,423 $ 59,878,974 $ 48,824,228
------------ ------------ ------------- ------------
OPERATING EXPENSES:
Cost of services 7,926,626 5,838,814 23,076,588 18,573,719
Selling, operating, and administrative 15,679,472 13,152,827 42,111,986 35,760,116
Depreciation and amortization 15,726,850 11,670,314 43,585,462 29,526,358
------------ ------------ ------------- ------------
Total 39,332,948 30,661,955 108,774,036 83,860,193
------------ ------------ ------------- ------------
OPERATING LOSS (18,447,636) (12,959,532) (48,895,062) (35,035,965)
OTHER INCOME AND EXPENSES:
Interest income 1,160,112 142,530 4,282,886 1,251,191
Interest expense (10,011,500) (8,676,864) (29,422,590) (24,393,289)
Other income (expense), net (1,131) 79,138 71,965 174,122
------------ ------------ ------------- ------------
Total (8,852,519) (8,455,196) (25,067,739) (22,967,976)
------------ ------------ ------------- ------------
LOSS BEFORE INCOME TAX BENEFIT (27,300,155) (21,414,728) (73,962,801) (58,003,941)
MINORITY INTEREST -- 3,267,653 3,267,653
INCOME TAX BENEFIT -- 4,428,468 1,557,194 11,011,711
------------ ------------ ------------- ------------
NET LOSS $(27,300,155) $(13,718,607) $ (72,405,607) $(43,724,577)
============ ============ ============= ============
NET LOSS PER SHARE:
Basic and diluted $ (0.38) $ (137,186) $ (1.05) $ (437,246)
============ ============ ============= ============
WEIGHTED AVERAGE SHARES OUTSTANDING 72,507,950 100 68,642,609 100
============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 5
KNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (72,405,607) $(43,724,577)
Adjustments to reconcile net loss to net cash
provided (used in) by operating activities:
Depreciation and amortization 43,585,462 29,526,358
Gain on disposition of assets (2,173) (7,809)
Amortization of bond discount 13,022,675 11,665,498
Amortization of deferred investment tax credit (53,712) (53,712)
Minority interest in net loss of subsidiary -- (3,267,653)
Changes in operating assets and liabilities:
Accounts receivable (1,354,632) (2,751,415)
Accounts receivable - affiliate 3,818,795 --
Prepaid expenses and other (458,258) (708,813)
Accounts payable 4,323,425 7,271,678
Accrued liabilities and interest 17,265,622 (1,380,524)
Unearned revenue 376,408 361,836
------------- ------------
Total adjustments 80,523,612 40,655,444
------------- ------------
Net cash provided by (used in) by operating activities 8,118,005 (3,069,133)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements (97,953,805) (64,290,709)
Investments (7,727,622) (993,527)
Organizational and franchise cost expenditures, net (732,281) --
Proceeds from sales of assets 220,857 74,632
Proceeds from sales of marketable securities, net 6,069,461 66,231,397
------------- ------------
Net cash (used in) provided by investing activities (100,123,390) 1,021,793
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility -- 19,000,000
Repayments to affiliates (337,964) (854,352)
Proceeds from private placement, net 130,850,199 --
Expenditures related to issuance of debt (38,518) (51,531)
Principal payments on debt (9,954) (5,574)
------------- ------------
Net cash provided by financing activities 130,463,763 18,088,543
------------- ------------
NET INCREASE IN CASH 38,458,378 16,041,203
CASH AT BEGINNING OF PERIOD 7,818,462 5,158,774
------------- ------------
CASH AT END OF PERIOD $ 46,276,840 $ 21,199,977
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,409,527 $ 132,675
Cash received during period for income taxes $ 5,289,521 $ 10,010,352
</TABLE>
4
<PAGE> 6
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
KNOLOGY Inc. (the "Company") offers residential and business
customers broadband communications services, including analog and digital
cable television, local and long distance telephone, high-speed Internet
access service, and other services including broadband carrier services,
using high capacity hybrid fiber/coaxial networks that are two-way
interactive. We own, operate and manage interactive broadband networks in
six metropolitan areas: Montgomery and Huntsville, Alabama; Columbus and
Augusta, Georgia; Panama City, Florida; and Charleston, South Carolina.
We also provide local telephone services in West Point, Georgia, and
Lanett and Valley, Alabama. Our local telephone service in this area is
provided over a traditional copper wire network while our cable and
Internet services are provided over our broadband network. We plan to
expand to additional cities in the southeastern United States.
The Company has experienced operating losses as a result of the
expansion of its 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 for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2000. 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 1999 Annual Report on Form 10-K for the year ended December
31, 1999.
Certain amounts included in the 1999 financial statements have been
reclassified to conform to the 2000 financial statements.
3. NET LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." This
statement requires the disclosure of basic net income (loss) per share
and diluted net income (loss) per share. Basic net income (loss) per
share is computed by dividing net income (loss) available to common
stockholders by the weighted-average number of common shares outstanding
during the period. Diluted net loss per share gives effect to all
potentially dilutive securities. As the Company has no significant common
stock outstanding, the convertible preferred stock is assumed to be
converted for purposes of this calculation. The Company's other
potentially dilutive securities, including stock options and stock
warrants, are not included in the computation of diluted net loss per
share as their effect is antidilutive.
5
<PAGE> 7
4. EQUITY TRANSACTIONS
In February 2000, ITC Holding Company, Inc., in connection with a
reorganization of certain of its businesses, distributed to its option
holders options to purchase 6,258,036 shares of our Series A preferred
stock, and distributed to its shareholders all of its 43,211,531 shares
of our Series A preferred stock. As a result of this distribution, we are
no longer a subsidiary of ITC Holding. The Series A preferred stock is
convertible at any time at the option of the holder into common stock at
a $4.75 conversion price and will automatically convert into common stock
upon the completion of a public offering in which (1) the per share price
to the public is at least $6.00, (2) the gross proceeds to the Company
are at least $50 million, and (3) the common stock sold in the offering
is listed on the Nasdaq National Market or on a national securities
exchange.
On February 7, 2000 the Company issued, in a private placement,
21,180,131 shares of its Series B preferred stock to a small group of
institutional investors and certain officers of the Company for proceeds
of approximately $100.6 million. The Series B preferred stock is
convertible at any time at the option of the holder into common stock at
a $4.75 conversion price and will automatically convert into common stock
upon the completion of a public offering in which (1) the per share price
to the public is at least $6.00, (2) the gross proceeds to the Company
are at least $50 million, and (3) the common stock sold in the offering
is listed on the Nasdaq National Market or on a national securities
exchange. The Series B preferred stockholders vote with the common
stockholders on an as converted basis. The Series B preferred shares do
not bear a special dividend. The Series B preferred shares have a
liquidation preference of $4.75 per share to the common and Series A
preferred shares.
5. 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, and high-speed Internet access, which the Company
refers to as video, voice, and data services. We also provide other
services including broadband carrier services, which 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.
Revenues by broadband communications service are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Video................ $10,360,460 $ 8,902,908 $30,974,969 $25,953,724
Voice................ 8,973,091 7,948,973 24,957,692 20,987,416
Data and Other....... 1,551,761 850,542 3,946,313 1,883,088
----------- ----------- ----------- -----------
Consolidated Revenues $20,885,312 $17,702,423 $59,878,974 $48,824,228
=========== =========== =========== ===========
</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, INCLUDING THE PRIVATE SECURITIES LITIGATION REFORM ACT, THAT
ARE SUBJECT TO FUTURE EVENTS, RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED. IMPORTANT FACTORS
THAT EITHER INDIVIDUALLY OR IN THE AGGREGATE COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED INCLUDE, WITHOUT LIMITATION, (1) THAT WE
WILL NOT RETAIN OR GROW OUR CUSTOMER BASE, (2) THAT WE WILL FAIL TO BE
COMPETITIVE WITH EXISTING AND NEW COMPETITORS, (3) THAT WE WILL NOT ADEQUATELY
RESPOND TO TECHNOLOGICAL DEVELOPMENTS IMPACTING OUR INDUSTRY AND MARKETS, (4)
THAT NEEDED FINANCING WILL NOT BE AVAILABLE IF AND AS
6
<PAGE> 8
NEEDED, (5) THAT A SIGNIFICANT CHANGE IN THE GROWTH RATE OF THE OVERALL U.S.
ECONOMY WILL OCCUR SUCH THAT CONSUMER AND CORPORATE SPENDING ARE MATERIALLY
IMPACTED, AND (6) THAT SOME OTHER UNFORESEEN DIFFICULTIES OCCUR, AS WELL AS
THOSE RISKS SET FORTH IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1999, WHICH ARE INCORPORATED HEREIN BY REFERENCE. THIS LIST IS
INTENDED TO IDENTIFY ONLY CERTAIN OF THE PRINCIPAL FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN.
The following is a discussion of our consolidated financial condition and
results of operations for the three and nine months ended September 30, 2000 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
Knology, Inc. was formed in September 1998 to enable ITC Holding to
complete a reorganization of some of its subsidiaries. In November 1999, in
order to effectuate the reorganization:
- ITC Holding contributed to Knology, Inc.:
- its 85% interest in Knology Broadband, Inc. (formerly Knology
Holdings, Inc.);
- all of the outstanding capital stock of Interstate Telephone
Company, Inc., Valley Telephone Company, Inc., Globe Telecom,
Inc. and ITC Globe, Inc., referred to as our "telephone
operations group;"
- a note in the principal amount of $9.6 million; and
- its 6% interest in ClearSource, Inc., subscription rights to
purchase ClearSource shares and $5.6 million in cash to
purchase the additional ClearSource shares; and
- the holders of the remaining 15% interest in Knology Broadband.
exchanged that interest for shares of Knology, Inc. and the holders of
outstanding warrants to purchase Knology Broadband preferred stock
exchanged those warrants for warrants to purchase preferred stock of
Knology, Inc.
As a result of the reorganization, ITC Holding held a 90% interest in us,
which it distributed to its stockholders on February 7, 2000. The reorganization
was accounted for in a manner similar to a pooling of interest for the telephone
operations group.
In January 2000, InterCall, Inc., a subsidiary of ITC Holding, loaned us
approximately $29.7 million to fund capital expenditures and working capital.
The loan, which had a maturity date of March 31, 2000, provided that InterCall
could elect to convert it into options to purchase our Series A preferred stock.
In February 2000, InterCall converted the loan into options to purchase
6,258,036 shares of our Series A preferred stock, and we issued to ITC Holding a
note under which we will pay ITC Holding any proceeds from option exercises
received by us, including an amount equal to the exercise price for cashless
exercises. The options were distributed to ITC Holdings' option holders on
February 4, 2000.
REVENUES AND EXPENSES
We have been expanding our networks and adding corporate staffing
necessary to grow the business into new markets. Accordingly, our operating
expenses and capital expenditures have increased significantly and are expected
to continue to increase with the continued expansion of the existing systems and
into new markets.
We have incurred net losses in each quarter since our inception, and as
of September 30, 2000, the accumulated deficit had reached approximately $152.0
million. We anticipate incurring net losses during the next several years while
continuing to expand operations, and as a result of substantially increased
depreciation and amortization from the construction of the new networks and
operating expenses incurred in building the customer base. There can be no
assurance that growth in revenue or the subscriber base will continue or that we
will be able to achieve or sustain profitability or positive cash flow.
7
<PAGE> 9
We can group our revenues into four categories: video revenues, voice
revenues, data 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 49.6% and 51.7% of our consolidated
revenues for the three and nine months ended September 30, 2000
compared to 50.3% and 53.2% for the three and nine months ended
September 30, 1999.
- Voice revenues. Our voice 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. Voice revenues
accounted for approximately 43.0% and 41.7% of our consolidated
revenues for the three and nine months ended September 30, 2000
compared to 44.9% and 43.0% for the three and nine months ended
September 30, 1999.
- Data revenues and other revenues. Our data 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 7.4% and 6.6% of our consolidated revenues
for the three and nine months ended September 30, 2000 compared to 4.8%
and 3.9% for the three and nine months ended September 30, 1999.
Our operating expenses include cost of services, selling, operations and
administrative and depreciation and amortization.
Cost of services 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 as a percentage of video
revenue were approximately 45.4% and 43.4% for the three and nine
months ended September 30, 2000 compared to 42.4% and 42.8% for the
three and nine months ended September 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.
- Voice and data services. Cost of services related to our voice and data
services include costs of Internet transport and telephone switching,
and interconnection and transport charges payable to local and long
distance carriers.
Selling, operations and administrative expenses include:
- 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 activity.
- 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 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
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1999
The following table sets forth financial data as a percentage of operating
revenues for the three months ended September 30, 2000 and 1999.
8
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------ -----
<S> <C> <C>
Operating revenues:
Video................................... 50% 50%
Voice................................... 43 45
Data and other.......................... 7 5
---- ----
Total................................ 100 100
Operating expenses:
Cost of services........................ 38 33
Selling, operating and administrative... 75 74
Depreciation and amortization........... 75 66
---- ----
Total................................ 188 173
---- ----
Operating loss.............................. (88) (73)
Other income and expenses, net.............. (42) (48)
---- ----
Loss before income tax benefit.............. (130) (121)
Minority interest........................... 0 19
Income tax benefit.......................... 0 25
---- ----
Net loss attributable to common
stockholders........................ (130)% (77)%
==== ====
</TABLE>
The following table sets forth certain operating and financial data for
the periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
2000 1999 CHANGE %
------- ------- ------ -----
<S> <C> <C> <C> <C>
MARKETABLE HOMES PASSED........ 359,739 287,901 71,838 25.0%
CONNECTIONS (1)
Video....................... 99,565 87,609 11,956 13.6%
------- ------- ------ -----
Voice
On Net (2).............. 51,591 31,760 19,831 62.4%
Off Net (3)............. 7,224 7,813 (589) (7.5)%
------- ------- ------ ------
58,815 39,573 19,242 48.6%
Data........................ 12,473 3,718 8,755 235.5%
------- ------- ----- -----
Total................... 170,853 130,900 39,953 30.5%
======= ======= ====== =====
</TABLE>
(1) Connections represent revenue-generating connections. For video and data,
connections represent the number of customers subscribing to the service.
For voice, connections represent the number of lines connected. For
example, a telephone customer that has two lines would be counted as two
connections.
(2) On-net refers to lines provided over our networks.
(3) Off-net consists of telephone lines leased from third parties.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999 CHANGE %
------------ ------------ ------------ -----
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Video.............................. $ 10,360,460 $ 8,902,908 $ 1,457,552 16.4%
Voice.............................. 8,973,091 7,948,973 1,024,118 12.9%
Data and other..................... 1,551,761 850,542 701,219 82.4%
------------ ------------ ------------ ----
Total........................ 20,885,312 17,702,423 3,182,889 18.0%
OPERATING EXPENSES:
Cost of services................... 7,926,626 5,838,814 2,087,812 35.8%
Selling, operating, and
administrative.................... 15,679,472 13,152,827 2,526,645 19.2%
Depreciation and amortization...... 15,726,850 11,670,314 4,056,536 34.8%
------------ ------------ ------------ -----
Total........................ 39,332,948 30,661,955 8,670,993 28.3%
------------ ------------ ------------ -----
OPERATING LOSS........................ (18,447,636) (12,959,532) (5,488,104) 42.3%
OTHER INCOME AND EXPENSES, NET........ (8,852,519) (8,455,196) (397,323) 4.7%
LOSS BEFORE INCOME TAX BENEFIT........ (27,300,155) (21,414,728) (5,885,427) 27.5%
MINORITY INTEREST..................... -- 3,267,653 (3,267,653) 100.0%
INCOME TAX BENEFIT.................... -- 4,428,468 (4,428,468) 100.0%
------------ ------------ ------------ -----
NET LOSS.............................. $(27,300,155) $(13,718,607) $(13,581,548) 99.0%
============ ============ ============ =====
</TABLE>
Revenues. Operating revenues increased 18.0% from $17.7 million for the
three months ended September 30, 1999, to $20.9 million for the three months
ended September 30, 2000. Operating revenues from video services increased 16.4%
from $8.9 million for the three months ended September 30, 1999 to $10.4 million
for the same period in 2000. Operating revenues from voice services increased
12.9% from $7.9 million for the three months ended September 30, 1999 to $9.0
million for the same period in 2000. Operating revenue from data and other
services increased 82.4% from $851,000 for the three months ended September 30,
1999 to $1.6 million for the same period in 2000, $1.4 million of which were
revenues from data services. The increased revenues for video,
9
<PAGE> 11
voice and data and other services are primarily due to increases in the number
of connections from September 30, 1999 to September 30, 2000 of 11,956 or 13.6%
for video, 19,242 or 48.6% for voice and 8,755 or 235% for data. The additional
connections resulted primarily from the extension and/or upgrade of our
broadband networks, and marketing and sales efforts.
Particularly in the cable industry, there is a trend towards
consolidation, exclusivity arrangements and other forms of competition. If the
level of competition continues to increase, due to consolidation, exclusivity
arrangements or otherwise, our ability to attract and retain customers and to
increase revenues could suffer.
Expenses. Operating expenses, excluding depreciation and amortization
increased 25.0% from $18.9 million for the three months ended September 30,
1999, to $23.6 million for the three months ended September 30, 2000. Cost of
services increased 35.8% from $5.8 million for the three months ended September
30, 1999, to $7.9 million for the three months ended September 30, 2000.
Selling, operating and administrative expenses increased 19.2% from $13.2
million for the three months ended September 30, 1999, to $15.7 million for the
three months ended September 30, 2000. The increase in our cost of services is
consistent with the growth in connections and revenues. The increase in
operating expenses is a result of the expansion of the operations and the
increase in the number of employees associated with such expansion and growth
into new markets. We expect our cost of services to continue to increase as we
add more connections. On a per subscriber basis, our cost of services should
remain relatively constant as we expand into new markets, but our selling,
operations and administration expenses will increase. Programming costs, which
are our largest single expense item, have been increasing over the last several
years, and we expect this trend to continue. We may not be able to pass these
higher costs on to customers, which would adversely affect our cash flow and
operating margins.
Depreciation and amortization increased from $11.7 million for the three
months ended September 30, 1999, to $15.7 million for the three months ended
September 30, 2000. 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 upgrading of older systems to
broadband capabilities; the purchase of buildings, computers and office
equipment; and the costs of the reorganization of Knology, Inc. We expect our
depreciation and amortization expense to continue to increase as we make capital
expenditures to extend our existing networks and build additional networks.
Other Income and Expense. Interest income was $143,000 for the three
months ended September 30, 1999, compared to $1.2 million for the same period in
2000. The increase primarily reflects the interest earned from the short-term
investment of certain proceeds of the $100.6 million received in the Series B
preferred stock offering completed in February 2000 and the $29.7 million loan
provided by InterCall.
Interest expense increased from $8.7 million for the three months ended
September 30, 1999, to $10.0 million for the three months ended September 30,
2000. The increase in interest expense reflects the accrual of the interest
attributable to the 11 7/8% senior discount notes issued in October 1997. We
capitalized interest related to the construction of our broadband networks of
$864,000 and $555,000 for the three months ended September 30, 1999 and 2000,
respectively.
Income Tax Benefit. The income tax benefit was $4.4 million for the three
months ended September 30, 1999, compared to no tax benefit for the same period
in 2000. The income tax benefit in 1999 resulted from our utilizing net tax
losses under a tax sharing agreement with ITC Holding. The tax sharing agreement
became effective August 1998 upon the acquisition by ITC Holding of its majority
interest in Knology Broadband. With the completion of the spinoff of Knology,
Inc. by ITC Holding, effective February 7, 2000, we no longer participate in the
tax sharing agreement and therefore can not utilize our net tax losses. As a
standalone entity after the spinoff, we record a full valuation allowance
against any net tax losses with no tax benefit being recorded.
Net Loss Attributed to Common Stockholders. We incurred a net loss of
$13.7 million for the three months ended September 30, 1999, compared to a net
loss of $27.3 million for the three months ended September 30, 2000. We expect
net losses to continue to increase as we continue to expand our business.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
The following table sets forth financial data as a percentage of operating
revenues for the nine months ended September 30, 2000 and 1999.
10
<PAGE> 12
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
----- -----
<S> <C> <C>
Operating revenues:
Video................................... 52% 53%
Voice................................... 42 43
Data and other.......................... 6 4
---- ----
Total................................ 100 100
Operating expenses:
Cost of services........................ 39 38
Selling, operating and administrative... 70 73
Depreciation and amortization........... 73 60
---- ----
Total................................ 182 171
---- ----
Operating loss.............................. (82) (71)
Other income and expenses, net.............. (42) (47)
---- ----
Loss before income tax benefit.............. (124) (118)
Minority interest...........................
0 7
Income tax benefit.......................... 3 22
---- ----
Net loss attributable to common
stockholders....................... (121)% (89)%
==== ====
</TABLE>
The following table sets forth certain operating and financial data for
the periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
2000 1999 CHANGE %
-------- -------- ------ -----
<S> <C> <C> <C> <C>
MARKETABLE HOMES PASSED........ 359,739 287,901 71,838 25.0%
CONNECTIONS (1)
Video....................... 99,565 87,609 11,956 13.6%
------- ------- ------ -----
Voice
On Net (2).............. 51,591 31,760 19,831 62.4%
Off Net (3)............. 7,224 7,813 (589) (7.5)%
------- ------- ------ -----
58,815 39,573 19,242 48.6%
Data........................ 12,473 3,718 8,755 235.5%
------- ------- ------ -----
Total................... 170,853 130,900 39,953 30.5%
======= ======= ====== =====
</TABLE>
(1) Connections represent revenue-generating connections. For video and data,
connections represent the number of customers subscribing to the service.
For voice, connections represent the number of lines connected. For
example, a telephone customer that has two lines would be counted as two
connections.
(2) On-net refers to lines provided over our networks.
(3) Off-net consists of telephone lines leased from third parties.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999 CHANGE %
------------ ------------ ------------ ------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Video.............................. $ 30,974,969 $ 25,953,724 $ 5,021,245 19.3%
Voice.............................. 24,957,692 20,987,416 3,970,276 18.9%
Data and other..................... 3,946,313 1,883,088 2,063,225 109.6%
------------ ------------ ------------ -----
Total........................ 59,878,974 48,824,228 11,054,746 22.6%
OPERATING EXPENSES:
Cost of services................... 23,076,588 18,573,719 4,502,869 24.2%
Selling, operating, and 42,111,986 35,760,116 6,351,870 17.8%
administrative
Depreciation and amortization...... 43,585,462 29,526,358 14,059,104 47.6%
------------ ------------ ------------ -----
Total........................ 108,774,036 83,860,193 24,913,843 29.7%
------------ ------------ ------------ -----
OPERATING LOSS........................ (48,895,062) (35,035,965) (13,859,097) 39.6%
OTHER INCOME AND EXPENSES, NET........ (25,067,739) (22,967,976) (2,099,763) 9.1%
LOSS BEFORE INCOME TAX BENEFIT........ (73,962,801) (58,003,941) (15,958,860) 27.5%
MINORITY INTEREST..................... -- 3,267,653 (3,267,653) 100.0%
INCOME TAX BENEFIT.................... 1,557,194 11,011,711 (9,454,517) 85.9%
------------ ------------ ------------ -----
NET LOSS.............................. $(72,405,607) $(43,724,577) $(28,681,030) 65.6%
============ ============ ============ =====
</TABLE>
Revenues. Operating revenues increased 22.6% from $48.8 million for the
nine months ended September 30, 1999, to $59.9 million for the nine months ended
September 30, 2000. Operating revenues from video services increased 19.3% from
$26.0 million for the nine months ended September 30, 1999 to $31.0 million for
the same period in 2000. Operating revenues from voice services increased 18.9%
from $21.0 million for the nine months ended September 30, 1999 to $25.0 million
for the same period in 2000. Operating revenue from data and other services
increased 110% from $1.9 million for the nine months ended September 30, 1999 to
$3.9 million for the same period in 2000, $3.8 million of which were revenues
from data services. The increased revenues for video, voice and data and other
services are primarily due to increases in the number of connections from
September 30, 1999 to September 30, 2000 of 11,956 or 13.6% for video, 19,242 or
48.6% for voice and 8,755 or 236% for data. The additional connections resulted
primarily from the extension and/or upgrade of our broadband networks, and
marketing and sales efforts.
11
<PAGE> 13
Particularly in the cable industry, there is a trend towards
consolidation, exclusivity arrangements and other forms of competition. If the
level of competition continues to increase, due to consolidation, exclusivity
arrangements or otherwise, our ability to attract and retain customers and to
increase revenues could suffer.
Expenses. Operating expenses, excluding depreciation and amortization,
increased 19.5 % from $54.6 million for the nine months ended September 30,
1999, to $65.2 million for the nine months ended September 30, 2000. Cost of
services increased 24.2% from $18.6 million for the nine months ended September
30, 1999, to $23.1 million for the nine months ended September 30, 2000.
Selling, operating and administrative expenses increased 17.8% from $35.8
million for the nine months ended September 30, 1999, to $42.1 million for the
nine months ended September 30, 2000. The increase in our cost of services is
consistent with the growth in connections and revenues. The increase in
operating expenses is a result of the expansion of the operations and the
increase in the number of employees associated with such expansion and growth
into new markets. We expect our cost of services to continue to increase as we
add more connections. On a per subscriber basis, our cost of services should
remain relatively constant as we expand into new markets, but our selling,
operations and administration expenses will increase. Programming costs, which
are our largest single expense item, have been increasing over the last several
years, and we expect this trend to continue. We may not be able to pass these
higher costs on to customers, which would adversely affect our cash flow and
operating margins.
Depreciation and amortization increased from $29.5 million for the nine
months ended September 30, 1999, to $43.6 million for the nine months ended
September 30, 2000. 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 upgrading of older systems to
broadband capabilities; the purchase of buildings, computers and office
equipment; and the costs of the reorganization of Knology, Inc. We expect our
depreciation and amortization expense to continue to increase as we make capital
expenditures to extend our existing networks and build additional networks.
Other Income and Expense. Interest income was $1.3 million for the nine
months ended September 30, 1999, compared to $4.3 million for the same period in
2000. The increase primarily reflects the interest earned from the short-term
investment of certain proceeds of the $100.6 million received in the Series B
preferred stock offering completed in February 2000 and the $29.7 million loan
provided by InterCall.
Interest expense increased from $24.4 million for the nine months ended
September 30, 1999, to $29.4 million for the nine months ended September 30,
2000. The increase in interest expense reflects the accrual of the interest
attributable to the 11 7/8% senior discount notes issued in October 1997. We
capitalized interest related to the construction of our broadband networks of
$2.4 million and $1.6 million for the nine months ended September 30, 1999 and
2000, respectively.
Income Tax Benefit. The income tax benefit was $11.0 million for the nine
months ended September 30, 1999, compared to $1.6 million for the same period in
2000. The income tax benefit in 1999 resulted from our utilizing net tax losses
under a tax sharing agreement with ITC Holding. The tax sharing agreement became
effective August 1998 upon the acquisition by ITC Holding of its majority
interest in Knology Broadband. With the completion of the spinoff of Knology,
Inc. by ITC Holding, effective February 7, 2000, we no longer participate in the
tax sharing agreement and therefore can not utilize our net tax losses. As a
standalone entity after the spinoff, we record a full valuation allowance
against any net tax losses with no tax benefit being recorded.
Net Loss Attributed to Common Stockholders. We incurred a net loss of
$43.7 million for the nine months ended September 30, 1999, compared to a net
loss of $72.4 million for the nine months ended September 30, 2000. We expect
net losses to continue to increase as we continue to expand our business.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had net working capital of $40.9 million,
compared to $15.7 million at December 31, 1999. The increase in working capital
is principally due to the completion of funding for the private placement of our
Series B preferred stock and the loan, which was subsequently converted to
equity, provided by InterCall.
Operating activities used cash of $3.1 million and provided cash of $8.1
million for the nine months ended September 30, 1999 and 2000, respectively. Net
cash provided by operating activities in the 2000 period was primarily due to
the $72.4 million net loss being offset by a $24.0 million increase in working
capital, non-cash depreciation and amortization of $43.6 million and non-cash
bond accretion on the 11 7/8% senior discount notes of $13.0 million.
12
<PAGE> 14
Investing activities provided cash of $1.0 million and used cash of
$100.1 million for the nine months ended September 30, 1999 and 2000,
respectively. Investing activities in the 2000 period primarily consisted of
$98.0 million of capital expenditures and a $7.7 million investment in
ClearSource, Inc., partially funded by $6.1 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 1997 offering of 11 7/8 % senior discount
notes that were invested in marketable securities.
Financing activities provided cash of $18.1 million and $131.0 million
for the nine months ended September 30, 1999 and 2000, respectively. Financing
activities in the nine months ended September 30, 2000 consisted of $100.6
million in proceeds from the private placement of Series B preferred stock and a
$29.7 million loan from InterCall.
FUNDING TO DATE
We have required equity infusions and debt proceeds to finance a
significant portion of our operating, investing and financing activities in the
development of our business. In October 1997, Knology Broadband 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 cash 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 a number of covenants that restrict the ability of Knology Broadband
and its subsidiaries to take certain actions, including the 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.
The proceeds from the units offering were used to fund capital
expenditures, including the upgrade and expansion of our networks, and to fund
operating losses.
In connection with the 1997 units offering, Knology Broadband completed
an equity private placement in which Knology Broadband issued approximately
$32.2 million of preferred stock. A portion of the proceeds from this private
placement were used to repay approximately $11.0 million in borrowings from
SCANA Communications, Inc. and an additional $11.0 million of debt incurred by
Knology Broadband to finance the purchase of its cable television systems in
Montgomery, Alabama and Columbus, Georgia in 1995.
In November 1999, we completed an exchange in which we received the
Knology Broadband warrants, issued in connection with the senior discount notes
in 1997, in exchange for warrants to purchase shares of our Series A preferred
stock.
On December 22, 1998, Knology Broadband entered into a $50 million
four-year senior secured credit facility with First Union National Bank and
First Union Securities, Inc. This credit facility allows Knology Broadband to
borrow up to five times the annualized consolidated adjusted cash flow of each
of its subsidiaries, if such subsidiary's cash flow is positive. The credit
facility may be used for working capital and other purposes, including capital
expenditures and permitted acquisitions. At Knology Broadband's 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 the leverage ratio of Knology Broadband. The credit
facility contains a number of covenants that restrict the ability of Knology
Broadband and its subsidiaries to take certain actions, including the ability
to:
- incur indebtedness;
- pay dividends;
- make distributions or stock repurchases;
- make investments;
13
<PAGE> 15
- engage in transactions with affiliates;
- create liens;
- sell assets; and
- engage in mergers and acquisitions.
The maximum amount available under the credit facility as of September
30, 2000 was approximately $19 million, assuming compliance with all of the
operating and financial covenants. As of September 30, 2000, $19 million had
been drawn against the credit facility. The company plans to refinance the
credit facility but there can be no assurances that it will be able to do so on
favorable terms
We obtained an aggregate of approximately $39.4 million in loans from ITC
Holding and its subsidiary InterCall during November 1999 and January 2000.
Approximately $9.6 million of these advances were provided to us in November
1999. This loan was converted into 2,029,724 shares of Series A preferred stock
in November 1999. Another $29.7 million loan was made in January 2000. The loan
bore interest at an annual rate of 11 7/8% and had a maturity date of March 31,
2000. In February 2000, the loan was converted into options to purchase up to
6,258,036 shares of our Series A preferred stock, and we issued to ITC Holding a
note under which we will pay ITC Holding any proceeds from option exercises
received by us, including an amount equal to the exercise price for cashless
exercises. The options were distributed to ITC Holding's option holders on
February 4, 2000.
In February 2000, we issued to qualified investors in an equity private
placement 21,180,131 shares of our Series B preferred stock at a purchase price
of $4.75 per share, for aggregate proceeds of approximately $100.6 million.
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. Our business plan currently requires approximately $125 million in
2001 to fund capital expenditures and net operating losses.
We expect that, with sufficient funds, the construction of our networks
in our existing markets will be substantially completed during 2002. We will not
have sufficient funds to complete this construction without significant
additional financing. We expect to raise this capital through future debt
offerings and private and/or public equity offerings, although there is no
assurance that this financing will be available on terms favorable to us. Our
ability to execute our current business plan, complete the construction of our
networks throughout our existing markets, remain in compliance with our
franchise agreements, meet our current obligations as they become due and avoid
material adverse effects on our results of operations is dependent upon our
ability to raise additional capital.
We plan to expand to additional cities in the southeastern United
States. We have recently received franchises to build networks in Knoxville and
Nashville, Tennessee. We have begun construction of our network in Knoxville and
have begun planning the construction of our network in Nashville. We estimate
the cost of constructing networks and funding initial subscriber equipment in
additional new cities at approximately $75 to $100 million per 100,000 homes.
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 currently expect to spend approximately $30 million during
2001 on the construction of networks in these new markets. We will need
additional financing to complete this expansion, for new business activities or
in the event we decide to make acquisitions. We expect to raise this capital
through future 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 additional cities will be
chosen for expansion are not expected to be made until this capital has been
raised.
In connection with our spinoff from ITC Holding, which was completed on
February 7, 2000, we entered into a tax separation agreement with ITC Holding.
In the agreement, we made representations and covenants that impose limitations
on our future actions. We could be liable for up to $50 million to ITC Holding,
under the tax separation agreement if we breach these representations and
covenants. For example, we covenanted not to pursue any transaction that would
be presumed to be part of a plan or series of related transactions which results
in any cumulative 50% change of ownership within the four-year period beginning
two years before the date of our spinoff from ITC Holding. Transactions that
could involve a possible breach include an actual or constructive change of
14
<PAGE> 16
control, exceeding limits on the raising of equity capital or the use of our
stock to acquire other companies. As a result, we may have to forego some growth
opportunities that may occur during the two years subsequent to the spinoff,
until February 7, 2002.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We do not engage in trading market risk sensitive instruments and do not
purchase as investments, as hedges, or for purposes "other than trading"
instruments that are likely to expose us to market risk, whether it be from
interest rate, foreign currency exchange, commodity price or equity price risk.
We have entered into no forward or futures contracts, purchased no options and
entered into no swaps.
Our primary market risk exposure is that of interest rate risk. A change
in LIBOR or the Prime Rate as set by First Union National Bank would affect the
rate at which we could borrow funds under our credit facility.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
On February 7, 2000 we completed a private placement of 21,180,131 shares
of our Series B preferred stock to a small group of institutional investors and
certain of our executive officers for approximately $100.6 million. The shares
of Series B preferred stock are convertible into shares of our common stock at
any time at the option of the holder and automatically upon the completion of a
public offering in which (1) the per share price to the public is at least
$6.00, (2) the gross proceeds to us are at least $50 million and (3) the common
stock sold in the offering is listed on the Nasdaq National Market or on a
national securities exchange. The shares are convertible into shares of common
stock on a one-to-one basis, subject to customary antidilution adjustments. The
Series B preferred stockholders will vote with the common stockholders on an as
converted basis. The Series B preferred shares will not bear a special dividend.
The Series B preferred shares have a liquidation preference of $4.75 per share
to the common and Series A preferred shares.
The issuance of securities described above was made in reliance on
exemptions from registration provided by Section 4(2) or Regulation D of the
Securities Act, as amended, as transactions by an issuer not involving any
public offering. The persons and entities exchanging securities in the
transactions represented their intention to acquire the securities for
investment only and not with a view to or for distribution in connection with
such transactions, and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access to
information about the Company, through their relationship with the Company or
through information about the Company made available to them.
ITEM 3. Default upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<S> <C>
27.1 Financial Data Schedule for the nine months ended September 30, 2000
(for SEC use only).
</TABLE>
15
<PAGE> 17
(B) REPORTS ON FORM 8-K
The Company did not file any reports on form 8-K during the quarterly period
ended September 30, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
KNOLOGY, Inc.
November 14, 2000 By: /s/ RODGER L. JOHNSON
--------------------------------------
President and Chief Executive Officer
KNOLOGY, Inc.
November 14, 2000 By: /s/ ROBERT K. MILLS
--------------------------------------
Chief Financial Officer
(Principal Financial Officer)
16
