<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 MARCH 31, 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 April 30, 2000, we had 82,378 shares of common stock, 50,453,719
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 MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C> <C>
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.........................................................8
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.............................16
PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS ............................................17
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..................................17
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K......................................................17
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 126,440,015 $ 7,818,462
Marketable securities -- 6,069,461
Affiliate receivable 14,288,204 18,244,232
Accounts receivable, net 9,130,610 9,037,451
Prepaid expenses and other 1,467,986 796,708
------------- -------------
Total current assets 151,326,815 41,966,314
PROPERTY AND EQUIPMENT, net 288,033,001 273,896,831
INVESTMENTS 3,254,056 3,249,056
INTANGIBLE AND OTHER ASSETS, net 76,586,165 81,063,813
OTHER 199,485 157,796
------------- -------------
Total assets $ 519,399,522 $ 400,333,810
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 12,174 $ 12,174
Accounts payable 16,385,760 15,138,408
Accounts payable - affiliate 123,800 337,964
Accrued liabilities 6,044,736 7,033,444
Unearned revenue 3,956,864 3,779,841
------------- -------------
Total current liabilities 26,523,334 26,301,831
NONCURRENT LIABILITIES:
Long-term notes payable 19,110,520 19,110,520
Bonds payable, net of discount 321,468,350 311,901,661
Unamortized credits 352,469 370,373
------------- -------------
Total noncurrent liabilities 340,931,339 331,382,554
------------- -------------
Total liabilities 367,454,673 357,684,385
WARRANTS 4,726,065 4,726,065
STOCKHOLDERS' EQUITY
Convertible preferred stock 716,339 480,355
Common Stock 824 65
Additional paid-in capital 247,137,126 117,066,988
Accumulated deficit (100,635,505) (79,593,349)
Unrealized (loss) gain on marketable securities (Note 4) -- (30,699)
------------- -------------
Total stockholders' equity 147,218,784 37,923,360
------------- -------------
Total liabilities and stockholders' equity $ 519,399,522 $ 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
MARCH 31,
2000 1999
------------- -------------
<S> <C> <C>
OPERATING REVENUES $ 18,739,769 $ 15,238,254
------------- -------------
OPERATING EXPENSES:
Cost of services 7,386,982 6,215,058
Selling, operating, and administrative 12,342,584 10,710,493
Depreciation and amortization 13,460,564 8,623,713
------------- -------------
Total 33,190,130 25,549,264
------------- -------------
OPERATING LOSS (14,450,361) (10,311,010)
OTHER INCOME AND EXPENSES:
Interest income 1,397,331 722,197
Interest expense (9,549,433) (7,838,516)
Other income (expense), net 3,115 47,289
------------- -------------
Total (8,148,987) (7,069,030)
------------- -------------
LOSS BEFORE INCOME TAX BENEFIT (22,599,348) (17,380,040)
INCOME TAX BENEFIT 1,557,194 3,641,044
------------- -------------
NET LOSS $ (21,042,154) $ (13,738,996)
============= =============
NET LOSS PER SHARE:
Basic and diluted $ (0.34) $ (13,738,996)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 61,205,240 100
============= =============
</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>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (21,042,154) $ (13,738,996)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 13,460,564 8,623,713
Gain on disposition of assets (2,874) (5,416)
Amortization of bond discount 4,208,257 3,556,851
Amortization of deferred investment tax credit (17,904) (17,904)
Changes in operating assets and liabilities:
Accounts receivable (93,159) 305,019
Accounts receivable - affiliate 3,956,025 (1,560,241)
Prepaid expenses and other (712,969) (541,402)
Accounts payable 1,247,352 11,778,422
Accrued liabilities and interest 4,369,724 (11,212,115)
Unearned revenue 177,023 37,862
------------- -------------
Total adjustments 26,592,039 10,964,789
------------- -------------
Net cash provided by (used in) by operating activities 5,549,885 (2,774,207)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements (23,105,656) (20,263,319)
Investments (5,000) (264,891)
Franchise cost expenditures, net (25,271) --
Proceeds from sales of assets 14,718 54,361
Proceeds from sales of marketable securities, net 6,069,461 19,573,170
------------- -------------
Net cash used in investing activities (17,051,748) (900,679)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances to affiliates (214,164) (688,093)
Proceeds from to private placement 130,337,580 --
Expenditures related to issuance of debt -- 19,723
Principal payments on debt -- (2,932)
------------- -------------
Net cash provided by (used in) financing activities 130,123,416 (671,302)
------------- -------------
NET INCREASE (DECREASE) IN CASH 118,621,553 (4,346,188)
CASH AT BEGINNING OF PERIOD 7,818,462 5,158,674
------------- -------------
CASH AT END OF PERIOD $ 126,440,015 $ 812,486
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 494,463 $ 7,124
</TABLE>
4
<PAGE> 6
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
KNOLOGY Inc. (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"). 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 months ended
March 31, 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.
5
<PAGE> 7
Certain amounts included in the 1999 financial statements have
been reclassified to conform with 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 shareholders 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.
4. EQUITY TRANSACTIONS
In February 2000, ITC Holding Company, 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 Company.
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 consummation of a qualified initial public
offering of not less than $50 million. 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 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, data and 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.
6
<PAGE> 8
Revenues by broadband communications service are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------- -------------
<S> <C> <C>
Cable Television $ 9,714,342 $ 8,394,763
Telephone 7,673,024 6,474,946
Data and Other 1,352,403 368,545
------------- -------------
Consolidated Revenues $ 18,739,769 $ 15,238,254
============= =============
</TABLE>
7
<PAGE> 9
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 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 RISK 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 months ended March 31, 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, Inc. 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. Knology Broadband and its
subsidiaries have been treated as an equity investment in our
8
<PAGE> 10
consolidated financial statements for 1997, since ITC Holding owned 29% of
Knology Broadband at that time. Knology Broadband and its subsidiaries have been
consolidated in our financial statements since July 1998 when ITC Holding
increased its ownership to 85%. The 1998 financials include the accounts of
Knology Broadband for the entire year and the minority interest in losses
includes the 58% share of Knology Broadband's losses for the period from January
1998 to July 1998. For a more detailed description of the reorganization and its
accounting treatment, see Note 1 to our consolidated financial statements.
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' stockholders on
February 4, 2000.
In June 1998, Knology Broadband acquired TTE Inc., a non-facilities
based reseller of local, long-distance and operator services in South Carolina.
The acquisition was accounted for as a purchase and the results of TTE have been
included in our financial statements since the date of its acquisition.
In October 1998, Knology Broadband acquired the Cable Alabama cable
television system serving the Huntsville, Alabama area. The acquisition was
accounted for as a purchase and the operations of the system have been included
in our financial statements since the date of its acquisition.
Our current organizational structure is as follows:
[CHART]
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 March 31, 2000, the accumulated deficit had reached approximately $101
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.
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 52% and 55% of our consolidated revenues
for the three months ended March 31, 2000 and March 31, 1999,
respectively.
9
<PAGE> 11
- - 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 41% and 43% of our consolidated
revenues for the three months ended March 31, 2000 and March 31, 1999,
respectively.
- - 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 7% and 2% of our consolidated revenues for
the three months ended March 31, 2000 and March 31, 1999, respectively.
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 43.7% and 43.4% for the three months ended
March 31, 2000 and 1999, respectively. Programming costs is our largest
single cost and we expect this to continue. Since this cost is based on
numbers of subscribers, it will increase as we add more subscribers.
- - Telephone and Internet access services. Cost of services related to our
telephone and Internet access services include costs of Internet
transport and telephone switching, and interconnection and transport
charges payable to local and long distance carriers.
Selling, operations and administrative expenses include:
- - 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 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 MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999
The following table sets forth financial data as a percentage of operating
revenues for the three months ended March 31, 2000 and 1999.
10
<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------ ------
<S> <C> <C>
Operating Revenues 100% 100%
Operating expenses:
Cost of services 39 41
Selling, operating and administrative 66 70
Depreciation and amortization 72 57
---- ----
Total 177 168
---- ----
Operating loss (77) (68)
Other income and expenses (43) (46)
---- ----
Loss before income tax benefit (120) (114)
Income tax benefit 8 24
---- ----
Net loss attributable to stockholders............. (112%) (90%)
==== ====
</TABLE>
The following table sets forth certain operating and financial data for
the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
AS OF MARCH 31,
2000 1999 CHANGE %
------- ------- ------ ----
<S> <C> <C> <C> <C>
HOMES RELEASED TO SALES 317,859 257,175 60,684 23.6%
======= ======= ====== ====
CONNECTIONS (1)
Video 93,770 83,127 10,643 12.8%
------- ------- ------ -----
Voice
On Net (2) 41,006 25,667 15,339 59.8%
Off Net (3) 7,609 6,789 820 12.1%
------- ------- ------ -----
48,615 32,456 16,159 49.8%
Internet/BCS 7,662 1,631 6,031 369.8%
------- ------- ------ -----
Total 150,047 117,214 32,833 28.0%
======= ======= ====== =====
</TABLE>
(1) Connections represent revenue-generating connections. For video and
high-speed Internet, connections represent the number of customers
subscribing to the service. For telephone, 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
MARCH 31,
2000 1999 CHANGE %
------------ ------------ ----------- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 18,739,769 $ 15,238,254 $ 3,501,515 23.0%
------------ ------------ ----------- ----
OPERATING EXPENSES
Cost of services 7,386,982 6,215,058 1,171,924 18.9%
Selling, operating, and administrative 12,342,584 10,710,493 1,632,091 15.2%
Depreciation and amortization 13,460,564 8,623,713 4,836,851 56.1%
------------ ------------ ----------- ----
</TABLE>
11
<PAGE> 13
<TABLE>
Total 33,190,130 25,549,264 7,640,866 29.9%
------------ ------------ ----------- ----
<S> <C> <C> <C> <C>
OPERATING LOSS (14,450,361) (10,311,010) (4,139,351) 40.1%
OTHER INCOME AND EXPENSES (8,148,987) (7,069,030) (1,079,957) 15.3%
------------ ------------ ----------- ----
LOSS BEFORE INCOME TAX BENEFIT (22,599,348) (17,380,040) (5,219,308) 30.0%
INCOME TAX BENEFIT 1,557,194 3,641,044 (2,083,850) 57.2%
------------ ------------ ----------- ----
NET LOSS $(21,042,154) $(13,738,996) $(7,303,158) 53.2%
============ ============ =========== ====
</TABLE>
Revenues. Operating revenues increased 23.0% from $15.2 million for the
three months ended March 31, 1999, to $18.7 million for the three months ended
March 31, 2000. Operating revenues from video services increased 16.7% from $8.4
million for the three months ended March 31, 1999 to $9.7 million for the same
period in 2000. Operating revenues from voice services increased 18.5% from $6.5
million for the three months ended March 31, 1999 to $7.7 million for the same
period in 2000. Operating revenue from data and other services increased 267%
from $370,000 for the three months ended March 31, 1999 to $1.3 million for the
same period in 2000, $1.2 million of which were revenues from data services. The
increased revenues for video, voice and data and other services are primarily
due to an increase in the number of connections, from 117,214 at March 31, 1999
to 150,047 at March 31, 2000. The additional connections resulted primarily from
the extension of our broadband networks in Montgomery, Columbus, Panama City,
Augusta and Charleston.
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 16.6% from $16.9 million for the three months ended March 31, 1999, to
$19.7 million for the three months ended March 31, 2000. Cost of services
increased 18.9% from $6.2 million for the three months ended March 31, 1999, to
$7.4 million for the three months ended March 31, 2000. Selling, operating and
administrative expenses increased 15.2% from $10.7 million for the three months
ended March 31, 1999, to $12.3 million for the three months ended March 31,
2000. 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 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 $8.6 million for the three
months ended March 31, 1999, to $13.5 million for the three months ended March
31, 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.
12
<PAGE> 14
Other Income and Expense. Interest income was $720,000 for the three
months ended March 31, 1999, compared to $1.4 million for the same period in
2000. The increase primarily reflects the interest earned from the investment of
$100.6 million in proceeds received in the Series B preferred stock offering
completed in February 2000 and the $29.7 million loan provided by InterCall,
Inc.
Interest expense increased from $7.8 million for the three months ended
March 31, 1999, to $9.5 million for the three months ended March 31, 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 $595,000 and
$528,000 for the three months ended March 31, 1999 and 2000 respectively.
Income Tax Benefit. The income tax benefit was $3.6 million for the
three months ended March 31, 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 spin-off of Knology,
Inc. by ITC Holding, effective February 4, 2000, we no longer participate in the
tax sharing agreement and therefore can not utilize our net tax losses. As a
stand-alone entity after the spin-off, we will 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
$13.3 million for the three months ended March 31, 1999, compared to a net loss
of $21.0 million for the three months ended March 31, 2000. We expect net losses
to continue to increase as we continue to expand our business.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had net working capital of $124.8 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 provided by InterCall, Inc.
Operating activities used cash of $2.8 million and provided cash of
$5.5 million for the three months ended March 31, 1999 and 2000, respectively.
Net cash provided by operating activities in the 2000 period was primarily due
to the $21.0 million net loss being offset by a $9.0 million increase in working
capital, depreciation and amortization of $13.4 million and bond accretion on
the Senior Discount Notes of $4.2 million. The net cash flow activity related to
operations consists primarily of changes in operating assets and liabilities and
adjustments to net income for non-cash transactions including:
- depreciation and amortization;
- deferred income taxes;
- deferred investment tax credit;
Investing activities used cash of $900,000 and $17.1 million for the
three months ended March 31, 1999 and 2000, respectively. Investing activities
in the 2000 period primarily consisted of $23.1 million of
13
<PAGE> 15
capital expenditures 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 22, 1997 offering of Senior Discount
Notes that were invested in marketable securities.
Financing activities used cash of $671,000 and provided cash of $130.1
million for the three months ended March 31, 1999 and 2000, respectively.
Financing activities in the three months ended March 31, 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, Inc.
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. On October 22, 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 covenants that restrict the ability of Knology Broadband to take
certain actions. See "Description of Indebtedness." 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 limiting the ability of Knology
Broadband and its subsidiaries to take certain actions. See "Description of
Indebtedness."
The maximum amount available under the credit facility as of March 31,
2000 was approximately $19 million, assuming compliance with all of the
operating and financial covenants. As of March 31, 2000, that amount had been
drawn against the credit facility.
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 117/8% 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
14
<PAGE> 16
received by us, including an amount equal to the exercise price for cashless
exercises. The options were distributed to ITC' stockholders 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. We currently expect to require approximately $9 million to fund
operating losses and approximately $131 million for capital expenditures during
2000. The $131 million for capital expenditures includes approximately $70
million related to the construction of networks in new and existing markets. The
remainder primarily relates to the purchase of equipment for customer premises,
such as cable boxes, and information systems.
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 additional
financing. If we are not successful in raising additional capital, we may not be
able to complete the construction of our networks throughout our existing
markets. This may cause us to violate our franchise agreements, which could
adversely affect us or limit our growth within these markets.
We plan to expand to additional cities in the southeastern United
States. 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 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 cities will be chosen for
expansion are not expected to be made until this capital has been raised.
In connection with our spin-off 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 spin-off from ITC
Holding. Transactions that could involve a possible breach include an actual or
constructive change of 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 spin-off, until February 7, 2002.
15
<PAGE> 17
THE YEAR 2000 ISSUE
RESULTS SINCE JANUARY 1, 2000
To date, year 2000 problems have had a minimal effect on our business.
However, we may not have identified and remediated all significant year 2000
problems.
Further remediation efforts may involve significant time and expense, and
unremediated problems may have a material adverse effect on our business. Also,
we sell telecommunications products to companies in a variety of industries,
each of which is experiencing different year 2000 issues. Customer difficulties
with year 2000 issues might require us to devote additional resources to resolve
underlying problems. Finally, although we have not been made a party to any
litigation or arbitration proceeding to date involving our products or services
and related to year 2000 compliance issues, we may in the future be required to
defend our products or services in such proceedings, or to negotiate resolutions
of claims based on year 2000 issues. The costs of defending and resolving year
2000-related disputes, regardless of the merits of such disputes, and any
liability for year 2000 related damages, including consequential damages, would
negatively affect our business, results of operations, financial condition and
liquidity, perhaps materially.
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.
16
<PAGE> 18
PART II. OTHER INFORMATION
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 anti-dilution
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 dividend. The Series B preferred shares have a liquidation preference of
$4.75 per share to the common and Series A preferred shares.
The issuances of securities described above were 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 our company, through their relationship with us or through
information about us made available to them.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As of March 31, 2000, the holders of the Series B preferred stock elected, by
written consent, James R. Matthews and Bret Pearlman to serve as their
representatives on our board of directors. Mr. Matthews and Mr. Pearlman will
serve until their successors have been elected and qualified.
ITEM 6. EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
Exhibit Number Description of Exhibit
- ------------- ----------------------
10.1 Stockholders Agreement dated February 7, 2000 among KNOLOGY, Inc.,
certain holders of the Series A preferred stock, the holders of the
Series B preferred stock, certain management holders and certain
additional stockholders (Incorporated herein by reference from Exhibit
10.84 to KNOLOGY, Inc.'s Post-Effective Amendment No. 2 to Form S-1 (File
No. 333-89179)).
27.1 Financial Data Schedule for the three months ended March 31, 2000.
</TABLE>
17
<PAGE> 19
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.
May 15, 2000 By: /s/ Rodger L. Johnson
President and Chief Executive Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF KNOLOGY, INC. AS OF MARCH 31, 2000 AND THE RELATED COMBINED STATEMENTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000. THIS INFORMATION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 126,440,015
<SECURITIES> 0
<RECEIVABLES> 24,132,461
<ALLOWANCES> 703,647
<INVENTORY> 21,675,482
<CURRENT-ASSETS> 288,033,001
<PP&E> 359,954,476
<DEPRECIATION> 71,921,475
<TOTAL-ASSETS> 519,399,522
<CURRENT-LIABILITIES> 26,523,334
<BONDS> 321,480,524
0
716,339
<COMMON> 824
<OTHER-SE> 146,501,621
<TOTAL-LIABILITY-AND-EQUITY> 519,399,522
<SALES> 18,710,983
<TOTAL-REVENUES> 18,739,769
<CGS> 7,386,982
<TOTAL-COSTS> 33,190,130
<OTHER-EXPENSES> 8,148,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,549,433
<INCOME-PRETAX> (22,599,348)
<INCOME-TAX> 1,557,194
<INCOME-CONTINUING> (21,042,154)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<EPS-BASIC> (.34)
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