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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER: 333-43339
KNOLOGY HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE 58-2203141
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
KNOLOGY HOLDINGS, INC.
1241 O.G. SKINNER DRIVE
WEST POINT, GEORGIA 31833
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (706) 645-8553
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated herein by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [ ]
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 March 1, 1997, there were no shares of the registrant's Common
Stock outstanding and 49,985 shares of the registrant's Preferred Stock
outstanding.
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* The Company does not have any class of equity securities registered
under the Securities Exchange Act of 1934 and files periodic reports
with the Securities and Exchange Commission pursuant to contractual
obligations with third parties.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . 44
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . 54
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . 54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . 55
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . 62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . 64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULES . . . . . . . . . S-1
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, MEMBERS OF THE
COMPANY'S SENIOR MANAGEMENT MAY, FROM TIME TO TIME, MAKE CERTAIN
FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, PERFORMANCE AND
OTHER DEVELOPMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS, INCLUDING THOSE SET FORTH UNDER THE CAPTION "BUSINESS--RISK FACTORS"
AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K, AS WELL AS FACTORS WHICH MAY
BE IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S OTHER FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION OR IN THE DOCUMENTS WHERE SUCH
FORWARD-LOOKING STATEMENTS APPEAR. UNLESS THE CONTEXT SUGGESTS OTHERWISE,
REFERENCES IN THIS ANNUAL REPORT ON FORM 10-K TO "KNOLOGY" OR TO THE "COMPANY"
MEAN KNOLOGY HOLDINGS, INC. AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED,
DOLLAR AMOUNTS OVER $1 MILLION HAVE BEEN ROUNDED TO ONE DECIMAL PLACE AND
DOLLAR AMOUNTS LESS THAN $1 MILLION HAVE BEEN ROUNDED TO THE NEAREST THOUSAND.
PART I
ITEM 1. BUSINESS
GENERAL
KNOLOGY offers residential and business customers broadband
communications services ("Broadband Services"), including cable television,
telephone and high-speed Internet access service. The Company provides these
Broadband Services using high-capacity hybrid fiber-coaxial networks that are
two-way interactive ("Interactive Broadband Networks"). The Company operates
Interactive Broadband Networks in three cities, Montgomery, Alabama, Columbus,
Georgia and Panama City Beach, Florida and plans to expand to additional
mid-sized cities in the southeastern United States. KNOLOGY has been providing
cable television service since 1995 and commenced providing telephone and
high-speed Internet access service in July 1997. The Company believes its
ability to provide numerous services over the same network and to bundle the
services at an attractive price, coupled with its emphasis on customer service,
provides it with a competitive advantage.
KNOLOGY commenced providing cable television service by acquiring
cable television systems in Montgomery and Columbus and using those systems as
a base for constructing new Interactive Broadband Networks. Since acquiring the
Montgomery system (the "Montgomery System") in April 1995, the Company has
extended the Montgomery network from approximately 275 miles and 8,252
subscribers to approximately 763 miles with 22,301 subscribers and 70,025 homes
passed as of February 28, 1998. Since its acquisition of the Columbus system
(the "Columbus System") in September 1995, the Company has extended the
Columbus network from approximately 180 miles and 5,109 subscribers to
approximately 545 miles with 13,940 subscribers and 49,703 homes passed as of
February 28, 1998. The Company's penetration rates (the ratio of the number of
subscribers to homes passed) were 31.8% and 28.0% in Montgomery and Columbus,
respectively, as of February 28, 1998. The Company acquired a cable
television system in Panama City Beach, Florida (the "Beach Cable System" and
together with the Montgomery System and the Columbus System, the "Systems") in
December 1997 and intends to commence expansion of the Beach Cable System in
1998. The Company believes that its ability to increase and maintain its
subscribers has been due largely to its commitment to customer service, the
greater number of channels and the greater reliability and quality of the
picture and sound offered by the Company over its Interactive
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Broadband Networks compared to the more traditional cable networks operated by
the Company's competitors. The Company expects the number of its cable
television subscribers to continue to increase as it expands its Systems in
Montgomery, Columbus and Panama City Beach, focuses on marketing to multiple
dwelling units, increases the number of Broadband Services offered and
introduces its OLOVISION(R) digital video service, which will use compression
technology to significantly increase the number of television channels.
KNOLOGY commercially launched its high-speed OLOBAHN(R) Internet
access service (using cable modems) and its OLOTEL(R) local and long distance
telephone services in July 1997 in Montgomery. In Columbus, high-speed
Internet access service was introduced in September 1997 and telephone service
was introduced in the fourth quarter of 1997. While the Company expects its
subscribers for cable television (which are primarily residential) to serve as
the Company's initial customer base for its telephone and Internet services,
the Company also targets small- and medium-sized businesses using a bundled
offering emphasizing telephone and Internet access services. As of February
28, 1998, the Company provided a bundle of at least two services to
approximately 700 subscribers in Montgomery and approximately 180 subscribers
in Columbus. KNOLOGY offers its OLOTEL(R) services using its Interactive
Broadband Networks, provides local service through interconnections with
BellSouth under a nine-state interconnection agreement and provides long
distance service through the use of leased facilities from other
telecommunications service providers. In addition, the Company offers special
access services, including long distance access services, over its Interactive
Broadband Networks to other carriers.
The Company believes that its Interactive Broadband Networks could in
the future enable it to provide additional Broadband Services, including (i)
interactive energy management services (in partnership with power companies),
which involve monitoring by the customer of energy usage and cost; (ii)
security services, including closed-circuit television security monitoring and
alarm systems; (iii) high-speed data transmission connecting homes and offices
("extranets"); and (iv) wholesale transport and interconnection ("local loop")
services to connect long distance carriers to their customers. The Company
expects to commence trials of certain of these services in 1998.
The Company intends to expand to additional mid-sized cities in the
southeastern United States. In December 1997, the Company acquired the Beach
Cable System for approximately $3.9 million in cash and 2,485 shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock"), valued at
approximately $3.7 million, subject to adjustment. The Beach Cable System,
which currently passes approximately 10,500 homes and approximately 17,600
commercial (hotel/motel/condo) units, consists of a new cable television
network which the Company is adapting for delivery of Broadband Services. The
Company intends to commence construction in the second quarter of 1998 to
expand the existing Beach Cable System into adjacent Panama City (the Beach
Cable System, as proposed to be expanded, is referred to herein as the "Panama
City System"). See "--Markets and Subscribers--New Markets." The Company's
cable franchises in Augusta, Georgia and Panama City, Florda were awarded
in January 1998 and March 1998, respectively. The Company's application for a
cable franchise in Columbia County, Georgia was approved in March
1998. The Company has applied for cable franchises in Charleston and North
Charleston, South Carolina and intends to apply for additional franchises in
other cities.
In 1995, the Company was originally formed as a limited liability
company and later was incorporated in the State of Delaware. The Company's
principal executive offices are located at 1241 O. G. Skinner Drive, West
Point, Georgia 31833 and its telephone number is (706) 645-8553.
RECENT TRANSACTIONS
On October 22, 1997, the Company completed a private offering of
444,100 Units ("Units"), each of which consisted of one 11-7/8% senior discount
note due October 15, 2007 (a "Senior Discount Note") and one warrant (a
"Warrant") to purchase .003734 shares of Preferred Stock of the Company
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at an exercise price of $.01 per share, subject to adjustment, of $444.1
million aggregate principal amount at maturity (the "Offering") yielding net
proceeds of approximately $242.4 million. The Senior Discount Notes issued in
the Offering were subsequently exchanged for $444.1 million aggregate principal
amount at maturity of substantially identical 11-7/8% senior discount notes due
October 15, 2007 (the "Exchange Notes," and together with the Senior Discount
Notes, the "Notes") that had been registered under the Securities Act of 1933,
as amended (the "Securities Act") in an exchange offer (the "Exchange Offer")
that expired on March 24, 1998. See " -- Description of Certain Indebtedness."
In October 1997, the Company issued approximately 21,400 shares of
Preferred Stock to qualified investors, including certain existing stockholders
of the Company, for an aggregate purchase price of approximately $32.2 million
(the "Equity Private Placement").
BROADBAND SERVICES STRATEGY
The Company has developed the following strategy for the
implementation and operation of its Broadband Services business.
BUILD RELIABLE INTERACTIVE BROADBAND NETWORKS. By constructing and
operating its own Interactive Broadband Networks, the Company provides its
residential and business customers with access to high-quality networks capable
of supporting a wide range of Broadband Services. The Company's networks
contain extra, unused capacity that will be available for planned and future
Broadband Services, and such capacity has been designed to be expanded later if
warranted by customer demand. The Company believes that this will provide a
competitive advantage over cable, telephone and wireless systems that do not
have the capability to provide a wide range of broadband services. The Company
also believes that its newly constructed, Interactive Broadband Networks will
give it a quality and reliability advantage over upgraded lower-capacity
coaxial cable systems. KNOLOGY's Interactive Broadband Networks utilize a 750
MHz signal (designed to allow for upgrade to 1,000 MHz) and are protected by
redundant paths for communications segments, including a SONET ring connecting
hubs for restoration and security purposes. By comparison, most traditional
cable television systems utilize 450 MHz to 550 MHz signals and do not have
significant redundancy protection. The Company uses a specially designed
powering system which is backed up at each hub site by a generator and
uninterruptable power source ("UPS") to allow service to continue in case of a
power outage. The Interactive Broadband Networks are monitored 24 hours per
day, seven days per week, at KNOLOGY's network operations center.
PROVIDE BUNDLED OFFERINGS. The Company believes that by bundling
Broadband Services it can distinguish itself from the competition. The Company
believes that savings on a bundle of services and the advantages of one-stop
shopping (including a single point of purchase and one relationship to manage
all services included in the bundle) will be attractive to new customers,
particularly since most of its prospective customers presently buy services
from multiple sources. The Company also believes that because of the cost
savings associated with purchasing a bundle of services from the Company,
customers will be less likely to switch should competitors offer lower prices
on individual services. The ability to realize an overall return on a bundle of
services should give the Company greater pricing flexibility.
BE FIRST TO MARKET WITH MULTIPLE BROADBAND SERVICES. The Company
believes that it is or will be the first provider of a bundled video, voice and
data Broadband Services package in Montgomery, Columbus and Panama City
Beach/Panama City and intends to be first to market a bundled video, voice and
data Broadband Services package in each of the cities in which it proposes to
construct and operate Interactive Broadband Networks. KNOLOGY seeks to
capitalize on its position as a new communications company that brings
competition and choice to cities where it provides service. The Company
believes that a large number of companies may seek to provide multiple
Broadband Services over the next several years, and that market share earned by
the early entrants will create financial barriers to entry in the Company's
target markets. Since constructing
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Broadband Services networks requires a large capital investment, the Company
expects that later entrants will have greater difficulty in demonstrating
economic returns that support such an investment. In addition, constructing
networks uses space on various rights of way, which may be limited or more
expensive for later entrants.
EXPAND TO ADDITIONAL MARKETS. The Company intends to expand to
additional mid-sized cities in the southeastern United States. The Company
intends to target cities (1) that have a geographic density such that network
plant can be constructed to pass an average of 70 homes per mile, (2) that
generally have populations of at least 100,000 and (3) in which the Company
believes it can capture a substantial portion of the cable television customers
and can be the leading provider of Broadband Services. The Company believes
that such cities will support a Broadband Services business and that most of
the large cable companies and other service providers currently are focusing
primarily on major metropolitan areas.
FOCUS ON THE CUSTOMER. Customer service is an essential element of
the Company's operations. The Company believes the quality and responsiveness
of its customer service differentiates it from its competitors. Customer
service representatives in each market handle customer-related functions such
as order taking, customer activations, billing inquiries and collections and
service upgrades and administer the Company's customer satisfaction program.
Under its customer satisfaction program, the Company follows up with new
customers regarding satisfaction with the service, and uses installation
customer surveys, market research and focus groups to improve its service and
marketing. In addition, the Company provides 24-hour customer service, operates
customer phone centers in each of the Company's service areas, and operates a
back-up customer phone center in West Point, Georgia. The Company monitors its
networks 24 hours a day, seven days a week and strives to resolve problems
prior to the customer being aware of any service interruptions.
PURSUE STRATEGIC RELATIONSHIPS WITH OTHER SERVICE PROVIDERS. KNOLOGY
offers certain of its Broadband Services in conjunction with or through
strategic partners. KNOLOGY was founded in 1995 by the corporate predecessor of
ITC Holding Company, Inc. (together with such predecessor, "ITC Holding"), which
holds significant interests in a variety of communications companies ("ITC
Companies"), including Interstate Telephone Company, an independent local
exchange carrier ("LEC") serving communities in western Georgia and eastern
Alabama for over 100 years, MindSpring Enterprises, Inc. ("MindSpring"), a
large Internet service provider, and which until October 1997 included
ITC/\DeltaCom, Inc. ("ITC/\DeltaCom"), a provider of retail long distance
services to mid-sized and major regional businesses using ITC/\DeltaCom's own
fiber optic network in the southern United States (now owned by ITC Holding's
stockholders). The Company uses ITC/\DeltaCom's fiber optic network to provide
long distance service as part of the Company's bundle of Broadband Services,
uses a direct link to the Internet procured through ITC/\DeltaCom and jointly
operates a network operations center with ITC/\DeltaCom in West Point, Georgia.
Interstate Telephone Company provides the Company with telephone billing and
switching services, and MindSpring provides the Company with Internet content
and back-up customer service on computer-related customer inquiries. Strategic
partners also include SCANA Communications, Inc. (together with SCANA
Corporation, "SCANA"), which is supporting the Company's entrance into
Charleston, providing assistance in areas including government relations,
franchise approval, marketing efforts and access to sites for its equipment,
which is an important part of network construction.
INDUSTRY STRUCTURE AND TECHNOLOGY
GENERAL
As a result of the passage of the Telecommunications Act of 1996 (the
"1996 Telecom Act"), cable television companies are permitted to provide
telephone service and vice versa, local telephone companies are permitted to
provide long distance service and vice versa, and all are permitted to
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provide numerous ancillary services. Municipalities are required to grant cable
television franchises to qualified applicants. This change in the regulatory
landscape, along with the substantial growth in use of the Internet, has led,
and is generally expected to continue to lead, to a rush by communications
companies and other companies (such as power companies) to provide a full range
of voice, video and data communications services to consumers. Most of this
activity has occurred through cross investment in other technologies, rather
than the expansion of one technology to provide multiple services, except in
isolated cases (such as cable television companies offering cable modem
services).
The Company believes that for the next several years its competitors
will continue to offer individual services, such as telephone and cable
television, in the Company's service areas. Compared to the individual services
offered by its competitors, the Company believes that its bundled service
offerings are more attractive to consumers. Although the process of building
broadband networks and expanding to other services has begun, the Company
believes that most of the large cable companies and other service providers
currently are focusing primarily on major metropolitan areas and that by being
among the first providers of a wide range of Broadband Services in its targeted
markets the Company will have a competitive advantage. See " -- Broadband
Services Strategy."
COMMUNICATIONS TECHNOLOGIES AND SERVICES
Set forth below is a brief description of the current communications
industry structure and the technology generally used by each system (although
numerous variations exist, and some systems combine a variety of technologies),
including certain hurdles each set of providers faces in offering new services.
CABLE TELEVISION. Cable television systems generally consist of
coaxial cable (which carries signals via radio frequency) and/or fiber optic
cable (which carries signals via light waves generated by a laser) that runs
along aerial or underground rights of way past the homes in a service area,
connecting to each house individually through a cable connection box located
outside of the house. Subscriber homes have internal wiring running from the
cable connection box to one or more boxes or "jacks" into which television sets
and set-top terminals (which are used for special services, descrambling,
"pay-per-view" and other features) may be connected. Coaxial cable networks
have numerous amplifiers located along the network to restore the strength of
the signal, which is diminished as it travels. The use of amplifiers produces
interference or noise which will cause the signal to degrade as the number of
amplifiers increases. Networks which are primarily fiber optic do not use
amplifiers in the fiber optic portion of the network. Fiber optic networks use
larger lasers to send signals further from the headend. The number of channels
or features that a cable system can offer is limited by the capacity of the
cable network and the electronic equipment which compresses and amplifies the
signal. Additional equipment may compensate for a lower capacity network, but
too much equipment results in noise or interference, leading to a lower quality
signal.
Many traditional cable companies have sought to compete by increasing
capacity through the use of additional equipment, and customers have
experienced increased interference. Most cable television systems generally use
one way (non interactive) cable, and accordingly do not have the ability to
provide telephone service which requires use of a two-way interactive cable.
Several cable companies, including large cable companies, are beginning to
offer high-speed data transmission and have announced plans to offer Internet
access using cable modems. However, such service generally cannot deliver
high-speed performance until the cable system infrastructure has been upgraded
to increase capacity and add two-way interactivity.
WIRELESS CABLE. Wireless cable or multichannel multipoint
distribution service technology allows the transmission of television
programming, including high speed computer data, high definition television and
facsimile transmissions, via microwave frequencies from a single location.
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Wireless cable was designed to serve primarily rural areas where laying
traditional coaxial cable is not economically feasible. The wireless cable
system's signal is sent from a centrally located facility equipped with
transmitters, antennas, satellite dishes and scrambling and descrambling
equipment, and is received by subscribers with rooftop antennas and the
necessary converters. Because wireless cable signals are sent via microwaves,
they require line-of-sight transmission from the central source to the
subscribers. Obstructions such as large buildings and trees or uneven terrain
can interfere with reception, although repeaters that aid in reaching
subscribers in certain obstructed areas are being developed to alleviate these
shortcomings. As a result, the Company believes that at present this technology
is not well suited to providing Broadband Services in urban areas such as those
targeted by the Company.
DTH, DBS AND OTHER SATELLITE TECHNOLOGIES. Direct-to-home satellite
television ("DTH") companies provide the satellite transmission of television
products and services. As part of the programming package, DTH companies
generally include hardware and software for the reception and decryption of
satellite television programming. The majority of DTH programming is
transmitted on C-band radio frequency, which typically requires dish sizes
ranging from six to twelve feet in diameter, depending upon the geographic
location of the subscriber. In 1982, the Federal Communications Commission
("FCC") allocated spectrum within the Ku-band for DBS systems. The Ku-band
historically has allowed for higher power transmission than C-band, enabling
recipients to receive Ku-band signals using smaller satellite dishes (ranging
in size from 15 to 18 inches in diameter). DBS systems generally offer more
channels (often over 100 channels in all) than cable systems, although DBS
providers usually do not offer local programming. Unlike cable television, DBS
and DTH do not require ground construction to install, maintain or upgrade
services. Rather, the programming is transmitted from a ground station to the
subscriber via a communications satellite. These systems require the subscriber
to purchase or lease a satellite dish to receive signals and a receiver system
to process and descramble signals for television viewing.
The small satellite dishes available at present are not two-way
interactive, and therefore not suitable for telephone or Internet services,
although businesses that can afford to do so purchase larger dishes with
two-way interactivity can receive each of the Broadband Services. Residential
systems have been designed using telephone lines to transmit to the Internet
and satellite transmission for reception from the Internet, which typically
involves much greater quantities of data. This approach still is subject to
dial-up delays, but has many of the same advantages over two-way telephone
communications as Broadband Services. However, satellite transmission may
cause an echo during voice transmissions due to the long distance to and from
the satellite.
WIRELINE TELEPHONY. Local wireline telephone systems consist of a
network of switches, transmission facilities between switches, and the "local
loop" connections between customer premises and the nearest local exchange
switch. A call initiated by a customer can be routed by the local exchange
switch either directly to the called party, if that party is served by the same
switch, to another local or toll switch for delivery to the called party, or
through one or more switches to the point of presence ("POP") of a long
distance carrier that transmits the call to a more distant local switch for
ultimate delivery to the called party. The transmission facilities connecting
switches are comprised primarily of very high capacity fiber optic cables.
However, local loops generally consist of twisted copper wire pairs that run
along aerial or underground rights-of-way to each of the premises served.
These local loops generally carry analog transmissions and have relatively low
transmission capacity, sufficient to carry only one two-way voice conversation.
Local loop capacity can be expanded somewhat by using advanced techniques such
as Integrated Services Digital Network ("ISDN"), which permits voice and data
transmissions to occur simultaneously and can support some level of video
teleconferencing. However, ISDN currently is not available in all areas.
Local loops (even with ISDN) generally do not have sufficient capacity
for large scale provision of video services. Telephone service is the most
common way of communicating with the Internet, but telephone lines do not have
enough capacity for rapid downloading of large volumes of
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data (such as graphics), leading many Internet users to experience delays and
ISPs to experience overloading of their circuits.
WIRELESS TELEPHONY (CELLULAR AND PCS). Wireless telephone technology
is based upon the division of a given market area into a number of smaller
geographic areas, or "cells." Each cell has "base stations" or "cell sites,"
which are physical locations equipped with transmitter-receivers and other
equipment that communicate by radio signal with cellular telephones located
within range of the cell. Cells generally have an operating range from two to
25 miles. Each cell site is connected to a mobile telephone switching office
("MTSO"), which, in turn, is connected to the local landline telephone network.
When a subscriber in a particular cell dials a number, the cellular telephone
sends the call by radio signal to the cell's transmitter-receiver, which then
sends it to the MTSO. The MTSO then completes the call by connecting it with
the landline telephone network or another cellular telephone unit. Incoming
calls are received by the MTSO, which instructs the appropriate cell to
complete the communications link by radio signal between the cell's
transmitter-receiver and the cellular telephone. Like wireline local loops,
wireless telephony technologies generally do not have sufficient capacity for
large scale provision of video and data services.
INTERNET ACCESS. Most Internet access takes place over telephone
lines using computer modems. This form of transmission works well for smaller
amounts of data, but telephone lines generally are not capable of handling
large volumes of information, multimedia applications or high-speed data
transmissions, resulting in lengthy delays. Also, ISPs have limited numbers of
ports available for customers to dial in to the Internet, and their customers
may experience difficulties obtaining access to the Internet or be disconnected
if activity is too limited. A few satellite companies provide broadband access
to the Internet from desktop PCs using a small dish antenna and receiver kit
comparable to that used for satellite television reception, although such
systems generally provide only one-way satellite transmission, requiring
communications in the other direction to be over telephone lines. High-speed
cable modems used over traditional non-interactive cable networks similarly
permit high-speed broadband reception from the Internet, but require
communications from the user to the Internet to be over telephone lines.
THE COMPANY'S INTERACTIVE BROADBAND NETWORKS
The Company's Interactive Broadband Networks are high-capacity,
two-way interactive, hybrid fiber-coaxial network with a 750 MHz signal
(designed to allow upgrades to 1,000 MHz). Each network includes hub sites with
a minimum of four fiber pairs running from each hub to nodes, each of which
serves an average of 500 homes. This design incorporates redundant fibers
running between hubs for restoration and security purposes, forming a SONET
ring. By comparison, most traditional cable television systems are 450 MHz to
550 MHz and do not have significant redundancy protection. The Company provides
power to its system from the hub sites, each of which is equipped with a
generator and UPS to allow service to continue in case of a power outage. For
each of the Broadband Services to be offered, the Company has added electronic
equipment at various hub sites and cards in various electronic housings along
the network.
The Company's Interactive Broadband Networks are capable of supporting
numerous channels of basic and premium cable television (including
pay-per-view) services (approximately 78 channels are offered by the Company
today, without digital compression), telephone, Internet access and other
Broadband Services. The Company's Interactive Broadband Networks have been
designed with extra capacity, so that new services can be added as content and
technology become available.
Local telephone service is offered over the Company's Interactive
Broadband Networks in much the same way local phone companies provide service,
since the network structure includes a return path suitable for voice
transmission. To provide local telephone service, the Company provides
switching services and installs a network interface box outside the customer's
home, and may, depending on the location of telephone and cable boxes or
"jacks" inside the home, add inside wiring
- 7 -
<PAGE> 10
as well. The Company can offer multiple lines of telephone service using its
Interactive Broadband Networks. The Company's networks are interconnected with
those of other local phone companies through a nine-state interconnection
agreement with BellSouth. The Company provides long distance service using
leased facilities from other telecommunications service providers, including
from ITC/\DeltaCom.
High speed Internet access services are provided by the Company using
a high speed cable modem in much the same way customers currently receive
Internet services over a modem linked to the local telephone network. The cable
modems presently being used with the Company's Interactive Broadband Networks
are 20 times faster (512.0 kilobits/second for two-way equivalent speed modems
and up to 4,000 kilobits/second for modems that primarily transmit one-way)
than 28.8 kilobits/second modems presently used with telephone lines and are
of higher quality. The customer's cable line (with cable modem) is connected
directly into the Internet. Since the cable modem connects through a cable line
rather than through a telephone line, the Internet connection is always active,
and there is no need to dial up for access to the Internet or wait to connect
through a port leased by an ISP.
THE COMPANY'S BROADBAND SERVICES
CABLE TELEVISION. The Company offers its customers three levels of
cable television services: basic, expanded basic and premium. Expanded basic
service is the Company's most heavily subscribed service. This service consists
of approximately 64 channels of programming, including television signals
available off-air, a limited number of television signals from so-called "super
stations" (such as WGN (Chicago)), numerous satellite-delivered nonbroadcast
channels (such as Cable News Network, MTV, ESPN, The Discovery Channel and
Nickelodeon), displays of information featuring news, weather, stock and
financial market reports and public, government and educational access
channels.
Basic service, a more limited version of the Company's expanded basic
package, is offered on a discounted basis to customers but this service
consists primarily of off-air channels. The Company also offers a variety of
premium services to its customers for an extra monthly charge. Premium services
include various channels that consist of feature motion pictures presented
without commercial interruptions (such as Home Box Office ("HBO"), Showtime and
Cinemax) or other special channels. Customers generally pay fixed monthly fees
for cable programming and premium television services, which constitute the
principal sources of revenue to the Company. The Company also provides its
customers access to additional channels offering pay-per-view feature movies,
live and taped sports events, concerts and other special features which involve
a charge for each viewing, access to home shopping networks and specialty
services such as digital audio service.
Programming for the Company's cable television systems, each of which
provides a range of 65-75 channels (78 channels including pay-per-view), comes
from over 70 national and local networks, including most major networks such as
ESPN, HBO, Showtime, Disney and CourtTV, and local networks such as local
affiliates of ABC, CBS, NBC and Fox. Since January 1, 1996, the Company's
arrangements with many of these networks, constituting approximately 60% of the
Company's channels, have been handled through the National Cable Television
Cooperative, Inc. (the "National Cable Television Cooperative"), which obtains
programming from most major networks and provides it to its members. By
obtaining programming through the cooperative (for which the Company has paid a
one time membership fee and pays ongoing monthly programming and administrative
fees), the Company benefits from volume discounts not otherwise available to
the Company and which more than offset the fees to the cooperative. In
addition, the cooperative handles the contracting and billing arrangements for
the Company with the networks. The Company also obtains programming directly
from networks such as ESPN and the Disney Channel, which presently do not deal
with the cooperative, and deals directly with a variety of networks on matters
such as support for the Company's promotional efforts.
- 8 -
<PAGE> 11
The Company intends to offer its OLOVISION(R) digital video service
beginning in August 1998, which uses compression technology to significantly
increase the number of television channels (to over 100 channels). Digital
technology converts numerous analog signals (now used to transmit video and
voice) into a digital format and compresses many such signals into the space
normally occupied by one analog signal. At the home, a set-top video terminal
(which would be provided by the Company for a fee) would convert the digital
signal back into analog channels that can be viewed on a normal television set.
These set-top video terminals are currently available and the Company believes
that they will soon be available at a cost which makes offering this service
economically attractive. The Company intends to add OLOVISION(R) as an
additional service without reducing the current number of expanded basic
channels. Digital technology also is expected to permit the Company to offer
near video-on-demand (movies or other programs that commence in frequent
intervals, such as every 15 minutes) to customers for a fee per viewing.
TELEPHONY. The Company's OLOTEL(R) service includes residential and
business local and long distance telephone services. Local telephone service
includes several bundled packages and additional services similar to those
offered by the Regional Bell Operating Companies ("RBOCs"), including BellSouth
Corp. ("BellSouth"). The Company's customers pay a fixed monthly rate for all
local calling. Customers may elect call waiting, call forwarding, voice mail
and other value added services, which generally involve an additional fixed
charge per month per telephone line. The Company generally prices its services
at rates comparable to those of its competitors, although typically the
Company's value-added services are less expensive than those of its
competition. The Company offers all customers of its cable television services
a discount on telephone service. Long distance service offers features and is
priced at levels comparable to those of the Company's competitors. In addition,
the Company also offers special access services, including long distance access
services, to other carriers over its Interactive Broadband Network.
The Company may seek to provide local telephone service to long
distance companies who need local connections at the terminating (or possibly
originating) end of long distance traffic, and for wireless telephone companies
that need to connect with wireline providers to terminate calls outside their
cellular or PCS networks.
INTERNET SERVICES. The Company's OLOBAHN(R) service offers customers
high-speed connections to the Internet (20 times faster than 28.8
kilobits/second dial-up service) using cable modems. The Internet connection
using a cable modem is always active, so the customers do not have to dial in
and wait for access. Since the customer's service is offered over the coaxial
network in the home, no second phone line is required and there is no
disruption of service when the phone rings or when the television is on. The
Company charges a fixed monthly fee for connection to the Internet and does not
offer different plans based on the amount of interconnection time or quantity
of data received, although the Company does charge a higher rate to customers
who desire higher speeds, which requires more capacity. The Company offers
discounts on its high-speed Internet service to customers who also receive the
Company's cable television service or telephone service. The Company also plans
to sell high-speed Internet access service directly to ISPs who wish to resell
the service to their customers.
FUTURE BROADBAND SERVICES. The Company believes that its Interactive
Broadband Networks could in the future enable it to provide additional
Broadband Services, including (i) interactive energy management services (in
partnership with power companies), which involve active monitoring by the
customer of energy usage and cost; (ii) security services, including
closed-circuit television security monitoring and alarm systems; (iii)
high-speed data transmission connecting homes and offices ("extranets"); and
(iv) wholesale transport and interconnection (local loop) services to connect
long distance carriers to their customers. The Company expects to commence
trials of certain of these services in 1998. See "--Risk Factors--Demand for
Bundle of Broadband Services is Uncertain."
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<PAGE> 12
Proposed interactive energy management services would involve a
utility sending and receiving consumption and pricing information over the
Company's network to and from customers' homes to enable customers to monitor
energy consumption. Proposed security services are expected to include primary
security monitoring through closed-circuit television and back-up alarm
networking. High-speed data transmission would utilize cable modems for
high-speed connections to offices, suppliers, customers, or others. Initially,
such services would be available only to and from specified groups of users on
the Company's networks. The Company would need to design external networks or
"extranets" for the users to permit the transfer of data within their specified
groups. The Company also plans to offer high-speed transmission and other
computer networking services in conjunction with local computer companies. The
Company may offer wholesale transport and interconnection services to long
distance and other telecommunications companies. It is presently negotiating an
agreement to provide these services to ITC/\DeltaCom for traffic that originates
or terminates in Montgomery and Columbus and other cities where the Company
constructs Interactive Broadband Networks.
MARKETS AND SUBSCRIBERS
CURRENT MARKETS. The Company's Interactive Broadband Networks
currently serve Montgomery, Alabama, Columbus, Georgia and Panama City Beach,
Florida.
The Company acquired substantially all of the outstanding stock of
Montgomery Cablevision and Entertainment, Inc. ("Montgomery Cablevision"), one
of the two franchisees serving the Montgomery, Alabama cable television market,
in April 1995 (and the remaining stock in January 1996). At the time the
Company acquired the Montgomery System, the network consisted of approximately
275 miles of 550 MHz coaxial cable. Since August 1995, the Company has been
expanding the Montgomery System with its new Interactive Broadband Network. The
Montgomery System currently consists of approximately 763 miles and passes
approximately 70,025 homes, or about 83.4% of the homes in the franchise area.
The Company intends to continue the buildout of the Montgomery network to
extend approximately 950 miles and pass nearly all of the homes in its
franchise area and expects to complete construction in 1998. The Company also
intends to upgrade the preexisting system in 1998.
The Company acquired the assets of the entity holding one of three
franchises serving the Columbus, Georgia cable television market in September
1995. At the time the Company acquired the Columbus System, the network
consisted of approximately 180 miles of 550 MHz coaxial cable. Since February
1996, the Company has been expanding the Columbus System with its new
Interactive Broadband Network. The Columbus System currently consists of
approximately 545 miles and passes approximately 49,703 homes, or about 82.8%
of the homes in the franchise area. The Company intends to continue the
buildout of the Columbus network to extend approximately 800 miles and pass
nearly all of the homes in its franchise area and expects to complete
construction in 1998. The Company also intends to upgrade the preexisting
system in 1998.
The Company acquired the Beach Cable System in December 1997. The
Beach Cable System consists of approximately 152 miles of 550 MHz coaxial cable
and passes approximately 10,500 homes, or about 84.0% of the homes in the
franchise area. The network also passes approximately 17,600 commercial
(hotel/motel/condo) units. The Company intends to commence construction in the
second quarter of 1998 to expand the Beach Cable System into adjacent Panama
City.
- 10 -
<PAGE> 13
The following table sets forth cable television delivery data with
respect to each of these service areas and the Company's service as of February
28, 1998:
<TABLE>
<CAPTION>
HOMES
IN CABLE
CABLE FRANCHISE MILES OF HOMES CABLE PENETRATION CHANNELS
SERVICE AREA HOUSEHOLDS(1) AREA(2) PLANT PASSED SUBSCRIBERS LEVEL(3) OFFERED
- ------------ ------------- ------- ----- ------ ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Montgomery, AL 152,190 84,000 763 70,025 22,301 31.8% 78
Columbus, GA 131,620 60,000 545 49,703 13,940 28.0% 78
Panama City
Beach, FL (4) * 13,000 152 10,500(5) 4,270(5) 40.7%(5) 75
</TABLE>
- ---------------
* Information not presently available.
(1) Represents cable households in Designated Market Areas as determined
by A.C. Nielsen Co.
Source: TV and Cable Factbook, 1998 Edition.
(2) Represents the total homes in the Company's franchise area. Source: TV
and Cable Factbook, 1998 Edition.
(3) Determined by dividing the applicable number of subscribers by the
number of homes passed. Because the Company does not begin to market
its services in an area until its network has been expanded and the
Company typically needs 60 to 90 days once marketing has commenced to
build its subscriber base, the Company's penetration rate is adversely
affected during rapid expansion of the networks.
(4) Does not include Panama City, Florida. See "--Markets and
Subscribers--New Markets."
(5) Does not include commercial (hotel/motel/condo) units passed or
commercial subscribers.
The Company believes that its ability to increase and maintain its
subscribers has been due largely to its commitment to customer service, the
greater number of channels and the greater reliability and quality of the
picture and sound offered by the Company over its Interactive Broadband
Networks compared to the more traditional cable networks operated by the
Company's competitors.
The Company commercially launched its high-speed OLOBAHN(R) Internet
access service (using cable modems) and its OLOTEL(R) local telephone, long
distance and long distance access services in July 1997 in Montgomery. In
Columbus, high-speed Internet access service was introduced in September 1997
and telephone service was introduced in the fourth quarter of 1997. While the
Company expects its subscribers for cable television (which are primarily
residential) to serve as the Company's initial customer base for its telephone
and Internet services, the Company also targets small- and medium-sized
businesses using a bundled offering emphasizing telephone and Internet access
services. As of February 28, 1998, the Company provided a bundle of at least
two services to approximately 700 subscribers in Montgomery and to
approximately 180 subscribers in Columbus. KNOLOGY offers its OLOTEL(R)
services using its Interactive Broadband Networks, provides local service
through interconnections with BellSouth under a nine-state interconnection
agreement and provides long distance service through the use of leased
facilities from other telecommunications service providers, including
ITC/\DeltaCom. In addition, the Company offers special access services,
including long distance access services, to other carriers over its Interactive
Broadband Networks.
NEW MARKETS. The Company intends to expand to additional mid-sized
cities in the southeastern United States, targeting cities (1) that have a
geographic density such that network plant can be constructed to pass an
average of 70 homes per mile, (2) that generally have populations
- 11 -
<PAGE> 14
of at least 100,000 and (3) in which the Company believes it can capture a
substantial portion of the cable television customers and can be the leading
provider of Broadband Services. The Company believes that such cities will
support a Broadband Services business, and that currently most of the large
cable companies and other service providers are focusing primarily on major
metropolitan areas. In December 1997, the Company acquired a cable television
system in Panama City Beach, Florida for approximately $3.9 million in cash and
2,485 shares of Preferred Stock valued at approximately $3.7 million, subject
to adjustment. The Beach Cable System, which currently passes approximately
10,500 homes and approximately 17,600 commercial (hotel/motel/condo) units,
consists of a new cable television network which the Company is adapting for
delivery of Broadband Services. The Company intends to commence construction
in the second quarter of 1998 to expand the existing Beach Cable System into
adjacent Panama City. The Company's cable franchises in Augusta, Georgia
and Panama City, Florida were awarded in January 1998 and March 1998,
respectively. The Company's application for a cable franchise in Columbia
County, Georgia was approved in March 1998. The Company has applied for cable
franchises in Charleston and North Charleston, South Carolina and intends to
apply for additional franchises in other cities. Consummation of this expansion
plan is subject to a number of significant contingencies. See "--Risk Factors."
The table below shows cable data for Panama City, Florida, Charleston,
South Carolina and Augusta, Georgia.
<TABLE>
<CAPTION>
CABLE CURRENT
CABLE PENETRATION CABLE CHANNELS
SERVICE AREA HOUSEHOLDS(1) LEVEL(1) PROVIDERS OFFERED
------------ ------------- -------- --------- -------
<S> <C> <C> <C> <C>
Panama City, FL(2) 79,130 68% Comcast Cable Communications 62
Charleston, SC 139,840 65% Comcast Cable Communications 60
Augusta, GA 137,780 61% Charter Communications 60
Jones Intercable 60
</TABLE>
- ---------------
(1) Represents cable households in Designated Market Areas as determined
by A.C. Nielsen Co. Source: TV and Cable Factbook , 1998 Edition.
(2) Does not include Panama City Beach. Jones Spacelink is a cable
provider in Panama City Beach with 36 channels offered.
NETWORK CONSTRUCTION AND OPERATIONS
NETWORK CONSTRUCTION. KNOLOGY uses contractors for the construction
of its Interactive Broadband Networks. The Company serves as the manager of the
construction process, directing and supervising the various construction crews.
The Company has 30 employees dedicated to monitoring and facilitating the
construction of the Company's networks, including a Vice President of Network
Construction and Maintenance who was hired in May 1997. The Company's approach
to construction also reflects its commitment to customer service, as the
Company notifies potential customers before commencing underground construction
and restores any damaged property.
The Company plans to build its networks in new service areas,
including Panama City Beach/Panama City, Charleston and Augusta, over three
year periods, based on the actual miles of network built during 1997 in
Montgomery and Columbus. During 1996 the Company experienced significant
difficulty in meeting its construction schedules, primarily as a result of
delays in installation of the aerial portions of the cable construction in
Montgomery, and to a lesser extent, Columbus. The principal difficulty
resulting in such delays arose from pole change-outs and "make-ready" time and
expense requirements. Construction moratoriums imposed by the telephone and
power companies for about six weeks during the Olympics caused additional
delays, particularly in Columbus. In addition, on three occasions the Mayor of
Montgomery requested that the Company temporarily cease underground
construction following complaints. Although the Company believed
- 12 -
<PAGE> 15
that it was performing such construction in an acceptable manner, the Company
voluntarily complied with the Mayor's requests and reallocated its crews to
other locations. The Company believes that during 1997 and the first quarter of
1998, it has improved its relationships with the divisions of the telephone and
power companies extending make-ready work completions, has substantially
improved the quality of its contractors and has developed methods of working
directly with customers to improve installation. There can be no assurance that
the Company will not experience construction-related difficulties in the
future. See "--Risk Factors--Network Construction Uncertainties."
NETWORK OPERATIONS AND MAINTENANCE. Technicians located in each of
the Company's service areas schedule and perform installations and repairs and
monitor the performance of the Interactive Broadband Networks. KNOLOGY's
Interactive Broadband Networks utilize a 750 MHz signal (designed to allow for
upgrade to 1,000 MHz) and are protected by redundant paths for communications
segments, including a SONET ring connecting hubs for restoration and security
purposes. By comparison, most traditional cable television systems utilize 450
MHz to 550 MHz signals and do not have significant redundancy protection.
KNOLOGY operates a network operations center in West Point, Georgia, and
monitors its networks 24 hours a day, seven days a week and strives to resolve
problems prior to the customer being aware of any service interruptions. The
network operations center monitors network activity, receiving real-time
information regarding network performance, power supply status, and telephony
customer premise equipment activation. The Company's technicians perform
maintenance and repair of the network on an ongoing basis. The Company plans to
maintain the quality of its networks to avoid service interruptions and extend
the networks' operational life.
FRANCHISES. Cable television systems generally are constructed and
operated under the authority of nonexclusive permits or "franchises" granted by
local and/or state governmental authorities. Franchises typically contain many
conditions, such as time limitations on commencement and completion of system
construction, customer service standards, minimum number of channels and the
provision of free service to schools and certain other public institutions. The
Company believes that the conditions in its franchises in Montgomery, Columbus,
Augusta and Panama City Beach/Panama City are fairly typical. Franchises
generally provide for the payment of fees to the issuing authority ranging from
3% to 5% of revenues from cable television service. The franchise fees in
Montgomery and Columbus each equal 5% of gross revenues and the franchise fees
for Panama City Beach and Augusta equal 3% of gross revenues; the Company is
presently working with each of such municipalities on defining the services
that are to be included in gross revenue. Franchises must be renewed
periodically. The Columbus franchise must be renewed in May 1998, and the
Company expects such franchise to be renewed by the relevant governmental
agency. Under the terms of its franchise agreement with the City of Montgomery,
the Company must extend its broadband network to cover the entire city by
August 1999, and must meet progress requirements of approximately 200 miles of
cable per year until completion. The Company expects to comply with this
requirement. The franchises require the consent of the franchising authority
prior to a transfer of the franchise or a transfer or change in ownership or
operating control of the franchisee. See "--Legislation and Regulation."
INTERCONNECTION. The Company relies on local telephone companies and
other companies to provide communications capacity for the Company's local and
long distance telephone service. The Company obtains access to BellSouth's
telephone network under a nine-state interconnection agreement. The terms of
such interconnection agreement have been approved by the Georgia, Alabama,
Florida and South Carolina state public utility commissions. Approvals of other
state public utility commissions will be required in connection with the
Company's provision of telephone service in other states. In addition, the 1996
Telecom Act established certain requirements and standards for interconnection
arrangements, and the Company's interconnection agreement with BellSouth is
based in part on such requirements. However, these requirements and standards
are still being developed and implemented by the FCC in conjunction with the
states through a process
- 13 -
<PAGE> 16
of negotiation and arbitration. To the extent that the standards as implemented
are unfavorable to the Company, the Company's interconnection arrangement with
BellSouth could be adversely affected. One area in which standards could be
unfavorable to the Company is permitted charges for access to and use of
BellSouth facilities. The Company's ability to offer telephony services at
competitive rates depends upon maintaining interconnection and access on
competitive terms. The 1996 Telecom Act creates incentives for local exchange
carriers to permit access to their facilities by denying such carriers the
ability to provide long distance services until they have taken the required
steps to open the local market to competition. BellSouth is not yet permitted
to offer long distance services. There can be no assurance that BellSouth or
other local exchange carriers will not be less accommodating to the Company
once they are permitted to offer long distance service. The interconnection
agreement expires in April 1999 and there can be no assurance that it will be
renewed on favorable terms, or at all. See "--Risk Factors--Dependence on
Interconnections" and "--Legislation and Regulation--Federal Regulation of
Telecommunications Services."
ARRANGEMENTS WITH ACSI. The Company has arrangements with a
subsidiary of American Communication Services, Inc. ("ACSI") that have helped
fund the cost of constructing portions of the Interactive Broadband Networks in
Montgomery and Columbus. Under these arrangements, the Company has installed
additional fiber optic cable for ACSI next to the Company's new fiber optic
cable. ACSI pays an ongoing royalty fee, one-half of certain costs incurred in
connection with restoration service following outages and of variable and
recurring costs relating to the ACSI portion of the network, and an annual
maintenance fee based on the pro-rated costs of constructing the network. ACSI
is expected to use its fiber for competitive access services for businesses,
which would connect customers directly to the POPs of long distance telephone
companies. The Company has agreed that, to the extent the Company provides long
distance service to certain customers, dedicated access from its POP to any
interexchange carriers other than ITC/\DeltaCom must be carried on ACSI's fiber,
subject to certain most favored customer terms and conditions. The Company
presently does not intend to use interexchange carriers other than
ITC/\DeltaCom, and therefore does not expect the requirement to use ACSI fiber
to have a significant impact on the Company. However, there can be no assurance
that the Company will not seek to use other carriers in the future.
SALES AND MARKETING
MARKETING STRATEGY. The Company believes that it is or will be the
first provider of a bundled video, voice and data Broadband Services package in
Montgomery, Columbus and Panama City Beach/Panama City and intends to be first
to market a bundled video, voice and data Broadband Services package in each of
the cities in which it proposes to construct and operate Interactive Broadband
Networks. KNOLOGY seeks to capitalize on its position as a new communications
company that brings competition and choice to cities where it provides service.
The Company's marketing strategy since commencing construction of its
Interactive Broadband Networks has been to focus on attracting new cable
television subscribers in areas to which its network has expanded. The Company
plans to dedicate additional marketing resources to pursuing new customers in
areas already served by the network to increase its penetration rate once its
networks are fully constructed. In particular, the Company expects to focus its
marketing efforts on multiple dwelling units, many of which are subject to
exclusivity arrangements with other cable providers that have not yet expired
or which involve more complex arrangements with the property owner.
The Company plans to use the availability of its bundle of Broadband
Services to pursue potential customers in existing service areas who did not
purchase the Company's cable television service. Marketing of telephone service
and high-speed Internet access service commenced in July 1997 in Montgomery. In
Columbus, high-speed Internet access service was introduced in September 1997
and telephone service was introduced in the fourth quarter of 1997. While the
Company expects its subscribers for cable television (which are primarily
residential) to serve as the Company's initial customer base for its telephone
and Internet services, the Company also targets small- and medium-
- 14 -
<PAGE> 17
sized businesses using a bundled offering emphasizing telephone and Internet
access services. As of February 28, 1998, the Company provided a bundle of at
least two services to approximately 700 subscribers in Montgomery and to
approximately 180 subscribers in Columbus. In marketing its bundle of services,
the Company offers savings on one or more of such services. The Company
believes that cost savings on a bundle of services and the advantages of
one-stop shopping (including a single point of purchase and one relationship to
manage all services included in the bundle) will be attractive to new
customers, particularly since most of its prospective customers presently buy
services from multiple sources.
CABLE TELEVISION SALES AND MARKETING. To attract cable television
subscribers in newly served areas, the Company mounts extensive marketing
campaigns in such areas prior to initiation of service by means of door-to-door
solicitations and flyers ("door hangers"), with direct mail and telemarketing
to follow up on the door-to-door solicitation. The Company has a sales staff in
each of its markets, including a sales manager, approximately 10-12 sales
representatives and 14-16 customer service representatives in each market. The
Company also uses its own installation and repair crews and those of outside
contractors to get the new service installed quickly. The Company's goal in
newly served areas is to achieve a 30% to 35% penetration rate within 60 to 90
days after commencing service. The Company's sales representatives receive
commissions based on the value created by each sale, and accordingly are
encouraged to focus on sales of premium services and enhanced basic service.
The Company also uses these solicitation efforts to market its cable
services in its existing areas to obtain customers who previously have not
received any cable service or to switch to the Company's service from that of
the competing franchise holder. The Company also provides technical and
engineering support and training of sales and service representatives from its
headquarters in West Point, Georgia.
TELEPHONE AND INTERNET SALES AND MARKETING. The Company's initial
marketing of its telephone and Internet Broadband Services has focused on
subscribers for the Company's cable television services through direct mail,
including placing promotional inserts in its billing materials, door-to-door
solicitations, door hangers and telemarketing. Customers of the Company's cable
television services are offered discounted rates for telephone service and
high-speed Internet services. The Company emphasizes a bundle of Broadband
Services that includes savings on one or more services as additional services
are added. The Company is exploring having ISPs and other third parties serve
as customer-resellers or distributors for the Company. The Company has sales
managers for telephone and Internet services, and sales representatives
focusing on Broadband Services.
CUSTOMER SERVICE
Customer service is an essential element of the Company's operations
and marketing, and the Company believes the quality and responsiveness of its
customer service differentiates it from its competitors. A significant number
of the Company's employees are dedicated to customer service activities,
including order taking, customer activations, billing inquiries and
collections, service upgrades and provision of customer premises equipment, and
administration of the Company's customer satisfaction program. Under its
customer satisfaction program, the Company follows up with new customers
regarding satisfaction with the service, and uses installation customer
surveys, market research and focus groups to improve its service and marketing.
In addition, the Company provides 24-hour customer service, operates customer
phone centers in each of the Company's service areas, and operates a back-up
customer phone center in West Point, Georgia. The Company's commitment to
customer service is also reflected in its approach to construction, where the
Company notifies potential customers before commencing underground construction
and restores any damaged property. The Company monitors its networks 24 hours a
day, seven days a week and strives to resolve problems prior to the customer
being aware of any service interruptions.
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<PAGE> 18
COMPETITION
TELEVISION
Cable television competes for customers in local markets with other
distributors of video programming and other providers of entertainment, news
and information. The competitors in these markets include broadcast television
and radio, satellite and wireless video distribution systems and directly
competitive cable television operations, newspapers, magazines and other
printed sources of information and entertainment. The enactment of the 1996
Telecom Act may initiate more competition with cable television, because it
allows local exchange carriers to provide video services in their local service
areas, in direct competition with local cable companies.
OTHER CABLE SYSTEMS. There are directly competitive cable television
operations in each of Montgomery, Columbus, Augusta and Panama City Beach, and
are expected to be competitive cable television providers in the cities in
which the Company would construct Interactive Broadband Networks. In addition,
Federal law prohibits cities from granting exclusive cable franchises and from
unreasonably refusing to grant additional, competitive franchises, so
additional cable television competitors could obtain franchises in the future.
An increasing number of cities are exploring the feasibility of owning their
own cable systems in a manner similar to city-provided utility services.
Montgomery. The Company's direct competitor for cable television
subscribers in Montgomery is Tele-Communications, Inc. ("TCI"), which is the
largest provider of cable television services in the United States. TCI
operates a network consisting of approximately 1,000 miles of 450 MHz coaxial
cable with a fiber optic "backbone," passing approximately 70,000 homes. At
present, TCI is competing aggressively on price to maintain or increase its
market share.
Columbus. The holders of the franchises serving the Columbus, Georgia
market are (1) TCI, which operates a network that passes approximately 42,000
homes, and (2) Charter Communications ("Charter"), a large, multiple systems
operator based in St. Louis, Missouri, which operates a network that passes
approximately 28,000 homes. Under the terms of the relevant franchises, both
other companies may overbuild to compete with the other providers (including
the Company) throughout the entire city. At present, TCI and Charter are
competing aggressively on price to maintain or increase their market shares.
Panama City Beach. The Company's direct competitor in Panama City
Beach is Jones Intercable ("Jones"), which operates a network that passes
approximately 11,200 homes. The Company believes that Jones' facility is not
interactive and presently does not have the capability to provide telephone or
other Broadband Services. Jones is currently competing aggressively on price
to maintain or increase its market share.
OTHER TELEVISION PROVIDERS. There are alternative methods of
distributing the same or similar video programming offered by cable television
systems, although cable television systems currently account for a substantial
percentage of total subscribership to multichannel video programming
distributors ("MVPDs"). Further, these technologies have been encouraged by
Congress and the FCC to offer services in direct competition with existing
cable systems. In addition to broadcast television stations, the Company
competes in a variety of areas with other multichannel programming service
providers on a direct over-the-air basis. Multichannel programming services are
distributed by communications satellites directly to HSDs serving residences,
private businesses and various nonprofit organizations. Cable programmers have
developed marketing efforts directed to HSD owners.
A more significant competitive impact is expected from medium power
and higher power communications DBS satellites that transmit signals that can
be received by dish antennas much smaller in size. DirecTV, a subsidiary of GM
Hughes Electronics, and United States Satellite
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Broadcasting Company, a subsidiary of Hubbard Broadcasting, began offering
multichannel programming services in 1994 via high-power communications
satellites that require a dish antenna of only approximately 18 inches. Other
DBS providers include PrimeStar and EchoStar. Although DBS providers presently
serve a relatively small percentage of pay television subscribers at this time,
their share has been growing steadily. Competition from both medium and high
power DBS services could become substantial as developments in technology
continue to increase satellite transmitter power and decrease the cost and size
of equipment needed to receive these transmissions; however, the Company
believes that equipment and programming costs presently are limiting DBS's
market share in cabled areas.
DBS has advantages and disadvantages as an alternative means of
distributing video signals to the home. Among the advantages are that the
capital investment (although initially high) for the satellite and uplinking
segment of a DBS system is fixed and does not increase with the number of
subscribers receiving satellite transmissions; that DBS is not currently
subject to local regulation of service or required to pay franchise fees; and
that the capital costs for the ground segment of a DBS system (the reception
equipment) are directly related to and limited by the number of service
subscribers. DBS's disadvantages presently include limited ability to tailor
the programming package to the interests of different geographic markets, such
as providing local news, other local origination services and local broadcast
stations; signal reception being subject to line of sight angles; and
intermittent interference from atmospheric conditions and terrestrially
generated radio frequency noise. The long term effect of competition from these
services cannot be predicted; however, the Company nonetheless believes that
such competition could be substantial in the near future.
Multichannel multipoint distribution systems ("MMDS") represent
another type of video distribution service. MMDS systems deliver programming
services over microwave channels received by subscribers with a special
antenna. MMDS systems are less capital intensive, are not required to obtain
local franchises or pay franchise fees, and are subject to fewer regulatory
requirements than cable television systems. Although there are relatively few
MMDS systems in the United States that are currently in operation or under
construction, many markets have been licensed or tentatively licensed. The FCC
has taken a series of actions intended to facilitate the development of these
"wireless cable systems" as alternative means of distributing video
programming, including reallocating the use of certain frequencies to these
services and expanding the permissible use of certain channels reserved for
educational purposes. The FCC's actions enable a single entity to develop an
MMDS system with a potential of up to 35 channels, and thus compete more
effectively with cable television. Developments in compression technology have
significantly increased the number of channels that can be made available from
other over-the-air technologies. Subscribership to MMDS services is projected
to continue to increase over the next several years.
The Company also competes with master antenna television ("MATV")
systems and satellite master antenna television ("SMATV") systems, which
provide multichannel program services directly to hotel, motel, apartment,
condominium and similar multiunit complexes within a cable television system's
franchise area, generally free of any regulation by state and local
governmental authorities. The 1996 Telecom Act changes the definition of a
"cable system" to include only systems that cross public rights-of-way.
Therefore, SMATV systems that serve buildings that are not commonly owned or
managed, but which do not cross public rights-of-way, are no longer considered
cable systems and no longer require a franchise to operate.
Prior to enactment of the 1996 Telecom Act, LECs were prohibited from
offering video programming directly to subscribers in their telephone service
areas (except in limited circumstances in rural areas). The 1996 Telecom Act
eliminated restrictions on LECs and the Company may face increased competition
from local telephone companies which, in most cases, have greater financial
resources than the Company. Several major LECs, including BellSouth, have
announced plans to
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acquire cable television systems or provide video services to the home through
fiber optic or wireless technology.
The 1996 Telecom Act provides LECs with four options for providing
video programming directly to customers in their local exchange areas.
Telephone companies may provide video programming by radio-based systems,
common carrier systems, "open video" systems, or "cable systems." LECs that
elect to provide service via "open video" systems must allow others to use up
to two-thirds of their activated channel capacity. They will be relieved of
regulation as "common carriers," and are not required to obtain local
franchises, but are still subject to many other regulations applicable to cable
systems. LECs operating as "cable systems" are subject to all rules governing
cable systems, including franchising requirements. It is unclear which model
LECs will ultimately choose, but the video distribution services developed by
local telephone companies are likely to represent a direct competitive threat
to the Company.
The ability of local telephone companies to compete with the Company
by acquiring an existing cable system however, is limited. The 1996 Telecom
Act prohibits a LEC or its affiliate from acquiring more than a 10% financial
or management interest in any cable operator providing cable service in its
telephone service area. It further prohibits a cable operator or its affiliate
from acquiring more than a 10% financial or management interest in any LEC
providing telephone exchange service in its franchise area. A LEC and cable
operator that have a telephone service area and cable franchise area in the
same market may not enter into a joint venture to provide telecommunications
services or video programming. There are exceptions to these limitations for
rural facilities, very small cable systems, and small LECs in non-urban areas,
and such restrictions do not apply to LECs that were not providing local
exchange service prior to January 1, 1993.
TELEPHONE
The Company is likely to face intense competition in providing local
and long distance telephone and other broadband telecommunications services.
The 1996 Telecom Act is expected to have a substantial impact on the degree of
competition because it permits providers to enter markets that were previously
closed to them. Specifically, the 1996 Telecom Act pre-empts state policies
that have historically protected LECs from significant competition in local
service markets. In addition, the 1996 Telecom Act supersedes the antitrust
consent decree that prohibited the RBOCs from providing long distance services,
and establishes the terms and conditions under which RBOC entry into the long
distance market will be permitted. The overall effect of these provisions is to
blur the distinctions that previously existed between local and long distance
services.
One major impact of the 1996 Telecom Act may be a trend toward the use
and acceptance of bundled service packages, consisting of local and long
distance telephony, combined with other elements such as cable television and
wireless telecommunications service. As a result, the Company will be competing
with the incumbent LEC, BellSouth, with traditional providers of long distance
services such as AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI"),
Sprint Corporation ("Sprint") and WorldCom, and with competitive local service
providers, and may face competition from other providers of cable television
service, such as TCI. The Company also may compete with ACSI or a successor to
ACSI's facilities in Montgomery or Columbus. The Company's ability to compete
successfully will depend on the attributes of the overall bundle of services
the Company is able to offer, including price, features, and customer service.
Presently, the RBOCs' networks are the only route to the vast majority of
customers.
Wireless telephone service (cellular and PCS) now is generally viewed
by consumers as a supplement to, not a replacement for, wireline telephone
service. In particular, wireless service is more expensive than wireline local
service and is generally priced on a usage-sensitive basis. In addition, the
transmission quality of wireless service is not comparable to wireline service.
However, it is possible that in the future the rate and quality differential
between wireless and wireline service
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will decrease, leading to more direct competition between providers of these
two types of services. In that event, the Company's telecommunications
operations may also face competition from wireless operators.
INTERNET SERVICES
Internet service is provided by Internet service providers ("ISPs"),
which provide both Internet access and on-line services, providers of
satellite-based Internet services, long distance carriers that offer Internet
access services, and other cable television companies offering Internet access
services. The Company principally provides Internet access service. At present,
the Company is bundling its high-speed Internet service with MindSpring's
on-line "content" service, as well as offering high-speed capacity to all other
ISPs for their customer bases.
A large number of companies provide businesses and individuals with
direct access to the Internet and a variety of supporting services. In
addition, many companies (such as America Online, CompuServe, MSN, Prodigy and
WebTV) offer "online" services consisting of access to closed, proprietary
information networks with services similar to those available on the Internet,
in addition to direct access to the Internet. Such companies generally offer
Internet services over telephone lines using computer modems. The Company
believes that this form of transmission works well for smaller amounts of data,
but telephone lines generally are not capable of handling large volumes of
information, multimedia applications or high-speed data transmissions,
resulting in lengthy delays. Also, ISPs have limited numbers of ports available
for customers to dial in to the Internet, and their customers may experience
difficulties obtaining access to the Internet or be disconnected if activity is
too limited. A few ISPs also offer high-speed ISDN connections to the Internet;
however, the Company believes that broadband transmission is the most efficient
means of transmitting large volumes of data and information on a high-speed
basis to and from the Internet.
A few satellite companies provide broadband access to the Internet
from desktop PCs using a small dish antenna and receiver kit comparable to that
used for satellite television reception. DirecPC, principally owned and
operated by Hughes, is one of the largest providers of satellite-based Internet
services in the United States.
Long distance companies are aggressively entering the Internet access
markets. Long distance carriers have substantial transmission capabilities that
traditionally carry data to millions of customers and have an established
billing system infrastructure that permits them easily to add new services. For
example, AT&T began providing Internet access in the United States through a
new service called WorldNet, offering its long distance customers Internet
access including unlimited usage at a fixed monthly rate or on a per hour fee
basis. MCI is offering internetMCI in competition with AT&T's WorldNet
service. The Company expects competition for the end-consumer from such
companies to be vigorous due to such competitors' greater resources, operating
history and name recognition.
Other cable television companies can enter the Internet services
market. Traditional cable networks provide only one-way transmission and must
be upgraded (and often reconfigured) to permit two-way data transmission, which
would require significant investments on the part of service providers.
Broadband technology must be incorporated to enable digital data to be
transmitted over a separate channel. The Company is not aware of any cable
television competitors in its existing service areas providing Internet access
service using cable modems. However, owners of newer or upgraded cable
television networks have the ability to provide Internet services using cable
modems. The Company believes that some of the existing cable television
providers (such as Time Warner and Continental Cable) are beginning to provide
such services in certain of their major markets or clusters, including certain
major metropolitan areas in the southeast. @Home, a joint venture among TCI and
several other large cable companies, is offering high-speed Internet service
using cable modems in areas where its affiliates have hybrid fiber-coaxial
networks. The Company
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believes that high-speed Internet services ultimately will be offered by other
cable providers and companies such as @Home in most of the Company's present
and future service areas.
LEGISLATION AND REGULATION
The cable television industry currently is regulated by the FCC, some
state governments and most local governments. Telecommunications services are
regulated by the FCC and state public utility commissions. In addition,
legislative and regulatory proposals under consideration by Congress and
federal agencies may materially affect the cable television and
telecommunications industries. The following is a summary of federal laws and
regulations affecting the growth and operation of the cable television and
telecommunications industries and a description of certain state and local
laws.
CABLE COMMUNICATIONS POLICY ACT OF 1984
The Cable Communications Policy Act of 1984 (the "1984 Cable Act"),
which amended the Communications Act, established comprehensive national
standards and guidelines for the regulation of cable television systems and
identified the boundaries of permissible federal, state and local government
regulation. The FCC was charged with responsibility for adopting rules to
implement the 1984 Cable Act. Among other things, the 1984 Cable Act affirmed
the right of franchising authorities (state or local, depending on the practice
in individual states) to award one or more franchises within their
jurisdictions. It also prohibited non-grandfathered cable television systems
from operating without a franchise in such jurisdictions. The 1984 Cable Act
provides that in granting or renewing franchises, franchising authorities may
establish requirements for cable-related facilities and equipment, but may not
establish or enforce requirements for video programming or information
services other than in broad categories.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
In October 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") which permitted a
greater degree of regulation of the cable industry with respect to, among other
things: (i) cable system rates for both basic and certain cable programming
services; (ii) program access and exclusivity arrangements; (iii) access to
cable channels by unaffiliated programming services; (iv) leased access terms
and conditions; (v) horizontal and vertical ownership of cable systems; (vi)
customer service requirements; (vii) television broadcast signal carriage and
retransmission consent; (viii) technical standards; and (ix) cable equipment
compatibility. Additionally, the legislation encouraged competition with
existing cable television systems by allowing municipalities to own and operate
their own cable television systems without a franchise, preventing franchising
authorities from granting exclusive franchises or unreasonably refusing to
award additional franchises covering an existing cable system's service area,
and prohibiting the common ownership of cable systems and co-located MMDS or
SMATV systems (except that SMATV systems may be co-owned by the local cable
operator if the SMATV system is operated pursuant to the terms of the franchise
agreement). The 1992 Cable Act also precluded video programmers affiliated
with cable television companies from favoring cable operators over competitors
and required such programmers to sell their programming to other multichannel
video distributors. The legislation required the FCC to initiate a number of
rulemaking proceedings to implement various provisions of the statute, the
majority of which have been completed. Various cable operators challenged the
constitutionality of several sections of the 1992 Cable Act, although the
courts have disposed of most of these challenges.
On June 28, 1996, the Supreme Court upheld cable operators' ability to
enforce prospective written policies against carrying programming that depicts
sexual or excretory activities on commercial leased access channels. The Court
also ruled that cable operators may not be required to block, scramble and
segregate indecent commercial leased access programming, finding that this
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statutory provision violated cable operators' First Amendment rights. The Court
also struck down on First Amendment grounds the statutory provision that
enabled cable operators to prohibit obscene material, sexually explicit conduct
or material soliciting unlawful acts on Public, Educational and Government
("PEG") channels.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the 1996 Telecom Act was enacted. The 1996
Telecom Act and the FCC rules implementing the 1996 Telecom Act radically
altered the regulatory structure of telecommunications markets by mandating
that states permit competition for local exchange services. The 1996 Telecom
Act also requires incumbent local exchange carriers ("ILECs") to provide
competitors with access to ILEC facilities on an unbundled basis and to provide
competitors with telecommunications services for resale at wholesale rates.
Another significant feature of the 1996 Telecom Act is the replacement of the
consent decree prohibiting the RBOCs from providing long distance service, with
a statutory procedure for the RBOCs to apply to the FCC for authority to
provide long distance services. This provision of the 1996 Telecom Act recently
was struck down as unconstitutional by a federal district court in Texas. That
decision has been appealed by the FCC and other parties and a stay has been
granted pending conclusion of the appeal.
The 1996 Telecom Act also included significant changes in the
regulation of cable operators. Specifically, the 1996 Telecom Act reverses much
of the cable rate regulation established by the 1992 Cable Act over a
three-year period. The rates for cable programming service ("CPS" or
"non-basic") tiers offered by small cable operators in small cable systems are
deregulated immediately. The FCC's authority to regulate the CPS tier rates of
all other cable operators will expire on March 31, 1999. The legislation also
(i) repeals the anti-trafficking provisions of the 1992 Cable Act; (ii) limits
the rights of franchising authorities to require certain technology and
prohibit or condition the provision of telecommunications services by the cable
operator; (iii) requires cable operators to fully block or scramble both the
audio and video on sexually-explicit or indecent programming on channels
primarily dedicated to sexually-oriented programming; (iv) allows cable
operators to refuse to carry access programs containing "obscenity, indecency
or nudity"; (v) adjusts the pole attachment laws; and (vi) allows cable
operators to enter telecommunications markets which historically have been
closed to them, while also allowing some telecommunications providers to begin
providing competitive cable service in their local service areas.
FEDERAL REGULATION OF CABLE SERVICES
The FCC, the principal federal regulatory agency with jurisdiction
over cable television, has promulgated regulations covering many aspects of
cable television operations, and is required to adopt additional regulations or
repeal or modify existing regulations to implement the 1996 Telecom Act. The
FCC may enforce its regulations through the imposition of fines, the issuance
of cease and desist orders and/or the imposition of other administrative
sanctions, such as the revocation of FCC licenses needed to operate certain
transmission facilities often used in connection with cable operations. A brief
summary of certain federal regulations follows.
RATE REGULATION. Prior to implementation of the 1992 Cable Act, most
cable systems were largely free to adjust cable service rates without
governmental approval. The 1992 Cable Act authorized rate regulation for
certain cable communications services and equipment in communities where the
cable operator is not subject to "effective competition." The 1992 Cable Act
requires the FCC to resolve complaints about rates for non-basic cable
programming services and to reduce any such rates found to be unreasonable. It
also limits the ability of many cable systems to raise rates for basic and
certain non-basic cable programming services (collectively, the "Regulated
Services"). Cable services offered on a per channel or on a per program basis
are not subject to rate regulation by either franchising authorities or the
FCC. Notwithstanding the above, the 1996 Telecom Act
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immediately deregulates the CPS rates of "small cable operators" and will
deregulate the CPS rates of all other cable operators by March 31,1999.
The 1992 Cable Act requires communities to certify with the FCC before
regulating basic cable rates. Upon certification, the local community obtains
the right to evaluate the reasonableness of basic rates under standards
established by the FCC. Certified franchising authorities are also empowered
to regulate rates charged for additional outlets and for the installation,
lease, and sale of equipment used by customers to receive the basic service
tier, such as converter boxes and remote control units. These equipment rates
must be based on actual cost plus a reasonable profit, as defined by the FCC.
Cable operators may be required to refund overcharges with interest. The 1992
Cable Act permits communities to certify at any time, so it is possible that
the Company's franchising authorities may choose in the future to certify to
regulate the Company's basic rates. After the 1996 Telecom Act, FCC review of
CPS rates is triggered by franchising authority complaints filed with the FCC
within 180 days of a rate increase. A franchising authority may not file a
complaint until it has received multiple subscriber complaints with respect to
a rate increase.
The FCC's rate regulations do not apply where a cable operator
demonstrates that it is subject to "effective competition." Under the 1992
Cable Act, a system is subject to effective competition where (i) fewer than
30% of the households in the franchise area subscribe to the cable service of a
cable system; (ii) the franchise area is served by at least two unaffiliated
MVPDs each of which offers comparable video programming to at least 50% of the
households in the franchise area and the number of households subscribing to
programming services offered by MVPDs other than the largest MVPD exceeds 15%
of the households in the franchise area; or (iii) a MVPD operated by the
franchising authority offers video programming to at least 50% of the
households in the franchise area. The 1996 Telecom Act also provides that
effective competition exists if a local exchange carrier or its affiliate
provides video programming in the franchise area. The Company believes that it
is subject to effective competition in the areas that it currently serves.
In implementing the 1992 Cable Act, the FCC adopted a benchmark
methodology as the principal method of regulating rates for Regulated Services.
Cable operators with rates above the level established by the FCC's benchmark
methodology may attempt to justify such rates using a cost-of-service
methodology. The FCC has instituted rate relief for small cable operators.
Cable operators with fewer than 400,000 subscribers are eligible to file a
streamlined cost-of-service analysis to justify their per-channel rates in
those systems serving 15,000 or fewer subscribers. Per-channel rates that fall
below a prescribed benchmark are presumed reasonable.
The 1992 Cable Act also requires cable systems to permit customers to
purchase video programming offered by the operator on a per channel or a per
program basis without the necessity of subscribing to any tier of service,
other than the basic service tier, unless the system's lack of addressable
converter boxes or other technological limitations does not permit it to do so.
The statute provides an exemption for cable systems that do not have the
technological capability to offer programming in the manner required. This
exemption is available until a system obtains such capability, but not later
than December 2002. Systems facing effective competition are not subject to the
tier buy-through prohibition.
The 1996 Telecom Act deregulates immediately CPS rates for small cable
operators that have less than 50,000 subscribers in the franchise area. A
"small operator" is an operator that, with its affiliates, serves less than 1%
of all subscribers in the United States (defined by the FCC as 617,000
subscribers) and is not affiliated with entities with annual aggregate gross
revenues of more than $250 million. Rates for basic service continue to be
regulated, however, unless the cable system had a single regulated tier as of
December 31, 1994. For all other cable systems, the FCC's rate regulation
authority for CPS tiers expires March 31, 1999. Rates for basic tiers will
continue to be subject to regulation.
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The 1996 Telecom Act allows cable operators to pass through franchise
fees and regulatory fees to subscribers without any prior notice. Notices of
other rate changes may be given by any reasonable written means, at the cable
operator's "sole discretion." Bulk discounts for multi-dwelling units no longer
must meet any uniform rate requirement.
CARRIAGE OF BROADCAST TELEVISION SIGNALS. The 1992 Cable Act
established signal carriage requirements. These requirements allow commercial
television broadcast stations which are "local" to a cable system, to elect
every three years whether to require the cable system to carry the station,
subject to certain exceptions, or whether to require the cable system to
negotiate for "retransmission consent" to carry the station. The first
must-carry/retransmission consent elections were made in June 1993. The second
elections were made in October 1996. Stations are generally considered local
to a cable system where the system is located in the station's 1992 Area of
Dominant Influence ("ADI"), as determined by Arbitron. This method for
determining whether a station is local to a cable system may change at the time
of the October 1999 election because Arbitron no longer updates ADIs and the
1996 Telecom Act requires the FCC to use commercial publications which
delineate markets based on viewing patterns. Cable systems must obtain
retransmission consent for the carriage of all "distant" commercial broadcast
stations, except for certain "superstations" (i.e., commercial
satellite-delivered independent stations such as WGN). All commercial stations
entitled to must-carriage were to have been carried by June 1993, and any
non-must-carry stations (other than superstations) for which retransmission
consent had not been obtained could no longer be carried after October 5, 1993.
The Company carries some stations pursuant to retransmission consents and pays
fees for such consents or has agreed to carry additional services pursuant to
retransmission consent agreements.
Local non-commercial television stations are also given mandatory
carriage rights, subject to certain exceptions, within the larger of (i) a
50-mile radius of the station's city of license; or (ii) the station's Grade B
contour (a measure of signal strength). Non-commercial stations are not given
the option to negotiate for retransmission consent. All non-commercial stations
entitled to carriage were to have been carried by December 1992.
NONDUPLICATION OF NETWORK PROGRAMMING. Cable television systems that
have 1,000 or more subscribers must, upon the appropriate request of a local
television station, delete or "black out" the simultaneous or nonsimultaneous
network programming of a distant same-network station when the local station
has contracted for such programming on an exclusive basis.
DELETION OF SYNDICATED PROGRAMMING. Cable television systems that
have 1,000 or more subscribers must, upon the appropriate request of a local
television station, delete or "black out" the simultaneous or nonsimultaneous
syndicated programming of a distant station when the local station has
contracted for such programming on an exclusive basis.
REGISTRATION PROCEDURES AND REPORTING REQUIREMENTS. Prior to
commencing operation in a particular community, all cable television systems
must file a registration statement with the FCC listing the broadcast signals
they will carry and certain other information. Additionally, cable operators
periodically are required to file various informational reports with the FCC.
Cable operators that operate in certain frequency bands, including the Company,
are required on an annual basis to file the results of their periodic
cumulative leakage testing measurements. Operators that fail to make this
filing or who exceed the FCC's allowable cumulative leakage index risk being
prohibited from operating in those frequency bands in addition to other
sanctions.
TECHNICAL REQUIREMENTS. Historically, the FCC has imposed technical
standards applicable to the cable channels on which broadcast stations are
carried, and has prohibited franchising authorities from adopting standards
which were in conflict with or more restrictive than those established by the
FCC. The FCC has applied its standards to all classes of channels which carry
downstream National Television System Committee ("NTSC") video programming. The
FCC
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also has adopted standards applicable to cable television systems using
frequencies in the 108-137 MHz and 225-400 MHz bands in order to prevent
harmful interference with aeronautical navigation and safety radio services and
has also established limits on cable system signal leakage. The 1992 Cable Act
requires the FCC to update periodically its technical standards. The 1996
Telecom Act requires that the FCC adopt minimal regulations to assure
compatibility among televisions, VCRs and cable systems, leaving all features,
functions, protocols and other product and service options for selection
through open competition in the market. The 1996 Telecom Act also prohibits
States or franchising authorities from prohibiting, conditioning or restricting
a cable system's use of any type of subscriber equipment or transmission
technology.
FRANCHISE AUTHORITY. The 1984 Cable Act affirmed the right of
franchising authorities (the cities, counties or political subdivisions in
which a cable operator provides cable service) to award franchises within their
jurisdictions and prohibited non-grandfathered cable systems from operating
without a franchise in such jurisdictions. The Company holds cable franchises
in all of the franchise areas in which it provides service. The 1992 Cable Act
encouraged competition with existing cable systems by (i) allowing
municipalities to operate their own cable systems without franchises; (ii)
preventing franchising authorities from granting exclusive franchises or from
unreasonably refusing to award additional franchises covering an existing cable
system's service area; and (iii) prohibiting (with limited exceptions) the
common ownership of cable systems and co-located MMDS or SMATV systems (a
prohibition which is limited by the 1996 Telecom Act to cases in which the
cable operator is not subject to effective competition).
The 1996 Telecom Act exempts from cable franchise requirements those
telecommunications services provided by a cable operator or its affiliate
although municipalities retain authority to regulate the manner in which a
cable operator uses the public rights-of-way to provide telecommunications
services. Franchise authorities may not require a cable operator to provide
telecommunications service or facilities, other than institutional networks, as
a condition of franchise grant, renewal, or transfer. Similarly, franchise
authorities may not impose any conditions on the provision of such service.
FRANCHISE FEES. Although franchising authorities may impose franchise
fees under the 1984 Cable Act, as modified by the 1996 Telecom Act, such
payments cannot exceed 5% of a cable system's annual gross revenues derived
from the operation of the cable system to provide cable services. Franchise
fees apply only to revenues for cable services. Franchising authorities are
permitted to charge a fee for any telecommunications providers' use of public
rights-of-way "on a competitively neutral and nondiscriminatory basis."
FRANCHISE RENEWAL. The 1984 Cable Act established renewal procedures
and criteria designed to protect incumbent franchisees against arbitrary
denials of renewal. These formal procedures are mandatory only if timely
invoked by either the cable operator or the franchising authority. Even after
the formal renewal procedures are invoked, franchising authorities and cable
operators remain free to negotiate a renewal outside the formal process.
Although the procedures provide substantial protection to incumbent
franchisees, renewal is by no means assured, as the franchisee must meet
certain statutory standards. Even if a franchise is renewed, a franchising
authority may impose new and more onerous requirements such as upgrading
facilities and equipment, although the municipality must take into account the
cost of meeting such requirements.
The 1992 Cable Act made several changes to the process which may make
it easier in some cases for a franchising authority to deny renewal. The cable
operator's timely request to commence renewal proceedings must be in writing
and the franchising authority must commence renewal proceedings not later than
six months after receipt of such notice. Within a four-month period beginning
with the submission of the renewal proposal the franchising authority must
grant or deny the renewal. Franchising authorities may consider the "level" of
programming service provided by a cable operator in deciding whether to renew.
Franchising authorities currently may deny renewal
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based on failure to substantially comply with the material terms of the
franchise, even if the franchising authority has "effectively acquiesced" to
such past violations. The franchising authority is estopped only if, after
giving the cable operator notice and opportunity to cure, the authority fails
to respond to a written notice from the cable operator of its failure or
inability to cure. Courts may not reverse a denial of renewal based on
procedural violations found to be "harmless error."
CHANNEL SET-ASIDES. The 1984 Cable Act permits local franchising
authorities to require cable operators to set aside certain channels for
public, educational and governmental access programming. The 1984 Cable Act
further requires cable television systems with 36 or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties. The 1992 Cable Act requires leased access rates to
be set according to an FCC-prescribed formula.
OWNERSHIP. The 1996 Telecom Act eliminates the 1984 Act provisions
prohibiting LECs from providing video programming directly to customers within
their local exchange telephone service areas, except in rural areas or by
specific waiver. Under the 1996 Telecom Act, LECs may provide video programming
by radio-based systems, common carrier systems, "open video" systems, or "cable
systems." LECs that elect to provide "open video" systems must allow others to
use up to two-thirds of their activated channel capacity. These LECs are
relieved of regulation as "common carriers," and are not required to obtain
local franchises, but are still subject to many other regulations applicable to
cable systems. LECs operating as "cable systems" are subject to all rules
governing cable systems, including franchising requirements.
The 1996 Telecom Act prohibits a LEC or its affiliate from acquiring
more than a 10% financial or management interest in any cable operator
providing cable service in its telephone service area. It also prohibits a
cable operator or its affiliate from acquiring more than a 10% financial or
management interest in any LEC providing telephone exchange service in its
franchise area. A LEC and cable operator whose telephone service area and
cable franchise area are in the same market may not enter into a joint venture
to provide telecommunications services or video programming. There are
exceptions to these limitations for rural facilities, very small cable systems,
and small LECs in non-urban areas, and such restrictions do not apply to LECs
that were not providing local exchange service prior to January 1, 1993.
The FCC's rules prohibit the common ownership, operation, control or
interest in a cable system and a local television broadcast station whose
predicted Grade B contour covers any portion of the community served by the
cable system. The 1996 Telecom Act repeals this statutory restriction on
broadcast-cable cross-ownership, but does not require the FCC to repeal its
cross-ownership rule. Nevertheless, the FCC intends to review this rule. The
1996 Telecom Act also eliminates the FCC's restriction against the ownership or
control of both a broadcast network and a cable system, but it authorizes the
FCC to adopt regulations which will ensure carriage, channel positioning and
nondiscriminatory treatment of non-affiliated broadcast stations by cable
systems which are owned by a broadcast network.
The 1992 Cable Act prohibits the common ownership, affiliation,
control or interest in cable television systems and MMDS facilities or SMATV
systems with overlapping service areas. However, a cable system may acquire a
co-located SMATV system if it provides cable service to the SMATV system in
accordance with the terms of its cable television franchise. The 1996 Telecom
Act provides that these rules shall not apply where the cable operator is
subject to effective competition.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of cable systems a single cable operator may own. In general, no cable
operator may hold an attributable interest in cable systems which pass more
than 30% of all homes nationwide. Attributable interests for these purposes
include voting interests of 5% or more (unless there is another single holder
of more than 50% of the voting stock), officerships, directorships and general
partnership interests.
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POLE ATTACHMENTS. The 1996 Telecom Act requires utilities (all local
exchange carriers and electric utilities, except those owned by municipalities
and co-ops) to provide cable operators and telecommunications carriers with
nondiscriminatory access to poles, ducts, conduit and right-of-way. The right
to mandatory access is beneficial to facilities-based providers such as
KNOLOGY. The 1996 Telecom Act also establishes principles to govern the
pricing of such access. Presently, the rates charged to cable and
telecommunications providers are the same. Starting in 2001,
telecommunications providers will be charged a higher rate than cable operators
for pole attachments. Companies that provide both cable and telecommunications
services over the same facilities, such as KNOLOGY, may be required to pay the
higher telecommunications rate.
INSIDE WIRING OF MULTIFAMILY DWELLING UNITS. The FCC recently adopted
rules to promote competition among multichannel video program distributors
("MVPDs") in multifamily dwelling units ("MDUs"). The rules provide generally
that, in cases where the MVPD owns the wiring inside an MDU, but has no right
of access to the premises, the MDU owner may give the cable operator notice
that it intends to permit another MVPD to provide service there. An MVPD then
must elect whether to remove the inside wiring, sell the inside wiring to the
MDU owner (at a price not to exceed the replacement cost of the wire, on a
per-foot basis), or abandon the inside wiring.
PRIVACY. The 1984 Cable Act imposes a number of restrictions on the
manner in which cable system operators can collect and disclose data about
individual system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a
cable operator is found to have violated the customer privacy provisions of the
1984 Cable Act, it could be required to pay damages, attorneys' fees and other
costs. Under the 1992 Cable Act, the privacy requirements are strengthened to
require that cable operators take such actions as are necessary to prevent
unauthorized access to personally identifiable information.
FRANCHISE TRANSFER. The 1996 Telecom Act repeals most of the
anti-trafficking restrictions imposed by the 1992 Cable Act, which prevented a
cable operator from selling or transferring ownership of a cable system within
36 months of acquisition. However, a local franchise may still require prior
approval of a transfer or sale. The 1992 Cable Act requires franchising
authorities to act on a franchise transfer request within 120 days after
receipt of all information required by FCC regulations and the franchising
authority. Approval is deemed granted if the franchising authority fails to act
within such period.
COPYRIGHT. Cable television systems are subject to federal compulsory
copyright licensing covering carriage of broadcast signals. In exchange for
making semi-annual payments to a federal copyright royalty pool and meeting
certain other obligations, cable operators obtain a statutory license to
retransmit broadcast signals. The amount of the royalty payment varies,
depending on the amount of system revenues from certain sources, the number of
distant signals carried, and the location of the cable system with respect to
over-the-air television stations. Adjustments in copyright royalty rates are
made through an arbitration process supervised by the U.S. Copyright Office.
Various bills have been introduced in Congress in the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable operators might need to negotiate rights
from the copyright owners for each program carried on each broadcast station
retransmitted by the cable system.
Copyright music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and cable programming networks
(such as USA Network) has generally been licensed by the networks through
private agreements with the American Society of Composers and Publishers
("ASCAP") and BMI, Inc. ("BMI"), the two major performing rights organizations
in the United States. ASCAP and BMI offer "through to the viewer" licenses to
the cable networks
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which cover the retransmission of the cable networks' programming by cable
television systems to their subscribers.
REGULATORY FEES AND OTHER MATTERS. The FCC requires payment of annual
"regulatory fees" by the various industries it regulates, including the cable
television industry. In 1996, cable television systems were required to pay
regulatory fees of $0.55 per subscriber. In 1997, the fee was $0.54 per
subscriber. Per-subscriber regulatory fees may be passed on to subscribers as
"external cost" adjustments to rates for basic cable service. Fees are also
assessed for other FCC licenses, including licenses for business radio, cable
television relay systems ("CARS") and earth stations. These fees, however, may
not be collected directly from subscribers as long as the FCC's rate
regulations remain applicable to the cable system.
In December 1994, the FCC adopted new cable television and broadcast
technical standards to support a new Emergency Alert System. Cable system
operators must install and activate equipment necessary to implement the new
Emergency Broadcast System by December 31, 1998 or October 1, 2002, depending
on the size of the system.
FCC regulations also address the carriage of local sports programming;
restrictions on origination and cablecasting by cable system operators;
application of the rules governing political broadcasts; customer service
standards; and limitations on advertising contained in nonbroadcast children's
programming.
FEDERAL REGULATION OF TELECOMMUNICATIONS SERVICES
Telecommunications services are subject to varying degrees of federal,
state and local regulation. The FCC exercises jurisdiction over all facilities
of and services offered by telecommunications carriers to the extent those
facilities are used to provide, originate or terminate interstate or
international communications.
The 1996 Telecom Act has substantially revised communications
regulation in the United States. The legislation is intended to allow providers
to enter communications markets that have historically been closed to them as a
result of legal restrictions and due to practical and economic considerations.
At the same time, implementation of the 1996 Telecom Act and regulatory actions
at the state level may leave incumbent providers in previously closed markets
in a position to defend their markets aggressively. The Company is unable to
predict the ultimate outcome of federal and state proceedings to implement the
legislation.
INTERCONNECTION. The 1996 Telecom Act establishes local exchange
competition as a national policy by preempting laws that prohibit competition
in the local exchange and by establishing uniform requirements and standards
for local network interconnection, local network unbundling and service resale.
The 1996 Telecom Act also requires incumbent local exchange carriers to enter
into mutual compensation arrangements with new local telephone companies for
transport and termination of local calls on each others' networks. The Act's
interconnection, unbundling and resale standards have been developed in the
first instance by the FCC and will be implemented by the states in numerous
proceedings and through a process of negotiation and arbitration. In August
1996, the FCC adopted a wide-ranging decision regarding the statutory
interconnection obligations of the LECs. Among other things, the order
established pricing principles to use by the states in determining rates for
unbundled local network elements and established a method for calculating
discounts to reflect costs saved by the LECs in offering their retail services
to other carriers on a wholesale basis. In July 1997, the United States Court
of Appeals for the 8th Circuit struck down the pricing rules established by the
FCC. The court ruled that the FCC did not have jurisdiction under the 1996
Telecom Act to establish pricing rules to be applied by the states.
Consequently, the pricing of unbundled network elements and wholesale services
is a matter solely within the jurisdiction of state commissions at the present
time. The court generally upheld the
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FCC's non-pricing requirements for unbundling of network elements and offering
of wholesale services. In a subsequent decision in October 1997, the United
States Court of Appeals for the 8th Circuit ruled that LECs were not obligated
to provide pre-existing combinations of unbundled network elements. This
decision may hamper the ability of carriers that do not own their own local
facilities to provide competitive local services. Each of the July 1997 and the
October 1997 decisions of the United States Court of Appeals for the 8th
Circuit has been appealed to the United States Supreme Court, which will hear
the case during its 1998-99 term.
NUMBER PORTABILITY. Another new statutory provision requires that all
carriers providing local exchange service give users the ability to retain, at
the same location, existing telephone numbers without impairment of quality,
reliability or convenience (i.e., "number portability"). Number portability
will remove one barrier to entry faced by new competitors, which would
otherwise face the difficult task of persuading customers to switch local
service providers despite having to change telephone numbers. The FCC has
adopted an order requiring the implementation of interim number portability and
mandating that permanent number portability be available in the 100 largest
metropolitan areas by December 31, 1998. However, an appeal challenging that
decision is pending.
UNIVERSAL SERVICE AND ACCESS CHARGE REFORM. The FCC has adopted rules
implementing the universal service requirements of the 1996 Telecom Act.
Pursuant to those rules, all telecommunications providers must contribute a
small percentage of their telecom revenues to a newly established Universal
Service Fund. There is, however, an exemption for providers whose contribution
would be less than $10,000 in a particular year. Carriers providing service to
customers in high-cost and rural areas, as well as to low-income customers,
will be eligible to collect subsidies from the fund. The fund also will
subsidize service provided to schools, libraries and rural health care
providers at discounted rates. The FCC also completed a proceeding in which it
revised the rules governing access charges imposed by LECs on interexchange
carriers ("IXCs") distance carriers for use of the local network to complete
long distance calls. The policies adopted in that proceeding are intended to
move the LECs' charges for access services closer to cost. Portions of the
FCC's universal service and access charge reform policies are subject to
reconsideration by the FCC and/or judicial review.
RBOC ENTRY INTO LONG DISTANCE. The 1996 Telecom Act also opens the
way for RBOCs and their affiliates to provide long distance telecommunications
services between a local access and transport area and points outside that
area. Prior to the 1996 Telecom Act, RBOCs were generally prohibited from
offering such "interLATA" services. Under the 1996 Telecom Act such services
may be offered by a RBOC outside of its local exchange service states
immediately. RBOCs may offer interLATA services from within such states
(in-region) when the FCC determines either that the RBOC is providing access
and interconnection to a competing exchange service provider under a
state-approved agreement or that no such provider has requested such access and
interconnection within ten months after enactment, and the state has approved
the RBOC's general terms for providing such access and interconnection. In
either case, the FCC also must conclude that the RBOC has satisfied a
"competitive checklist" of interconnection and other requirements specified in
the 1996 Telecom Act and that RBOC entry is in the public interest. In December
1997, a federal district court in Texas struck down these provisions as
unconstitutional on their face. That decision has been appealed and a stay has
been granted pending review. BellSouth filed applications during 1997 at the
FCC for authority to offer interLATA services in South Carolina and Louisiana.
In December 1997, the FCC rejected the South Carolina application. The
Louisiana application was rejected in February 1998. Notwithstanding these
decisions, BellSouth likely will file additional applications for other states
in its territory, including states in which the Company provides interLATA
services. Because of its existing base of local customers and its extensive
telecommunications network, it is anticipated that BellSouth will be a
significant competitor in the interLATA market after it obtains interLATA
authority from the FCC.
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TARIFFS. Pursuant to its forbearance authority, the FCC recently
determined that it will no longer require domestic nondominant interexchange
carriers to file tariffs listing their rates, term and conditions. This
decision has been stayed by the U.S. Court of Appeals for the District of
Columbia Circuit. Nondominant providers of exchange access services provided to
interexchange carriers no longer are required to file tariffs at the FCC.
Tariffs detailing the rates, terms and conditions of service are still required
for international services.
ADDITIONAL REQUIREMENTS. The FCC imposes a number of additional
obligations on all telecommunications carriers, including the obligation to:
(1) interconnect with other carriers and not to install equipment that cannot
be connected with the facilities of other carriers; (2) ensure that their
services are accessible and usable by persons with disabilities; (3) provide
Telecommunications Relay Service ("TRS"), either directly or through
arrangements with other carriers or service providers (TRS enables hearing
impaired individuals to communicate by telephone with hearing individuals
through an operator at a relay center); (4) comply with verification procedures
in connection with changing the presubscribed interexchange carrier of a
customer so as to prevent "slamming," a practice by which a customer's chosen
long distance carrier is switched without the customer's knowledge; (5) protect
the confidentiality of proprietary information obtained from other carriers,
manufacturers and customers; (6) pay annual regulatory fees to the FCC; and (7)
contribute to the Telecommunications Relay Services Fund.
FORBEARANCE. The 1996 Telecom Act permits the FCC to scale back its
regulation of common carriers. The Act permits the FCC to forbear from applying
statutory provisions or regulations if the FCC determines that enforcement is
not necessary to ensure that a carrier's terms are reasonable and
nondiscriminatory, or to protect consumers, and that forbearance is in the
public interest and, in particular, that it will promote competition. The FCC
has exempted certain carriers from tariffing and reporting requirements
pursuant to this provision of the 1996 Telecom Act. The FCC may take similar
action in the future to reduce or eliminate other requirements. Such actions
could free the Company from regulatory burdens, but might also increase the
pricing flexibility of the Company's competitors.
STATE AND LOCAL REGULATION
CABLE TELEVISION REGULATION
MONTGOMERY, ALABAMA. The Company's subsidiary, KNOLOGY of Montgomery,
Inc. holds a franchise with the City of Montgomery extending through March 6,
2005. The franchise requires the payment of a franchise fee of five percent
(5%) of "annual gross subscriber revenues" and five percent (5%) of "annual net
auxiliary services revenue derived from its operation of the franchised cable
television system within the franchised area limits." The Company is required
to file annual financial reports with the city and is subject to audit and
assessment for a period of three years after payment.
The original franchise agreement, dated March 6, 1990, required
Montgomery Cablevision to complete two hundred (200) miles of service per time
period for five time periods," with the first time period consisting of
eighteen (18) months and each successive time period consisting of twelve (12)
months. The Company was granted a three month grace period (after each of the
aforementioned time periods) in which to cure any "defects or deficiencies."
The franchise provided for a $250,000 penalty for each time period in which
Montgomery Cablevision failed to complete the aforementioned construction
objectives and also the potential cancellation of the franchise for
non-compliance. On April 4, 1995, the City Council passed a resolution
extending the Company's time period to meet such requirements until August 4,
1996 and the remaining requirements annually thereafter through August 4, 1999.
In management's opinion, KNOLOGY of Montgomery is currently in compliance with
this ordinance.
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At the end of 1996, the City of Montgomery adopted an ordinance which
places heightened notice and public education requirements on cable companies
seeking to install new facilities in residential areas and prescribed
penalties for violation of the notice requirement. Under Alabama law, a county
may require that a provider of cable services receive a franchise prior to
using the public rights of ways, easements, etc. of the county outside the
incorporated areas of a municipality. The Company does not serve any
unincorporated areas in the State of Alabama. Should it extend cable services
into such areas, the Company may be required to obtain a franchise and to pay
certain franchise fees on its revenues derived from cable services provided
therein.
COLUMBUS, GEORGIA. The Company holds a franchise providing the right
to operate a cable system within the corporate limits of Columbus, Georgia,
through June 1, 1998. The Company is seeking the renewal of the franchise.
The franchise requires the Company to provide a minimum of 22 viewing channels,
including all local television channels, as basic service. The franchise
purports to limit rate increases for basic cable service to five percent (5%)
per year and provides for thirty days advance notice to the City Clerk of a
proposed rate increase or new charge. The Company is also required to indemnify
the city of Columbus for any damages resulting from the construction or
operation of its cable system. As part of the franchise, the Company agreed to
install facilities to offer service to all residents of Columbus in any area
with a population density of thirty-five (35) homes per mile or more in an area
within one half mile of the "facilities headend" as of January 1, 1989. The
Company also agreed to provide service within one and one half miles of its
headend beginning January 1,1990, upon receipt of written request from
potential subscribers, provided such potential subscribers pay the equitable
share of the cost of line construction where density is less than thirty-five
occupied dwelling units per mile. The Company is also obligated under the
franchise to provide free connection and monthly basic service to all occupied
governmental buildings that are within the Company's service area. The Company
believes it is in compliance with all such franchise requirements. The
Columbus franchise provides for payment of a franchise fee of five percent (5%)
of the "gross revenues" of KNOLOGY of Columbus, Inc. exclusive of installation
charges.
The Company also holds a franchise with the town of Bibb City, Georgia
(adjacent to the city of Columbus and part of the Columbus System), extending
through October 5, 2000. The terms of the franchise, including the payment of a
franchise fee, are substantially the same as the Columbus franchise, with the
exception that there is no build out commitment. The Company believes it is in
compliance with the terms of such franchise.
AUGUSTA, GEORGIA. The Company holds a franchise for Augusta, Georgia,
which includes all of Richmond County, Georgia. The franchise grants the
Company the right to operate a cable television system and a telecommunications
system within the city and county. The Company is required to pay a franchise
fee equal to three percent (3%) of the revenues collected from subscribers for
cable television services and three percent (3%) of the recurring revenues from
subscribers for local telephone services. The term of the franchise is fifteen
years and will be automatically extended for successive additional five-year
periods unless one of the parties to the franchise gives nine months' written
notice to the other of its intention not to extend the franchise. The Company
has agreed that, within ten years of the date of the grant of the franchise, it
will deploy its system in such a manner that it is capable of providing service
to at least 85% of the residents of Augusta-Richmond County.
Under Georgia law, a county may require that a provider of cable
services receive a franchise prior to using the public rights of ways,
easements, etc. outside the incorporated areas of a municipality. The Company
does not serve any unincorporated areas in the state of Georgia. Should it
extend cable services into such areas, the Company may be required to obtain a
franchise and to pay certain franchise fees on its revenues derived from cable
services provided in such areas.
PANAMA CITY BEACH, FLORIDA AND PANAMA CITY, FLORIDA. KNOLOGY of
Panama City, Inc. has a non-exclusive franchise to operate a cable television
system in the city of Panama City
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Beach, Florida, during a fifteen-year term (which began on July 23, 1992).
Pursuant to the franchise agreement, KNOLOGY of Panama City, Inc. pays a
monthly franchise fee of three percent (3%) of its gross revenues, and it is
required to offer cable service throughout the entire city of Panama City
Beach, Florida. Additionally, pursuant to the agreement, the franchisee must
make available a channel for programs originated by the City of Panama City
Beach, Florida.
KNOLOGY of Panama City, Inc. also holds a non-exclusive license from
Bay County, Florida to operate a cable television system in unincorporated
areas of the county for a fifteen-year term (which began on January 19, 1993).
The license does not require the Company to pay any franchise fees.
The Company's application for a cable franchise in Panama City,
Florida was awarded in March 1998.
OTHER. KNOLOGY will need to obtain franchises in cities to which it
plans to expand. The Communications Act provides that municipalities may not
unreasonably refuse to award competitive franchises. The Company believes that
it will be able to obtain franchises in its expansion cities on acceptable
terms and within acceptable time frames, although there can be no assurance
that this will occur.
TELEPHONY REGULATION
As discussed above, the 1996 Telecom Act contains provisions that
prohibit states and localities from adopting or imposing any legal requirement
that may prohibit, or have the effect of prohibiting, market entry by new
providers of interstate or intrastate telecommunications services. The FCC is
required to preempt any such state or local requirement to the extent necessary
to enforce the 1996 Telecom Act's open market entry requirements. State and
localities may, however, continue to regulate the provision of intrastate
telecommunications services and require carriers to obtain certificates or
licenses before providing service. Alabama, Georgia, Florida, and South
Carolina have adopted a statutory and regulatory scheme that requires
certification of communications providers, subject in some cases to certain
restrictions on the scope of the services of competitive local exchange
carriers, which are discussed below.
ALABAMA. CLECs seeking to provide service in Alabama are required to
obtain a certificate from the Alabama Public Service Commission ("APSC") and
meet certain minimum reporting and service requirements, including the filing
of informational tariffs. All telecommunications carriers in Alabama must
comply with certain "anti-slamming" procedures in connection with changing a
customer's telecommunications provider.
The Company obtained such a certificate and began providing service in
July 1997. It is possible that CLECs (such as the Company) will be required to
contribute at some point in the future to an intrastate fund to support
universal service objectives. The APSC has required BellSouth to provide
interconnection and access to unbundled network elements to CLECs and to
otherwise take certain steps necessary to allow for network interoperability
and competitive entry. The APSC has certain ongoing proceedings which may
affect the terms of the interconnection agreement between the Company and
BellSouth, especially after the expiration of its existing interconnection
agreement in April 1999. The APSC has recently approved the interconnection
agreement.
On October 8, 1996, the APSC granted all ILECs in Alabama other than
BellSouth and GTE an interim modification and suspension of certain provisions
of Section 251 of the 1996 Telecom Act. This modification and suspension is set
to expire on September 20, 1998. It is possible that further modifications and
suspensions of the 1996 Telecom Act's provisions will be granted to small
ILECs, which would serve to impede entry by CLECs into many rural areas of the
state.
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The APSC has conducted a proceeding to determine whether BellSouth has
satisfied the "competitive checklist" and other prerequisites for obtaining
authority to provide long distance services. The APSC concluded that it would
be premature for BellSouth to file an application with the FCC. This decision
is strictly advisory; the FCC will make the ultimate determination as to
whether BellSouth can provide interLATA services in Alabama at the time
BellSouth files an application at the FCC. Approval by the FCC of an
application to provide long distance service would enable BellSouth to offer
"one stop shopping" for telecommunications services within Alabama.
The 1996 Telecom Act exempts from cable franchise requirements those
telecommunications services provided by a cable operator or its affiliate. The
Company's franchise with the city of Montgomery requires payment of a franchise
fee of five percent (5%) of "annual gross subscriber revenues" and five percent
(5%) of "annual net auxiliary services revenue derived from its operation of
the franchised cable television system within the franchised area limits." The
1996 Telecom Act prohibits the application of cable franchise fees to revenues
derived from the provision of telecommunications services; however, the city of
Montgomery has recently imposed a five percent (5%) franchise fee on
telecommunications services provided by another franchised competitive access
provider and it is not known what position the city of Montgomery may take in
regard to the imposition of such fees on telecommunication services that may be
provided by the Company. In Montgomery, BellSouth does not pay franchise fees
on telecommunications service. To the extent that the Company (notwithstanding
the 1996 Telecom Act) is required to pay these fees and competitors do not pay
the same level of fees as the Company, the Company could be placed at a
competitive disadvantage. The ability of the city of Montgomery to impose a
divergent fee structure on comparable services is limited by requirements in
the 1996 Telecom Act that any fee imposed on telecommunications providers be
"fair and reasonable," and "competitively neutral and nondiscriminatory."
In addition to the above, the Company will be subject to ad valorem
taxation in the state of Alabama as a utility and be required to collect and
remit utility gross receipts taxes and other regulatory fees from its customers
for its telecommunications services.
GEORGIA. The Georgia Public Service Commission ("GPSC") has adopted
interim filing requirements for CLECs seeking to apply for new certificates of
authority. The Company obtained such a certificate in September 1997.
Amendments to the certificate will be required in connection with the Company's
provision of telephone service in additional cities in Georgia. The Company has
also obtained certificates of authority from the GPSC to resell interexchange
telecommunications services and to provide alternate operator services. CLECs
will be required to contribute to a state universal access fund, along with all
other telecommunications companies.
Under the Georgia Competition Act, ILECs are also required to allow
resale of their services and interconnection on reasonable terms to CLECs. The
GPSC has initiated several rulemaking proceedings to implement the provisions
of the Georgia Competition Act and the 1996 Telecom Act, including a proceeding
to determine the rates which BellSouth may charge for unbundled network
elements. The results of these proceedings will impact the terms of the
interconnection agreement with BellSouth, which has been approved by the GPSC.
The GPSC also has a pending proceeding to determine whether BellSouth
has satisfied the competitive checklist and is otherwise qualified to begin
providing long distance services. The GPSC's decision on this issue will be
strictly advisory. The FCC will make the ultimate determination as to whether
BellSouth is qualified to provide interLATA service in Georgia at the time
BellSouth files an application with the FCC.
The Company's franchises with the cities of Columbus and Bibb City,
Georgia to provide cable television also require the payment of a franchise fee
of five percent (5%) of annual gross subscriber revenues (exclusive of
installation charges). The 1996 Telecom Act prohibits the
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application of such franchise fee to revenues derived from the provision of
telecommunications services; however, it is not known what position the
municipalities may take in regard to the imposition of such franchise fees.
Under the 1996 Telecom Act, a local government may require telecommunications
providers to pay reasonable compensation for the use of public rights-of-way,
but such compensation must be "fair and reasonable" and be on a "competitively
neutral and nondiscriminatory basis." To the extent that competitors do not
pay the same level of fees as the Company, the Company could be placed at a
competitive disadvantage.
The Company will be subject to taxation in the State of Georgia as a
utility for its telecommunications services.
OTHER. The Company intends to provide telecommunications services in
each city in which it constructs an Interactive Broadband Network. Before
providing such services in a state the Company generally will be required to
obtain certification from the applicable state public service commission, file
a price list and otherwise comply with the state's regulatory requirements,
including the payment of fees and taxes and making contributions to the state's
universal service fund. The Company has obtained the necessary certification
from the Florida Public Service Commission. The Company's application for such
certification in South Carolina is pending. The Company will also need to
obtain the approval of its interconnection agreement with BellSouth from the
applicable state public service commission.
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR DISCOUNT NOTES. The Company completed the offering of its
Senior Discount Notes on October 22, 1997 and completed the Exchange Offer in
which the Senior Discount Notes were exchanged for the Exchange Notes on March
24, 1998. See "Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Interest will not accrue on the Notes prior to October 15, 2002. Thereafter,
interest on the Notes will accrue at a rate of 11-7/8% per annum and will be
payable semiannually on April 15 and October 15 of each year, commencing April
15, 2003.
The Notes are unsubordinated indebtedness of the Company, ranking pari
passu in right of payment with all other existing and future unsubordinated
indebtedness of the Company, junior in right of payment to all secured
indebtedness of the Company and senior in right of payment to all subordinated
indebtedness of the Company.
The Notes will mature on October 15, 2007. The Notes are redeemable
at the option of the Company, in whole or in part, at any time on or after
October 15, 2002, initially at 105.9375% of their principal amount at maturity,
plus accrued interest, declining ratably to 100% of their principal amount at
maturity, plus accrued interest, on and after October 15, 2004. In addition,
at any time prior to October 15, 2000, the Company may redeem up to 35% of the
aggregate principal amount at maturity of the Notes from the proceeds of one or
more public equity offerings at 111.875% of their Accreted Value on the
redemption date; provided that after any such redemption, at least $288.7
million principal amount at maturity of the Notes remains outstanding.
The indenture pursuant to which the Notes were issued (the
"Indenture") contains certain covenants that affect, and in certain cases
significantly limit or prohibit, among other things, the ability of the Company
to incur indebtedness, pay dividends, prepay subordinated indebtedness, redeem
capital stock, make investments, engage in transactions with stockholders and
affiliates, create liens, sell assets and engage in mergers and consolidations.
If the Company fails to comply with these covenants, the Company's obligation
to repay the Notes may be accelerated. However, these limitations are subject
to a number of important qualifications and exceptions. In particular, while
the Indenture restricts the Company's ability to incur additional indebtedness
by requiring compliance with specified leverage ratios, it permits the Company
and its subsidiaries to incur an unlimited amount of indebtedness to finance
the acquisition of equipment, inventory and network assets and to secure such
indebtedness, and up to $50.0 million of additional secured indebtedness.
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Upon a "Change of Control" of the Company (as defined in the
Indenture), the Company will be required to make an offer to purchase the Notes
at a purchase price equal to 101% of the Accreted Value thereof, plus accrued
interest.
PROPOSED NEW CREDIT FACILITY. The Company has received a commitment
letter (the "Commitment Letter") from First Union National Bank and First Union
Capital Markets Corp. (collectively, "First Union") pursuant to which First
Union has agreed, subject to the terms and conditions set forth in the
Commitment Letter (including the negotiation of definitive loan documents and
satisfactory completion by First Union of its due diligence review), to provide
a five-year senior secured credit facility of up to $50.0 million (the
"Proposed New Credit Facility") to KNOLOGY of Montgomery, KNOLOGY of Columbus,
KNOLOGY of Panama City, Inc., KNOLOGY of Augusta, Inc., KNOLOGY of Charleston,
Inc. and future subsidiaries of the Company (the "Borrowers"), which will be
granted by the Company, to be used for working capital and other general
corporate purposes, including capital expenditures and permitted acquisitions.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The following summary of the material provisions of the Commitment
Letter does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Commitment Letter, a copy of which is filed
as an exhibit hereto. Defined terms that are used but not defined in this
section have the meanings given to such terms in the Commitment Letter.
Because the terms, conditions and covenants of the Proposed New Credit Facility
are subject to the negotiation, execution and delivery of the definitive loan
documents, certain of the actual terms, conditions and covenants thereof may
differ from those described below.
The Proposed New Credit Facility will mature on the fifth anniversary
of its closing. Amounts drawn under the Proposed New Credit Facility will bear
interest, at the Borrowers' option, at either the Alternate Base Rate or the
LIBOR rate, plus an Applicable Margin. The Applicable Margin will be an annual
rate which will fluctuate based on the Borrower's Total Leverage Ratio (as
defined below) and which will be between 1.25% and .25% for Base Rate
borrowings and between 2.25% and 1.25% for the LIBOR rate borrowings.
The Commitment Letter contemplates that the Borrowers will be required
to repay indebtedness outstanding under the Proposed New Credit Facility with
the net cash proceeds from sales of assets, other than in the ordinary course
of business, above a specified threshold and with 50% of the net cash proceeds
from certain issuances of equity securities by the Company, excluding an
initial public offering.
The Commitment Letter contemplates that the Borrowers' obligations
under the Proposed New Credit Facility will be secured by a first priority
security interest in all tangible and intangible assets of the Borrowers and
that the Company's obligations under its guarantee will be secured by a pledge
of the stock of all wholly-owned subsidiaries of the Company, including the
Borrowers, and a first priority security interest on all tangible and
intangible assets of the Company.
The Commitment Letter contemplates that the Proposed New Credit
Facility will contain a number of negative covenants, including, among others,
covenants limiting the ability of the Borrowers and their present and future
subsidiaries to incur debt, create liens, pay dividends, make distributions or
stock repurchases, make investments (including a limitation on investments by
the Company in subsidiaries other than the Company's two existing subsidiaries
and new subsidiaries that operate franchises in Panama City, Charleston and
Augusta (collectively, the "Initial Borrowers") to an amount equal to the
proceeds of the Proposed New Credit Facility, net proceeds of future debt and
equity offerings plus approximately $75 million), engage in transactions with
affiliates, sell assets and engage in mergers and acquisitions. In addition,
the Commitment Letter contemplates that the Proposed New Credit Facility will
contain affirmative covenants, including,
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among others, covenants requiring compliance with laws, maintenance of
properties, books and records and insurance, payment of obligations and the
delivery of financial and other information. The Commitment Letter
contemplates that the Proposed New Credit Facility will require, as a condition
to initial funding, that the Initial Borrowers have received from the Company
and expended $100 million of the proceeds of the Offering and Equity Private
Placement to expand network operations, to consummate permitted acquisitions or
for working capital.
The Commitment Letter contemplates that the Company will be required
to comply with certain financial tests and to maintain certain financial ratios
on a consolidated basis. The Company must maintain (i) a Total Leverage Ratio,
as of the end of any fiscal quarter beginning with the fiscal quarter ending
June 30, 2001, no greater than 7.0 to 1.0 with subsequent adjustments to be
determined, (ii) a Senior Leverage Ratio, as of the end of any fiscal quarter,
no greater than 5.0 to 1.0 initially, with subsequent adjustments to be
determined, and (iii) a Consolidated Adjusted Cash Flow to Cash Interest
Expense ratio, as of the end of each fiscal quarter, no less than 1.5 to 1.0
through June 30, 2001, with subsequent adjustments to be determined, and, as of
the end of each fiscal quarter beginning with the fiscal quarter ending June
30, 2001, a Consolidated Cash Flow to Cash Interest Expense ratio no less than
amounts to be determined. Total Leverage Ratio means, at any date, the ratio
of Consolidated Total Funded Debt of the Company (on a consolidated basis) on
such date, less cash equivalents in excess of $1.0 million immediately
available to the Borrowers for repayment of the Proposed New Credit Facility,
to Consolidated Cash Flow. Consolidated Total Funded Debt means the aggregate
indebtedness of a person for borrowed money, obligations for deferred purchase
prices, obligations under capital leases, debt of other persons secured by
liens on assets of such person, guaranty obligations, obligations with respect
to letters of credit, obligations to redeem, repurchase, exchange, defease or
otherwise make payments in respect of capital stock and termination payments
under hedging arrangements. Consolidated Cash Flow means, for any two
consecutive fiscal quarters, the sum, multiplied by two, of consolidated net
income (loss) of the Borrowers for such period, plus income and franchise
taxes, interest expense, amortization, depreciation and other non-cash charges,
in each case to the extent included in the determination of such income (loss),
less interest income and extraordinary gains. Senior Leverage Ratio means, at
the end of any fiscal quarter prior to June 30, 2001, the ratio of Consolidated
Senior Funded Debt (Consolidated Total Funded Debt minus the Notes) to
Consolidated Adjusted Cash Flow, or, at the end of any fiscal quarter after
June 30, 2001, the ratio of Consolidated Senior Funded Debt to Consolidated
Cash Flow. Consolidated Adjusted Cash Flow is calculated in the same manner as
Consolidated Cash Flow, but only for Borrowers designated by the Company to be
Designated Borrowers (based upon achieving certain minimum operating
thresholds).
The Commitment Letter contemplates that the Proposed New Credit
Facility will include other customary events of default including, without
limitation a change of control provision similar to that of the Notes. The
occurrence of any such event of default could result, at the option of the
lenders under the Proposed New Credit Facility, in the acceleration of all
indebtedness thereunder and the exercise of such lenders' other remedies with
respect to such event of default, including without limitation remedies
relating to the Company's guarantee of such indebtedness and remedies with
respect to the collateral for such indebtedness and such guarantee.
RISK FACTORS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, set forth below are cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in any forward-looking
statements of the Company made by or on behalf of the Company, whether oral or
written. These forward-looking statements can be identified by use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. The
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Company wishes to ensure that any forward-looking statements are accompanied by
meaningful cautionary statements in order to maximize to the fullest extent
possible the protections of the safe harbor established in the Private
Securities Litigation Reform Act of 1995. Accordingly, any such statements are
qualified in their entirety by reference to, and are accompanied by, the
following important factors, among others, that could cause the Company's
actual results to differ materially from those projected in forward-looking
statements of the Company.
HISTORY OF LOSSES; EXPECTATION OF FUTURE LOSSES AND NEGATIVE CASH FLOWS FROM
OPERATIONS
The Company has incurred net losses and negative cash flow from
operations since its commencement of operations. Since the Company acquired the
Montgomery and Columbus Systems in April and September 1995, respectively, the
Company has incurred aggregate net losses, as of December 31, 1997 of
approximately $13.8 million and aggregate negative cash flow from operations of
$3.7 million, and as of December 31, 1997, the Company had an accumulated
deficit of $13.4 million. The implementation of the Company's business plan to
build out the Systems and commence construction of new systems involves
significant additional expenditures and is expected to result in substantially
increased depreciation and amortization. Revenues from new services are
expected to be subject to start-up delays. Accordingly, the Company expects
that it will incur net losses and negative cash flow (after capital
expenditures) during the next several years as it continues to expand its
operations and expects its net losses to continue to increase as new Broadband
Services are introduced and as the Company continues to expand its business. In
addition to timely and cost-effective construction efforts, the ability of the
Company to achieve profitability and positive cash flow will depend in large
part on the successful marketing of the cable television and other Broadband
Services offered by the Company. There can be no assurance the Company can
successfully compete in obtaining subscribers for its Broadband Services or
that the Company will generate sufficient revenues such that the Company's
operations will become profitable or generate positive cash flows in the
future. If the Company cannot achieve operating profitability or positive cash
flows from operating activities, it may not be able to meet its working capital
or debt service requirements. See "--Risk Factors--Significant Capital
Requirements," "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION
The television, telephone and Internet service businesses are highly
competitive and the level of competition is increasing. Many of the Company's
existing and potential competitors have long-standing customer relationships
and experience, financial, technical and other resources, marketing
capabilities and name recognition far greater than those of the Company. The
ability of the Company to compete will depend in part on the technical
advantages of its systems, its focus on customer service, the pricing of its
services and its ability to offer a bundle of services not available from any
other single vendor. There can be no assurance that the Company will be able to
compete successfully or that competitive pressures will not have a material
adverse effect on the Company's business, operating results or financial
condition. See "Business -- Competition."
TELEVISION. In providing cable television service, the Company
currently competes with other cable television providers (including TCI in
Montgomery, TCI and Charter in Columbus and Jones in Panama City Beach) and
competes or may compete with other means of video distribution, including
broadcast television stations, direct broadcast satellite companies,
multichannel multipoint distribution services ("MMDS"), satellite master
antenna systems ("SMATV") and private home dish earth stations. Additional
competition may also come from new wireless local multipoint distribution
services ("LMDS") authorized by the FCC, for which spectrum was auctioned by
the FCC in February and March 1998. In addition, the 1996 Telecom Act repealed
the cable/television cross ownership ban and telephone companies will now be
permitted to provide cable television service within their service
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areas. The Company also faces competition from other communications and
entertainment media, including newspapers, movie theaters, live sporting events
and entities that make videotaped movies and programs available for home
rental.
TELEPHONE. In providing local and long distance telephone service and
long distance access services the Company competes and will compete with the
incumbent local exchange carrier. BellSouth is the incumbent local exchange
carrier and a particularly strong competitor in its current markets and most of
the markets targeted by the Company. The Company will also compete with long
distance carriers (such as AT&T, MCI and Sprint. Other competitors are likely
to include independent local exchange carriers, including other RBOCs,
competitive local exchange carriers, microwave, wireless and satellite carriers
and utilities.
INTERNET SERVICES. In providing Internet access services, the Company
will compete with other network providers which provide Internet access
services; providers of satellite-based Internet services, and long distance
carriers that offer Internet access services and other cable television
companies that offer Internet access services. Although the Company believes
that broadband transmission is the most efficient means of transmitting large
volumes of data and information on a high-speed basis to and from the Internet,
technologies such as ISDN and direct broadcast satellite also offer high-speed
or broadband connections to the Internet. In providing Internet services, the
Company likely will compete with companies such as DirecPC, one of the
principal providers of satellite-based Internet services in the United States,
long distance carriers such as AT&T and MCI and cable modem services such as
@Home, a joint venture among TCI and other large cable companies, and ISPs.
HIGH LEVERAGE; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS
At December 31, 1997, the Company had $250.1 million of indebtedness
and its stockholders' equity was $51.6 million. In addition, the Company
expects to have $50.0 million of availability under the Proposed New Credit
Facility and the accretion of original issue discount on the Notes will cause
an increase in indebtedness of approximately $194.2 million by October 15,
2007. The level of the Company's indebtedness could adversely affect the
Company in a number of ways, including the following: (i) a substantial portion
of the Company's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness and will not be available for other
purposes; (ii) the ability of the Company to obtain any necessary financing in
the future for working capital, capital expenditures, debt service requirements
or other purposes may be limited; (iii) the Company's level of indebtedness
could limit its flexibility in planning for, or reacting to, changes in its
business; (iv) the Company may be more highly leveraged than some of its
competitors, which may place it at a competitive disadvantage; and (v) the
Company's degree of indebtedness may make it more vulnerable to a downturn in
its business or the economy generally.
For the years ended December 31, 1996 and 1997, the Company's earnings
were insufficient to cover its fixed charges by $3.4 million and $9.1 million,
respectively, and its EBITDA less capital expenditures and interest expense
would have been $16.2 million and $44.9 million, respectively. There can be no
assurance that the Company will be able to improve its earnings before fixed
charges or that the Company will be able to meet its debt service obligations.
If the Company is unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments, or if the Company otherwise fails to
comply with the various covenants in its indebtedness, it would be in default
under the terms thereof, which would permit the holders of such indebtedness to
accelerate the maturity of such indebtedness and could cause defaults under
other indebtedness of the Company. The ability of the Company to meet its
obligations will be dependent upon the future performance of the Company, which
will be subject to prevailing economic conditions and to financial, business
and other factors. See "--Description of Certain Indebtedness."
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The successful implementation of the Company's strategy, including
increasing the number of cable television subscribers, obtaining customers for
other Broadband Services, expanding or constructing Interactive Broadband
Networks in Montgomery, Columbus, Panama City Beach/Panama City, Charleston and
Augusta, and significant and sustained growth in the Company's cash flow are
necessary for the Company to be able to meet its debt service requirements.
There can be no assurance that the Company will successfully implement its
strategy or that the Company will be able to generate sufficient cash flow from
operating activities to meet its debt service obligations and working capital
requirements. In the event the implementation of the Company's strategy is
delayed or is unsuccessful or the Company does not generate sufficient cash
flow to meet its debt service and working capital requirements, the Company may
need to seek additional financing. There can be no assurance that any such
financing could be obtained on terms that are acceptable to the Company, or at
all. In the absence of such financing, the Company could be forced to dispose
of assets in order to make up for any shortfall in the payments due on its
indebtedness under circumstances that might not be favorable to realizing the
highest price for such assets. There can be no assurance that the Company's
assets could be sold quickly enough or for sufficient amounts to enable the
Company to meet its obligations.
The Indenture imposes, and the Proposed New Credit Facility will
impose, operating and financial restrictions on the Company and its
subsidiaries. These restrictions will affect, and in certain cases
significantly limit or prohibit, among other things, the ability of the Company
and its subsidiaries to incur additional indebtedness, create liens upon
assets, apply the proceeds from the disposal of assets, make investments, make
dividend payments and other distributions on capital stock and redeem capital
stock. In addition, the Proposed New Credit Facility is expected to require the
Company to maintain certain financial ratios. See "--Description of Certain
Indebtedness." There can be no assurance that the Company will be able to
maintain such ratios or that such covenants will not adversely affect the
Company's ability to finance its future operations or capital needs or to
engage in other business activities that may be in the interest of the Company.
The limitations in the Indenture are subject to a number of important
qualifications and exceptions. In particular, while the Indenture restricts the
Company's ability to incur indebtedness by requiring compliance with specified
leverage ratios, it permits the Company to incur an unlimited amount of
additional indebtedness to finance the acquisition of equipment, inventory or
network assets.
NETWORK CONSTRUCTION UNCERTAINTIES
The timing of completion of the various phases of construction is
subject to uncertainties. Expansion into additional cities will require the
Company to obtain franchises and other regulatory approvals, including
construction permits, and there can be no assurance that they will be obtained
on a timely basis. See "--Need for Favorable Franchises and Franchise Renewals"
and "--Legislation and Regulation." Delays in receiving the necessary
construction permits and financing, in performing the "make-ready" work to
attach the cable to utility poles, and in conducting the construction itself
(due to inclement weather and other causes) have adversely affected the
Company's schedule in the past, and could do so again in the future. In
constructing the network, the Company will be dependent on the performance of
contractors. There can be no assurance that these contractors will perform in
accordance with the Company's expectations. During 1996, the Company
experienced significant difficulty in meeting its construction schedules,
primarily as a result of delays in installation of aerial portions of the cable
construction in Montgomery and to a lesser extent, Columbus. The principal
difficulty resulting in such delays arose from pole change-outs and
"make-ready" time and expense requirements. Construction moratoriums imposed by
telephone and power companies for about six weeks during the Olympics caused
additional delays, particularly in Columbus. In addition, on three occasions
the Mayor of Montgomery requested that the Company temporarily cease
underground construction following complaints. Although the Company believed
that it was performing such construction in an acceptable manner, the Company
voluntarily complied with the Mayor's requests and reallocated its crews to
other locations. Since the Company's plan involves entering cities where it can
capture a significant share of the cable television
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subscribers and where it can be one of the first providers of Broadband
Services, delays in implementing the expansion plan could have an adverse
effect on the Company.
ABILITY TO MANAGE GROWTH
The Company's future performance will depend, in part, upon its
ability to successfully implement its sales and marketing strategy, evaluate
markets, secure financing, construct facilities, acquire rights of way and
effect pole attachments and obtain any required government authorizations, all
in a timely manner, at reasonable costs and on satisfactory terms and
conditions. Rapid growth may place a significant strain on a company's
management, administrative, operational and financial resources. The Company's
ability to manage its growth successfully will require the Company to further
enhance its operational, management, financial and information systems and
controls. The Company's success will also depend in part upon its ability to
hire and retain qualified sales, marketing, administrative, operating and
technical personnel. There can be no assurance that the Company will be able to
recruit, train, manage and retain sufficient qualified personnel. In addition,
as the Company increases its service offerings and expands its targeted
markets, there will be additional demands on customer support, sales and
marketing, administrative resources and network infrastructure. The Company's
inability to effectively manage its growth could have a significant adverse
effect on the Company's business, results of operations and financial
condition.
If the Company acquires existing companies or networks, or enters into
joint ventures as part of its expansion plan, it will be subject to the risks
generally attendant to an acquisition strategy or joint venture. Such risks
include the acquired company or joint venture not having all the benefits that
are anticipated, the diversion of resources and management time, the
integration of the acquired business or joint venture with the Company's
operations, the potential impairment of relationships with employees or
customers as a result of changes in management, the Company becoming subject
to liabilities or taking on obligations as a result of the acquisition or joint
venture, the additional debt burden or dilution incurred to pay the purchase
price or capital investment requirements, and other matters. There are also
risks in participating in joint ventures, including the risk that the other
joint venture partners may at any time have economic, business or legal
interests or goals that are inconsistent with those of the joint venture or the
Company or that a joint venture partner may be unable to meet its economic or
other obligations in the joint venture and that the Company may be required to
fulfill some or all of those obligations.
SIGNIFICANT CAPITAL REQUIREMENTS
The Company's business requires substantial investment to finance
capital expenditures and related expenses to expand the Interactive Broadband
Networks in Montgomery and Columbus, to construct additional Interactive
Broadband Networks, to fund subscriber equipment, to fund operating deficits in
new systems as it builds its customer base and to maintain the quality of its
networks. The Company currently expects to spend at least $78.4 million during
1998 to expand and upgrade the Montgomery, Columbus and Panama City Beach
networks and to commence construction of networks in Panama City, Augusta and
Charleston. In addition, the Company estimates the cost of constructing
networks in additional cities and funding initial subscriber equipment at
approximately $35 million to $50 million per city. Actual costs may vary
significantly from this range and will depend in part on the number of miles of
network to be constructed, the geographic and demographic characteristics of
the city, other factors affecting construction costs, costs associated with the
cable franchise in each city, the number of subscribers, the mix of services
purchased, the cost of subscriber equipment paid for or financed by the Company
and other factors. Although there can be no assurance, the Company believes
that present cash reserves, cash flow from operations and amounts expected to
be available under the Proposed New Credit Facility, will provide sufficient
funds to expand the Systems as currently planned and fund the expansion into
Panama City Beach/Panama City, Charleston and Augusta. The Company may need to
seek
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additional financing in the event the Proposed New Credit Facility is not
entered into or actual costs vary. In addition, the Company will need
additional financing to expand into additional cities, for new business
activities or in the event it decides to make additional acquisitions. Sources
of additional capital may include cash flow from operations, and public and
private equity and debt financings. There can be no assurance that such
financing will be available to the Company on acceptable terms or at all. If
the Company is not successful in obtaining sufficient funds it may be required
to defer or abandon its expansion plans, which could limit the Company's growth
and prospects, and reduce some of the economies of scale the Company expects to
obtain, including with respect to purchases of equipment, programming and
advertising, which could have an adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NEED FOR FAVORABLE FRANCHISES AND FRANCHISE RENEWALS
In order to construct and operate its Interactive Broadband Networks
in a city, the Company must obtain a franchise from the city (along with other
regulatory approvals). See "--Legislation and Regulation -- Federal Regulation
of Cable Services -- Franchise Authority." The Company's business is dependent
on its ability to obtain and renew its franchises in a timely manner. Each city
has some flexibility in determining the terms of a franchise (including
franchise fees), and to some extent can impose conditions on such franchise,
such as build-out requirements. The Company cannot predict whether it will
obtain franchises in new cities on terms that will make construction of a
network and provision of Broadband Services (including cable television)
economically attractive for the Company. In addition, although the
Communications Act of 1934, as amended (the "Communications Act"), limits the
ability of franchise authorities to decline to award or renew a franchise and
specifies a period within which franchise authorities must act, franchises may
be withheld and are subject to non-renewal or termination under certain
circumstances. The Company's franchise for the Columbus System expires in June
1998, the Company's franchise for the Montgomery System expires in March 2005,
the Company's initial franchise for the Beach Cable System expires in July
2007, and the Company's franchise for Augusta, Georgia extends until January
2013.
DEPENDENCE ON INTERCONNECTIONS
The Company relies on local telephone companies and other companies to
provide communications capacity for the Company's local and long distance
telephone service. The Company obtains access to BellSouth's telephone network
under a nine-state interconnection agreement. The terms of such interconnection
agreement have been approved by the Georgia, Alabama, Florida and South
Carolina state public utility commissions. Approvals of other state public
utility commissions will be required in connection with the Company's provision
of telephone service in other states. In addition, the 1996 Telecom Act
established certain requirements and standards for interconnection
arrangements, and the Company's interconnection agreement with BellSouth is
based in part on such requirements. However, these requirements and standards
are still being developed and implemented by the FCC in conjunction with the
states through a process of negotiation and arbitration. To the extent that the
standards as implemented are unfavorable to the Company, the Company's
interconnection arrangement with BellSouth could be adversely affected. One
area in which standards could be unfavorable to the Company is permitted access
charges by BellSouth for terminating calls. The Company's ability to offer
telephony services at competitive rates depends upon maintaining
interconnection and access on economic terms acceptable to the Company. The
1996 Telecom Act creates incentives for local exchange carriers to permit
access to their facilities by denying such carriers the ability to provide long
distance services until they have taken the required steps to open the local
market to competition. BellSouth is not yet permitted to offer long distance
services. There can be no assurance that BellSouth or other local exchange
carriers will not be less accommodating to the Company once they are permitted
to offer long distance service. The interconnection agreement expires in April
1999 and there can be no assurance that it will be
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renewed on favorable terms, or at all. See "--Legislation and Regulation --
Federal Regulation of Telecommunications Services."
DEPENDENCE ON TELEPHONY BILLING AND INFORMATION SYSTEMS
The Company is dependent on Interstate Telephone Company, an ITC
Company, and others for provision of sophisticated telephony information and
processing systems to monitor costs, bill customers, fill customer orders and
achieve operating efficiencies. As the Company increases its provision of
telephone services, its dependence on billing and information systems will
increase significantly. The inability of the Company to adequately identify all
of its information and processing needs, or to obtain upgraded systems as
necessary, could have a material adverse impact on the Company's ability to
expand its telephone business and on its results of operations and financial
condition.
RISKS ASSOCIATED WITH YEAR 2000 DATE CONVERSION
The Year 2000 issue is the result of computer programs using two
digits rather than four to define the applicable year. Date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in system failures or miscalculations causing disruptions of
operations, including, among others, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has commenced an analysis, which it expects to complete
during the fourth quarter of 1998, to determine the extent to which its own
information, customer service and billing systems and the systems of its major
vendors and third party network service providers (insofar as they relate to
the Company's business) are vulnerable to the Year 2000 issue. The Company is
currently unable to predict the extent to which the Year 2000 issue will affect
its internal systems, or those of its vendors and third party network service
providers. Any failure by such vendors or third party network service providers
to resolve any Year 2000 issues on a timely basis, or in a manner that is
compatible with the Company's systems, could have a material adverse effect on
the Company. Although the Company may incur substantial costs, particularly
costs resulting from charges by its vendors or third party network service
providers, in correcting Year 2000 issues, such costs cannot currently be
estimated. Additionally, such costs will be expensed as incurred, which will
have a negative effect on current operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
EQUIPMENT SUPPLY UNCERTAINTIES FOR NEW SERVICES
The Company's ability to offer certain new Broadband Services will
depend in part upon the availability at economical prices of implementing
equipment, such as set-top terminals (in the case of digital video service).
Certain equipment will need to be reduced in price and standardized in order
for the Company to offer a cost-effective service that is attractive to
consumers and to compete successfully with service providers using different
technologies (such as direct broadcast satellite, in the case of digital video
service).
DEMAND FOR BUNDLE OF BROADBAND SERVICES IS UNCERTAIN
The Company's business strategy to provide an integrated bundle of
Broadband Services is comparatively untested and subject to certain risks such
as future competition, pricing, regulatory uncertainties, operating and
technical difficulties. Accordingly, the demand for an integrated bundle of
such services, at the prices proposed to be charged by the Company is
uncertain. In addition, some of the Broadband Services being considered by the
Company, including high-speed data transmission services for residential
customers and interactive energy management services, are not generally
available currently. The demand for these new services also is uncertain. The
Company's business
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could be materially adversely affected if demand for an integrated bundle of
Broadband Services is materially lower than anticipated.
RISK OF RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant
changes in technology. Even though the Company believes its networks will be
"state-of-the-art" when constructed, there can be no assurance that subsequent
technological developments will not reduce the competitiveness of the Company's
networks, and require upgrades or additional equipment that could be expensive
and time consuming. In addition, the Company may be required to select in
advance one technology over another, but it will be impossible to predict with
any certainty, at the time the Company is required to make its investment,
which technology will prove to be the most economic, efficient or capable of
attracting customer usage.
EVOLVING REGULATORY ENVIRONMENT
Although the 1996 Telecom Act, together with the 1992 Cable Act and
other recent laws and regulations, eliminated most limitations on competition
in the Broadband Services business, the 1996 Telecom Act is complex and in
many areas sets forth policy objectives to be implemented by regulation. It is
generally expected that the 1996 Telecom Act will undergo considerable
interpretation and implementation through regulation and court decisions over
the next several years. There can be no assurance that such interpretation or
implementing regulations will be favorable to the Company. In certain areas,
particularly telephony, further regulation is expected to affect the Company's
provision of service. The Company's ability to compete successfully in the
provision of telephone service will depend in part on the timing of such
implementing regulations and whether they are favorable to the Company. It is
also important to the Company that the provisions limiting the ability of
franchise authorities to deny awarding or renewing franchises not change in a
manner adverse to the Company. See "--Risk Factors--Dependence on
Interconnections" and "--Legislation and Regulation."
RELATIONSHIPS WITH ITC COMPANIES; POTENTIAL CONFLICTS OF INTERESTS
The Company has relationships with several ITC Companies. Its bundle
of Broadband Services includes long distance traffic routed over ITC/\DeltaCom's
fiber optic network pursuant to an exclusive agreement with ITC/\DeltaCom. The
Company offers special access services, including long distance access services,
to small- and medium-sized businesses and other customers in Montgomery and
Columbus by carrying traffic to ITC/\DeltaCom's POP. The Company obtains
telephone billing and switching services from Interstate Telephone Company,
another ITC Company. See "Certain Relationships and Related Transactions."
Certain members of the Company's Board of Directors (Campbell B. Lanier, III,
William H. Scott, III, Donald W. Burton and O. Gene Gabbard) are directors,
stockholders, and/or officers of ITC Holding, ITC/\DeltaCom and/or a number of
other ITC Companies. ITC Holding and Messrs. Hilton, Lanier, Scott and Gabbard,
as significant stockholders of the Company, are in positions involving the
possibility of conflicts of interest with respect to certain transactions
concerning the Company. When the interests of ITC Holding or other ITC Companies
and its affiliates (other than the Company) and the Company diverge, ITC Holding
and its affiliates may exercise their influence in their own best interests.
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between the Company and ITC Holding
and/or its affiliates. See "--Risk Factors--Control by Principal Stockholders;
Conflicts of Interest."
DEPENDENCE ON KEY PERSONNEL
The Company's business is currently managed by a small number of key
management and operating personnel. The Company does not have any term
employment agreements with, nor does
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<PAGE> 45
the Company maintain "key man" insurance on, these or any other employees. The
loss of the services of key personnel, or the inability to attract, recruit and
retain sufficient or additional qualified personnel, could have a material
adverse effect on the Company. See "Directors and Executive Officers of the
Registrant."
CONTROL BY PRINCIPAL STOCKHOLDERS; CONFLICTS OF INTEREST
As of January 31, 1998, ITC Holding (through wholly owned
subsidiaries) owned approximately 42.0%, AT&T Venture Fund II, L.P. and related
funds (collectively "AT&T Venture Funds") owned approximately 14.2%, South
Atlantic Venture Fund III, Limited Partnership and related funds (collectively,
"South Atlantic") owned approximately 15.0% and SCANA owned approximately 7.3%
(excluding warrants to purchase Preferred Stock to be issued to SCANA) of the
outstanding capital stock of the Company. As a result, these stockholders are
in a position to control matters requiring approval by the stockholders of the
Company, including the election of a majority of the directors and the approval
of significant corporate matters, including certain change-of-control
transactions. In addition, certain decisions concerning the operations or
financial structure of the Company may present conflicts of interest between
such shareholders or management and the holders of the Notes. For example, if
the Company encounters financial difficulties or is unable to pay its debts as
they mature, the interests of such shareholders and management might conflict
with those of the holders of the Notes. In addition, such shareholders and
management may have an interest in pursuing transactions that, in their
respective judgments, could enhance its equity investment, even though such
transactions might involve risk to the holders of the Notes.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its
capital stock and does not anticipate paying cash dividends in the foreseeable
future. See "Market for Registrant's Common Equity and Related Stockholder
Matters--Dividends."
EMPLOYEES
As of February 28, 1998, the Company had 224 full-time employees of
which 57 are customer service representatives, 54 are technicians or others
performing installation, maintenance and repair on the Company's networks, 35
are involved principally in sales and marketing, 30 are involved in matters
relating to construction of the Company's networks and 48 have management or
administrative responsibilities.
The Company considers its relations with its employees to be good and
structures its compensation and benefit plans to facilitate the attraction and
retention of high caliber personnel. The Company will need to recruit
additional employees to implement its expansion plan, including general
managers for each new city and additional personnel for installation, sales,
customer service and network construction. The Company recruits from several
major industries for employees with skills in voice, video and data
technologies. The Company believes it will not be difficult to retain personnel
with the necessary qualifications.
ITEM 2. PROPERTIES
The Company leases (and in two cases owns) parcels of real property in
each of its market areas for one or more business offices, sites for electronic
equipment used by its cable television systems and a "headend" earth station
that receives programming via satellite for re-transmission over the broadband
network. The Company also leases temporary offices (the landlord under which is
owned or controlled by a relative of a director of the Company and ITC Holding)
for office space in West Point, Georgia, where a number of the ITC Companies
have their headquarters. In January 1998, the Company's headquarters offices
were relocated to a newly constructed facility in West Point, Georgia.
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<PAGE> 46
The Company's principal physical assets consist of fiber optic and
coaxial broadband network and equipment, located either at the equipment site
or along the network. The Company's distribution equipment along the network is
generally attached to utility poles under pole rental agreements with local
public utilities, although in some areas the distribution cable is buried in
underground ducts or trenches. The Company's franchises from the cities of
Montgomery, Columbus, Panama City Beach/Panama City and Augusta give the
Company rights of way for its network. The physical components of the networks
require maintenance and periodic upgrading to keep pace with technological
advances. The Company believes that its properties, taken as a whole, are in
good operating condition and are suitable for the Company's business
operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to legal proceedings which arise in the ordinary
course of its business, including disputes with contractors or vendors, which
the Company believes are not material to the Company or its business. The
Company is also party to regulatory proceedings affecting the relevant segments
of the communications industry generally.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 47
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There is no established public trading market for the Company's
capital stock, and accordingly, no high and low bid information or quotations
are available with respect to the Company's Common Stock.
As of February 28, 1998, there were no shares of Common Stock
outstanding, and 49,985 shares of Preferred Stock outstanding and held of
record by 66 stockholders.
DIVIDENDS
The Company has never declared or paid any cash dividends on its
capital stock and does not anticipate paying cash dividends on its capital
stock in the foreseeable future. It is the current policy of the Company's
Board of Directors to retain earnings to finance the expansion of the Company's
operations. Future declaration and payment of dividends, if any, will be
determined in light of the then-current conditions, including the Company's
earnings, operations, capital requirements, financial condition, and other
factors deemed relevant by the Board of Directors. In addition, the Company's
ability to pay dividends is limited by the terms of the Indenture governing the
Notes and is expected to be limited by the terms of the Proposed New Credit
Facility.
RECENT SALES OF UNREGISTERED SECURITIES
In December 1995 and January 1996, in connection with the initial
capitalization of the Company, the Company issued 7,780 shares of Preferred
Stock for a purchase price of $1,000 per share to certain of the current
stockholders of the Company for an aggregate amount of $7,780,000. ITC Holding
contributed $4,000,000 plus all of its direct and indirect interests in
Cybernet Holding, L.L.C. (a predecessor of the Company) and in KNOLOGY of
Columbus, Inc. (then known as American Cable, Inc.) in exchange for Preferred
Stock.
In April 1996, in connection with a private placement of Preferred
Stock of the Company, the Company issued 9,312 shares of Preferred Stock for a
purchase price of $1,200 per share to certain of the current stockholders of
the Company for an aggregate amount of $11,174,400.
In February 1997, the Company issued 8,960 shares of Preferred Stock
to certain of the current stockholders of the Company for a purchase price of
$1,200 per share, for an aggregate amount of $10,752,000.
In October 1997, the Company issued approximately 21,400 shares of
Preferred Stock to qualified investors in the Equity Private Placement for a
purchase price of $1,500 per share, for an aggregate amount of approximately
$32.2 million. ITC Holding, Century Telephone Enterprises, Inc. ("Century
Telephone"), South Atlantic, AT&T Venture Funds and SCANA purchased
approximately $10.0 million, $2.5 million, $5.5 million, $5.0 million and $5.0
million of Preferred Stock, respectively, in the Equity Private Placement. ITC
Holding purchased all shares of the Company's Preferred Stock owned by Century
Telephone in January 1998.
On October 22, 1997, the Company issued 444,100 Units, each
of which consists of one Senior Discount Note and one Warrant to purchase
.003734 shares of Preferred Stock of the Company, for net proceeds of
approximately $242.4 million. The Warrants may be exercised at a price of $.01
per share, subject to adjustment, at any time beginning one year after the date
of issuance and prior to the close of business on the tenth anniversary of such
grant. Morgan Stanley & Co. Incorporated, J.P. Morgan Securities, Inc. and
First Union Capital Markets Corp. served as placement agents for the Company in
the transaction. SCANA purchased 71,050 of such Units in the transaction for an
aggregate purchase price of $39,998,308.
Pursuant to the Company's 1995 Stock Option Plan, the Company has
granted options to purchase Common Stock of the Company to key employees and
non-employee directors of the Company and its subsidiaries. As of December 31,
1997, the Company has issued and outstanding options to purchase 1,088.28
shares of Common Stock pursuant to the 1995 Stock Option Plan at exercise
prices ranging from $1,000 to $1,500 per share.
The Company has agreed to issue to SCANA warrants to purchase 753
shares of Preferred Stock, valued at $1,500 per share, in connection with a
construction credit facility.
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<PAGE> 48
Each issuance of securities described above was made in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
or Regulation D promulgated thereunder for transactions by an issuer not
involving any public offering. The recipients of securities in each such
transaction represented their intention to acquire the securities for
investment only and not with a view to or for distribution in connection with
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.
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<PAGE> 49
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and
operating data for the Company. The selected financial and operating data as
of and for the years ended December, 31, 1993 and 1994, the four months ended
April 30, 1995, the eight months ended December 31, 1995 and the years ended
December 31, 1996 and 1997 have been derived from the audited financial
statements of Montgomery Cablevision and Entertainment, Inc. (the "Predecessor
Company") and the Company. The selected financial and operating data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and the notes thereto included elsewhere in this report. The financial and
operating data for periods after April 28, 1995 (the date the Company acquired
the Predecessor Company, the owner and operator of the Montgomery System), are
not comparable to the financial and operating data for prior periods as a
result of the amortization of the cost in excess of net assets in connection
with the acquisition of the Montgomery System, and the acquisition of the
Columbus System on September 29, 1995. See notes 1 and 2 to the Company's
Consolidated Financial Statements included elsewhere in this report.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY (a) SUCCESSOR COMPANY (a)
------------------------------------------ --------------------------------------------
EIGHT
YEAR YEAR FOUR MONTHS MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1995 (b) 1996 1997
------------ ------------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . $ 1,706,138 $ 2,111,952 $ 857,161 $ 2,196,998 $ 5,334,183 $ 10,355,068
Operating expenses:
General and administrative . . . . 479,868 587,579 175,724 1,027,001 2,346,201 4,383,830
Programming charges . . . . . . . . 710,158 1,042,186 409,325 1,029,959 2,513,693 4,758,730
Depreciation and amortization. . . 641,583 768,496 259,336 745,004 1,640,025 3,715,184
Field and technical . . . . . . . . 365,780 303,600 98,293 417,273 877,870 1,564,654
Sales and marketing . . . . . . . . 202,813 128,909 16,590 58,414 659,667 1,444,056
------------ ------------ ---------- ----------- ----------- -----------
Total operating expenses . . . . . 2,400,202 2,830,770 959,268 3,277,651 8,037,456 15,866,454
------------ ------------ ---------- ----------- ----------- -----------
Operating loss . . . . . . . . . . . (694,064) (718,818) (102,107) (1,080,653) (2,703,273) (5,511,386)
------------ ------------ ---------- ----------- ----------- -----------
Other income and expenses . . . . . (255,933) (155,417) (21,878) (549,169) (795,478) (3,580,147)
------------ ------------ ---------- ----------- ----------- -----------
Loss before minority interest
and income tax benefit . . . . . . (949,997) (874,235) (123,985) (1,629,822) (3,498,751) (9,091,533)
Minority interest . . . . . . . . . -- -- -- 109,837 -- --
Income tax benefit . . . . . . . . . -- -- -- 334,451 373,323 --
------------ ------------ ---------- ----------- ----------- -----------
Net loss . . . . . . . . . . . . . . (949,997) (874,235) (123,985) (1,185,534) (3,125,428) (9,091,533)
Preferred stock dividends. . . . . . (285,645) (591,175) (230,407) -- -- --
------------ ------------ ---------- ----------- ----------- -----------
Net loss after preferred stock
dividends . . . . . . . . . . . . $ (1,235,642) $ (1,465,410) $ (354,392) $ (1,185,534) $ (3,125,428) $ (9,091,533)
============ ============ =========== ============ ============ =============
PER SHARE DATA:
Net loss per share (c) . . . . . . . $ 157.65 $ 229.37(c) $ 315.30
Weighted average common share
equivalents outstanding. . . . . . 7,520 13,626(c) 28,835
OTHER FINANCIAL DATA:
Capital expenditures . . . . . . . . $ 1,427,433 $ 717,325 $ 42,504 $ 1,291,080 $ 14,416,135 $ 39,625,408
Net cash provided by (used in)
operating activities. . . . . . . 5,062 82,590 144,076 (742,928) (1,998,007) (1,120,168)
Net cash used in investing
activities . . . . . . . . . . . (1,402,113) (717,325) (42,504) (1,744,816) (14,441,268) (267,983,480)
Net cash provided by (used in)
financing activities. . . . . . . 1,450,080 596,947 (104,889) 2,771,619 16,221,873 275,165,136
EBITDA (d) 52,481 124,836 157,229 (207,068) (1,123,248) (1,925,235)
Ratio of earnings to fixed
charges (e) . . . . . . . . . . . . -- -- -- -- -- --
OTHER OPERATING DATA:
Cable subscribers . . . . . . . . . 14,219 18,169 37,716
Average monthly cable revenue
per subscriber. . . . . . . . . . $ 25.47 $ 26.71 $ 29.20
Homes passed . . . . . . . . . . . 124,773
Cable penetration level (f) . . . . 30.2%
</TABLE>
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<PAGE> 50
<TABLE>
<CAPTION>
PREDECESSOR COMPANY (a) SUCCESSOR COMPANY (a)
----------------------- ------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ (1,394,676) $ (3,559,715) $ 3,498,482 $ (3,201,202) $226,830,160
Property and equipment, net............ 4,684,479 4,833,142 6,976,268 21,477,209 62,567,736
Total assets........................... 4,972,191 4,987,354 19,346,317 29,941,745 316,198,100
Total liabilities...................... 2,968,729 4,734,947 12,992,682 15,743,318 253,232,923
Minority interest...................... -- -- 84,479 -- --
Accumulated deficit.................... (4,305,143) (6,056,198) (1,185,534) (4,310,962) (13,402,495)
Total stockholders' equity............. 2,003,462 252,407 6,269,156 14,198,427 51,637,954
</TABLE>
(a) "Successor Company" refers to KNOLOGY and its subsidiaries. KNOLOGY,
initially capitalized as a limited liability company in March 1995, was
established for the purpose of acquiring the Predecessor Company. The
acquisition of Montgomery Cablevision (the "Montgomery Acquisition"), which
was accounted for as a purchase, was consummated on April 28, 1995, and the
Company acquired the remaining minority interest in the Predecessor Company
in January 1996. See note 1 to the Company's Consolidated Financial
Statements included elsewhere in this report.
(b) Includes the operations of the Columbus System from September 29, 1995.
The acquisition of the Columbus System was accounted for as a purchase.
See note 1 to the Company's Consolidated Financial Statements included
elsewhere in this report.
(c) Net loss per share is computed using the weighted average number of shares
of common stock and dilutive common stock equivalent shares from
convertible preferred stock (using the if converted method). As the
Company has no common stock outstanding, the preferred stock is assumed to
be converted for purposes of this calculation. The Predecessor Company net
losses per share are not shown, as they are not comparable with the
Successor Company's. All options and warrants have been excluded from the
calculation of net loss per share as they are anti-dilutive.
(d) EBITDA represents earnings before preferred stock dividends, interest
expense, interest income, income taxes, depreciation and amortization.
EBITDA is provided because it is a measure commonly used in the industry.
EBITDA is not a measurement of financial performance under generally
accepted accounting principles and should not be considered an alternative
to net income as a measure of performance or to cash flow as a measure of
liquidity. EBITDA is not necessarily comparable with similarly titled
measures for other companies.
(e) Earnings consist of income before minority interest, preferred stock
dividends, income taxes, plus fixed charges. Fixed charges consist of
interest charges and amortization of debt issuance costs and the portion of
rent expense under operating leases representing interest (estimated to be
1/3 of such expense). Earnings were insufficient to cover fixed charges
for the years ended December 31, 1993 and 1994, the four months ended April
30, 1995, the eight months ended December 31, 1995 and the years ended
December 31, 1996 and 1997 by $949,997, $874,235, $123,985, $1,629,822,
$3,498,751 and $9,091,533, respectively.
(f) Determined by dividing the number of subscribers by the number of homes
passed. Because the Company does not begin to market its services in an
area until its network has been expanded and the Company typically needs 60
to 90 days once marketing has commenced to build its subscriber base, the
Company's penetration rate is adversely affected during rapid expansion of
the networks.
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<PAGE> 51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, MEMBERS OF THE
COMPANY'S SENIOR MANAGEMENT MAY, FROM TIME TO TIME, MAKE CERTAIN
FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, PERFORMANCE AND
OTHER DEVELOPMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS, INCLUDING THOSE SET FORTH UNDER THE CAPTION "BUSINESS--RISK FACTORS"
AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K, AS WELL AS FACTORS WHICH MAY
BE IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S OTHER FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION OR IN DOCUMENTS WHERE SUCH FORWARD-LOOKING
STATEMENTS APPEAR. UNLESS OTHERWISE INDICATED, DOLLAR AMOUNTS OVER $1 MILLION
HAVE BEEN ROUNDED TO ONE DECIMAL PLACE AND DOLLAR AMOUNTS LESS THAN $1 MILLION
HAVE BEEN ROUNDED TO THE NEAREST THOUSAND.
The following is a discussion of the consolidated financial condition
and results of operations of KNOLOGY Holdings, Inc. for the fiscal years ended
December 31, 1997 and 1996, the four months ended April 30, 1995 and the eight
months ended December 31, 1995, and certain factors that are expected to affect
the Company's 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-K.
GENERAL
KNOLOGY offers its customers Broadband Services including cable
television, telephone (local telephone, long distance and long distance access
services), and high-speed Internet access service using cable modems. The
Company provides these video, voice and data services over its Interactive
Broadband Networks. The Company plans to expand its existing networks and build
networks in additional mid-sized cities in the southeastern United States.
The Company acquired substantially all of the capital stock of KNOLOGY
of Montgomery (formerly Montgomery Cablevision) in Montgomery, Alabama on April
28, 1995 in exchange for a promissory note in the aggregate principal amount of
$6.0 million (repaid following the Offering) and completed the purchase of the
balance of such entity's outstanding capital stock in January 1996 for $14,000
in cash plus 200 shares of the Company's Preferred Stock. The Company accounted
for the Montgomery Acquisition under the purchase method of accounting. Since
the Company had no significant operations prior to such acquisition, Montgomery
Cablevision is considered the Company's predecessor, and the amounts included
in the consolidated financial statements as of and for the year ended December
31, 1994 and for the four months ended April 30, 1995 reflect the accounts of
Montgomery Cablevision prior to its acquisition by the Company. The Company
acquired the assets of KNOLOGY of Columbus (formerly the American Cable Company
and American Cable Company Partnership ("American Cable")) cable television
business in Columbus, Georgia in September 1995 in exchange for a promissory
note in the aggregate principal amount of $5.0 million (repaid following the
Offering). The Company accounted for the acquisition under the purchase method
of accounting. Financial and operating data for periods after April 28, 1995
(the date the Company acquired Montgomery Cablevision) are not comparable to
the financial and operating data for prior periods as a result of the
amortization of the cost in excess of net assets in connection with the
Montgomery Acquisition and the acquisition of the Columbus System on September
29, 1995. See notes 1 and 2 to the Company's Consolidated Financial Statements
included elsewhere in this report.
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<PAGE> 52
In December 1997, the Company acquired the Beach Cable System in
Panama City Beach, Florida for approximately $3.9 million in cash and 2,485
shares of Preferred Stock valued at approximately $3.7 million, subject to
adjustment. The Company accounted for the acquisition under the purchase
method of accounting.
Substantially all of the Company's revenues through December 1997 come
from its cable television operations. In July 1997 the Company began to offer
Internet access and telephone service in Montgomery. In Columbus, high-speed
Internet access service was introduced in September 1997 and telephone service
was introduced in the fourth quarter of 1997. The Company intends to offer
telephone and Internet access services in Panama City Beach during the second
quarter of 1998. Subscriber revenue consists of fixed monthly fees for cable
programming and premium television services, as well as fees from pay-per-view
movies and events (such as boxing matches and concerts) which involve a charge
for each viewing. Miscellaneous revenues result principally from converter
rentals, installation fees, franchise fees, late payment charges and the
wholesaling of network capacity. Revenues from Internet access services consist
primarily of fixed monthly fees, and revenues from the Company's telephone
services consist primarily of fixed monthly fees, variable fees (billed
monthly) that are based primarily on usage and fees for enhanced services such
as call waiting or voice mail. Additional revenues will be derived from
installation services and leases or sales of equipment such as cable modems.
TCI in Montgomery, TCI and Charter in Columbus, and Jones in Panama City Beach
have been and are expected to continue to compete aggressively on price for
cable services.
The Company's principal operating expenses through December 31, 1997
consisted of programming charges (for cable television), general and
administrative expenses, depreciation and amortization expense, field and
technical expenses and sales and marketing costs. Programming charges consist
primarily of monthly fees to the National Cable Television Cooperative and
programming providers, and are generally based on the average number of
subscribers to each program and other factors. General and administrative
expenses consist of general management, customer service and corporate
administration expenses. Depreciation and amortization include depreciation of
the Company's Interactive Broadband Networks and equipment, and amortization
of cost in excess of net assets and other intangible assets related to
acquisitions. Field and technical expenses include costs of field personnel
engaged in network operations, maintenance and monitoring and network operating
expenses, including pole rental fees. Sales and marketing costs include cost of
sales and marketing personnel and marketing expenses. Operating expenses
related to the Company's Internet access services and telephone services
include primarily costs of Internet access, telephone access and transport
charges payable to local and long distance carriers.
Since acquiring the Montgomery and Columbus Systems, the Company has
been expanding these networks and adding corporate staffing necessary to grow
the business into new markets. Accordingly, the Company's operating expenses
and capital expenditures have increased significantly and are expected to
continue to increase as the Company continues to expand the existing Systems
and expands into new markets.
The Company has incurred net losses in each quarter since its
inception, and as of December 31, 1997, the Company had an accumulated deficit
of $13.4 million. The Company anticipates that it will continue to incur net
losses during the next several years as it continues to expand its operations
as a result of substantially increased depreciation and amortization from the
construction of new networks and operating expenses incurred as it builds its
customer base. There can be no assurance that growth in the Company's revenue
or subscriber base will continue or that the Company will be able to achieve or
sustain profitability or positive cash flow. See "Business --Risk Factors --
History of Losses; Expectation of Future Losses and Negative Cash Flows from
Operations."
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<PAGE> 53
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUES. Total revenues for the year ended December 31, 1997
increased 98% to $10.4 million, compared to $5.3 million for the year ended
December 31, 1996. The Company generated subscriber revenues of $9.0 million
for the year ended December 31, 1997, as compared to $4.7 million or the year
ended December 31, 1996. Miscellaneous revenues were $1.3 million and
$652,000, respectively, for the years ended December 31, 1997 and 1996. The
increased subscriber and miscellaneous revenues resulted primarily from
additional subscribers in 1997 as the Company extended its Broadband networks
in the Montgomery and Columbus markets. During 1997, the Montgomery and
Columbus networks were extended to pass approximately 56,000 additional homes.
The additional homes reached by the extension of the Montgomery and Columbus
networks combined with the Company's marketing and sales efforts resulted in
approximately 15,270 new subscribers being added to the Company's customer base
during 1997.
EXPENSES. The Company's operating expenses for the year ended December
31, 1997, excluding depreciation and amortization, increased 93% to $12.2
million, compared to $6.4 million for the year ended December 31, 1996.
Programming charges were $4.8 million and $2.5 million which represent 52.6%
and 53.7% of subscriber revenues, respectively. General and administrative
expenses were $4.4 million and $2.3 million, field and technical expenses were
$1.6 million and $878,000, and sales and marketing costs were $1.4 million and
$660,000, respectively, for such periods. The increases in the Company's
programming charges, general and administrative expenses, field and technical
expenses and sales and marketing costs reflect the Company's expansion of the
Interactive Broadband Networks in the Montgomery and Columbus markets and the
significant increase in the number of employees in connection with such
expansion and the planned growth of the business into new markets in the
southeastern region of the United States.
Depreciation and amortization for the year ended December 31, 1997
increased to $3.7 million, compared to $1.6 million for the year ended December
31, 1996 reflecting a significant increase in capital expenditures during 1997
to expand the Montgomery and Columbus networks.
Interest expense for the year ended December 31, 1997 increased to
$6.2 million, compared to $1.1 million for the year ended December 31, 1996.
The increased expense reflects the interest expense attributable to the Senior
Discount Notes sold in October 1997.
Other interest income for the year ended December 31, 1997 increased
to $2.8 million, compared to 46,000 for the year ended December 31,
1996 and reflects primarily the interest income from the investment of certain
proceeds received from the sale of the Senior Discount Notes in October 1997.
NET LOSS. The Company incurred a net loss for the year ended December
31, 1997 of $9,092,000 compared to a net loss of $3,125,000 for the year ended
December 31, 1996. The Company expects its net losses to continue to increase
as the Company continues to expand its business. See "Business--Risk
Factors---History of Losses; Expectation of Future Losses and Negative Cash
Flows from Operations."
FOUR MONTHS ENDED APRIL 30, 1995, EIGHT MONTHS ENDED DECEMBER 31, 1995 AND YEAR
ENDED DECEMBER 31, 1996
REVENUES. The Company generated revenues of $857,000 for the four
months ended April 30, 1995, $2.2 million for the eight months ended December
31, 1995, and $5.3 million for the year ending December 31, 1996. The Company
generated subscriber revenues of $811,000 and $2.0 million and $4.7 million,
respectively, and included approximately $7,000, $58,000 and $141,000 for
pay-per-view fees, respectively, for such periods. Miscellaneous revenues for
the four months ended April 30, 1995, the eight months ended December 31, 1995
and the year ended December 31, 1996
- 51 -
<PAGE> 54
were $46,000, $181,000 and $652,000, respectively. The increase in revenues for
the year ended December 31, 1996 compared to the twelve months ended December
31, 1995 was due to an increase in the number of subscribers resulting from the
acquisition of the Montgomery System and the Columbus System in April 1995 and
September 1995 and expansion of the Systems.
EXPENSES. The Company's operating expenses for the four months ended
April 30, 1995 were $959,000, for the eight months ended December 31, 1995 were
$3.3 million and for the year ended December 31, 1996 were $8.0 million.
Programming charges were $409,000, $1.0 million and $2.5 million, general and
administrative expenses were $176,000, $1.0 million and $2.3 million,
depreciation and amortization costs were $259,000, $745,000 and $1.6 million,
field and technical expenses were $98,000, $417,000 and $878,000, and sales and
marketing costs were $17,000, $58,000 and $660,000, respectively, for such
periods. The increase in operating expenses for the year ended December 31,
1996 compared to the twelve months ended December 31, 1995 was due primarily to
an increase in the number of subscribers and the number of employees resulting
from the acquisition and expansion of the Montgomery System and the Columbus
System.
NET LOSS. For the four months ended April 30, 1995, the Company
incurred net losses of $124,000. For the eight months ended December 31, 1995,
the Company incurred net losses of $1.2 million. For the year ended December
31, 1996, the Company incurred net losses of $3.1 million. The increase in net
losses for the year ended December 31, 1996 compared to the twelve months ended
December 31, 1995 was due to continued expansion of the Systems.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had working capital of $226.8
million, compared to negative working capital of $3.2 million as of December
31, 1996.
The Company has required significant capital for operating and
investing activities in the development of its business. For the years ended
December 31, 1996 and 1997, the Company invested approximately $16.4 million
and $269.1 million, respectively, in operating and investing activities. The
Company's investing activities for the year ended December 31, 1997 primarily
consisted of $228.0 million investment of proceeds from the Offering and $39.7
million of capital expenditures (including inventory). Investing activities
for the year ended December 31, 1996 primarily consisted of capital
expenditures (including inventory) of $14.4 million. The increase in capital
expenditures and inventory is due primarily to the expansion of the networks in
Montgomery and Columbus and to the acquisition of the Beach Cable System in
December 1997. Management reviews inventory for obsolescence on a periodic
basis in connection with physical and cycle count procedures. The Company's
net cash used in operating activities was $1.1 million and $2.0 million for the
years ended December 31, 1997 and 1996, respectively. The Company's funding
prior to the Offering and the Equity Private Placement was provided primarily
by private sales of equity securities aggregating $29.2 million and loans
aggregating $24.0 million, including approximately $11.0 million in borrowings
from SCANA and promissory notes aggregating $11.0 million due in 2000 used for
the purchase of the Montgomery and Columbus Systems. A portion of the proceeds
from the Offering and the Equity Private Placement were used to repay the
borrowings from SCANA and the promissory notes for the purchase of the
Montgomery and Columbus Systems.
On October 22, 1997, the Company received net proceeds of
approximately $242.4 million from the Offering. Interest will not accrue on the
Notes prior to 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 certain covenants that affect, and in certain cases
significantly limit or prohibit, among other things, the ability of the Company
to incur indebtedness, pay dividends, prepay subordinated indebtedness, redeem
capital stock, make investments, engage in transactions with stockholders and
affiliates, create liens, sell assets and engage in mergers and consolidations.
If the Company fails to comply
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<PAGE> 55
with these covenants, the Company's obligation to repay the Notes may be
accelerated. However, these limitations are subject to a number of important
qualifications and exceptions. In particular, while the Indenture restricts
the Company's ability to incur additional indebtedness by requiring compliance
with specified leverage ratios, it permits the Company and its subsidiaries to
incur an unlimited amount of indebtedness to finance the acquisition of
equipment, inventory and network assets and to secure such indebtedness, and up
to $50.0 million of additional secured indebtedness. Upon a "Change of
Control" of the Company (as defined in the Indenture), the Company will be
required to make an offer to purchase the Notes at a purchase price equal to
101% of the Accreted Value thereof, plus accrued interest. See
"Business--Description of Certain Indebtedness--Senior Discount Notes."
In connection with the Offering, the Company completed the Equity
Private Placement, pursuant to which the Company issued approximately 21,400
additional shares of Preferred Stock at $1,500 per share for aggregate proceeds
of approximately $32.2 million, of which approximately $28.0 million was
purchased by ITC Holding, Century Telephone, SCANA, South Atlantic and AT&T
Venture Funds.
The Company has received a commitment letter from First Union for a
$50.0 million five-year senior secured credit facility to be used for working
capital and other purposes, including capital expenditures. "See
Business--Description of Certain Indebtedness--Proposed New Credit Facility."
It is currently contemplated that the Company's obligations under the Proposed
New Credit Facility will be secured by all current and future assets of the
Company. The Proposed New Credit Facility will require the Company to maintain
certain financial ratios. See "Description of Certain Indebtedness--Proposed
New Credit Facility." The failure of the Company to maintain such ratios would
constitute an event of default under the Proposed New Credit Facility,
notwithstanding the ability of the Company to meet its debt service
obligations. An event of default under the Proposed New Credit Facility would
allow the lenders thereunder to accelerate the maturity of the indebtedness
under the Proposed New Credit Facility. In such event, a significant portion of
the Company's other indebtedness, including the Notes, may become immediately
due and payable.
The Company's business requires substantial investment to finance
capital expenditures and related expenses to expand the Interactive Broadband
Networks in Montgomery and Columbus, to construct additional Interactive
Broadband Networks, to fund subscriber equipment, to fund operating deficits in
new systems until it builds its customer base and to maintain the quality of
its networks. The Company currently expects to spend at least $78.4 million
during 1998 to expand and upgrade the Montgomery, Columbus and Panama City
Beach networks and to commence construction of networks in Augusta and
Charleston. In addition, the Company estimates the cost of constructing
networks in additional cities and funding initial subscriber equipment at
approximately $35 million to $50 million per city (including, in the case of
the Panama City System, the cost of acquiring the Beach Cable System). Actual
costs may vary significantly from this range and will depend in part on the
number of miles of network to be constructed, the geographic and demographic
characteristics of the city, other factors affecting construction costs, costs
associated with the cable franchise in each city, the number of subscribers,
the mix of services purchased, the cost of subscriber equipment paid for or
financed by the Company and other factors. The Company expects to enter into
purchase agreements through 1998 in the ordinary course of business for
programming services and construction related services to expand its service
offerings and to expand and upgrade the Systems. Although there can be no
assurance, the Company believes that present cash reserves, cash flow from
operations and amounts expected to be available under the Proposed New Credit
Facility, will provide sufficient funds to expand the Systems as currently
planned and fund the expansion into Panama City Beach/Panama City, Charleston
and Augusta. The Company may need to seek additional financing in the event
the Proposed New Credit Facility is not entered into or actual costs vary. In
addition, the Company will need additional financing to expand into additional
cities for new business activities or in the event it decides to make
additional acquisitions. See "Business --Risk Factors -- Significant Capital
Requirements."
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<PAGE> 56
The Year 2000 Issue. The Year 2000 issue is the result of computer
programs using two digits rather than four to define the applicable year.
Date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. The Company has commenced an analysis, which it expects to
complete during the fourth quarter of 1998, to determine the extent to which
its own information, customer service and billing systems and the systems of
its major vendors and third party network service providers (insofar as they
relate to the Company's business) are vulnerable to the Year 2000 issue. The
Company is currently unable to predict the extent to which the Year 2000 issue
will affect its internal systems, or those of its vendors and third party
network service providers. Any failure by such vendors or third party network
service providers to resolve any Year 2000 issues on a timely basis, or in a
manner that is compatible with the Company's systems, could have a material
adverse effect on the Company. Although the Company may incur substantial
costs, particularly costs resulting from charges by its vendors or third party
network service providers, in correcting Year 2000 issues, such costs cannot
currently be estimated. Additionally, such costs will be expensed as incurred,
which will have a negative effect on current operating results.
EFFECTS OF ACCOUNTING STANDARDS
In 1997, the FASB has issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosure About Segments of an Enterprise and
Related Information." The Company does not believe that these statements
significantly change its financial statement disclosures.
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on
the results of operations to date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, including the
Company's Consolidated Balance Sheets as of December 31, 1996 and 1997,
Consolidated Statements of Operations for the Four Months Ended April 30, 1995,
the Eight Months Ended December 31, 1995, and the Years Ended December 31, 1996
and 1997, the Consolidated Statements of Cash Flows for the Four Months Ended
April 30, 1995, the Eight Months Ended December 31, 1995, and the Years Ended
December 31, 1996 and 1997, the Consolidated Statements of Stockholders'
(Deficit) Equity for the Four Months Ended April 30, 1995, the Eight Months
Ended December 31, 1995, and the Years Ended December 31, 1996 and 1997, and
Notes to Consolidated Financial Statements, together with a report therein of
Arthur Andersen LLP, dated March 6, 1998, are attached hereto.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
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<PAGE> 57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are listed below.
Directors of the Company are elected at the annual meeting of stockholders.
Executive officers of the Company are appointed at the first meeting of the
Board of Directors after each annual meeting of stockholders. Directors and
executive officers of the Company are elected to serve until they resign or are
removed, or are otherwise disqualified to serve, or until their successors are
elected and qualified. The ages of the persons set forth below are as of
December 31, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH COMPANY
---- --- ------------------------
<S> <C> <C>
William E. Morrow . . . . . 35 President, Chief Executive Officer and Director
James K. McCormick . . . . 41 Chief Financial Officer and Secretary
Marcus R. Luke . . . . . . 42 Chief Technology Officer
Felix L. Boccucci, Jr . . . 40 Vice President of Business Development
Bret T. McCants . . . . . . 38 Vice President of Network Construction and Maintenance
Peggy B. Warner . . . . . . 46 Vice President of Marketing and Carrier Sales
Ancel A. Hamilton, Jr . . . 48 Vice President of Operations
O. Gene Gabbard. . . . . . 57 Chairman of the Board and Director
Richard Bodman(1) . . . . . 59 Director
Donald W. Burton(2) . . . . 53 Director
L. Charles Hilton, Jr. . . 66 Director
Campbell B. Lanier, III . . 47 Director
William H. Scott, III(1)(2) 50 Director
Andrew M. Walker . . . . . 56 Director
</TABLE>
- ----------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation and Stock Option Committee.
WILLIAM E. MORROW has been President, Chief Executive Officer and
Director of the Company since February 1997. Prior to joining the Company, from
August 1996 to February 1997, Mr. Morrow served as Senior Vice President and
General Manager of Network Alliances for UtiliCom Networks. Prior to that time,
Mr. Morrow served in various capacities at Central and South West Corp. from
March 1985 to August 1996, including Marketing, Area Management,
Governmental/Regulatory Lobbyist, Ventures/Business Development and Founder and
Managing Director of CSW Communications ("CSW") from December 1993 to August
1996. While at CSW Communications, Mr. Morrow oversaw the company's energy
management services over a 750 MHz two-way broadband network, the construction,
maintenance, operation and marketing of long-haul fiber capacity, and the
design, construction, operation and marketing of competitive access services.
JAMES K. MCCORMICK joined KNOLOGY Holdings, Inc. as Chief Financial
Officer and Secretary in September 1997. Prior to joining the Company, from
November 1992 to September 1997, Mr. McCormick was Corporate
Controller/Treasurer of United Dairy Farmers, Inc. ("UDF"), a
retailer/manufacturer operating in seven Midwestern states. While at UDF, Mr.
McCormick managed the employment practices, inventory management, cash
management, capital allocation, accounting and financial reporting functions.
Mr. McCormick also served as Director of Finance at American Sign and Marketing
Services, Inc. from June 1991 until November 1992. Prior to that time, Mr.
McCormick served in various capacities at Andersen Worldwide. From February
1989 until January 1991, he served as consulting manager in the Strategic
Services Division of Andersen Consulting's Melbourne, Australia office and from
October 1984 to February 1989, he served as Senior Auditor, Emerging Business
Division at Arthur Andersen LLP.
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<PAGE> 58
MARCUS R. LUKE, PH.D. has served as Chief Technology Officer of the
Company since August 1997. Prior thereto, he served as Vice President of
Network Construction of the Company, since November 1995, and Director of
Engineering of Cybernet Holding, L.L.C., from May 1995 until November 1995.
Prior to joining the Company, Dr. Luke served as Southeast Division
Construction Manager for TCI from July 1993 to May 1995. From July 1987 to June
1993, he served as Area Technical Manager for TCI's southeast area, which
included Montgomery. Dr. Luke worked for Storer Communications Inc. from 1985
to 1987 as Vice President of Engineering. Prior to 1985, he spent 12 years in
various engineering and management positions with Storer Communications Inc.
FELIX L. BOCCUCCI, JR. has served as the Vice President of Business
Development of the Company since August 1997 and served as Chief Financial
Officer, Treasurer and Secretary of the Company from November 1995 through
August 1997. From October 1994 until December 1995, Mr. Boccucci served as Vice
President Finance Broadband of ITC Holding. Prior to such time, Mr. Boccucci
worked for GTE Corporation ("GTE"), a telecommunications company, which merged
with Contel Corporation ("Contel") in March 1991. From May 1993 to October
1994, he served as a Senior Financial Analyst for GTE. From 1991 to 1993, Mr.
Boccucci served as Financial Director for GTE's Central Area Telephone
Operations. From 1987 to 1991, he was the controller in charge of Contel's
Eastern Region Telephone Operations comprising 13 companies in twelve states.
BRET T. MCCANTS has served as Vice President of Network Construction
and Maintenance since April 1997. Prior to joining the Company, Mr. McCants was
a co-founder of CSW Communications and from January 1996 to April 1997 served
as Director of Operations and from 1994 to 1996 participated in the development
and managed the deployment of interactive energy management equipment to homes
in Laredo, Texas. Prior to joining CSW Communications, he served in various
capacities with Central Power and Light Company including as Corporate Manager
of Commercial and Small Industrial Marketing from 1992 to 1994 and as Business
Manager from 1990 to 1992. From 1982 to 1990, Mr. McCants also held several
positions in the Sales, Marketing and Engineering departments at Central Power
and Light Company.
ANCEL A. HAMILTON, JR. has been Vice President Operations since
October 1997. Prior to joining the Company, from June 1994 to October 1997, Mr.
Hamilton served as Vice President -- Operations for InterCall where he managed
call center and network operations. Prior to joining InterCall, Mr. Hamilton
served as General Manager -- Information Services for SCANA Corporation from
June 1991 to June 1994, where he managed all facets of the information systems
function including computer operations, programming and customer support. From
1983 until 1991, Mr. Hamilton served in numerous marketing and sales positions
with International Business Machines Corporation, primarily in the electric
utility and government arenas.
PEGGY B. WARNER joined the Company as Vice President of Marketing and
Carrier Sales in January 1998. Prior to joining the Company, from February 1995
to December 1997, Ms. Warner held various positions at SCANA Communications,
Inc., including Manager Sales, Marketing and Customer Service and General
Manager. While at SCANA Communications, Inc., Ms. Warner was responsible for
the company's fiber optic carriers' carrier and 800 MHz trunked radio lines of
business. Prior to that time, she was an Executive National Accounts Manager
with MCI Telecommunications Corporation where she developed and managed a
nationwide Government Systems regional sales organization between December 1993
and January 1994. Ms. Warner also held various other sales and marketing
management positions with MCI between May 1986 and January 1995. She was an
Account Manager with AT&T Information Systems between January 1983 and April
1986 and held various sales positions with BellSouth prior to 1983.
O. GENE GABBARD has been a Director of the Company since November
1995, and was elected Chairman of the Board in April 1996. He has worked
independently as an entrepreneur and consultant since February 1993. Mr. Gabbard
currently serves as a director of ITC Holding and several ITC Companies,
including PowerTel, Inc., ITC/\DeltaCom and MindSpring. From August
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<PAGE> 59
1990 through January 1993, he served as Executive Vice President and Chief
Financial Officer of MCI. He served in various senior executive capacities,
including Chairman of the Board, President and Chief Executive Officer of
Telecom*USA, Inc. from December 1988 until Telecom's merger with MCI in August
1990. From July 1984 to December 1988, he was Chairman and/or President of
SouthernNet, Inc. ("SouthernNet"), a long distance telecommunications company
which was the predecessor to Telecom*USA, Inc. Since July 1997, Mr. Gabbard
has served as a Managing Director of South Atlantic Private Equity Fund IV,
Limited Partnership. He also currently serves as a director of two
telecommunications technology companies, Dynatech Corporation and Adtran, Inc.
RICHARD BODMAN has been a Director of the Company since June of 1996.
Mr. Bodman is currently the Managing General Partner of AT&T Ventures. From
August 1990 to May 1996, Mr. Bodman served as Senior Vice President of
Corporate Strategy and Development for AT&T. Mr. Bodman also is currently a
director of the following public companies: Internet Security Systems, Inc.,
Tyco International Inc., Reed Elsevier and NHP, Inc.
DONALD W. BURTON has been a Director of the Company since January
1996. Since January 1981, he has served as Managing General Partner of South
Atlantic Venture Fund I, II and III, Limited Partnerships and Chairman of South
Atlantic Private Equity Fund IV, Limited Partnership. Mr. Burton has been the
general partner of The Burton Partnership, Limited Partnership since January
1979. Since January 1981, he has served as President of South Atlantic Capital
Corporation. Mr. Burton also serves on the Board of Directors of ITC Holding,
ITC/\DeltaCom, PowerTel, Inc., MTL Inc., AvData Systems, Inc. ("AvData") (a
company providing data communications networks), K&G Men's Centers, Inc. (a
discount retailer of men's clothing), the Heritage Group of Mutual Funds and
several private companies. Mr. Burton also serves as a director of the National
Venture Capital Association.
L. CHARLES HILTON, JR. has been a director of the Company since the
Company acquired the Beach Cable System in December 1997. Mr. Hilton has been
elected to serve a one-year term as a member of the Board of Directors pursuant
to the Beach Cable System acquisition agreement. Mr. Hilton was the founder and
sole stockholder of Beach Cable, Inc., and served as its Chief Executive
Officer from 1991 to December 1997. Since 1958, Mr. Hilton has served as
Chairman and Chief Executive Officer of Gulf Asphalt Corporation, a general
construction firm. Mr. Hilton has been a partner in the law firm of Hilton,
Hilton, Kolk & Roesch since 1984, and currently serves as Chief Executive
Officer of Hilton, Inc., a family corporation which owns and operates various
commercial buildings in Bay County, Florida. He also is a member of the board
of directors of several private companies.
CAMPBELL B. LANIER, III has been a Director of the Company since
November 1995. Mr. Lanier serves as Chairman of the Board and Chief Executive
Officer of ITC Holding and served as a director of the corporate predecessor of
ITC Holding from its inception in May 1985 through another predecessor company
to October 1997. He is Chairman of the Board and a director of ITC/\DeltaCom, a
director of MindSpring, National Vision Associates, Ltd. (a full service optical
retailer), K&G Men's Centers, Inc., Vice Chairman of the Board of AvData and
Chairman of the Board of PowerTel, Inc. He served as Chairman of the Board of
AvData from June 1988 to September 1990. Mr. Lanier has served as a Managing
Director of South Atlantic Private Equity Fund IV, Limited Partnership since
1997.
WILLIAM H. SCOTT, III has been a Director of the Company since
November 1995. Mr. Scott served as President of the corporate predecessor of ITC
Holding from December 1991 until October 1997 and was a director of the
corporate predecessor of ITC Holding from May 1989 until October 1997. Mr. Scott
is a director of several ITC Companies, including ITC Holding, PowerTel, Inc.,
AvData, ITC/\DeltaCom, and MindSpring. From 1989 to 1991, he served as Executive
Vice President of the corporate predecessor of ITC Holding. From 1985 to 1989,
Mr. Scott was an officer and director of Async Corporation. Between 1984 and
1988, Mr. Scott held several offices with SouthernNet,
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<PAGE> 60
including Chief Operating Officer, Chief Financial Officer, and Vice President
- -- Administration. He was a director of SouthernNet from 1984 to 1987.
ANDREW M. WALKER has served as a Director of the Company since July
1996 and served as Chief Executive Officer and President of the Company from
July 1996 until February 1997. Since March 1997, he has been Chief Executive
Officer and a director of ITC/\DeltaCom, Inc. Mr. Walker was President and Chief
Executive Officer of the Managing Partners of each of Interstate FiberNet and
Gulf States FiberNet, both ITC Companies, from November 1994 until March 1997.
Mr. Walker worked for MCI from August 1990 to November 1994 as Vice President
Carrier Services. From January 1986 to August 1990 Mr. Walker served as a
Division President for Telecom*USA. Prior to January 1986, Mr. Walker held
different positions with the Christian Broadcasting Network, M/A-Com and Comsat
Laboratories.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board currently has two committees, the Audit Committee and the
Compensation and Stock Option Committee. The Audit Committee, among other
things, recommends the firm to be appointed as independent accountants to audit
the Company's financial statements, discusses the scope and results of the audit
with the independent accountants, reviews with management and the independent
accounts the Company's interim and year-end operating results, considers the
adequacy of the internal accounting controls and audit procedures of the Company
and reviews the non-audit services to be performed by the independent
accountants. The current members of the Audit Committee are Messrs. Bodman and
Scott.
The Compensation and Stock Option Committee reviews and recommends the
compensation arrangements for management of the Company and administers the
Company's stock option plans. The current members of the Compensation and Stock
Option Committee are Messrs. Scott and Burton.
DIRECTOR COMPENSATION
Directors of the Company receive no directors' fees. Directors are
reimbursed for their reasonable out-of-pocket travel expenditures incurred.
Directors of the Company are also eligible to receive grants of stock options
under the Company's Stock Option Plan. Mr. Gabbard earns an annual salary of
$40,000 for his services as Chairman of the Board of Directors. In May 1997,
Mr. Gabbard was granted an option to purchase 100 shares of Common Stock of
the Company as additional compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation and Stock Option Committee are
Messrs. Scott and Burton.
INCENTIVE COMPENSATION PLAN
1995 Stock Option Plan. The Company's 1995 Stock Option Plan (the
"Stock Option Plan") provides for the grant of options that are intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), as well as the grant of non-qualifying
options to key employees (including key employees who are officers and
directors of the Company) and non-employee directors of the Company and its
subsidiaries. The Stock Option Plan authorizes the issuance of up to 1,144
shares of Common Stock pursuant to options granted under the Stock Option Plan
(subject to anti-dilution adjustments in the event of a stock split,
recapitalization or similar transaction). The maximum number of shares subject
to options that may be awarded under the Stock Option Plan to any person is 422
shares. The Compensation and Stock
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<PAGE> 61
Option Committee of the Board of Directors will administer the Stock Option
Plan and will grant options to purchase Common Stock.
The option exercise price for incentive stock options granted under
the Stock Option Plan may not be less than 100% of the fair market value of the
Common Stock on the date of grant of the option (or 110% in the case of an
incentive stock option granted to an optionee beneficially owning more than 10%
of the outstanding Common Stock). The option exercise price for non-incentive
stock options granted under the Stock Option Plan may not be less than the par
value of the Common Stock on the date of grant of the option. The maximum
option term is ten years (or five years in the case of an incentive stock
option granted to an optionee beneficially owning more than 10% of the
outstanding Common Stock). Options may be exercised at any time after grant,
except as otherwise provided in the particular option agreement. There is also
a $100,000 limit on the value of Common Stock (determined at the time of grant)
covered by incentive stock options that become exercisable by an optionee in
any year.
The Board of Directors may amend, suspend or terminate the Stock
Option Plan with respect to shares of Common Stock as to which options have not
been granted.
At December 31, 1997, options to purchase 1,088.28 shares of Common
Stock were outstanding pursuant to the Stock Option Plan.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the cash
and non-cash compensation paid or accrued during the periods indicated to the
Chief Executive Officer and the other most highly compensated officers of the
Company whose combined salary and bonus exceeded $100,000 during the fiscal
year ended December 31, 1997 (the "Named Executive officers").
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<PAGE> 62
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL -------------
COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
YEAR(1) SALARY BONUS OPTIONS(2) COMPENSATION(3)
------- ------ ----- --------- ---------------
<S> <C> <C> <C> <C> <C>
William E. Morrow 1997 $ 102,462(5) $ 22,602 300 $ 24,526
President and Chief Executive
Officer(4)
Andrew M. Walker 1997 $ -- $ -- -- --
President and Chief Executive 1996 $ -- $ -- -- --
Officer(6)
James K. McCormick 1997 $ 30,770(7) $ 17,609 100 $ 33,700
Chief Financial Officer
Felix L. Boccucci, Jr. 1997 $ 92,430 $ 9,473 -- $ 36,159(9)
Vice President of Business 1996 $ 84,015 $ 46,102(10) 110.11 $ 68,464(11)
Development(8) 1995 $ 71,262 $ 5,070 -- $ 34,222
Bret T. McCants 1997 $ 58,847(12) $ 21,177 70 $ 35,535
Vice President of Network
Construction and Maintenance
Marcus R. Luke 1997 $ 90,292 $ 6,102 -- $ 5,111
Chief Technology Officer 1996 $ 72,547 $ 7,102 42.7 $ 5,076
1995 $ 40,385 $ 150 -- $ 12,822
- ---------------
</TABLE>
(1) Under rules promulgated by the Securities and Exchange Commission, since
the Company was not a reporting company during the three immediately
preceding fiscal years, information with respect to the most recent
completed fiscal year is noted in the Summary Compensation Table. Most of
the Named Executive Officers were initially employed by the Company
during 1997 or are in a different position with the Company than the
position held by such Named Executive Officer in 1996. Compensation for
the year ended 1995 was paid by ITC Holding.
(2) All options are exercisable for shares of Common Stock of the Company.
(3) Includes car allowances and relocation expenses. For Messrs. Morrow,
Boccucci, McCants and Luke, also includes premiums on life insurance.
(4) Mr. Morrow has served as President and Chief Executive Officer of the
Company since the resignation of Mr. Walker in February 1997.
(5) Reflects amounts paid to Mr. Morrow based on an annual salary rate of
approximately $120,000.
(6) Mr. Walker served as President and Chief Executive Officer of the Company
from July 1996 until February 1997 at the request of the Company and ITC
Holding and received no compensation from the Company during such period.
He resigned as President and Chief Executive Officer effective February
20, 1997.
(7) Reflects amounts paid to Mr. McCormick based on an annual salary rate of
approximately $100,000.
(8) Mr. Boccucci served as Chief Financial Officer, Treasurer and Secretary
of the Company from November 1995 through August 1997.
(9) Includes grants of ITC Holding capital stock valued at $30,789 at the
time of grant.
(10) Includes a $46,000 bonus earned in 1995 and paid in 1996.
(11) Includes grants of ITC Holding capital stock valued at $63,448 at time of
grant.
(12) Reflects amounts paid to Mr. McCants based on an annual salary rate of
approximately $90,000.
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<PAGE> 63
OPTION GRANTS
The following table sets forth information with respect to grants of
stock options to the Named Executive Officers during the fiscal year ended
December 31, 1997.
OPTION GRANTS DURING 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
----------------------------------------------------------------------------
PERCENT OF POTENTIAL
TOTAL REALIZED VALUE AT
OPTIONS ASSUMED ANNUAL
NUMBER OF GRANTED TO RATES OF STOCK
SECURITIES EMPLOYEES PRICE
UNDERLYING IN FISCAL EXERCISE EXPIRATION APPRECIATION FOR
NAME OPTIONS GRANTED YEAR(2) PRICE GRANT DATE DATE OPTION TERM(3)
---- --------------- ------- ----- ---------- ----- -----------------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C> <C>
William E. Morrow 300 35.5% $1,200 March 12, 1997 March 12, 2007 $1,955 $3,112
President and Chief
Executive Officer
Andrew M. Walker --- --- --- --- --- --- ---
President and Chief
Executive Officer(4)
James K. McCormick 100 11.8% $1,200 August 28, 1997 August 28, 2007 $1,955 $3,112
Chief Financial Officer
Felix L. Boccucci, Jr. --- --- --- --- --- --- ---
Vice President of
Business
Development(5)
Bret T. McCants 70 8.3% $1,200 May 18, 1997 May 18, 2007 $1,955 $3,112
Vice President of
Network Construction
and Maintenance
Marcus R. Luke --- --- --- --- --- --- ---
Chief Technology
Officer
</TABLE>
- ---------------
(1) All options are exercisable for shares of Common Stock and are granted
under the Stock Option Plan. Such options generally vest over five years
unless such person's employment with the Company is terminated, in which
case options that have not vested at that time will terminate.
(2) Based on 845 options granted in fiscal 1997.
(3) These amounts are based on compounded annual rates of stock price
appreciation of five and ten percent over the 10-year term of the
options, are mandated by rules of the Securities and Exchange Commission
and are not indicative of expected stock price performance. Actual gains,
if any, on stock option exercises are dependent on future performance of
the Common Stock, overall market conditions, as well as the option
holders' continued employment throughout the vesting period. The amounts
reflected in this table may not necessarily be achieved or may be
exceeded.
(4) Mr. Walker served as President and Chief Executive Officer of the Company
from July 1996 until February 1997 at the request of the Company and ITC
Holding and received no compensation from the Company during such period.
He resigned as Chief Executive Officer effective February 20, 1997.
(5) Mr. Boccucci served as Chief Financial Officer, Treasurer and Secretary
of the Company from November 1995 through August 1997.
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<PAGE> 64
OPTION EXERCISES AND FISCAL YEAR-END VALUES
None of the Named Executive Officers exercised stock options during
the fiscal year ended December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information at January 31,
1998, regarding beneficial ownership of the capital stock of the Company by (i)
each person known by the Company to beneficially own more than 5% of the
outstanding capital stock of the Company, (ii) each director of the Company,
(iii) each executive officer of the Company and (iv) all directors and
executive officers as a group. The information as to beneficial ownership has
been furnished by the respective stockholders, directors and executive officers
of the Company, and, unless otherwise indicated, each of the stockholders has
sole voting and investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
NATURE AND PERCENT OF
AMOUNT AND TOTAL SHARES OF
NAMES AND ADDRESS OF NATURE OF SHARES CAPITAL STOCK
BENEFICIAL OWNERS AND DIRECTORS BENEFICIALLY OWNED(1)(2) OUTSTANDING(2)
- -------------------------------- -------------------------------------------------
<S> <C> <C>
ITC Holding Company, Inc.(3) . . . . . . . . . . . . 21,014 42.0%
South Atlantic(4) . . . . . . . . . . . . . . . . . . 7,521 15.0
Donald W. Burton(4) . . . . . . . . . . . . . . . . . 7,521 15.0
AT&T Venture Funds(5) . . . . . . . . . . . . . . . . 7,113 14.2
Richard Bodman(5) . . . . . . . . . . . . . . . . . . 7,113 14.2
SCANA Communications, Inc.(6) . . . . . . . . . . . . 3,639 7.3
L. Charles Hilton, Jr.(12) . . . . . . . . . . . . . 2,485 5.0
Campbell B. Lanier, III(7)(12) . . . . . . . . . . . 1,023 2.0
O. Gene Gabbard(12) . . . . . . . . . . . . . . . . . 312 *
William H. Scott, III(12) . . . . . . . . . . . . . . 256 *
Andrew M. Walker(12) . . . . . . . . . . . . . . . . 81 *
Felix L. Boccucci, Jr.(8)(11)(12) . . . . . . . . . . 54 *
Marcus R. Luke(9)(11)(12) . . . . . . . . . . . . . . 40 *
William E. Morrow(11)(12) . . . . . . . . . . . . . . 20 *
James McCormick(10)(11)(12) . . . . . . . . . . . . . 20 *
Bret McCants(11)(12) . . . . . . . . . . . . . . . . 8 *
Ancel A. Hamilton, Jr.(11)(12) . . . . . . . . . . . -- *
Peggy B. Warner(12) . . . . . . . . . . . . . . . . . -- *
All executive officers and directors as a group
(13 persons)(8)(9)(11) . . . . . . . . . . . . . . . 18,933 37.8%
</TABLE>
- --------------------
* Less than one percent.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
as amended, a person is deemed to be the beneficial owner, for purposes
of this table, of any shares of capital stock if such person has or
shares voting power or investment power with respect to such security, or
has the right to acquire beneficial ownership at any time within 60 days
from January 31, 1998. As used herein, "voting power" is the power to
vote or direct the voting of shares and "investment power" is the power
to dispose or direct the disposition of shares.
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<PAGE> 65
(2) Each share of capital stock owned represented in this table represents a
share of Preferred Stock of the Company, except for an option to purchase
44 shares of Common Stock granted to Mr. Boccucci and an option to
purchase 17 shares of Common Stock granted to Mr. Luke.
(3) The address of ITC Holding is 1239 O.G. Skinner Drive, West Point,
Georgia 31833. Includes 21,014 shares held by ITC Service Company, a
wholly owned subsidiary of ITC Holding. Voting and investment power with
respect to the shares beneficially owned is exercised by the Board of
Directors and the executive officers of ITC Holding in the name and on
behalf of ITC Holding. The members of the ITC Holding Board of Directors
are Campbell B. Lanier, III, William H. Scott, III, Donald W. Burton, O.
Gene Gabbard, William T. Parr, Malcolm C. Davenport V, J. Smith Lanier,
II, William B. Timmerman, Donald W. Weber and Robert P. Dolson. The
executive officers of ITC Holding are Campbell B. Lanier, III (Chief
Executive Officer), William H. Scott, III (President and Chief Operating
Officer), Bryan W. Adams (Senior Vice President, Chief Financial Officer
and Assistant Secretary), Kimberley E. Thompson (Senior Vice President,
General Counsel and Secretary) and J. Douglas Cox (Senior Vice President,
Corporate Development). Such members of the Board of Directors and the
executive officers disclaim beneficial ownership of such shares.
(4) The address of Mr. Burton and of each entity comprising South Atlantic is
614 West Bay Street, Suite 200, Tampa, Florida 33606. Includes 3,834
shares held by South Atlantic Venture Fund III, Limited Partnership, of
which South Atlantic Venture Partners III, Limited Partnership is the
sole general partner, of which Mr. Burton is the managing partner; 2,138
shares held by South Atlantic Venture Fund IV, Limited Partnership, of
which Mr. Burton is a general partner; and 1,549 shares held by South
Atlantic Venture Fund IV (QP), Limited Partnership, of which Mr. Burton
is a general partner. Each of the respective South Atlantic venture funds
has sole voting and investment power with respect to the shares
beneficially owned by such fund.
(5) The address of each of the AT&T Venture Funds and of Mr. Bodman is 2
Wisconsin Circle, #610, Chevy Chase, Maryland 20815. Includes 543 shares
owned by Venture Fund I, L.P., of which Venture Management I, a general
partnership, is the general partner, of which Mr. Bodman is the managing
general partner; 4,886 shares owned by AT&T Venture Fund II, L.P., of
which Venture Management, L.L.C. is the general partner, of which Mr.
Bodman is a manager; includes 256 shares owned by Special Partners Fund,
L.P., of which Venture Management III, L.L.C. is the general partner, of
which Mr. Bodman is a manager; and includes 1,428 shares owned by Special
Partners Fund International, L.P., of which the investment general
partner is Venture Management III, L.L.C., of which Mr. Bodman is a
manager. Each of the respective AT&T Venture Funds has sole voting and
investment power with respect to the shares beneficially owned by such
fund.
(6) The address of SCANA Communications, Inc. is 440 Knox Abbott Drive, Suite
240, Cayce, SC 29033. Does not include warrants to purchase 753 shares of
Preferred Stock to be issued in connection with a construction credit
facility or Warrants to purchase 265.3007 shares of Preferred Stock
issued in connection with the Offering. Voting and investment power with
respect to the shares beneficially owned is exercised by the Board of
Directors and the executive officers of SCANA Communications, Inc. in the
name and on behalf of such company. The members of the SCANA
Communications Inc. Board of Directors are: William B. Timmerman, Bill
L. Amick, James A. Bennett, William B. Bookhart, Jr., William T. Cassels,
Jr., Hugh M. Chapman, Elaine T. Freeman, Lawrence M. Gressette, Jr., W.
Hayne Hipp, F. Creighton McMaster, Lynne M. Miller, John B. Rhodes and
Maceo K. Sloan. The executive officers of SCANA Communications, Inc.
are: William B. Timmerman (President and Chief Executive Officer), George
J. Bullwinkel, Jr. (President) and Kevin B. Marsh (Vice
President-Finance, Chief Financial Officer and Controller). Such members
of the Board of Directors and the executive officers disclaim beneficial
ownership of such shares.
(7) Includes 170 shares held by Campbell B. Lanier, III Life Trust.
(8) Includes options to purchase 44 shares of Common Stock which are
currently exercisable.
(9) Includes options to purchase 17 shares of Common Stock which are
currently exercisable.
- 63 -
<PAGE> 66
(10) Mr. McCormick has shared voting and investment power with respect to such
shares with his wife.
(11) Does not include options to purchase 25.7, 66.11, 300, 100, 70 and 50
shares of Common Stock held by Messrs. Luke, Boccucci, Morrow, McCormick,
McCants and Hamilton respectively, which are not exercisable within 60
days from January 31, 1998.
(12) The address of each of Messrs. Hilton, Lanier, Gabbard, Scott, Walker,
Boccucci, Luke, Morrow, McCormick, McCants and Hamilton and Ms. Warner is
c/o KNOLOGY Holdings, Inc., 1241 O.G. Skinner Drive, West Point, Georgia
31833.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has adopted a policy requiring that any material
transactions between the Company and persons or entities affiliated with
officers, directors or principal stockholders of the Company be on terms no
less favorable to the Company than reasonably could have been obtained in
arm's-length transactions with independent third parties.
TRANSACTIONS WITH ITC COMPANIES
The Systems were originally acquired in 1995 by entities that were
directly and indirectly owned by ITC Holding. The Company has conducted several
private placements of its Preferred Stock which diluted the original ownership
interest of ITC Holding, even though ITC Holding also purchased shares of
Preferred Stock of the Company in private placements in December 1995, January
1996, May 1996, January 1997 and October 1997. In connection with a
reorganization, ITC Holding transferred all of its 7,595 shares of Preferred
Stock of the Company to InterCall, a wholly-owned subsidiary of ITC Holding. ITC
Holding subsequently purchased additional Preferred Stock of the Company in the
Equity Private Placement. ITC Holding purchased all shares of the Company's
Preferred Stock owned by Century Telephone in January 1998. As of January 31,
1998, ITC Holding (through its wholly owned subsidiaries) owned approximately
42.0% of the outstanding capital stock of the Company. See "Security Ownership
of Certain Beneficial Owners and Management." As of October 20, 1997, Mr. Lanier
beneficially owned approximately 21.4% of the common stock of ITC Holding, and
Mr. Scott, Mr. Burton and Mr. Gabbard beneficially owned approximately 2.0%,
5.8% and .5%, respectively, of the common stock of ITC Holding as of such date.
Mr. Walker and Mr. Boccucci served as executive officers of ITC
Holding prior to October 1997 and Mr. Walker currently serves as Chief Executive
Officer and director of ITC/\DeltaCom, which until October 1997 was owned by ITC
Holding and now is owned by substantially the same stockholders as ITC Holding.
Mr. Lanier and Mr. Scott serve as executive officers and directors of ITC
Holding and as executive officers and directors of a number of ITC Companies,
including ITC/\DeltaCom. Mr. Gabbard is director of ITC Holding and is a
director of several ITC Companies, including ITC/\DeltaCom. Mr. Burton serves as
a director of several ITC Companies, including ITC Holding, ITC/\DeltaCom and
PowerTel, Inc.
In 1995, ITC Holding extended a series of unsecured, interest-free
loans to KNOLOGY Holding, L.L.C. The maximum aggregate principal amount of such
loans was $824,405. In 1995, ITC Service Company, a wholly owned subsidiary of
ITC Holding, extended to the Company (or KNOLOGY Holding, L.L.C., as applicable)
a series of unsecured, interest free loans, the maximum aggregate principal
amount of which was $151,583, to be used for the payment of salaries of
employees. These loans were repaid by December 31, 1995. In 1995, ITC Holding
also extended a series of unsecured loans to KNOLOGY of Montgomery at annual
interest rates ranging from 9.25% to 10.5%. The maximum aggregate principal
amount of such loans was $1,791,781. The loans were paid in full (including all
interest thereon) by January 31, 1996.
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<PAGE> 67
In December 1995, the Company used proceeds from sales of its
Preferred Stock to extend an unsecured loan to ITC Holding in the aggregate
principal amount of $4,255,835 at an annual interest rate of 7%. In May 1996,
the Company extended an unsecured loan to ITC Holding in the aggregate
principal amount of $10,500,000 at an annual interest rate of 7%. Both of these
loans were paid in full together with interest thereon by December 31, 1996.
ITC Holding was a co-obligor under the note that was issued in payment
of the purchase price for the Montgomery System (the "Montgomery Note") and was
a co-party to the stock purchase agreement relating to the Montgomery
Acquisition. ITC Holding also was a guarantor of the note that was issued in
payment of the purchase price for the Columbus System (the "Columbus Note") and
is a co-party to the asset purchase agreement relating to the purchase of the
Columbus System. In connection with a reorganization of ITC Holding, ITC
Holding pre-paid the Montgomery Note and the Columbus Note and the Company
repaid ITC Holding amounts equal to the principal and accrued interest under
such notes. The Montgomery Note and Columbus Note (or refinancings of such
notes by ITC Holding) were repaid with a portion of the proceeds from the
Offering and the Equity Private Placement.
ITC Holding provides certain administrative services to the Company,
including legal and tax planning services. In 1995, 1996 and 1997, the Company
paid ITC Holding approximately $1,000, $24,000 and $31,000, respectively, for
these services. Additionally, during 1997, ITC Holding paid several invoices
related to the construction of the Company's building in West Point, Georgia. As
of December 31, 1997, the Company owed ITC Holding approximately $419,000 in
connection with such payments.
The Company leases certain office space in West Point, Georgia from J.
Smith Lanier & Co., Inc. In 1995, 1996 and 1997, the Company paid approximately
$36,000, $86,000 and $134,000, respectively, for insurance services to J. Smith
Lanier & Co., Inc., some of whose stockholders, directors and/or officers also
were directors and/or stockholders of ITC Holding and are directors and/or
stockholders of ITC Holding.
The Company's computers are connected with ITC Holding's local area
network. The Company pays ITC Holding no remuneration for such connection and
believes that the value of such connection is approximately $1,000 per year.
The Company is a customer of a number of ITC Companies. In 1995, the
Company paid Interstate FiberNet approximately $62,830 to construct fiber routes
to be developed for future use in Auburn, Alabama and paid Interstate Telephone
approximately $5,735 for local telephone service. In addition, the Company
received management services from Interstate FiberNet. These services were
primarily engineering and construction related. Interstate FiberNet did not bill
the Company for these services. The Company believes the value of these services
to be approximately $50,000. In 1996 and 1997, respectively, the Company paid
the following additional amounts to ITC Companies: approximately $1,350 and
$27,027 to Interstate FiberNet for the lease of circuits and network operations
center management fees and rent; approximately $16,145 and $154,347 to
Interstate Telephone Company for local telephone service; and approximately
$11,373 and $64,869 to PowerTel, Inc. for cellular services. The Company has
chosen ITC/\DeltaCom as its exclusive long distance carrier and in 1997 the
Company paid approximately $23,872 for telecommunications services pursuant to
such agreement.
OTHER TRANSACTIONS
In May 1997, the Company signed a letter of intent with SCANA
Corporation, whereby SCANA agreed to provide the Company with a revolving
credit facility of up to $40.0 million for network construction and working
capital (the "SCANA Credit Facility"). The SCANA Credit Facility would be
subject to receiving certain authorizations and approvals and would accrue
interest at 12% per annum. Beginning in June 1997, the Company borrowed an
aggregate of $11.0 million of principal plus accrued interest (approximately
$305,300) from SCANA pursuant to a promissory note. The note accrued interest
at the rate of 12% per annum and was payable upon demand after
- 65 -
<PAGE> 68
January 1, 1998. The Company repaid the promissory note in October 1997 with a
portion of the proceeds from the Offering and the Equity Private Placement.
The Company has agreed to issue to SCANA warrants to purchase 753 shares of
Preferred Stock in connection with the SCANA Credit Facility.
In October 1997, the Company issued to SCANA 71,050 Units in the
Offering, each of which consists of one Senior Discount Note and one Warrant to
purchase .003734 shares of Preferred Stock of the Company, for an aggregate
purchase price of $39,998,308. Additionally, in October 1997, the Company
issued to SCANA 3,334 shares of Preferred Stock for a purchase price of $1,500
per share in the Equity Private Placement.
The Company provides cable television service to several commercial
properties in Panama City Beach owned or controlled by Mr. Hilton, a director
of the Company. In connection with its acquisition of the Beach Cable System
in December 1997, the Company also leases certain real property for its
administrative offices and network equipment from The Hilton Company, of which
Mr. Hilton is a general partner.
SALES OF CAPITAL STOCK
In December 1995 and January 1996, in connection with the initial
capitalization of the Company, the Company issued 7,780 shares of Preferred
Stock for a purchase price of $1,000 per share to certain of the current
stockholders of the Company for an aggregate amount of $7,780,000. ITC Holding
contributed $4,000,000 plus all of its direct and indirect interests in
Cybernet Holding, L.L.C. (a predecessor of the Company) and in KNOLOGY of
Columbus, Inc. (then known as American Cable, Inc.) in exchange for Preferred
Stock.
In April 1996, in connection with a private placement of Preferred
Stock of the Company, the Company issued 9,312 shares of Preferred Stock for a
purchase price of $1,200 per share to certain of the current stockholders of
the Company for an aggregate amount of $11,174,400. In connection with this
private placement, the Company, ITC Holding, South Atlantic, Century Telephone
and AT&T Venture Funds entered into an Agreement Among Shareholders, which was
amended and restated as of July 28, 1997, pursuant to which the parties thereto
agreed to take all action within their respective power as may be required, for
as long as Century Telephone (and its affiliates) and/or Venture Fund I, L.P.
(and their respective affiliates) own equity securities of the Company with a
combined voting power in excess of 5% of the aggregate voting power of all
outstanding equity securities of the Company (each, a "5% Stockholder" for so
long as it owns in excess of 5% of the outstanding equity securities of the
Company), to cause to be elected to the Board of Directors of the Company one
director designated by each such 5% Stockholder.
In February 1997, the Company issued 8,960 shares of Preferred Stock
to certain of the current stockholders of the Company for a purchase price of
$1,200 per share, for an aggregate amount of $10,752,000. As part of this
private placement, ITC Holding, Century Telephone, South Atlantic and AT&T
Venture Funds contributed $4,302,000, $2,096,400, $1,000,800 and $1,416,000,
respectively, in exchange for such Preferred Stock. See "Description of Capital
Stock."
The Company is a party to a Stockholders' Agreement (the
"Stockholders' Agreement"), dated as of December 8, 1995, as amended, with all
of the stockholders of the Company. None of the parties to the Stockholders'
Agreement may transfer any share of any class or series of capital stock of the
Company or any right or option to acquire any share of capital stock of the
Company held by such party to third parties (subject to limited exceptions)
without having offered rights of first refusal to purchase such securities to
the Company.
The Company issued approximately 21,400 shares of Preferred Stock to
qualified investors in the Equity Private Placement for a purchase price of
$1,500 per share, for an aggregate amount of
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<PAGE> 69
approximately $32.2 million. ITC Holding, Century Telephone, South Atlantic,
AT&T Venture Funds and SCANA purchased approximately $10.0 million, $2.5
million, $5.5 million, $5.0 million and $5.0 million of Preferred Stock,
respectively, in the Equity Private Placement.
On October 22, 1997, the Company completed a private offering of
444,100 Units, each of which consisted of one 11-7/8% Senior Discount Note and
one Warrant to purchase .003734 shares of Preferred Stock of the Company at an
exercise price of $.01 per share, subject to adjustment, for $444.1 million
aggregate principal amount at maturity yielding net proceeds of approximately
$242.4 million. The Senior Discount Notes issued in the Offering were
subsequently exchanged for $444.1 million aggregate principal amount at
maturity of substantially identical Exchange Notes that had been registered
under the Securities Act in the Exchange Offer that expired on March 24, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) The following Consolidated Financial Statements of the
Company and independent auditor's report are included in Item 8 of this Form
10-K.
Report of Independent Public Accountants.
Company's Consolidated Balance Sheets as of December 31, 1996
and 1997.
Consolidated Statements of Operations for the Four Months
Ended April 30, 1995, the Eight Months Ended December 31, 1995
and the Years Ended December 31, 1996 and 1997.
Consolidated Statements of Cash Flows for the Four Months
Ended April 30, 1995, the Eight Months Ended December 31, 1995
and the Years Ended December 31, 1996 and 1997.
Consolidated Statements of Stockholders' (Deficit) Equity for
the Four Months Ended April 30, 1995, the Eight Months Ended
December 31, 1995 and the Years Ended December 31, 1996 and
1997.
Notes to Consolidated Financial Statements.
(a)(2) The following financial statement schedule is filed as part
of this report and is attached hereto as pages S-1 and S-2.
Independent Auditor's Report on the Financial Statement
Schedules.
Schedule II -- Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission either have been included
in the Consolidated Financial Statements of the Company or the notes thereto,
are not required under the related instructions or are inapplicable, and
therefore have been omitted.
(a)(3) The following exhibits are either provided with this Form
10-K or are incorporated herein by reference:
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<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated December 5, 1997, by and among KNOLOGY Holdings, Inc., KNOLOGY of Panama City,
Inc., Beach Cable, Inc. and L. Charles Hilton (Filed as Exhibit 2.1 to the Registration Statement on Form S-4, File
No. 333-43339 (the "Form S-4") and incorporated herein by reference).
3.1 Certificate of Incorporation of KNOLOGY Holdings, Inc. (Filed as Exhibit 3.1 to the Form S-4 and incorporated herein
by reference).
3.2 Amended and Restated Bylaws of KNOLOGY Holdings, Inc. (Filed as Exhibit 3.2 to the Form S-4 and incorporated herein
by reference).
4.1 Indenture dated as of October 22, 1997 between KNOLOGY Holdings, Inc. and United States Trust Company of New York,
as Trustee, relating to the 11-7/8% Senior Discount Notes Due 2007 of KNOLOGY Holdings, Inc. (Filed as Exhibit 4.1
to the Form S-4 and incorporated herein by reference).
4.2 Registration Rights Agreement, dated October 22, 1997, between KNOLOGY Holdings, Inc., the Placement Agents and
SCANA Communications, Inc. (Filed as Exhibit 4.2 to the Form S-4 and incorporated herein by reference).
4.3 Form of Senior Discount Note (contained in Indenture filed as Exhibit 4.1).
4.4 Form of Exchange Note (contained in Indenture filed as Exhibit 4.1).
10.1 Unit Purchase Agreement, dated as of October 16, 1997 between KNOLOGY Holdings, Inc. and SCANA Communications, Inc.
(Filed as Exhibit 10.1 to the Form S-4 and incorporated herein by reference).
10.2 Warrant Agreement, dated as of October 22, 1997, between KNOLOGY Holdings, Inc. and United States Trust Company of
New York (including form of Warrant Certificate) (Filed as Exhibit 10.2 to the Form S-4 and incorporated herein by
reference).
10.3 Warrant Registration Rights Agreement, dated as of October 22, 1997, between KNOLOGY Holdings, Inc. and United
States Trust Company of New York (Filed as Exhibit 10.3 to the Form S-4 and incorporated herein by reference).
10.4 Sub-Lease Indenture dated November 1, 1995 by and between J. Smith Lanier & Co. Financial Services, Inc. and ITC
Holding Company, Inc. (Filed as Exhibit 10.4 to the Form S-4 and incorporated herein by reference).
10.5 Lease Agreement dated April 15, 1996 by and between D.L. Jordan and American Cable Company, Inc. (Filed as Exhibit
10.5 to the Form S-4 and incorporated herein by reference).
10.6 Lease Agreement dated April 19, 1996 by and between B.E. Satterwhite and American Cable Company, Inc. (Filed as
Exhibit 10.6 to the Form S-4 and incorporated herein by reference).
10.7 Pole Attachment Agreement dated January 1, 1998 by and between Gulf Power Company and Beach Cable, Inc. (Filed as
Exhibit 10.7 to the Form S-4 and incorporated herein by reference).
</TABLE>
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<PAGE> 71
<TABLE>
<S> <C>
10.8 Lease Agreement dated August 19, 1996 by and between Vaughn/Taylor, L.L.C. and Montgomery Cablevision and
Entertainment, Inc. (Filed as Exhibit 10.8 to the Form S-4 and incorporated herein by reference).
10.9 Lease Agreement dated August 20, 1996 by and between William H. McLemore and Montgomery Cablevision and
Entertainment, Inc. (Filed as Exhibit 10.9 to the Form S-4 and incorporated herein by reference).
10.10 Lease Agreement dated November 7, 1996 by and between Samuel B. Hewitt and American Cable Company, Inc. (Filed as
Exhibit 10.10 to the Form S-4 and incorporated herein by reference).
10.11 Site Agreement dated November 19, 1996 by and between John Walter Stowers and Montgomery Cablevision and
Entertainment, Inc. (Filed as Exhibit 10.11 to the Form S-4 and incorporated herein by reference).
10.12 Office Lease Agreement dated February 15, 1997 by and between Scott P. Pinckard and Cybernet Holdings, Inc. (Filed
as Exhibit 10.12 to the Form S-4 and incorporated herein by reference).
10.13* Lease Agreement dated April 2, 1997 by and between Interstate Telephone Company and Cybernet Holding, Inc. (Filed as
Exhibit 10.13 to the Form S-4 and incorporated herein by reference).
10.14 Lease Agreement dated May 15, 1997 by and between Southern Boulevard Corporation and Cybernet Holding d/b/a
Montgomery Cablevision and Entertainment, Inc. (Filed as Exhibit 10.14 to the Form S-4 and incorporated herein by
reference).
10.15 Lease Agreement dated August 23, 1997 by and between Interstate Fibernet, Inc. and KNOLOGY Holdings, Inc. (Filed as
Exhibit 10.15 to the Form S-4 and incorporated herein by reference).
10.16* Telecommunications Facility Lease and Capacity Agreement, dated September 10, 1996, by and between Troup EMC
Communications, Inc. and Cybernet Holding, Inc. (Filed as Exhibit 10.16 to the Form S-4 and incorporated herein by
reference).
10.17 Master Pole Attachment Agreement dated January 12, 1998 by and between South Carolina Electric and Gas and KNOLOGY
Holdings, Inc. d/b/a/ KNOLOGY of Charleston (Filed as Exhibit 10.17 to the Form S-4 and incorporated herein by
reference).
10.18 Pole Attachment Agreement dated May 21, 1990 by and between the Georgia Power Company and American Cable Company
(Filed as Exhibit 10.18 to the Form S-4 and incorporated herein by reference).
10.19 License Agreement for Pole Attachments dated June 19, 1990 by and between South Central Bell Telephone Company and
Montgomery Cablevision and Entertainment, Inc. (Filed as Exhibit 10.19 to the Form S-4 and incorporated herein by
reference).
10.20 Agreement for Attachments of Cables, Amplifiers, and Associated Equipment for the Provision of Cable Television
Service dated March 1, 1993 by and between Alabama Power Company and Montgomery Cablevision and Entertainment, Inc.
(Filed as Exhibit 10.20 to the Form S-4 and incorporated herein by reference).
</TABLE>
- 69 -
<PAGE> 72
<TABLE>
<S> <C>
10.21* License Agreement for Pole Attachments and/or Conduit Occupancy dated July 28, 1993 by and between BellSouth
Telecommunications, Inc. d/b/a Southern Bell Telephone and Telegraph Company and American Cable Company. (Filed as
Exhibit 10.21 to the Form S-4 and incorporated herein by reference).
10.22* License Agreement dated September 29, 1995 by and between Montgomery Cablevision and Entertainment, Inc. and
American Communications Services of Montgomery, Inc. (Filed as Exhibit 10.22 to the Form S-4 and incorporated herein
by reference).
10.23* License Agreement dated January 17, 1996 by and between American Cable, Inc. and American Communication Services of
Columbus, Inc. (Filed as Exhibit 10.23 to the Form S-4 and incorporated herein by reference).
10.24* Addendum to License Agreement dated April 21, 1997 by and between American Cable, Inc. and American Communication
Services of Columbus, Inc. (Filed as Exhibit 10.24 to the Form S-4 and incorporated herein by reference).
10.25 Lease Agreement, dated December 5, 1997 by and between The Hilton Company and KNOLOGY of Panama City, Inc. (Filed as
Exhibit 10.25 to the Form S-4 and incorporated herein by reference).
10.26* Billing and Collection Services Agreement dated April 2, 1997 by and between Interstate Telephone Company and
Cybernet Holding, Inc. (Filed as Exhibit 10.26 to the Form S-4 and incorporated herein by reference).
10.27* Operator and Related Services Agreement dated April 14, 1997 by and between Eastern Telecom Inc. d/b/a Inter Quest
and Cybernet Holding, Inc. (Filed as Exhibit 10.27 to the Form S-4 and incorporated herein by reference).
10.28* Agreement for Telecommunication Services dated May 1, 1997 by and between Cybernet Holding, Inc. and DeltaCom, Inc.
(Filed as Exhibit 10.28 to the Form S-4 and incorporated herein by reference).
10.29* First Addendum to Service Agreement dated July 7, 1997 by and between KNOLOGY Holdings, Inc. and DeltaCom, Inc.
(Filed as Exhibit 10.29 to the Form S-4 and incorporated herein by reference).
10.30 Interconnection Agreement by and among BellSouth Communications, Inc., Cybernet Holding, Inc., American Cable, Inc.
and Montgomery Cablevision & Entertainment, Inc., dated April 15, 1997 (Filed as Exhibit 10.30 to the Form S-4 and
incorporated herein by reference).
10.31 Amendment to Interconnection Agreement by and among BellSouth Telecommunications, Inc., Cybernet Holding, Inc.,
American Cable, Inc. and Montgomery Cablevision & Entertainment, dated May 1, 1997. (Filed as Exhibit 10.31 to the
Form S-4 and incorporated herein by reference).
10.32 Second Amendment to Interconnection Agreement by and among BellSouth Telecommunications, Inc., Cybernet Holding,
Inc., American Cable, Inc. and Montgomery Cablevision & Entertainment, dated July 7, 1997 (Filed as Exhibit 10.32 to
the Form S-4 and incorporated herein by reference).
</TABLE>
- 70 -
<PAGE> 73
<TABLE>
<S> <C>
10.33 Commitment Letter from First Union National Bank to KNOLOGY Holdings, Inc., dated October 15, 1997 (Filed as Exhibit
10.33 to the Form S-4 and incorporated herein by reference).
10.33.1 Commitment Extension Letter from First Union National Bank to KNOLOGY Holdings, Inc., dated December 12, 1997 (Filed
as Exhibit 10.33.1 to the Form S-4 and incorporated herein by reference).
10.34 Certificate of Membership with National Cable Television Cooperative, dated January 29, 1996, of Cybernet Holding,
Inc. (Filed as Exhibit 10.34 to the Form S-4 and incorporated herein by reference).
10.35 Stockholders' Agreement among KNOLOGY Holdings, Inc. and Certain Stockholders Thereof dated as of December 8, 1995
(Filed as Exhibit 10.35 to the Form S-4 and incorporated herein by reference).
10.36 Amendment No. 1 to Stockholders' Agreement dated as of January 25, 1996 (Filed as Exhibit 10.36 to the Form S-4 and
incorporated herein by reference).
10.37 Amendment No. 2 to Stockholders' Agreement dated as of April 18, 1996 (Filed as Exhibit 10.37 to the Form S-4 and
incorporated herein by reference).
10.38 Amended and Restated Agreement Among Shareholders Among KNOLOGY Holdings, Inc. and Certain Shareholders thereof
dated as of July 28, 1997 (Filed as Exhibit 10.38 to the Form S-4 and incorporated herein by reference).
10.39 Ordinance (Harris County, Georgia) dated April 6, 1982 (Filed as Exhibit 10.39 to the Form S-4 and incorporated
herein by reference).
10.40 Ordinance (Harris County, Georgia) to Amend Cable Franchise Ordinance of April 6, 1982, dated November 5, 1996
(Filed as Exhibit 10.40 to the Form S-4 and incorporated herein by reference).
10.41 Ordinance (Bibb City, Georgia) dated October 5, 1990 (Filed as Exhibit 10.41 to the Form S-4 and incorporated herein
by reference).
10.42 Ordinance No. 88-53 (Columbus, Georgia) dated May 17, 1988 (Filed as Exhibit 10.42 to the Form S-4 and incorporated
herein by reference).
10.43 Ordinance No. 89-3 (Columbus, Georgia) dated January 10, 1989 (Filed as Exhibit 10.43 to the Form S-4 and
incorporated herein by reference).
10.44 Ordinance No. 16-90 (Montgomery, Alabama) dated March 6, 1990 (Filed as Exhibit 10.44 to the Form S-4 and
incorporated herein by reference).
10.45 Ordinance No. 50-76 (Montgomery, Alabama) (Filed as Exhibit 10.45 to the Form S-4 and incorporated herein by
reference).
10.45.1 Ordinance No. 9-90 (Montgomery, Alabama) dated January 16, 1990 (Filed as Exhibit 10.45.1 to the Form S-4 and
incorporated herein by reference).
10.46 Resolution No. 58-95 (Montgomery, Alabama) dated April 6, 1995 (Filed as Exhibit 10.46 to the Form S-4 and
incorporated herein by reference).
</TABLE>
- 71 -
<PAGE> 74
<TABLE>
<S> <C>
10.47 Resolution No. 92-7 (Panama City Beach, Florida) dated July 23, 1992 (Filed as Exhibit 10.47 to the Form S-4 and
incorporated herein by reference).
10.48 License (Bay County, Florida) dated January 5, 1993 (Filed as Exhibit 10.48 to the Form S-4 and incorporated herein
by reference).
10.49 Resolution No. 97-22 (Panama City Beach, Florida) dated December 3, 1997 (Filed as Exhibit 10.49 to the Form S-4 and
incorporated herein by reference).
10.50 Resolution No. 2075 (Bay County, Florida) dated November 18, 1997 (Filed as Exhibit 10.50 to the Form S-4 and
incorporated herein by reference).
10.51* Collocation Agreement between Interstate FiberNet and Cybernet Holding, Inc., dated July 1, 1997 (Filed as Exhibit
10.51 to the Form S-4 and incorporated herein by reference).
10.52* License Agreement for Pole Attachments and/or Conduit Occupancy in Florida dated September 15, 1993 between
BellSouth Telecommunications, Inc. d/b/a Southern Bell Telephone and Telegraph and Beach Cable, Inc. (Filed as
Exhibit 10.52 to the Form S-4 and incorporated herein by reference).
10.53 Ordinance No. 5999 (Augusta, Georgia) dated January 20, 1998.
10.54 Ordinance No. 1723 (Panama City, Florida) dated March 10, 1998.
11.1 Computation of Earnings Per Share of Common Stock.
12.1 Statement regarding Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of KNOLOGY Holdings, Inc. (Filed as Exhibit 21.1 to the Form S-4 and incorporated herein by reference).
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
</TABLE>
- ----------
* Confidential treatment has been granted. The copy filed as an exhibit omits
the information subject to the confidential treatment request.
(b) REPORTS ON FORM 8-K.
On February 17, 1998, the Company filed a Current Report on Form 8-K
to report the acquisition on December 5, 1997 of Beach Cable, Inc. and to
include the relevant financial statements of KNOLOGY of Panama City, Inc.,
including the relevant pro forma financial information for the Company.
(c) EXHIBITS
The Company hereby files as part of this Form 10-K the Exhibits listed
in the Index to Exhibits.
(d) FINANCIAL STATEMENT SCHEDULE
- 72 -
<PAGE> 75
The following financial statement schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are
inapplicable or the information required to be set forth therein is provided in
the Consolidated Financial Statements of the Company or notes thereto.
- 73 -
<PAGE> 76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized as of the 27th day
of March, 1998.
KNOLOGY HOLDINGS, INC.
By: /s/ William E. Morrow
-----------------------------------
William E. Morrow
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ O. GENE GABBARD Chairman of the Board and Director March 27, 1998
- ------------------------------------
O. Gene Gabbard
/s/ William E. Morrow President, Chief Executive Officer March 27, 1998
- ------------------------------------ and Director (Principal executive officer)
William E. Morrow
/s/ James K. McCormick Chief Financial Officer and Secretary March 27, 1998
- ------------------------------------ (Principal financial officer and principal
James K. McCormick accounting officer)
/s/ Donald W. Burton Director March 26, 1998
- ------------------------------------
Donald W. Burton
/s/ William H. Scott, III Director March 26, 1998
- ------------------------------------
William H. Scott, III
/s/ ANDREW M. WALKER Director March 27, 1998
- ------------------------------------
Andrew M. Walker
/s/ Campbell B. Lanier, III Director March 26, 1998
- ------------------------------------
Campbell B. Lanier, III
</TABLE>
- 74 -
<PAGE> 77
<TABLE>
<S> <C> <C>
/s/ Richard Bodman Director March 25, 1998
- ------------------------------------
Richard Bodman
Director March __, 1998
- ------------------------------------
L. Charles Hilton, Jr.
</TABLE>
- 75 -
<PAGE> 78
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
KNOLOGY HOLDINGS, INC.
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets---December 31, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the Four Months Ended April 30, 1995, the
Eight Months Ended December 31, 1995, and the Years Ended December 31, 1996 and 1997 . . . . . . . . F-4
Consolidated Statements of Cash Flows for the Four Months Ended April 30, 1995,
the Eight Months Ended December 31, 1995, and the Years Ended December 31, 1996 and 1997 . . . . . . F-5
Consolidated Statements of Stockholders' (Deficit) Equity for the Four Months Ended
April 30, 1995, the Eight Months Ended December 31, 1995, and the Years Ended
December 31, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE> 79
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
KNOLOGY Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of KNOLOGY
HOLDINGS, INC. (a Delaware corporation) AND SUBSIDIARIES (SUCCESSOR COMPANY) AND
KNOLOGY OF MONTGOMERY, INC. (an Alabama corporation) (PREDECESSOR COMPANY) as of
December 31, 1996 and 1997 and the related consolidated statements of
operations, stockholders' (deficit) equity, and cash flows for the four months
ended April 30, 1995, the eight months ended December 31, 1995 and the years
ended December 31, 1996 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of KNOLOGY Holdings, Inc. and
subsidiaries (Successor Company) and KNOLOGY of Montgomery, Inc. (Predecessor
Company) as of December 31, 1995 and 1996 and the results of their operations
and their cash flows for the four months ended April 30, 1995, the eight months
ended December 31, 1995 and the years ended December 31, 1996 and 1997 in
conformity with generally accepted accounting principles. As discussed in Note
1 to the financial statements, effective April 28, 1995, KNOLOGY Holdings, Inc.
acquired a majority ownership interest in KNOLOGY of Montgomery, Inc. in a
business combination accounted for as a purchase. As a result of this
acquisition, the financial information for the periods after the acquisition
is presented on a different cost basis than for the periods before the
acquisition and, therefore, is not comparable.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 6, 1998
F-2
<PAGE> 80
<TABLE>
<CAPTION>
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
December 31,
1996 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 83,092 $ 6,144,581
Marketable securities 0 227,880,923
Accounts receivable--trade, less allowance for
doubtful accounts of $23,342, and $108,529 885,463 1,607,859
in 1996, and 1997, respectively
Interest receivable--affiliate (Note 8) 1,345 0
Deferred tax assets (Note 6) 0 0
Prepaid expenses 280,920 37,060
------------ ------------
Total current assets 1,250,820 235,670,423
------------ ------------
PROPERTY AND EQUIPMENT:
Cable system and installation equipment 20,965,636 56,909,159
Test and office equipment 421,997 1,628,485
Automobiles and trucks 286,422 837,490
Production equipment 0 297,286
Buildings 0 1,936,035
Inventory, less allowance for shrinkage of
$30,000 in 1997 1,605,922 5,806,320
Leasehold improvements 170,272 324,270
------------ ------------
23,450,249 67,739,045
Less accumulated depreciation and amortization (1,973,040) (5,171,309)
------------ ------------
Property and equipment, net (Note 1) 21,477,209 62,567,736
COST IN EXCESS OF NET ASSETS ACQUIRED, NET OF ------------ ------------
ACCUMULATED AMORTIZATION OF $202,516, AND
$441,877 IN 1996, AND 1997, RESPECTIVELY (NOTE
2) 6,877,607 9,433,385
DEBT ISSUANCE COSTS, NET OF ACCUMULATED ------------ ------------
AMORTIZATION OF $121,652 IN 0 7,761,655
1997 (NOTE 3) ------------ ------------
ORGANIZATIONAL COSTS, NET OF ACCUMULATED
AMORTIZATION OF $157,535, AND $253,942 IN 326,590 701,106
1996, AND 1997, RESPECTIVELY ------------ ------------
OTHER 9,519 63,795
------------ ------------
Total assets $29,941,745 $316,198,100
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3) $1,027,873 $ 25,094
Accounts payable 1,894,178 5,817,733
Accounts payable--affiliate (Note 8) 7,073 452,346
Accrued liabilities 907,247 1,638,042
Unearned revenue 615,651 907,048
----------- ------------
Total current liabilities 4,452,022 8,840,263
NONCURRENT LIABILITIES:
Long-term notes payable (Note 3) 11,291,296 120,804
Long-term accrued interest payable 0 3,201,688
Bonds payable, net of discount of
$194,189,569 in 1997 0 249,910,431
----------- ------------
Total liabilities 15,743,318 253,232,923
----------- ------------
DEFERRED TAX LIABILITIES, NET OF ALLOWANCE OF
$2,475,223, AND $4,165,308 IN 1996, AND 1997,
RESPECTIVELY (NOTE 6) 0 0
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 5)
----------- ------------
WARRANTS (NOTE 3) 0 2,486,960
----------- ------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value
per share; 50,000 and 100,000 shares authorized,
17,092 and 49,985 shares issued and outstanding
in 1996 and 1997, respectively 171 500
Common stock, $.01 par value per share; 15,000
and 200,000 shares authorized, no shares issued
and outstanding in 1996 and 1997, respectively 0 0
Additional paid-in capital 18,509,218 65,060,712
Accumulated deficit (4,310,962) (13,402,495)
Unrealized losses on marketable securities 0 (20,763)
(Note 2) ------------ ------------
Total stockholders' equity 14,149,427 51,637,954
------------ ------------
Total liabilities and stockholders'
equity $29,941,745 $316,198,100
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 81
<TABLE>
<CAPTION>
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOUR MONTHS ENDED APRIL 30, 1995, THE EIGHT MONTHS ENDED DECEMBER 31, 1995,
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
PREDECESSOR
COMPANY SUCCESSOR COMPANY
------------ -------------------------------------------
Four Months Eight Months Year Year
Ended Ended Ended Ended
April 30, December 31, December 31, December 31,
1995 1995 1996 1997
------------ -------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Subscriber $ 811,103 $ 2,016,082 $ 4,682,666 $ 9,041,549
Miscellaneous 46,058 180,916 651,517 1,313,519
--------------- ------------- -------------- -------------
Total 857,161 2,196,998 5,334,183 10,355,068
--------------- ------------- -------------- -------------
OPERATING EXPENSES:
General and administrative 175,724 1,027,001 2,346,201 4,383,830
Programming charges 409,325 1,029,959 2,513,693 4,758,730
Depreciation and amortization 259,336 745,004 1,640,025 3,715,184
Field and technical 98,293 417,273 877,870 1,564,654
Sales and marketing 16,590 58,414 659,667 1,444,056
--------------- ------------- -------------- -------------
Total 959,268 3,277,651 8,037,456 15,866,454
--------------- ------------- -------------- -------------
OPERATING LOSS (102,107) (1,080,653) (2,703,273) (5,511,386)
--------------- ------------- -------------- -------------
OTHER INCOME AND EXPENSES:
Affiliate interest income (Note 8) 0 12,098 273,799 0
Other interest income 0 6,646 46,221 2,774,909
Affiliate interest expense (Note 8) (2,017) (58,856) 0 0
Other interest expense (19,861) (509,057) (1,055,498) (6,226,023)
Other income (expense), net 0 0 (60,000) (129,033)
--------------- ------------- -------------- -------------
Total (21,878) (549,169) (795,478) (3,580,147)
--------------- ------------- -------------- -------------
LOSS BEFORE MINORITY INTEREST AND INCOME TAX BENEFIT $(123,985) $(1,629,822) $(3,498,751) (9,091,533)
MINORITY INTEREST (NOTE 2) 0 109,837 0 0
--------------- ------------- -------------- -------------
LOSS BEFORE INCOME TAX BENEFIT (123,985) (1,519,985) (3,498,751) (9,091,533)
INCOME TAX BENEFIT 0 334,451 373,323 0
--------------- ------------- -------------- -------------
NET LOSS (123,985) (1,185,534) (3,125,428) (9,091,533)
PREFERRED STOCK DIVIDENDS (230,407) 0 0 0
--------------- ------------- -------------- -------------
NET LOSS AFTER PREFERRED STOCK DIVIDENDS $(354,392) $(1,185,534) $(3,125,428) $(9,091,533)
=============== ============= ============== =============
PRIMARY NET LOSS PER SHARE (NOTE 2):
Weighted average shares outstanding--7,520, 13,626,
and 28,835 shares in 1995, 1996, and 1997,
respectively $0.00 $(157.65) $(229.37) $(315.30)
=============== ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 82
<TABLE>
<CAPTION>
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOUR MONTHS ENDED APRIL 30, 1995, THE EIGHT MONTHS ENDED DECEMBER 31, 1995,
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
PREDECESSOR
COMPANY SUCCESSOR COMPANY
-------------- -------------------------------------------
Eight Months Year Year
Four Months Ended Ended Ended
Ended December 31, December 31, December 31,
April 30, 1995 1995 1996 1997
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(123,985) $(1,185,534) $ (3,125,428) $ (9,091,533)
--------- ----------- ------------ --------------
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 259,336 745,004 1,640,025 3,655,689
Loss on disposition of assets 0 0 21,370 23,464
Deferred income tax benefit 0 (334,451) (373,323) 0
Minority interest 0 (109,837) 0 0
Changes in current assets and liabilities:
Accounts receivable (11,069) (205,159) (512,337) (721,396)
Prepaid expenses 7,955 (86,156) (180,950) 244,199
Accounts payable 79,608 (246,687) (39,648) 4,361,740
Accrued liabilities and interest 28,528 372,966 293,394 163,317
Unearned revenue (96,297) 336,894 278,757 243,007
Other 0 (29,968) 133 1,345
--------- ----------- ------------ --------------
Total adjustments 268,061 442,606 1,127,421 7,971,365
--------- ----------- ------------ --------------
Net cash provided by (used in) operating activities 144,076 (742,928) (1,998,007) (1,120,168)
--------- ----------- ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements $ (42,504) $(1,291,080) $(14,416,135) $ (39,625,408)
Organizational cost expenditures, net of write-offs 0 (453,736) (20,133) (470,923)
Purchase of investments 0 0 (5,000) (1,346,150,712)
Proceeds from sales of investments 0 0 0 1,118,194,411
Proceeds from sales of property 0 0 0 69,152
--------- ----------- ------------ --------------
Net cash used in investing activities (42,504) (1,744,816) (14,441,268) (267,983,480)
--------- ----------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Advances to) repayments from affiliate 0 (4,255,836) 4,255,836 0
Proceeds from issuances of debt and short-term
borrowings, net of discount and issue costs on bonds 0 51,389 1,258,238 257,370,383
Principal payments on debt and short-term borrowings (104,889) (478,624) (160,900) (29,903,385)
Proceeds from initial capitalization of Successor Company 0 200,000 0 0
Proceeds from issuance of preferred stock, net of
related offering expenses 0 7,254,690 10,868,699 42,824,323
Accretion of discount on bonds 0 0 0 2,386,856
Proceeds from issuance of warrants 0 0 0 2,486,960
--------- ----------- ------------ --------------
Net cash (used in) provided by financing activities (104,889) 2,771,619 16,221,873 275,165,137
--------- ----------- ------------ --------------
NET (DECREASE) INCREASE IN CASH (3,317) 283,875 (217,402) 6,061,489
CASH AT BEGINNING OF PERIOD 19,936 16,619 300,494 83,092
--------- ----------- ------------ --------------
CASH AT END OF PERIOD $ 16,619 $ 300,494 $ 83,092 $ 6,144,581
--------- ----------- ------------ --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 22,027 $ 46,762 $ 1,016,039 $ 1,543,125
--------- ----------- ------------ --------------
Cash paid during the period for income taxes $ 0 $ 0 $ 0 $ 0
--------- ----------- ------------ --------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Preferred stock dividends $ 230,407 $ 0 $ 0 $ 0
========= =========== ============ ==============
Acquisition of Beach Cable:
Fair value of assets acquired, including goodwill 0 0 0 7,552,144
Preferred stock issued in connection with acquisitions 0 0 0 3,727,500
--------- ----------- ------------ --------------
Liabilities assumed 0 0 0 3,824,644
========= =========== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 83
<TABLE>
<CAPTION>
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE FOUR MONTHS ENDED APRIL 30, 1995, THE EIGHT MONTHS ENDED DECEMBER 31, 1995,
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
COMMON STOCK ADDITIONAL PREFERRED STOCK
---------------- PAID-IN ----------------
SHARES AMOUNT CAPITAL SHARES AMOUNT
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
BALANCE AT APRIL 30, 1995 1,000 $10 $ 6,563,598 197 $197
SUCCESSOR COMPANY:
INITIAL CAPITAL CONTRIBUTION 0 0 200,000 0 0
Acquisition of Predecessor Company (1,000) (10) (6,563,598) (197) (197)
Conversion of capital to preferred stock 0 0 (2) 20 2
Issuance of preferred stock, net of related
offering expenses of $65,310 0 0 7,254,617 7,500 73
------- ---------- ------------- --------- ---------
BALANCE AT DECEMBER 31, 1995 0 0 7,454,615 7,520 75
Issuance of preferred stock, net of related
offering expenses of $379,701 0 $ 0 $11,054,603 9,572 $ 96
Net loss 0 0 0 0 0
------- ---------- ------------- --------- ---------
BALANCE AT DECEMBER 31, 1996 0 0 18,509,218 17,092 171
Issuance of preferred stock, net of related
offering expenses of $99,677 0 0 $42,824,019 30,408 $304
0
Purchase of Beach Cable (Note 1) 0 0 3,727,475 2,485 25
Net loss 0 0 0 0 0
Unrealized loss on marketable securities 0 0 0 0 0
------- ---------- ------------- --------- ---------
BALANCE AT DECEMBER 31, 1997 0 $ 0 $65,060,712 49,985 $500
======= ========== ============= ========= =========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED TOTAL
TREASURY STOCK LOSS ON STOCKHOLDERS'
---------------- ACCUMULATED MARKETABLE (DEFICIT)
SHARES AMOUNT DEFICIT SECURITIES EQUITY
------ ------ ------- ---------- ------
<S> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
BALANCE AT APRIL 30, 1995 (5,104) $(255,200) $ (6,410,590) $ 0 $ (101,985)
SUCCESSOR COMPANY:
INITIAL CAPITAL CONTRIBUTION 0 0 0 0 200,000
Acquisition of Predecessor Company 5,104 255,200 6,410,590 0 101,985
Conversion of capital to preferred stock 0 0 0 0 0
Issuance of preferred stock, net of related
offering expenses of $65,310 0 0 0 0 7,254,690
-------- ---------- --------------- -------------- -------------
BALANCE AT DECEMBER 31, 1995 0 0 (1,185,534) 0 6,269,156
Issuance of preferred stock, net of related
offering expenses of $379,701 0 $ 0 $ 0 0 $ 11,054,699
Net loss 0 0 (3,125,428) 0 (3,125,428)
-------- ---------- --------------- -------------- -------------
BALANCE AT DECEMBER 31, 1996 0 0 (4,310,962) 0 14,198,427
Issuance of preferred stock, net of related
offering expenses of $99,677 0 $ 0 $ 0 $ 0 $ 42,824,323
Purchase of Beach Cable (Note 1) 0 0 0 0 3,727,500
Net loss 0 0 (9,091,533) 0 (9,091,533)
Unrealized loss on marketable securities 0 0 0 (20,763) (20,763)
-------- ---------- --------------- -------------- -------------
BALANCE AT DECEMBER 31, 1997 0 $ 0 $(13,402,495) $(20,763) $(51,637,954)
======== ========== =============== ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 84
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, AND 1997
1. ORGANIZATION AND NATURE OF BUSINESS
KNOLOGY Holdings, Inc. (formerly Cybernet Holding, Inc.) and its
subsidiaries (the "Company" or "Successor Company") provide residential and
business customers broadband communications services; including cable
television, telephone, and high-speed Internet access service, to various
areas in the southeastern United States. The Company was initially
capitalized as ITC Broadband Services, L.L.C. (subsequently changed to
CyberNet Holding, L.L.C.) in March 1995, at which time it was ultimately
wholly owned by the corporate predecessor of ITC Holding Company, Inc.
(together with such predecessor, "ITC Holding"). Due to subsequent equity
transactions (Note 7), the Company is no longer a consolidated subsidiary
of ITC Holding.
CyberNet Holding, L.L.C. was established for the purpose of the acquisition
of KNOLOGY of Montgomery, Inc., formerly, Montgomery Cablevision &
Entertainment ("KNOLOGY of Montgomery" or "Predecessor Company"), a provider
of cable television services in Montgomery, Alabama. This acquisition was
consummated on April 28, 1995 when the Company purchased the equity
interests of InterRedec, Inc. ("InterRedec") in KNOLOGY of Montgomery in
exchange for a note bearing interest at 9%, with principal and interest due
in five years (Note 3). The transaction was accounted for as a purchase. As
of December 31, 1995, the Company owned 80% of the common stock and
approximately 97% of the preferred stock of KNOLOGY of Montgomery. In
January 1996, the Company exchanged 200 shares of its preferred stock for
the 200 common shares and 5 preferred shares of KNOLOGY of Montgomery
F-7
<PAGE> 85
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
held by the minority shareholder and $14,000 in cash. As a result of this
exchange, KNOLOGY of Montgomery is now a wholly owned subsidiary of the
Company.
In August 1995, CyberNet Holding, L.L.C. established American Cable, L.L.C.
(95% owned by CyberNet Holding, L.L.C. and 5% owned by ITC Holding). On
September 29, 1995, American Cable, L.L.C. purchased certain assets of
American Cable Company Partnership and American Cable Company (collectively,
"American"), a provider of cable television services in Columbus, Georgia,
in exchange for a note bearing interest at 9%, with principal and interest
due in five years (Note 3). The transaction was accounted for as a purchase
(Note 9).
In November 1995, KNOLOGY of Columbus, Inc. (formerly American Cable, Inc.)
a Delaware corporation was established. In consideration for shares in
KNOLOGY of Columbus, CyberNet Holding, L.L.C. and ITC Holding conveyed their
ownership interests in American Cable, L.L.C. to KNOLOGY of Columbus.
In November 1995, the Company (a Delaware corporation) was established. In
December 1995, in exchange for shares of the Company's preferred stock, ITC
Holding conveyed its direct and indirect interests in CyberNet Holding,
L.L.C. and KNOLOGY of Columbus to the Company (Note 7).
CyberNet Holding L.L.C. and American Cable, L.L.C. were dissolved in
February and October 1996, respectively.
On December 5, 1997, the Company consummated the acquisition of Beach
Cable, Inc., a Florida corporation that owned and operated a cable
television system in Panama City Beach, Florida ("Beach Cable"). The
acquisition was effected pursuant to an Agreement and Plan of Merger dated
December 5, 1997 (the "Merger Agreement") by and among the Company, KNOLOGY
of Panama City, Inc., Beach Cable, and L. Charles Hilton, Jr., the sole
stockholder of Beach Cable, under which KNOLOGY of Panama City, Inc., a
Delaware corporation and a wholly-owned subsidiary of the Company, merged
(the "Merger") with and into Beach Cable. Beach Cable, the surviving
corporation in the Merger, was renamed KNOLOGY of Panama City, Inc. as of
the effective time of the Merger (the "Effective Time") and became a
wholly-owned subsidiary of the Company. At the Effective Time, all of the
issued and outstanding shares of Common Stock, no par value, of KNOLOGY of
Panama City were converted into 2,485 shares of preferred stock, par value
$.01 per share, of the Company valued at approximately $3.7 million.
Immediately following the Merger, the Company also contributed cash of
approximately $3.9 million to KNOLOGY of Panama City to repay an existing
note and related accrued interest to Hilton, Inc., a holding company owned
by
F-8
<PAGE> 86
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
L. Charles Hilton, Jr. The Merger has been accounted for under the purchase
method of accounting.
The following table summarizes the net assets purchased by the Company in
connection with its acquisitions of KNOLOGY of Montgomery, KNOLOGY of
Columbus and KNOLOGY of Panama City and the amount attributable to cost in
excess of net assets acquired (in thousands):
<TABLE>
<CAPTION>
KNOLOGY KNOLOGY KNOLOGY
OF OF OF PANAMA
MONTGOMERY COLUMBUS CITY TOTAL
---------- -------- ---- -----
<S> <C> <C> <C> <C>
Purchase price $6,000 $5,000 $3,728 $14,728
Assumption of note
payable (2,191) 0 0 (2,191)
Assumption of
preferred stock
dividends payable (1,107) 0 0 (1,107)
Net (assets) liabilities 1,002 (1,725) (933) (1,656)
------------ ------------ ------------- --------
Cost in excess of
net assets
acquired $3,704 $3,275 $2,795 $9,774
============ ============ ============= ========
</TABLE>
The acquisitions of these assets have been accounted for as noncash
transactions for purposes of the consolidated statements of cash flows.
The Company has experienced operating losses as a result of the expansion
of its broadband communications systems and services in new and existing
markets. The Company expects that its operating expenses and capital
expenditures will increase as it extends its broadband communications
systems to customers in these markets in accordance with its 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.
F-9
<PAGE> 87
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
As a result of the acquisition of KNOLOGY of Montgomery (Note 1), the
capital structure of and the basis of accounting for the Company differs
from those of KNOLOGY of Montgomery prior to the acquisition. Financial data
of the Company for reporting periods subsequent to April 30, 1995 (the
"Successor Period") reflect the acquisition under the purchase method of
accounting. Therefore, financial data of KNOLOGY of Montgomery prior to the
acquisition (the "Predecessor Period") generally will not be comparable to
that of the Company with respect to the items described below.
As a result of the acquisitions of KNOLOGY of Montgomery, Columbus, and
Panama City (Note 1), the statements of operations for the Successor Period
includes amortization of cost in excess of net assets acquired and interest
expense on debt incurred in connection with the acquisitions. Also, as a
result of purchase accounting, the fair values of the property and
equipment at the date of their acquisition became their new "cost" bases.
Accordingly, the depreciation of property and equipment for the Successor
Period is based on the newly established cost bases of these assets. The
other effects of purchase accounting in the Successor Period are not
significant.
The statements of operations, stockholders' (deficit) equity, and cash flows
for 1995 are divided between the four months ended April 30, 1995, when
InterRedec held the controlling interest in the Predecessor Company, and the
eight months ended December 31, 1995, when the Successor Company held the
controlling interest following the transfer of ownership discussed in Note
1. In addition, the financial statements as of December 31, 1995 and for the
eight months then ended include the accounts of KNOLOGY Holdings, Inc.,
CyberNet Holding, L.L.C., KNOLOGY of Columbus, American Cable, L.L.C., and
KNOLOGY of Montgomery. The equity share of KNOLOGY of Montgomery previously
not owned by the Company is reflected in the accompanying balance sheets and
statements of operations as minority interest. The financial statements as
of December 31, 1996 and for the year then ended include the accounts of
KNOLOGY Holdings, Inc., and KNOLOGY of Montgomery. All significant
intercompany transactions have been eliminated in consolidation.
As a result of the acquisition of KNOLOGY of Panama City, approximately one
month's operations of KNOLOGY of Panama City are included in the
accompanying statement of operations for the year ended December 31, 1997.
F-10
<PAGE> 88
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Certain prior year amounts have been reclassified to conform with the
current year presentation.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents. Cash
and cash equivalents are stated at cost, which approximates fair value.
MARKETABLE SECURITIES
The Company's marketable securities are categorized as available-for-sale
securities, as defined by the Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Unrealized holding gains and losses are reflected as a net amount in a
separate component of stockholders' equity until realized. For the purpose
of computing realized gains and losses cost is identified on a specific
identification basis. Securities available for sale at December 31, 1997
are comprised of $173,581,473 in commercial paper and $54,299,450 in U.S.
Government Agency securities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are calculated using the straight-line method over the estimated useful
lives of the assets, commencing when the asset is installed or placed in
service. Maintenance, repairs, and renewals are charged to expense as
incurred. The cost and accumulated depreciation of property and equipment
disposed of are removed from the related accounts, and any gain or loss is
included in or deducted from income. Depreciation and amortization are
provided over the estimated useful lives as follows:
F-11
<PAGE> 89
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<S> <C>
Buildings ...................................... 25 years
Cable system and installation equipment ........ 7-10 years
Production equipment ........................... 7 years
Test and office equipment ...................... 5-7 years
Automobiles and trucks ......................... 5 years
Leasehold improvements ......................... 5 years
</TABLE>
Inventories are valued at the lower of cost or market (determined on a
first-in, first-out basis) and include converter boxes and cable and
electronic cable hook-up equipment. These items are transferred to cable
system and installation equipment when installed.
Interest is capitalized in connection with the construction of the
Company's broadband network. The capitalized interest is recorded as part
of the asset to which it relates and is amortized over the asset's
estimated useful life. In 1997, $676,160 of interest cost was capitalized.
No interest was capitalized prior to 1997.
COST IN EXCESS OF NET ASSETS ACQUIRED
This amount represents the excess of cost over the fair value of the net
assets acquired by the Company in its purchases of KNOLOGY of Montgomery,
Columbus, and Panama City discussed in Note 1. These costs are being
amortized using the straight-line method over 40 years.
ORGANIZATIONAL COSTS
Organizational costs represent the direct costs, primarily legal and
payroll costs, incurred in the start-up of new markets. All indirect costs,
such as travel and entertainment, and other general and administrative
costs have been expensed as incurred. The deferred costs are amortized
using the straight-line method over a five-year period.
LONG-LIVED ASSETS
In 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and cost in excess of net assets acquired related
to those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The effect of adopting SFAS No.
121 was not material.
The Company periodically reviews the values assigned to long-lived assets
such as inventory, property and equipment, and cost in excess of net assets
acquired to
F-12
<PAGE> 90
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
determine whether any impairments are other than temporary. Management
believes that the long-lived assets in the accompanying balance sheets are
appropriately valued.
REVENUE RECOGNITION
Subscriber revenues are recognized in the month of service. Subscriber fees
billed in advance are included in the accompanying balance sheets as
unearned revenue and are deferred until the month the service is provided.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes, as
set forth in SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, deferred taxes are determined based on the difference
between the financial and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse. Deferred tax benefit represents the change in the deferred tax
asset and liability balances (Note 6).
NET LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share." That
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.
As the Company has no common stock outstanding, the convertible preferred
stock is assumed to be converted for purposes of this calculation. Diluted
net income (loss) per share gives effect to all potentially dilutive
securities. The Predecessor Company's net losses per share are not shown,
as they are not comparable with the Successor Company's.
<TABLE>
<CAPTION>
For the Years Ended December
--------------------------------------------------------------
1996 1997
--------------------------- -----------------------
Weighted Weighted
Net Average Net Loss Net Average Net Loss
Loss Shares Per Share Loss Shares Per Share
-------- -------- --------- -------- -------- ---------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Basic
net loss $(3,125) 14 $(229.37) $(9,092) 29 $(315.30)
-------- -------- --------- -------- -------- ---------
Diluted
net loss $(3,125) 14 $(229.37) $(9,092) 29 $(315.30)
-------- -------- --------- -------- -------- ---------
</TABLE>
SOURCES OF SUPPLIES
The Company attempts to maintain multiple vendors for each required product.
However, the Company currently only has one supplier for cable and
converters and several for remotes, which represent important components of
its system. If the suppliers are unable to meet the Company's needs as it
builds out its network infrastructure, then delays and increased costs in
the expansion of the Company's network infrastructure could result, which
would adversely affect operating results.
F-13
<PAGE> 91
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss
is limited due to advance billings to customers for services and the
ability to terminate access on delinquent accounts. The potential for
material credit loss is mitigated by the large number of customers with
relatively small receivable balances. The carrying amount of the Company's
receivables approximates their fair values.
3. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1997
--------------- ------------
<S> <C> <C>
Senior Discount Notes, with a face value of $444,100,000,
bearing interest at 11.875% beginning October 15, 2002, payable
semi-annually beginning April 15, 2003 with principal and any
unpaid interest due October 15, 2007 ................................ $ 0 $249,910,431
InterRedec, bearing interest at 9%, payable on March 31, 2000,
plus interest, unsecured (a) ........................................ 6,000,000 0
Francine, Inc., bearing interest at 9%, payable on September
29, 2000, plus interest, unsecured (b) .............................. 5,000,000 0
Sterling Bank, bearing interest at prime plus 1.5%, payable in
monthly installments of $1,425, plus interest, through May
1999, unsecured ..................................................... 36,316 0
Compass Bank, bearing interest at 8.75%, payable in monthly
installments of $1,673 through September 1998, secured .............. 31,659 0
SunTrust Bank, bearing interest at 8.25%, payable in monthly
installments of $828 through September 1997, secured ................ 6,828 0
</TABLE>
F-14
<PAGE> 92
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1997
--------------- ------------
<S> <C> <C>
First National Bank of West Point line of credit, bearing
interest at prime, maturing March 1997, unsecured ................... 900,000 0
Compass Bank, bearing interest at 9.25%, payable in monthly
installments of $5,426 through November 1999, secured ............... 170,000 0
First National Bank of West Point, note bearing interest at
8.5%, payable in monthly installments of $945 through March
1999, secured ....................................................... 23,200 0
Troup capitalized lease obligation, at a rate of 10%, payable
in quarterly installments of $6,304 through December 2006, .......... $ 151,166 $ 145,898
--------------- ------------
12,319,169 250,056,329
Less current maturities ............................................. 1,027,873 25,094
--------------- ------------
$11,291,296 $250,031,235
=============== ============
</TABLE>
(a) ITC Holding is a co-obligor under this note.
(b) ITC Holding is a guarantor of this note.
Following are maturities of long-term debt for each of the next five years
as of December 31, 1997:
<TABLE>
<S> <C>
1998 ............................. $ 25,094
1999 ............................. 12,174
2000 ............................. 13,438
2001 ............................. 14,833
2002 ............................. 16,374
Thereafter ....................... 444,163,985
------------
Total ................ $444,245,898
============
</TABLE>
The fair values of long-term debt exclusive of affiliated debt, including
current maturities, at December 31, 1996 and 1997 are estimated to be
approximately
F-15
<PAGE> 93
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$9,397,000 and $253,781,000, respectively, based on a valuation technique
that considers cash flows discounted at current rates.
In the fourth quarter of 1997, the company issued units consisting of
senior discount notes due 2007 and warrants to purchase Preferred Stock for
gross proceeds of approximately $250 million. The notes were offered at a
substantial discount from face value, with no interest payable for the first
five years. Approximately $2.5 million of the gross proceeds has been
allocated to the warrants. Each warrant allows the holder to purchase
.003734 shares of the Company's preferred stock. The Company incurred
approximately $7.9 million in costs to issue the senior discount notes.
These costs are being amortized at an effective rate over the life of the
notes. The indenture relating to the Notes contains certain covenants that,
among other things, limit the ablity of the Company to incur
indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
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 offering of units has been,
and will be, used to repay certain indebtedness of the Company, fund
expansion of the Company's business, and for additional working capital and
general corporate purposes.
On May 7, 1997, the Company signed a letter of intent with SCANA
Corporation ("SCANA") whereby SCANA agreed to provide the Company with a
revolving credit facility of up to $40 million (the "SCANA Credit
Facility") to fund construction for completion of its broadband network
in Montgomery, Alabama, and Columbus, Georgia, as well as up to $5 million
for expansion into other cities and for working capital. The SCANA Credit
Facility would be subject to receiving certain authorizations and approvals
and would allow monthly drawdowns of between $500,000 and $5 million.
Interest would accrue from the date of each drawdown on all outstanding
principal, plus any accrued but unpaid interest at 12% per annum. On
December 31, 1998, all outstanding amounts including unpaid interest would
automatically convert to a term loan, payable in quarterly installments to
be repaid over no more than five years. There would be no penalty for early
repayment. SCANA would also receive warrants to purchase preferred stock at
$1,500 per share in an amount equal to 10% of each drawdown plus any
incremental accrued interest. The Company would be responsible for legal
and filing fees incurred in connection with the SCANA Credit Facility up to
a maximum of $40,000.
On June 2, 1997, the Company borrowed $3 million under a promissory
note from SCANA at 12% interest with an original maturity of June 30, 1997.
In July 1997, and again in September 1997, the Company and SCANA amended
the promissory note agreement to increase the borrowings to $10 million and
to extend the maturity date until January 1, 1998. On September 29, 1997,
the Company borrowed an additional $1 million at 12% interest under an oral
agreement with SCANA with similar terms. Under the terms of the SCANA
Credit Facility discussed above, SCANA will receive warrants to purchase
753 shares of the Company's preferred stock. On October 24, 1997, the
Company repaid all of these borrowings.
On May 13, 1997, the Company obtained a $3 million bridge loan facility
from First National Bank of West Point (the "Bridge Facility") to provide
additional liquidity until long-term financing could be arranged. Interest
accrued at the prime rate (as announced by SunTrust Bank Atlanta) plus .5%
per annum on all outstanding principal amounts, plus accrued but unpaid
interest. As amended on September 18, 1997, the Bridge Facility was payable
on demand, with a final maturity date of December 15, 1997. On December 15,
1997, the Company repaid all of these borrowings.
The Company received a commitment letter for a $50 million five-year senior
secured credit facility (the "Proposed New Credit Facility") from First
Union National Bank and First Union Capital Markets Corp., which will be
used for working capital and other purposes, including capital expenditures
and permitted aquisitions. At the Company's option, interest will accrue
based on either the Alternate Base Rate plus applicable margin or the LIBOR
rate plus applicable margin. Obligations under the Proposed New Credit
Facility will be secured by substantially all tangible and intangible
assets of the Company and its current and future subsidiaries. The Proposed
New Credit Facility will include a number of covenants including, among
others, convenants limiting the ability of the Company and its subsidiaries
and their present and future subsidiaries to incur debt, create liens, pay
dividends, make distributions or stock repurchases, make certain
investments, engage in transactions with affiliates, sell assets, and
engage in certain mergers and acquisitions. The Proposed New Credit
Facility also will include covenants requiring compliance with certain
financial ratios on a consolidated basis. The Company has not entered into
definitive agreements as contemplated by the commitment letter.
4. OPERATING LEASES
The Company leases office space, utility poles, and other assets for varying
periods. Leases that expire are generally expected to be renewed or replaced
by other leases.
Future minimum rental payments required under the operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 ............................................. $175,412
1999 ............................................. 126,397
2000 ............................................. 135,257
2001 ............................................. 129,486
2002 ............................................. 136,261
--------
Total minimum lease payments ......... $702,813
========
</TABLE>
Total rental expense for all operating leases was approximately $27,000,
$66,000, $70,000, and $75,000 for the four months ended April 30, 1995, the
eight months ended December 31, 1995, and the years ended December 31, 1996
and 1997, respectively.
5. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
Effective January 1996, the Company joined the National Cable Television
Cooperative ("NCTC"), which coordinates programming for member cable
companies. In addition, the Company has entered into contracts with various
entities not in NCTC to provide programming to be aired by the Company. As
compensation for the
F-16
<PAGE> 94
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
programming, the Company pays a monthly fee to NCTC or the individual
supplier. The fee is generally based on the number of average subscribers
to the program, although some fees are adjusted based on the total number
of subscribers to the system and/or the system penetration percentage.
Certain contracts have minimum monthly fees. The Company estimates that it
will pay approximately $4.3 million in fees during 1998.
BUILD-OUT REQUIREMENTS
Under a franchise agreement with the city of Montgomery, Alabama, KNOLOGY of
Montgomery is subject to the terms and conditions specified by City
Ordinance Number 16-90. One such condition contains a build-out clause which
requires KNOLOGY of Montgomery to complete 200 miles of service per year
over the five-year period commencing March 6, 1990, with certain grace
periods specified in the agreement. Failure to meet the build-out
requirements would subject KNOLOGY of Montgomery to a penalty for each time
period during which KNOLOGY of Montgomery failed to meet the build-out
requirements and would permit the city of Montgomery to revoke its
franchise. In connection with the proposed sale of InterRedec's interest in
KNOLOGY of Montgomery discussed in Note 1, City Resolution Number 58-95 was
approved by the Montgomery City Council on April 4, 1995. KNOLOGY of
Montgomery met this extended time frame on August 4, 1997. In management's
opinion, KNOLOGY of Montgomery is currently in compliance with this
ordinance.
LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to various
litigation; however, in management's opinion, there are no legal proceedings
pending against the Company which would have a material adverse effect on
the financial position, results of operations, or liquidity of the Company.
6. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
significant components of deferred tax assets and liabilities as of December
31, 1996 and 1997 are as follows (in thousands):
F-17
<PAGE> 95
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ...... $3,875 $7,221
Other ................................. 92 279
Valuation allowance ................... (2,475) (4,165)
-------- -------
Total deferred tax assets ...... 1,492 3,335
Deferred tax liabilities--depreciation
and amortization ...................... (1,492) (3,335)
-------- -------
Net deferred tax liabilities ............. 0 0
Portion included in current assets ....... 0 0
-------- -------
Net deferred taxes ....................... $ 0 $ 0
======== =======
</TABLE>
The Company has available, at December 31, 1996 and 1997, unused operating
loss carryforwards of approximately $3,875,000 and $7,221,000, respectively,
expiring in various years from 2005 to 2012, unless utilized. Management has
recorded a valuation allowance of approximately $2,475,000 and $4,165,000 in
1996 and 1997, respectively, on these operating loss carryforwards, the
majority of which contain limitations on utilization.
A reconciliation of the income tax provision computed at statutory tax rates
to the income tax provision for the four months ended April 30, 1995, the
eight months ended December 31, 1995, and the years ended December 31, 1996
and 1997 is as follows:
F-18
<PAGE> 96
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
----------- ---------------------------
FOUR MONTHS EIGHT MONTHS
ENDED ENDED
APRIL 30, DECEMBER 31,
1995 1995 1996 1997
--------- ---------- -------- ------
<S> <C> <C> <C> <C>
Income tax benefit at
statutory rate ................ (34)% (34)% (34)% (34)%
State income taxes, net of
federal benefit ............... (2) (2) (2) (4)
Tax benefits recorded by ITC
Holding ....................... 0 14 0 0
Prior year actualization ......... 0 0 (6) 3
Goodwill ......................... 0 0 (1) 1
Deferred tax valuation allowance . 36 0 32 34
--------- ---------- -------- ------
0% (22)% (11)% 0%
========= ========== ======== ======
</TABLE>
A limited liability company is treated as a partnership for income tax
purposes. Therefore, through November 1995, the income tax benefits
generated by CyberNet Holding, L.L.C. and American Cable, L.L.C. were
recorded by ITC Holding as the corporate owner of these entities. Following
the formation of KNOLOGY of Columbus and CyberNet Holding, Inc. and the
subsequent transfer of ownership interests in CyberNet Holding, L.L.C. and
KNOLOGY of Columbus from ITC Holding in December 1995 (Notes 1 and 8), the
Company recognized the income tax benefits generated by its subsidiaries in
the accompanying statements of operations for the Successor Period.
Effective December 1995, the Company and its subsidiaries began filing a
consolidated federal income tax return. Each entity files separate state
income tax returns.
For the period following the acquisition of KNOLOGY of Montgomery by
CyberNet Holding, L.L.C. through the formation of the Company, KNOLOGY of
Montgomery filed separate income tax returns. Subsequent to the formation of
the Company, KNOLOGY of Montgomery is included in the Company's consolidated
federal income tax return.
F-19
<PAGE> 97
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. EQUITY INTERESTS
PREDECESSOR COMPANY STOCK TRANSACTIONS
On June 16, 1993, KNOLOGY of Montgomery effected a recapitalization whereby
InterRedec forgave $4,658,000 in debt in exchange for an increase in its
equity ownership, 5,104 shares of common stock were repurchased for total
proceeds of $255,200 from various shareholders, and the remaining
outstanding common and preferred shares were adjusted such that InterRedec
owned 80% of the outstanding $.01 par value common stock and approximately
97% of the outstanding $1 par value preferred stock. The repurchased shares
are reflected as treasury stock in the accompanying statements of
stockholders' (deficit) equity at cost.
The cost associated with the cumulative nonvoting preferred stock following
the recapitalization is $31,000 per share. The shares of cumulative
nonvoting preferred stock may be called for redemption by the Company at any
time, and upon such call, the Company shall pay $32,750 per share in cash
plus an amount equal to all dividends accrued and unpaid thereon to the date
of such redemption. The Company is accreting the difference between the
redemption price and the face value of the shares over a five-year period as
a charge to retained earnings and a corresponding increase to additional
paid-in capital. The holders of the cumulative nonvoting preferred stock
shall be entitled to receive, out of the unreserved and unrestricted surplus
or net profits of the corporation, cash dividends as declared by the board
of directors. No such dividends have been declared as of December 31, 1997,
but the Company is accruing dividends at a rate of prime plus 2%. The
preferred stock has no conversion privileges. For the eight months ended
December 31, 1995 and the years ended December 31, 1996 and 1997, these
preferred stock accretion and dividend amounts were eliminated in
consolidation.
SUCCESSOR COMPANY CAPITAL TRANSACTIONS
The Successor Company has authorized 200,000 shares of $.01 par value common
stock and 100,000 shares of $.01 par value convertible preferred stock. In
December 1995, the Company offered 7,780 shares of preferred stock for
subscription at $1,000 per share. At December 31, 1995, subscriptions had
been accepted for 7,520 shares and consideration of $1,000 per share had
been received. As additional consideration for 4,000 shares, ITC Holding
conveyed its direct and indirect ownership interests in CyberNet Holding,
L.L.C. and KNOLOGY of Columbus to the Company. In January 1996, the
remaining subscriptions for 260 shares were accepted. Included in this
amount are 200 shares which were exchanged for the minority interest of
KNOLOGY
F-20
<PAGE> 98
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of Montgomery (Note 1). In April 1996, the Company offered and accepted
9,312 shares of preferred shares for subscription at $1,200 per share. In
February 1997, the Company offered and accepted 8,960 shares of preferred
stock for subscription at $1,200 per share. Additionally, in October 1997,
the Company offered and accepted 21,448 shares of preferred stock for
subscription at $1,500 per share. In December 1997, in conjunction with the
acquisition of KNOLOGY of Panama City (Note 1), the Company issued 2,485
shares of preferred stock valued at $1,500 per share. The amount of the
consideration paid in excess of the par value, net of expenses incurred in
connection with each issuance, is included in additional paid-in capital on
the accompanying balance sheets. Each share of convertible preferred stock
is automatically convertible into common stock on a one-for-one basis at the
earlier of either the effective date of a public offering of common stock by
the Company or on December 8, 2005. In the event of liquidation of the
Company, whether voluntary or involuntary, the holders of convertible
preferred stock are entitled to receive preferential distributions of
$1,000, $1,200, or $1,500 per share (depending on when the stock was issued)
before any distributions to common stockholders. The holders of the
preferred stock are not entitled to any other preferences, including
dividends.
SUCCESSOR COMPANY STOCKHOLDERS' AGREEMENT
The Company entered into a stockholders' agreement (the "Stockholders'
Agreement"), dated as of December 8, 1995 and amended as of January 25,
1996, with all of the stockholders of the Company. None of the parties to
the Stockholders' Agreement may transfer any class or series of capital
stock of the Company or any right or option to acquire any share of capital
stock of the Company held by such party to third parties (subject to limited
exceptions) without having offered rights of first refusal to purchase such
securities to the Company. The Stockholders' Agreement will irrevocably
terminate upon the consummation of an initial public offering.
SUCCESSOR COMPANY STOCK OPTION PLAN
Under the Company's 1995 stock option plan (the "Stock Option Plan"), as
adopted in December 1995, 1,144 shares of common stock are reserved and
authorized for issuance upon the exercise of the options. All employees of
the Company are eligible to receive options under the Stock Option Plan. The
Stock Option Plan is administered by the compensation and stock option
committee of the board of directors. Options granted under the Stock Option
Plan are intended to qualify as "incentive stock options" under Section 422
of the Internal Revenue Code of 1986, as amended. All options were
granted at an exercise price equal to the estimated fair value of the
common stock at the dates of grant as determined by the board of directors
based on equity transactions and other analyses. The options expire ten
years from the date of grant.
F-21
<PAGE> 99
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Options for 40% of the 110.11 shares of common stock granted to one
executive officer became exercisable on January 1, 1997 and an additional
20% are exercisable annually thereafter through January 1, 2000. Options
for 40% of the 72.7 shares granted to one other executive officer and
another employee become exercisable on January 1, 1998 and an additional
20% are exercisable annually thereafter through January 1, 2001. On October
29, 1996 options for an additional 13 shares were issued to this employee,
exercisable on the same vesting schedule. The remaining options become
exercisable as to 40% two years from the date of issuance and as to an
additional 20% annually for the three following years.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting
for all of their employee stock compensation plans. However, it also allows
an entity to continue to measure compensation cost for those plans using the
method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
electing to remain with the accounting methodology required by APB Opinion
No. 25 must make pro forma disclosures of net income and, if presented,
earnings per share as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation plans
under APB Opinion No. 25, under which no compensation cost has been
recognized by the Company. However, the Company has computed, for pro forma
disclosure purposes, the value of all options for shares of the Company's
common stock to employees of the Company using the minimum value option
pricing model and the following weighted average assumptions in 1996 and
1997:
F-22
<PAGE> 100
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1996 1997
----------- ----------
<S> <C> <C>
Risk-free interest rate .... 6.31% 6.43%
Expected dividend yield .... 0% 0%
Expected lives ............. Seven years Seven years
Expected forfeiture rate ... 7% 7%
</TABLE>
The weighted average fair value of options granted was $1,200 and $1,266 for
1996 and 1997, respectively. The total value of options for the Company's
stock granted to employees of the Company during 1996 and 1997 was computed
as approximately $154,000 and $304,000, respectively, which would be
amortized on a pro forma basis over the five-year vesting period of the
options. If the Company had accounted for these plans in accordance with
SFAS No. 123, the Company's net loss for the year ended December 31,1997
would have increased as follows:
<TABLE>
<CAPTION>
AS
REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net loss for the year ended
December 31, 1996 .......... $(3,125,428) $(3,155,917)
Net loss for the year ended
December 31, 1997 .......... $(9,091,533) $(9,188,862)
Earnings per share for the year
ended December 31, 1996 .... $(229.37) $(231.61)
Earnings per share for the year
ended December 31, 1997 .... $(315.30) $(318.67)
</TABLE>
A summary of the status of the Company's stock option plan at December 31,
1997 is presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
SHARES SHARE
---------- ---------
<S> <C> <C>
Outstanding at December 31, 1995 0 $ 0
Granted ............................ 502.95 1,200
Forfeited .......................... 150.97 1,200
----------
Outstanding at December 31, 1996 351.98 1,200
==========
Granted ............................ 842.56 1,266
Forfeited .......................... 106.26 1,200
----------
Outstanding at December 31, 1997 1,088.28 1,251
==========
</TABLE>
F-23
<PAGE> 101
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. RELATED-PARTY TRANSACTIONS
Following the recapitalization of KNOLOGY of Montgomery (Note 7), InterRedec
and KNOLOGY of Montgomery entered into a revolving credit agreement and note
up to $2,000,000. In connection with the Company's purchase of InterRedec's
interest in KNOLOGY of Montgomery (Note 1), the Company assumed this note
payable to InterRedec. For the four months ended April 30, 1995, interest on
the note payable was forgiven as part of the sale. During the Successor
Period, the note and the related interest expense were eliminated for
consolidation purposes.
ITC Holding occasionally provides certain administrative services, such as
legal and tax planning services, for the Company. The costs of these
services are charged to the Company based primarily on the salaries and
related expenses for certain of the ITC Holding executives and an estimate
of their time spent on projects specific to the Company. ITC Holding also
leases office space to the Company in West Point, Georgia. For the period
from inception (March 10, 1995) through December 31, 1995 and the years
ended December 31, 1996 and 1997, the Company recorded $1,000, $24,000, and
$31,000 in selling, operations, and administrative expenses related to these
services. In the opinion of management, the methodology used to calculate
the amounts charged to the Company is reasonable. Additionally, during 1997,
ITC Holding paid several invoices related to the construction of the
Company's building. At December 31, 1997, there is approximately $419,000
related to these payments included in Accounts Payable--Affiliate in the
Company's balance sheet.
Certain of ITC Holding's other wholly owned or majority-owned subsidiaries
provide the Company with various services and/or receive services provided
by the Company. These entities include Interstate Telephone Company and
Valley Telephone Company, which provide local and long-distance telephone
services; ITC/\DeltaCom, Inc., which provides long-distance and related
services and which leases capacity on certain of its fiber routes, and
InterCall, Inc., which provides conference calling services. ITC Holding
also holds equity investments in the following entities which do business
with the Company: PowerTel, Inc., which provides cellular services, and
MindSpring Enterprises, Inc. ("MindSpring"), which is a regional provider of
Internet access. In management's opinion, the Company's transactions with
these affiliated entities are arm's-length transactions.
F-24
<PAGE> 102
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For the period from inception (March 10, 1995) through December 31, 1995 and
the years ended December 31, 1996 and 1997, the Company received services
from these affiliated entities in the amounts of $14,000, $48,000, and
$247,000, respectively, which are reflected in selling, operations, and
administration expenses in the Company's statements of operations. In
addition, in 1996 and 1997, the Company received services from these
affiliated entities in the amount of $11,000 and $13,000, respectively,
which is reflected in field and technical expenses in the Company's
statement of operations. At December 31, 1996 and 1997, amounts payable for
these services of $7,000 and $33,000, respectively, are recorded in the
Company's balance sheets as accounts payable--affiliate.
In December 1996 and 1997, the Company invested $5,000 and $55,000,
respectively, in an airplane co-owned by ITC Holding and several of its
subsidiaries and other affiliated entities.
Advances to affiliate which were outstanding for the majority of 1996
represent excess funds from the issuance of the Company's convertible
preferred stock which were loaned to ITC Holding at an annual interest rate
of 7%. The Company recorded interest income of approximately $274,000 for
the year ended December 31, 1996, on these advances, of which approximately
$1,000 is reflected as interest receivable--affiliate in the accompanying
balance sheets as of December 31, 1996. The advances were repaid in December
1996.
Relatives of the stockholders of ITC Holding are stockholders and employees
of the Company's insurance provider. The costs charged to the Company for
insurance services were approximately $36,000 and $134,000 for the years
ended December 31, 1996 and 1997, respectively.
In 1995, an affiliate constructed fiber routes on behalf of the Company in
Auburn, Alabama. The Company intends to develop the Auburn, Alabama, area in
the future; however, since the exact plans and timing for development are
uncertain, the Company recorded the $62,830 costs of constructing these
routes as field and technical expense for the eight months ended December
31, 1995. This affiliate also provided certain engineering and
construction-related management services to the Company in 1995. The Company
was not billed for these services, which are estimated to have a value of
approximately $50,000.
The chief executive officer of an affiliate served from July 15, 1996 to
February 20, 1997 as president and chief executive officer of the Company.
He served in his capacity as chief executive officer and president of the
Company at the request of the Company and ITC Holding and received no
compensation from the
F-25
<PAGE> 103
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company for the year ended December 31, 1996. The value of his services
provided through February 20, 1997 is estimated to total approximately
$20,000.
9. ACQUISITIONS
As discussed in Note 1, in 1995, the Company acquired certain assets of
American Cable Company Partnership and American Cable Company in a
transaction accounted for as a purchase (the "Acquisition").
The assets acquired are now held by KNOLOGY of Columbus and have been
included in the consolidated financial statements since October 1, 1995. The
following unaudited pro forma results of operations for the year ended
December 31, 1995 assumes the Acquisition occurred on January 1, 1994. The
pro forma information is presented for informational purposes only and may
not be indicative of the actual results of operations had the Acquisition
occurred on the assumed date, nor is the information necessarily indicative
of future results of operations.
<TABLE>
<CAPTION>
Year Ended December 31,
1995
----------
<S> <C>
Operating revenues $4,192,781
Income before extraordinary items (2,343,846)
Net income (2,343,846)
Earnings per share (a) (311.68)
(a) Earnings per share is computed
using 7,520 as number of shares
outstanding.
</TABLE>
As discussed in Note 1, in 1997, the Company acquired Beach Cable, Inc. in a
transaction accounted for as a purchase (the "Acquisition")
The merged company, now KNOLOGY of Panama City has been included in the
consolidated financial statements since December 5, 1997. The following
unaudited pro forma results of operations for the years ended December 31,
1996 and 1997 assumes the Acquisition occurred on January 1, 1996. The pro
forma information is presented for informational purposes only and may not
be indicative of the actual results of operations had the Acquisition
occurred on the assumed date, nor is the information necessarily indicative
of future results of operations.
F-26
<PAGE> 104
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
Operating revenues $6,837,586 $11,990,403
Income before extraordinary items (4,690,518) (10,183,585)
Net income (4,690,518) (10,183,585)
Earnings per share (a) (291.14) (326.99)
(a) Earnings per share is computed using 10,006 and 31,143 as
number of shares outstanding in 1996 and 1997,
respectively.
</TABLE>
10. SUBSEQUENT EVENTS
The Company's cable franchises in Augusta, Georgia and Panama City, Florida
were awarded in January 1998 and March 1998, respectively. The Company's
application for a cable franchise in Columbia County, Georgia was approved
in March 1998.
F-27
<PAGE> 105
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing
standards, the financial statements of KNOLOGY Holdings, Inc. included in this
Annual Report on Form 10-K and have issued our report thereon dated March 6,
1998. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule II--Valuation
and Qualifying Accounts ("Schedule II") is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic financial
statements. The Schedule II has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 6, 1998
S-1
<PAGE> 106
SCHEDULE II
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FOUR MONTHS ENDED APRIL 30, 1995,
THE EIGHT MONTHS ENDED DECEMBER 31, 1995,
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
------- -------
FOUR MONTHS EIGHT MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
APRIL 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Allowance for doubtful accounts,
balance at beginning of year $ 4,147 $ 931 $ 17,113 $ 23,342
Addition charged to cost and 367,527
expense 16,754 36,848 81,082
Deductions (19,970) (20,666) (74,853) (282,341)
---------- --------- --------- ----------
Allowance for doubtful accounts,
balance at end of year $ 931 $ 17,113 $ 23,342 $ 108,528
========== ========= ========= ==========
</TABLE>
S-2
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated December 5, 1997, by and among KNOLOGY Holdings, Inc., KNOLOGY of Panama City,
Inc., Beach Cable, Inc. and L. Charles Hilton (Filed as Exhibit 2.1 to the Registration Statement on Form S-4, File
No. 333-43339 (the "Form S-4") and incorporated herein by reference).
3.1 Certificate of Incorporation of KNOLOGY Holdings, Inc. (Filed as Exhibit 3.1 to the Form S-4 and incorporated herein
by reference).
3.2 Amended and Restated Bylaws of KNOLOGY Holdings, Inc. (Filed as Exhibit 3.2 to the Form S-4 and incorporated herein by
reference).
4.1 Indenture dated as of October 22, 1997 between KNOLOGY Holdings, Inc. and United States Trust Company of New York, as
Trustee, relating to the 11-7/8% Senior Discount Notes Due 2007 of KNOLOGY Holdings, Inc. (Filed as Exhibit 4.1 to the
Form S-4 and incorporated herein by reference).
4.2 Registration Rights Agreement, dated October 22, 1997, between KNOLOGY Holdings, Inc., the Placement Agents and SCANA
Communications, Inc. (Filed as Exhibit 4.2 to the Form S-4 and incorporated herein by reference).
4.3 Form of Senior Discount Note (contained in Indenture filed as Exhibit 4.1).
4.4 Form of Exchange Note (contained in Indenture filed as Exhibit 4.1).
10.1 Unit Purchase Agreement, dated as of October 16, 1997 between KNOLOGY Holdings, Inc. and SCANA Communications, Inc.
(Filed as Exhibit 10.1 to the Form S-4 and incorporated herein by reference).
10.2 Warrant Agreement, dated as of October 22, 1997, between KNOLOGY Holdings, Inc. and United States Trust Company of New
York (including form of Warrant Certificate) (Filed as Exhibit 10.2 to the Form S-4 and incorporated herein by
reference).
10.3 Warrant Registration Rights Agreement, dated as of October 22, 1997, between KNOLOGY Holdings, Inc. and United States
Trust Company of New York (Filed as Exhibit 10.3 to the Form S-4 and incorporated herein by reference).
10.4 Sub-Lease Indenture dated November 1, 1995 by and between J. Smith Lanier & Co. Financial Services, Inc. and ITC
Holding Company, Inc. (Filed as Exhibit 10.4 to the Form S-4 and incorporated herein by reference).
10.5 Lease Agreement dated April 15, 1996 by and between D.L. Jordan and American Cable Company, Inc. (Filed as Exhibit
10.5 to the Form S-4 and incorporated herein by reference).
10.6 Lease Agreement dated April 19, 1996 by and between B.E. Satterwhite and American Cable Company, Inc. (Filed as
Exhibit 10.6 to the Form S-4 and incorporated herein by reference).
</TABLE>
<PAGE> 108
<TABLE>
<S> <C>
10.7 Pole Attachment Agreement dated January 1, 1998 by and between Gulf Power Company and Beach Cable, Inc. (Filed as
Exhibit 10.7 to the Form S-4 and incorporated herein by reference).
10.8 Lease Agreement dated August 19, 1996 by and between Vaughn/Taylor, L.L.C. and Montgomery Cablevision and
Entertainment, Inc. (Filed as Exhibit 10.8 to the Form S-4 and incorporated herein by reference).
10.9 Lease Agreement dated August 20, 1996 by and between William H. McLemore and Montgomery Cablevision and Entertainment,
Inc. (Filed as Exhibit 10.9 to the Form S-4 and incorporated herein by reference).
10.10 Lease Agreement dated November 7, 1996 by and between Samuel B. Hewitt and American Cable Company, Inc. (Filed as
Exhibit 10.10 to the Form S-4 and incorporated herein by reference).
10.11 Site Agreement dated November 19, 1996 by and between John Walter Stowers and Montgomery Cablevision and
Entertainment, Inc. (Filed as Exhibit 10.11 to the Form S-4 and incorporated herein by reference).
10.12 Office Lease Agreement dated February 15, 1997 by and between Scott P. Pinckard and Cybernet Holdings, Inc. (Filed as
Exhibit 10.12 to the Form S-4 and incorporated herein by reference).
10.13* Lease Agreement dated April 2, 1997 by and between Interstate Telephone Company and Cybernet Holding, Inc. (Filed as
Exhibit 10.13 to the Form S-4 and incorporated herein by reference).
10.14 Lease Agreement dated May 15, 1997 by and between Southern Boulevard Corporation and Cybernet Holding d/b/a Montgomery
Cablevision and Entertainment, Inc. (Filed as Exhibit 10.14 to the Form S-4 and incorporated herein by reference).
10.15 Lease Agreement dated August 23, 1997 by and between Interstate Fibernet, Inc. and KNOLOGY Holdings, Inc. (Filed as
Exhibit 10.15 to the Form S-4 and incorporated herein by reference).
10.16* Telecommunications Facility Lease and Capacity Agreement, dated September 10, 1996, by and between Troup EMC
Communications, Inc. and Cybernet Holding, Inc. (Filed as Exhibit 10.16 to the Form S-4 and incorporated herein by
reference).
10.17 Master Pole Attachment Agreement dated January 12, 1998 by and between South Carolina Electric and Gas and KNOLOGY
Holdings, Inc. d/b/a/ KNOLOGY of Charleston (Filed as Exhibit 10.17 to the Form S-4 and incorporated herein by
reference).
10.18 Pole Attachment Agreement dated May 21, 1990 by and between the Georgia Power Company and American Cable Company
(Filed as Exhibit 10.18 to the Form S-4 and incorporated herein by reference).
10.19 License Agreement for Pole Attachments dated June 19, 1990 by and between South Central Bell Telephone Company and
Montgomery Cablevision and Entertainment, Inc. (Filed as Exhibit 10.19 to the Form S-4 and incorporated herein by
reference).
10.20 Agreement for Attachments of Cables, Amplifiers, and Associated Equipment for the Provision of Cable Television
Service dated March 1, 1993 by and between Alabama Power
</TABLE>
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Company and Montgomery Cablevision and Entertainment, Inc. (Filed as Exhibit 10.20 to the Form S-4 and incorporated
herein by reference).
10.21* License Agreement for Pole Attachments and/or Conduit Occupancy dated July 28, 1993 by and between BellSouth
Telecommunications, Inc. d/b/a Southern Bell Telephone and Telegraph Company and American Cable Company. (Filed as
Exhibit 10.21 to the Form S-4 and incorporated herein by reference).
10.22* License Agreement dated September 29, 1995 by and between Montgomery Cablevision and Entertainment, Inc. and American
Communications Services of Montgomery, Inc. (Filed as Exhibit 10.22 to the Form S-4 and incorporated herein by
reference).
10.23* License Agreement dated January 17, 1996 by and between American Cable, Inc. and American Communication Services of
Columbus, Inc. (Filed as Exhibit 10.23 to the Form S-4 and incorporated herein by reference).
10.24* Addendum to License Agreement dated April 21, 1997 by and between American Cable, Inc. and American Communication
Services of Columbus, Inc. (Filed as Exhibit 10.24 to the Form S-4 and incorporated herein by reference).
10.25 Lease Agreement, dated December 5, 1997 by and between The Hilton Company and KNOLOGY of Panama City, Inc. (Filed as
Exhibit 10.25 to the Form S-4 and incorporated herein by reference).
10.26* Billing and Collection Services Agreement dated April 2, 1997 by and between Interstate Telephone Company and Cybernet
Holding, Inc. (Filed as Exhibit 10.26 to the Form S-4 and incorporated herein by reference).
10.27* Operator and Related Services Agreement dated April 14, 1997 by and between Eastern Telecom Inc. d/b/a Inter Quest and
Cybernet Holding, Inc. (Filed as Exhibit 10.27 to the Form S-4 and incorporated herein by reference).
10.28* Agreement for Telecommunication Services dated May 1, 1997 by and between Cybernet Holding, Inc. and DeltaCom, Inc.
(Filed as Exhibit 10.28 to the Form S-4 and incorporated herein by reference).
10.29* First Addendum to Service Agreement dated July 7, 1997 by and between KNOLOGY Holdings, Inc. and DeltaCom, Inc. (Filed
as Exhibit 10.29 to the Form S-4 and incorporated herein by reference).
10.30 Interconnection Agreement by and among BellSouth Communications, Inc., Cybernet Holding, Inc., American Cable, Inc.
and Montgomery Cablevision & Entertainment, Inc., dated April 15, 1997 (Filed as Exhibit 10.30 to the Form S-4 and
incorporated herein by reference).
10.31 Amendment to Interconnection Agreement by and among BellSouth Telecommunications, Inc., Cybernet Holding, Inc.,
American Cable, Inc. and Montgomery Cablevision & Entertainment, dated May 1, 1997. (Filed as Exhibit 10.31 to the
Form S-4 and incorporated herein by reference).
10.32 Second Amendment to Interconnection Agreement by and among BellSouth Telecommunications, Inc., Cybernet Holding, Inc.,
American Cable, Inc. and Montgomery Cablevision & Entertainment, dated July 7, 1997 (Filed as Exhibit 10.32 to the
Form S-4 and incorporated herein by reference).
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10.33 Commitment Letter from First Union National Bank to KNOLOGY Holdings, Inc., dated October 15, 1997 (Filed as Exhibit
10.33 to the Form S-4 and incorporated herein by reference).
10.33.1 Commitment Extension Letter from First Union National Bank to KNOLOGY Holdings, Inc., dated December 12, 1997 (Filed
as Exhibit 10.33.1 to the Form S-4 and incorporated herein by reference).
10.34 Certificate of Membership with National Cable Television Cooperative, dated January 29, 1996, of Cybernet Holding,
Inc. (Filed as Exhibit 10.34 to the Form S-4 and incorporated herein by reference).
10.35 Stockholders' Agreement among KNOLOGY Holdings, Inc. and Certain Stockholders Thereof dated as of December 8, 1995
(Filed as Exhibit 10.35 to the Form S-4 and incorporated herein by reference).
10.36 Amendment No. 1 to Stockholders' Agreement dated as of January 25, 1996 (Filed as Exhibit 10.36 to the Form S-4 and
incorporated herein by reference).
10.37 Amendment No. 2 to Stockholders' Agreement dated as of April 18, 1996 (Filed as Exhibit 10.37 to the Form S-4 and
incorporated herein by reference).
10.38 Amended and Restated Agreement Among Shareholders Among KNOLOGY Holdings, Inc. and Certain Shareholders thereof dated
as of July 28, 1997 (Filed as Exhibit 10.38 to the Form S-4 and incorporated herein by reference).
10.39 Ordinance (Harris County, Georgia) dated April 6, 1982 (Filed as Exhibit 10.39 to the Form S-4 and incorporated herein
by reference).
10.40 Ordinance (Harris County, Georgia) to Amend Cable Franchise Ordinance of April 6, 1982, dated November 5, 1996 (Filed
as Exhibit 10.40 to the Form S-4 and incorporated herein by reference).
10.41 Ordinance (Bibb City, Georgia) dated October 5, 1990 (Filed as Exhibit 10.41 to the Form S-4 and incorporated herein
by reference).
10.42 Ordinance No. 88-53 (Columbus, Georgia) dated May 17, 1988 (Filed as Exhibit 10.42 to the Form S-4 and incorporated
herein by reference).
10.43 Ordinance No. 89-3 (Columbus, Georgia) dated January 10, 1989 (Filed as Exhibit 10.43 to the Form S-4 and incorporated
herein by reference).
10.44 Ordinance No. 16-90 (Montgomery, Alabama) dated March 6, 1990 (Filed as Exhibit 10.44 to the Form S-4 and incorporated
herein by reference).
10.45 Ordinance No. 50-76 (Montgomery, Alabama) (Filed as Exhibit 10.45 to the Form S-4 and incorporated herein by
reference).
10.45.1 Ordinance No. 9-90 (Montgomery, Alabama) dated January 16, 1990 (Filed as Exhibit 10.45.1 to the Form S-4 and
incorporated herein by reference).
10.46 Resolution No. 58-95 (Montgomery, Alabama) dated April 6, 1995 (Filed as Exhibit 10.46 to the Form S-4 and
incorporated herein by reference).
</TABLE>
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<TABLE>
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10.47 Resolution No. 92-7 (Panama City Beach, Florida) dated July 23, 1992 (Filed as Exhibit 10.47 to the Form S-4 and
incorporated herein by reference).
10.48 License (Bay County, Florida) dated January 5, 1993 (Filed as Exhibit 10.48 to the Form S-4 and incorporated herein by
reference).
10.49 Resolution No. 97-22 (Panama City Beach, Florida) dated December 3, 1997 (Filed as Exhibit 10.49 to the Form S-4 and
incorporated herein by reference).
10.50 Resolution No. 2075 (Bay County, Florida) dated November 18, 1997 (Filed as Exhibit 10.50 to the Form S-4 and
incorporated herein by reference).
10.51* Collocation Agreement between Interstate FiberNet and Cybernet Holding, Inc., dated July 1, 1997 (Filed as Exhibit
10.51 to the Form S-4 and incorporated herein by reference).
10.52* License Agreement for Pole Attachments and/or Conduit Occupancy in Florida dated September 15, 1993 between BellSouth
Telecommunications, Inc. d/b/a Southern Bell Telephone and Telegraph and Beach Cable, Inc. (Filed as Exhibit 10.52 to
the Form S-4 and incorporated herein by reference).
10.53 Ordinance No. 5999 (Augusta, Georgia) dated January 20, 1998.
10.54 Ordinance No. 1723 (Panama City, Florida) dated March 10, 1998.
11.1 Computation of Earnings Per Share of Common Stock.
12.1 Statement regarding Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of KNOLOGY Holdings, Inc. (Filed as Exhibit 21.1 to the Form S-4 and incorporated herein by reference).
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
</TABLE>
- ---------
* Confidential treatment has been granted. The copy filed as an exhibit
omits the information subject to the confidential treatment request.
<PAGE> 1
EXHIBIT 10.53
ORDINANCE NO. 5999
AN ORDINANCE GRANTING A FRANCHISE TO KNOLOGY HOLDINGS, INC.,
AUTHORIZING IT TO INSTALL, MAINTAIN AND OPERATE A SYSTEM FOR
THE TRANSMISSION OF AUDIO, VOICE, DATA AND/OR VIDEO SIGNALS
OVER, ACROSS AND UNDER PUBLIC STREETS AND RIGHTS OF WAY IN
AUGUSTA, GEORGIA UNDER CERTAIN CONDITIONS AND RESTRICTIONS; TO
REPEAL CONFLICTING ORDINANCES, AND FOR OTHER PURPOSES.
THE AUGUSTA-RICHMOND COUNTY COMMISSION HEREBY ORDAINS:
SECTION 1. DEFINITIONS.
For the purpose of this Ordinance, the following terms,
phrases, words and their derivations shall have the meanings given herein
unless more specifically defined within other sections of this ordinance. When
not inconsistent with the content, words used in the present tense include the
future tense, and words in the single number include the plural number. The
word "shall" is always mandatory and not merely directory.
(a) "Augusta" means the City of Augusta, Georgia (which
includes all of Richmond County, Georgia), a political subdivision of the State
of Georgia.
(b) "CATV System" means a community antenna television
system and related cable or fiber optic networks for transmission of audio
and/or video signals by cable or other means and such related services as
Grantee may choose to provide in connection with cable television services.
(c) "Commission" means the Augusta-Richmond County
Commission.
(d) "Franchise" is the authorization, and any renewal
thereof, issued by the Commission, as franchising authority, whether such
authorization is designated as a franchise,
<PAGE> 2
permit, license, resolution, contract, certificate, agreement or otherwise, for
Grantee to construct, install and operate the System in the public streets,
alleys, roads, and rights of way identified in said Franchise.
(e) "Grantee" is Knology Holdings, Inc., and its
permitted successors and assigns.
(f) "Gross Revenues" shall mean (1) revenues collected by
Grantee from subscribers for cable television services provided in Augusta, and
(2) monthly recurring revenues from subscribers for local telephone services
provided in Augusta, in each case excluding (i) penalty or other fees received
for late payments or cancelled checks, (ii) revenues received from advertising,
(iii) taxes, fees, assessments or similar charges collected by the Grantee on
behalf of any governmental agency (including without limitation the franchise
fees collected pursuant to Section 2), (iv) installation, connection,
disconnection or other non-recurring fees charged to subscribers, (v) all
revenues from equipment sold, leased or rented to subscribers upon subscribers'
premises; (vi) all toll and long distance revenues (whether Interlata,
Intralata or international) and (vii) all revenues related to Internet content.
(g) "Person" is any person, firm, partnership, trust,
joint stock company, association, corporation, company, governmental entity or
organization of any kind.
(h) "Rights of Way" shall mean all present and future
streets within the limits of Augusta.
(i) "Street" shall mean the entire width between the
boundary lines of every highway, alley, street, avenue, bridge, viaduct,
tunnel, and causeway in Augusta, dedicated or devoted to public use.
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<PAGE> 3
(j) "System" shall mean, collectively, the CATV System
and the Telecommunications System.
(k) "Telecommunications System" shall mean a system and
network which provides voice and data communications, including without
limitation local exchange telephone services, roll and long distance services
(Interlata, Intralata, or international), data services (including
Internet-related services) and operator services.
SECTION 2. CONSIDERATION.
The grant of the right, privilege and franchise under this Ordinance has been
determined to be in the best interest of the citizens of Augusta and shall be in
accordance with the terms and conditions set forth herein. The Grantee shall
annually pay to Augusta a fee of three percent (3%) of Gross Revenues as
defined in this Agreement. Said annual fee shall, for each year of the term of
this Franchise, be paid quarterly with each quarterly payment becoming due
within forty-five (45) days of the end of each of the months of March, June,
September and December hereafter. Within 60 days of the end of each December,
the Grantee shall also file a statement executed by Grantee's chief executive
officer which shall certify the amount of the Gross Revenues and the Franchise
fee for the previous calendar year. All Franchise payments or fees provided
herein and the statement referred to above shall be considered delinquent if
not delivered to Augusta within (10) days of the due date as specified herein
and shall be subject to penalty at the rate of one and one-half percent
(1-1/2%) of all amounts due per calendar month or any portion thereof in which
the payment of such amount remains delinquent. In the event any such
delinquent fees are collected through the services of an attorney, Grantee
shall pay, in addition thereto, all costs of collection including reasonable
attorney's fees.
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<PAGE> 4
Notwithstanding the foregoing, the Grantee agrees that (a) with respect to the
CATV System, it will agree to increase the franchise fees for cable television
services (up to any applicable legal limits) if the Commission takes action to
increase the franchise fees for the other CATV companies who use the Streets
and Rights of Way of Augusta and (b) with respect to its Telecommunications
System, it will agree to modify the basis upon which franchise fees for
telecommunications services are determined if the Commission takes action to
modify the basis upon which the franchise fees for the other local exchange
carriers in Augusta are determined.
SECTION 3. GRANT OF AUTHORITY AND TERM.
(a) Grant of Authority.
(1) There is hereby granted, subject to the terms
and conditions of this Franchise, to Grantee the nonexclusive right and
privilege to have, own, acquire, construct, expand, reconstruct, maintain,
repair, use and operate the System in, along, across, on, over, through, above
and under the Streets and Rights of Way of Augusta.
(2) Except as otherwise provided herein, this
Ordinance is granted to Grantee solely for the purpose of directly serving its
end-user customers.
(3) This Ordinance does not require Grantee to
provide ubiquitous service throughout all of Augusta as a public service
provider. Notwithstanding the foregoing, the Grantee agrees that, within ten
years of the date of the grant of this Franchise, it will deploy its System in
such a manner that it is capable of providing service to at least 85% of the
residents of Augusta.
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<PAGE> 5
(4) Nothing herein contained shall ever be held
or construed to confer upon Grantee, its successors and/or assigns, exclusive
rights or privileges of any nature whatsoever.
(b) Term. This Franchise is granted for an initial term
of fifteen (15) years from and after the date this Ordinance is adopted by the
Commission. The original term of this Franchise shall be automatically
extended for successive additional five-year periods unless one of the parties
hereto shall give nine (9) months' written notice to the other party of its
intention not to extend this Franchise (or any extension thereof) on these
terms and conditions. Notwithstanding such notice, the City and Grantee agree
to renegotiate in good faith changes proposed by either party which would apply
to a renewal or extension of this Franchise so as to insure continuity of
service to the public.
SECTION 4. CONDITIONS OF USE.
(a) Prior to beginning any work in any public streets or
rights of way, the Grantee shall obtain from the Augusta-Richmond County
Engineering Department, the Augusta-Richmond County License & Inspection
Department and the Augusta-Richmond County Trees and Landscape Department any
permits which may be required by Augusta or any other governing authority for
the construction and operation of the System. The Grantee shall not
unnecessarily obstruct or impair traffic upon any street, road or other public
way of Augusta and shall comply with all of the Commission's rules and
regulations designed to prevent damage to trees and shrubbery on or adjacent to
such public streets or rights of way which may be caused by installation and
operation of the System. Upon making an opening in any public way, street,
sidewalk or road as authorized by this Franchise for the purpose of laying,
constructing,
5
<PAGE> 6
repairing and/or maintaining the System and any related facility or equipment,
the Grantee shall, without unnecessary delay, replace and restore same to its
former condition as nearly as possible, and in full compliance with the
provisions of Augusta's policies, rules, regulations and/or ordinances. The
Grantee shall re-sod disturbed grassed areas and replace all excavated areas to
their original or better condition in order to minimize the disruption of
public property.
(b) The Grantee shall provide safe passageway for
pedestrians and vehicles through, in and around the work site areas. The
Grantee shall meet all local and State requirements for traffic control and
notify Augusta at least 24 hours prior to the commencement of work or the
accessing of Augusta conduit, except in cases of emergency.
(c) In all sections of Augusta where the cables, wires or
other like facilities of public utilities are placed underground, Grantee shall
place its cable, wires or other like facilities underground to the maximum
extent that existing technology reasonably permits Grantee to do so.
(d) The Grantee shall file with Augusta-Richmond County
Engineering Department true and correct as-built maps or plats of all existing
and proposed cable plant construction and the types of equipment and facilities
installed or constructed, properly identified and described as to the type of
equipment and facility by appropriate symbols and marks which shall include
annotations of all public ways, streets, road and conduits where the work is to
be undertaken. Maps shall be drawn in a scale and in such detail so as to
allow proper review and interpretation by the Engineering Department and the
Trees and Landscape Department, and the same will be filed with Augusta not
less than ten (10) working days before any excavation or cable plant
construction commences.
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<PAGE> 7
(e) If, at any time during the period of this Franchise,
Augusta shall lawfully elect to vacate, relocate, abandon, alter, reconstruct
or change the grade of any street, sidewalk, alley or other public way
including any related drainage and utility areas, the Grantee, upon reasonable
notice from Augusta, shall remove, relay and relocate its wires, cables and
other fixtures and equipment at its own expense and within reasonable time
schedules established by Augusta. Should Grantee refuse or fail to remove its
equipment or plant as provided for herein within 45 days after written
notification, Augusta shall have the right to do such work or cause it to be
done and the full cost thereof shall be chargeable to the Grantee, or in the
alternative, to consider such failure by the Grantee to remove its equipment or
plant as abandonment of all ownership rights in said property.
(f) Grantee shall maintain an office within the present
limits of Augusta. Grantee shall always keep and maintain Augusta-specific
books, records, contracts, accounts, documents and papers for its operation in
this office. Additionally, all as-built maps, plats, records, inventories and
books of the Grantee, insofar as they show values and location of existing
property, shall be kept and maintained in said office and preserved for use, if
necessary, in connection with any future valuation of the property of the
Grantee. In lieu of physical custody of the forgoing records in Grantee's
Augusta office, Grantee may hold the records in a corporate office located
elsewhere, provided that any and all records which may be requested by
employees or agents of Augusta shall be delivered to Grantee's Augusta office
and made available to the requester within five (5) business days from the date
requested. For the purposes of this Section, the date requested shall be the
date a written request is delivered to the
7
<PAGE> 8
Grantee's Augusta office, and unaltered photocopies of requested documents may
be delivered in lieu of original records.
(g) Grantee shall keep Augusta fully informed as to all
material matters in connection with or affecting the construction,
reconstruction, removal, maintenance, operation and repair of the System,
Grantee's accounting methods and procedures in connection therewith and the
recording and reporting by Grantee of all revenues and uncollectible accounts.
(h) Grantee shall keep complete and accurate books of
account and records of its business and operations, pursuant to this Franchise
Ordinance in accordance with generally accepted accounting principles. If
required by the FCC, Grantee shall use the system of accounts and the forms of
books, accounts, records, and memoranda prescribed by appropriate FCC
regulations, and as may be further described herein. The Commission may
require the keeping of additional records or accounts which are reasonably
necessary for purposes of identifying, accounting for and reporting Gross
Revenues and uncollectible accounts for purposes determining the annual fees to
be paid by Grantee pursuant to this Agreement. Grantee shall keep its books of
accounts and records in such a way that breakdowns of revenues are available by
type of service within Augusta.
(i) Grantee shall report to the Commission such other
information relating to the Grantee as the Commission may consider useful and
shall comply with the Commission's determination of forms for reports, the time
for reports, the frequency with which any reports are to be made, and if
reports are to be made under oath.
(j) Grantee shall provide the Commission with access at
reasonable times and for reasonable purposes, to examine, audit, review, and/or
obtain copies of the papers, books,
8
<PAGE> 9
accounts, documents, maps, plans and other records of Grantee pertaining to
this Franchise Ordinance. Grantee shall fully cooperate in making available
its records and otherwise assisting in these activities.
(k) The Commission may at any time make inquiries
pertaining to Grantee's operation of the System within Augusta. Grantee shall
respond to such inquiries on a timely basis.
(l) Grantee shall, upon request, provide the Commission
with copies of notices of all petitions, applications, communications and
reports submitted by Grantee to the FCC, Securities and Exchange Commissions
and the Georgia Public Service Commission or their successor agencies, relating
to any matters affecting the use of Augusta's Streets and Rights of Way and/or
the System authorized pursuant to this Franchise ordinance.
(m) Upon termination by any Subscriber of the Grantee's
services, Grantee shall comply with all applicable state and federal laws and
regulations regarding the removal of its facilities and equipment from the
premises of said Subscriber upon said Subscriber's request.
(n) Charges for services offered to the public by Grantee
shall comply with all applicable state and federal laws and regulations
regarding subscriber rates. Grantee shall provide notice to the Commission
prior to any rate change, and shall maintain on file with said Commission a
schedule of the current rates and fees charged for its services offered to the
public.
(o) Grantee shall install and maintain its wires, cables,
fixtures and other equipment in accordance with the requirements of all
applicable Augusta codes, ordinances and
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<PAGE> 10
regulations, and in such a manner that they will not interfere with any
existing installations of Augusta or the operation of a public utility serving
Augusta.
(p) All structures and all lines, equipment and
connections in, over, under and upon the Streets, sidewalks, alleys and public
ways or places of Augusta, wherever situated or located, shall at all times be
kept and maintained in a safe and suitable condition, and in good order and
repair.
(q) No poles or other wire-holding structures shall be
erected by Grantee without prior written approval of the Augusta-Richmond
County Engineering Department with regard to location, height, type and other
pertinent considerations. Any poles and wire-holding structures of Grantee
erected pursuant to this subsection shall be moved or modified by Grantee at
its sole expense, upon reasonable notice, whenever the Engineering Department
has determined that the public convenience would be enhanced thereby.
SECTION 5. SAFETY REQUIREMENTS.
(a) The Grantee shall at all times employ ordinary care
and shall install and maintain in use commonly accepted methods and devices for
preventing failures and accidents which are likely to cause damage or injury to
the public or to constitute a nuisance. Grantee shall install such equipment
and employ such personnel to maintain its facilities so as to assure efficient
service, and shall have the equipment and personnel necessary to make repairs
promptly. Grantee shall interrupt service only for good cause and for the
shortest time possible.
(b) The Grantee shall install and maintain the System in
accordance with the requirements of applicable building codes and regulations
of Augusta and the statutes and regulations of appropriate Federal and State
agencies, including but not limited to the Federal
10
<PAGE> 11
Communications Commission and the U.S. Army Corps of Engineers, which may now
be in effect or enacted, and in such a manner that will not interfere with any
installations of Augusta or the operation of any public utility serving
Augusta.
(c) The System, wherever situated, or located, shall at
all times be kept and maintained in a safe, operating condition and in good
order and repair.
SECTION 6. LIABILITY AND INDEMNIFICATION.
(a) By acceptance of this Franchise and right, Grantee
agrees that it shall indemnify, protect and hold forever harmless Augusta, its
elected officials, officers, agents, representatives and employees, and their
successors, legal representatives and assigns, from any and all claims,
liabilities, losses, costs, judgments, penalties, damages and expenses
(including reasonable attorney's fees and expenses of litigation incurred in
the defense of any such claim), arising out of or relating to the installation,
operation or maintenance by the Grantee of the System, or the Grantee's failure
to perform any of the obligations of this Franchise, including but not limited
to claims for injury or death to any person or persons, or damages to any
property, as may be incurred by or asserted against Augusta, its elected
officials, officers, agents, representatives and/or employees, directly or
indirectly, by reason of the installation, operation or maintenance by the
Grantee of the System within Augusta.
(b) The Grantee shall pay, and, by acceptance of this
Franchise, the Grantee specifically agrees that it will pay all damages and
penalties which Augusta may legally be required to pay as a result of copyright
infringements by Grantee and all other damages or penalties arising from
Grantee's installation, operation or maintenance of the System authorized
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<PAGE> 12
herein, whether or not any act or omission complained of is authorized, allowed
or prohibited by this Franchise.
(c) The Grantee shall pay, and by its acceptance of this
Franchise, specifically agrees that it will pay, all expenses incurred by
Augusta in defending itself with regard to all damages and penalties mentioned
in subsection (b) above. These expenses shall include all out-of-pocket
expenses, including reasonable attorneys fees and expenses of litigation.
(d) The Grantee shall maintain, and by its acceptance of
this Franchise, specifically agrees that it will provide throughout the term of
this Franchise, workers compensation insurance in such amounts of coverage as
required by the State of Georgia and liability insurance coverage with regard
to all damages mentioned in subsections (a) and (b) above in the following
minimum amounts, whichever is greater:
(1) General Liability Insurance - public
liability including premises, products and completed operations.
(a) Bodily injury liability $1,000,000 each
person $2,000,000 each occurrence
(b) Property damage Liability $1,000,000 each
occurrence.
(c) Or, in lieu of (a) and (b) above, bodily
injury and property damage $2,000,000 combined single limit.
(2) Comprehensive - Automobile Liability
Insurance including owned, non-owned and hired vehicles.
(a) Bodily injury liability $1,000,000 each
person $2,000,000 each occurrence
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(b) Property damage liability $1,000,000 each
occurrence,
(c) Or, in lieu of (a) and (b) above, bodily
injury and property damage $2,000,000 combined single limit.
(e) Grantee agrees that all insurance contracts providing
any of the above required coverage will be issued by one or more insurance
carriers duly licensed to do business in the State of Georgia.
(f) Grantee shall furnish the Commission at least
annually (and at such other times as may be reasonably required by the
Commission) a certificate from the insurance carrier(s) providing such
insurance coverage certifying that such coverage is in full force and effect.
Such certificates shall be in such form as is approved by the Commission.
SECTION 7. CITY RIGHTS IN FRANCHISE.
(a) The Grantee shall at all times comply with all
reasonable requirements, regulations, laws and ordinances now in force, and
which may hereafter be adopted by the Commission and be applicable to the
construction, repair or maintenance of the System or use of Augusta-owned
conduit.
(b) The following events shall constitute an "Event of
Default" under this Franchise:
(1) Grantee breaches any material covenant set
forth in this Franchise;
(2) Grantee becomes insolvent, unable or
unwilling to pay its legal debts, or is adjudged a bankrupt;
(3) Grantee practices any fraud or deceit upon
Augusta; or
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(4) Grantee fails to begin construction of the
System within one hundred eighty (180) days from the date this Franchise
Ordinance is adopted by the Commission and to continue such construction
without unreasonable delay or interruption until completed.
Augusta's right to terminate this Franchise may be exercised
only after delivery of a written notice of an Event of Default to Grantee and a
60 day period for Grantee to cure such Event of Default, except for any Event
of Default involving the payment of Franchise Fees or failing to provide any
insurance coverage required hereunder in which event said 60 day period shall
be reduced to five (5) business days. Notwithstanding the foregoing, this
Franchise shall not be terminated (i) unless Grantee has had the opportunity to
present its case before a meeting of the Commission and (ii) Grantee is given a
reasonable period of time (not to be less than sixty (60) days) to transition
toward the termination of the Franchise and, at its option, to seek a purchaser
for the System.
(c) The right is hereby reserved to Augusta to adopt, in
addition to the provisions contained herein and in existing applicable
ordinances, such additional regulations of general application to all similarly
situated Franchises as it shall find necessary in the exercise of its police
power; provided, that such regulation, by ordinance or otherwise, shall be
reasonable and not in conflict with the rights herein granted.
(d) At the Commission's request, Grantee shall provide
the Augusta government with the use of fiber capacity for the transmission of
data for non-commercial governmental purposes, at a fifty percent (50%)
discount off of the retail rate for similar services (but in no event shall
such prices be less than the Grantee's cost). The Grantee agrees that it will
make available to Augusta one channel for non-commercial governmental or
educational
14
<PAGE> 15
programming provided by Augusta, at no charge to Augusta. The Grantee shall
have the right, from time to time, to use any unused time on such channel.
(e) Augusta shall have the right during the term of this
Franchise to install and maintain, free of charge, upon the poles which are
owned by Grantee and which are used in the System, any wire or pole fixtures
necessary for its police alarm system, on the condition that such wire and pole
fixtures do not interfere with the operations of Grantee.
(f) Augusta shall have the right, when the Commission in
its sole discretion finds it necessary or appropriate, to hold a public hearing
with regard to this Franchise, and Grantee shall make representatives available
to attend any such hearing.
SECTION 8. ACCEPTANCE.
This Franchise and the rights, privileges and authority hereby
granted, shall take effect and be in force from and after enactment of this
Ordinance and execution by the Mayor and Clerk of Commission, provided that
within 15 days after the date of the enactment of this Ordinance, the Grantee
shall file with the person specified in Section 10 herein its unconditional
acceptance of this Franchise, which acceptance shall include its agreement to
comply with and abide by all its provisions, terms and conditions. Such
acceptance and agreement shall be in writing, duly executed by or on behalf of
the Grantee and accompanied by an insurance certificate as specified in Section
6 unless these documents or evidence thereof have been previously filed with
the Clerk of Commission.
SECTION 9. TRANSFER OF TITLE.
(a) The Grantee shall not transfer this Franchise to
another person without prior written approval of Augusta, provided that such
approval will not be unreasonably withheld
15
<PAGE> 16
or delayed and further provided that this Franchise may be transferred, without
such approval, to an affiliate of Grantee or to a purchaser or successor of all
or substantially all of the assets of the System, if such purchaser or
successor agrees in writing to be bound by the terms and conditions of this
Franchise. This provision shall not be construed as requiring Augusta's
approval of secured financing arrangements.
(b) The Grantee, without the advance written consent of
Augusta (which consent shall not be unreasonably withheld or delayed), shall
not lease any of the Rights of Way, the System, plant, facilities or conduit
space it uses in connection with the System to any non-affiliated person or
entity.
SECTION 10. NOTICE.
For the purpose of giving notice as provided for in this
Ordinance, the Grantee's address is declared to be:
Knology Holdings, Inc.
312 West 8th Street
West Point, GA 31833
Attention: President
Augusta's address shall be:
Augusta-Richmond County Commission
Eighth Floor, Municipal Bldg. (I 1)
530 Greene Street
Augusta, Georgia 30911
Attention: Charles R. Oliver, Administrator
Unless Augusta is notified in writing to the contrary, the
placing of notices in the United States Mail addressed to the Grantee as set
forth above by registered or certified mail, return receipt requested, shall
constitute compliance with the provisions of this Section.
16
<PAGE> 17
SECTION 11. SEVERABILITY.
If any section, subsection, sentence, clause, phrase or
portion of this Ordinance is for any reason held invalid, unenforceable or
unconstitutional by any court of competent jurisdiction, such portion shall be
deemed a separate, distinct, independent, and severable provision and such
holding shall not affect the validity of the remaining portions hereof.
SECTION 12. CONTROLLING LAW
This Franchise shall be interpreted and construed in
accordance with the laws of the State of Georgia.
SECTION 13. VENUE
All claims, disputes and other matters in question between the
Grantee and Augusta arising out of or relating to the Agreement, or the breach
thereof, shall be decided in the Superior Court of Richmond County, Georgia.
The Grantee, by executing this Agreement, specifically consents to venue in
Richmond County, Georgia and waives any right to contest the venue in the
Superior Court of Richmond County, Georgia.
SECTION 14. REPEALER.
All ordinances or parts of ordinances in conflict with this
ordinance are hereby repealed.
17
<PAGE> 18
APPROVED the 20th day of January, 1998 and the ___ day of
__________________, 1998.
/s/ Larry E. Sconyer
--------------------------------
Mayor
ATTEST:
/s/ Lena J. Bonner
- -------------------------------------------
Clerk
18
<PAGE> 1
EXHIBIT 10.54
ORDINANCE NO. 1723
AN ORDINANCE GRANTING A FRANCHISE TO KNOLOGY OF
PANAMA CITY, INC., AUTHORIZING IT TO INSTALL,
MAINTAIN AND OPERATE A SYSTEM FOR THE TRANSMISSION OF
AUDIO, AND/OR VIDEO SIGNALS AND ELECTRONIC DATA OVER,
ACROSS AND UNDER PUBLIC STREETS AND RIGHTS OF WAY IN
PANAMA CITY, FLORIDA UNDER CERTAIN CONDITIONS AND
RESTRICTIONS; TO REPEAL CONFLICTING ORDINANCES; AND
FOR OTHER PURPOSES.
BE IT ENACTED BY THE PEOPLE OF THE CITY OF PANAMA CITY, FLORIDA:
SECTION 1. DEFINITIONS. For the purpose of this Ordinance, the
following terms, phrases, words and their derivations shall have the meanings
given herein unless more specifically defined within other sections of this
Ordinance. When not inconsistent with the content, words used in the present
tense include the future tense, and words in the single tense include the
plural number. The word "shall" is always mandatory and not merely directory.
(A) "Panama City" means the City of Panama City, Florida.
(B) "Business Plan" means the business plans and documents related
thereto given from Grantee to Panama City as an inducement to
grant this Franchise.
(C) "CATV System" means a community antenna television system and
related cable or fiber optic networks for transmission of audio
and/or video signals and electronic data by cable or other means
and such related services as Grantee may choose to provide in
connection with cable television services.
1
<PAGE> 2
(D) "Commission" means the City of Panama City Commission.
(E) "Franchise" is the authorization, and any renewal thereof, issued
by the Commission as franchising authority, whether such
authorization is designated as a franchise, permit, license
resolution, contract, certificate, agreement or otherwise, for
Grantee to construct, install and operate the System in the
public streets, alleys, roads and rights of way identified in
said Franchise.
(F) "Grantee" is KNOLOGY of Panama City, Inc., and its permitted
successors and assigns.
(G) "Gross Revenues" shall mean all revenues recognized directly or
indirectly by Franchisee from any source whatsoever arising from,
attributable to or in anyway derived from the sale or exchange of
cable services from the operation of a cable system by the
Franchisee within the City of Panama City. Gross revenues shall
include but not be limited to (a) revenues derived by Grantee
from subscribers for cable television services provided in Panama
City, (b) penalty or other fees received for late payments or
canceled checks, (c) revenues derived from advertising (gross
advertising revenues, not net), (d) taxes, fees, assessments or
similar charges derived by Grantee on behalf of any governmental
agency (including without limitation the franchise fees derived
pursuant to Section 2), (e) installation connection,
disconnection or other non-recurring fees charged to subscribers,
(f) all revenues from equipment sold, leased or rented to
subscribers upon
2
<PAGE> 3
subscribers' premises, (g) any itemized franchise fee to the
subscribers, (h) any financial inducements from program service
providers, (i) marketing or launch support payments from program
service providers, and (j) any commissions received from
merchandise sales to customers who are subscribers. "Gross
Revenue" shall not include revenue received by Grantee upon sale
of the System. Grantee will pay fees/percentage equal to but no
greater than competing service providers in Panama City.
(H) "Person" is any person, firm, partnership, trust, joint stock
company, association, corporation, company, governmental entity
or organization of any kind.
(I) "Rights of Way" shall mean all present and future streets within
the limits of the City of Panama City.
(J) "Street" shall mean the entire width between the boundary lines
of every highway, alley, street, avenue, bridge, viaduct, tunnel,
and causeway in Panama City, dedicated or devoted to public use
and easements related thereto.
(K) "Substantial Buildout" shall mean development of cable services
capability to seventy-five percent (75%) of all residential and
commercial structures within the City of Panama City at the time
of the signing of this agreement by both parties.
(L) "System" shall mean the CATV System.
3
<PAGE> 4
SECTION 2. CONSIDERATION. The grant of the right, privilege and
franchise under this Ordinance has been determined to be in the best interest
of the citizens of Panama City and shall be in accordance with the terms and
conditions set forth herein. Until 2006, the Grantee shall annually pay to
Panama City a fee of three and one-half percent (3 1/2%) of Gross Revenues as
defined in this Agreement. Beginning in 2006, the annual payment shall
increase to a fee of four percent (4%) of Gross Revenue provided however in
no event shall Grantee be required to pay a fee greater than that being paid
by Grantee's competitors within the City of Panama City, Florida. Said
annual fee, for each year of the term of this Franchise, shall be paid
quarterly with each quarterly payment becoming due thirty (30) days following
the end of the months of March, June, September and December hereafter. All
rents and other monetary obligations, if not paid when due, shall bear
interest at the maximum legal rate from the date such payments are due.
Within sixty (60) days of the end of each December, the Grantee shall also
file a statement executed by Grantee's chief executive officer which shall
certify the amount of Gross Revenues and the Franchise fee for the previous
calendar year. All franchise fees will be in accordance with state and
federal laws.
SECTION 3. GRANT OF AUTHORITY AND TERM.
A. GRANT OF AUTHORITY.
(i) There is hereby granted, subject to the terms and
conditions of this Franchise, to Grantee the nonexclusive
right and privilege to have, own, acquire, construct,
expand, reconstruct, maintain, repair, use and operate the
System in, along, across, on, over,
4
<PAGE> 5
through, above and under the Streets and Rights of Way of
Panama City, Florida.
(ii) Except as otherwise provided herein, this Ordinance is
granted to Grantee for the sole purpose of directly serving
its end-user customer.
(iii) Grantee shall provide service throughout all of Panama City
as a public service provider in accordance with the
schedule set forth in Grantee's business plan. Said
business plan shall contain development provisions for the
construction and operation of fiber optic cable services
for all residential and commercial structures, as set out
herein below. The business plan shall contain measures to
meet the following minimal criteria:
a. Fifty percent (50%) of the residential and commercial
structures in the City's boundaries as they exist on
this date will be serviceable within three (3) years
of the execution of this Franchise.
b. Within five (5) years of the execution of this
Franchise, Grantee will be able to provide service to
all residential and commercial structures for which
cable service is presently available from other
Franchisees.
5
<PAGE> 6
(iv) Nothing herein contained shall ever be construed to confer
upon Grantee, its successors and/or assigns, exclusive
rights or privileges of any nature whatsoever.
B. TERM. This Franchise is granted for an initial term of twenty (20)
years from and after the date this Ordinance is adopted by the Commission.
SECTION 4. CONDITIONS OF USE.
A. The Grantee shall not unnecessarily obstruct or impair traffic
upon any street, road or other public way of Panama City and
shall comply with all of the Commission's rules and regulations
designed to prevent damage to trees and shrubbery on or adjacent
to such public streets or rights of way which may be caused by
installation and operation of the System. Upon making an opening
in any public way, street, sidewalk or road as authorized by this
Franchise for the purpose of laying, constructing, repairing
and/or maintaining the System and any related facilities or
equipment, the Grantee shall, without unnecessary delay, replace
and restore same to its former condition as nearly as possible,
and in full compliance with the provisions of Panama City's
policies, rules, regulations and/or ordinances.
B. In all sections of Panama City where the cables, wires or other
like facilities of public utilities are placed underground,
Grantee shall place its cable, wires or other like facilities
underground to the maximum extent that existing technology
reasonably permits Grantee to do so.
6
<PAGE> 7
C. The Grantee shall file with Panama City Engineering Department
true and correct as-built maps or plats of all existing and
proposed cable plant construction and the types of equipment and
facilities installed or constructed, property identified and
described as to the type of equipment and facility by appropriate
symbols and marks and which shall include annotations of all
public ways, streets, roads and conduits where the work is to be
undertaken.
D. If, at any time during the period of this Franchise, Panama City
shall lawfully elect to vacate, relocate, abandon, alter,
reconstruct or change the grade of any street, sidewalk, alley or
other public way including any related drainage and utility
areas, the Grantee upon reasonable notice from Panama City, shall
remove, relay and relocate its wires, cables and other fixtures
and equipment at its own expense and within reasonable time
schedules established by Panama City. Should Grantee fail to do
so, it shall be deemed to have waived its right to claim said
wire, cable or other equipment and Grantee shall be liable to
Panama City for any costs and expenses incurred by the City
should the City elect to remove, relay or relocate the wires,
cables and other fixtures and equipment.
E. The Commission may at any time make inquiries pertaining to
Grantee's operation of the System with Panama City. Grantee
shall respond to such inquiries on a timely basis.
7
<PAGE> 8
F. Grantee shall, upon request, provide the Commission with copies
of notices of all petitions, applications, communications and
reports submitted between Grantee and the FCC, Securities and
Exchange Commissions and the Florida Public Service Commission or
their successor agencies, relating to any matters affecting the
use of Panama City's Streets and Rights of Way and/or the System
authorized pursuant to this Franchise ordinance.
G. Charges for service offered to the public by Grantee shall comply
with all applicable state and federal laws and regulations
regarding subscriber rates. Grantee shall provide notice to the
Commission prior to any rate change, and shall maintain on file
with said Commission a schedule of the current rates and fees
charged for its services offered to the public.
H. Grantee shall install and maintain its wires, cables, fixtures
and other equipment in accordance with the requirements of all
applicable Panama City codes, ordinances and regulations, and in
such a manner that they will not interfere with any existing
installations of Panama City or the operation of a public utility
serving Panama City.
I. No poles or other wire-holding structures shall be erected by
Grantee without prior written approval of the Panama City
Engineering Department with regard to the location, height, type
and other pertinent considerations. Any poles and wire-holding
structures of Grantee erected pursuant to this subsection shall
be moved or modified
8
<PAGE> 9
by Grantee at its sole expense, upon reasonable notice, whenever
the Engineering Department has determined that the public
convenience would be enhanced thereby.
J. Should Grantee fail to begin construction of the System within
one hundred twenty (120) days from the date this Franchise
ordinance is adopted by the Commission, Panama City shall be
entitled to terminate this Franchise immediately.
K. Grantee shall provide continuous service under this Franchise.
Should services be disrupted or discontinued for thirty (30) days
out of any ninety (90) consecutive days, Grantee shall be in
default of this Franchise and Panama City shall be entitled to
terminate the Franchise immediately; provided, however, that any
such disruption or discontinuance which is caused by an act of
God shall not result in a termination of this Franchise if
Grantee immediately, continuously and diligently works toward
restoring service to its full capacity.
SECTION 5. LIABILITY AND INDEMNIFICATION.
A. By acceptance of this Franchise and right, Grantee agrees that it
shall indemnify, protect and hold forever harmless Panama City,
its elected officials, officers, agents, represents and
employees, and their successors, legal representatives and
assigns, from any and all claims, liabilities, losses, costs,
judgments, penalties, damages and expenses (including reasonable
attorney's fees and expenses of litigation incurred in the
defense of any such claim), arising out of or relating to
9
<PAGE> 10
the installation, operation or maintenance by the Grantee of the
System, or the Grantee's failure to perform any of the
obligations of this Franchise, including but not limited to
claims for injury or death to any person or persons, or damages
to any property, as may be incurred by or asserted against Panama
City, its elected officials, officers, agents, representatives
and/or employees, directly or indirectly, by reason of the
installation, operation or maintenance by the Grantee of the
System within Panama City.
B. During all periods of this Franchise, Grantee shall maintain all
insurance coverage required by law, and shall also maintain
comprehensive general liability insurance coverage in a single
limit sum of 1.6 Million Dollars ($1,600,000.00) for any one
occurrence for bodily injury, including death, and property
damage. Compliance with all insurance requirements shall be
evidenced by a prepaid Certificate of Insurance designating
Panama City as an additional insured, which by its terms shall
prohibit any cancellation or material change in coverage absent
thirty (30) days written notice to Lessor. On or before the
anniversary date of the insurance coverage, Grantee shall furnish
like evidence of continuing or replacement coverage.
C. Lessee shall maintain worker's compensation insurance and any
other such insurance or coverage as may be required by law. The
obligation to maintain workers' compensation insurance coverage
exists without regard to any exemptions under Florida law.
10
<PAGE> 11
SECTION 6. CITY RIGHTS IN FRANCHISE.
A. The Grantee shall at all times comply with all reasonable
requirements, regulations, laws and ordinances now in force, and
which may hereafter be adopted by the Commission and applicable
to the construction, repair, or maintenance or operation of the
System or use of Panama City-owned conduit.
B. The following events shall constitute an "Event of Default" under
this Franchise:
(i) Grantee breaches any material covenant set forth in this
Franchise;
(ii) Grantee fails to begin construction of the System within
one hundred twenty (120) days from the date this Franchise
ordinance is adopted by the Commission.
Panama City's right to terminate this Franchise may be exercised
only after delivery of a written notice of an Event of Default to
Grantee and a sixty (60) day period for Grantee to cure an Event
of Default. Notwithstanding the foregoing, this Franchise shall
not be terminated unless Grantee has had the opportunity to
present its case before a meeting of the Commission.
C. The right is hereby reserved to Panama City to adopt, in addition
to the provisions contained herein and in existing applicable
ordinances, such additional regulations of general application to
all Franchisees providing competing services, including
regulations relating to
11
<PAGE> 12
customer service obligations, as it shall find necessary in the
exercise of its police power; provided, that such regulations, by
ordinance or otherwise, shall be reasonable and not in conflict
with the rights herein granted.
D. Panama City shall have the right, when the Commission in its sole
discretion finds it necessary or appropriate, to hold a public
hearing with regard to this Franchise, and Grantee shall make
representatives available to attend any such hearing.
E. Upon reasonable notice, Panama City shall have the right to
inspect the business records of Grantee. Panama City shall have
the right to conduct an audit of Grantee's book at any time.
Grantee shall be responsible for the costs and expenses of the
audit if the results of the audit reveal Grantee owes Panama City
more than three percent (3%) of the amount paid during the period
subject to the audit. The prevailing party shall be liable for
all costs and expenses, including reasonable attorneys' fees,
incurred to collect any amounts claimed by Grantor.
SECTION 7. ACCEPTANCE. This Franchise and the rights, privileges and
authority hereby granted, shall take effect and be in force from and after
enactment of this Ordinance and execution by the Mayor and City Clerk,
provided that within fifteen (15) days after the date of the enactment of
this Ordinance, the Grantee shall file with the person specified in
Section 10 herein its unconditional acceptance of this Franchise, which
acceptance shall include its agreement to comply with and
12
<PAGE> 13
abide by all its provisions, terms and conditions. Such acceptance and
agreement shall be in writing, duly executed by or on behalf of the Grantee
and accompanied by an insurance certificate as specified in Section 5 unless
these documents or evidence thereof have been filed with the City Clerk.
SECTION 8. TRANSFER OF TITLE. The Grantee shall not transfer this
Franchise to another person or entity without prior written approval of
Panama City, provided that such approval will not be unreasonably withheld or
delayed. Panama City shall have the absolute right to withhold consent to a
transfer of this Franchise at any time before substantial buildout is
achieved and three (3) years have passed since the adoption of this
ordinance. This provision shall not be construed as requiring Panama City's
approval of secured financing arrangements.
SECTION 9. NOTICE. All notices, demands or other writings in this
Franchise provided to be given or made or sent, or which may be given or made
or sent, by either party, shall be deemed to have been fully given or made or
sent when made in writing and deposited in the United States mail, registered
and postage prepaid, and addressed as follows:
TO GRANTEE:
KNOLOGY of Panama City, Inc.
312 West 8th Street
West Point, Georgia 31833
Attention: President
(706) 645-1446 (fax)
13
<PAGE> 14
TO PANAMA CITY:
City of Panama City
P.O. Box 1880
Panama City, Florida 32402
Attention: City Manager
(850) 872-3024
The address of a party may be changed by written notice given to the other
party in the manner above provided.
Alternatively, a notice or other communication shall be deemed to be
duly received, if delivered by hand or sent by business courier, when left at
the address of the recipient, and if sent by facsimile transmission, upon
receipt by the sender of an acknowledgment or transmission report generated
by the machine from which the facsimile was sent in its entirety to the
recipient's facsimile number; provided that if such notice or other
communication is delivered by hand or business courier, or is received by
facsimile on a day which is not a business day, or after 5:00 p.m. on any
business day at the addressee's location, such notice or communication shall
be deemed to be duly received by the recipient at 10:00 a.m. on the first
business day thereafter.
SECTION 10. SEVERABILITY. If any section, subsection, sentence,
clause, phrase or portion of this Ordinance is for any reason held invalid,
unenforceable or unconstitutional by any court of competent jurisdiction,
such portion shall be deemed a separate, distinct, independent, and severable
provision and such holding shall not affect the validity of the remaining
portions hereof.
SECTION 11. CONTROLLING LAW. This Franchise shall be interpreted and
construed in accordance with the laws of the State of Florida.
14
<PAGE> 15
SECTION 12. VENUE. All claims, disputes and other matters in question
between the Grantee and Panama City arising out of or relating to the
Agreement, or the breach thereof, shall be decided in the Circuit Court of
Bay County, Florida. The Grantee, by executing this Agreement, specifically
consents to venue in Bay County, Florida and waives any right to contest the
venue in the Circuit Court of Bay County, Florida.
SECTION 13. EFFECTIVE DATE. This ordinance shall become effective
upon its passage.
PASSED, APPROVED and ADOPTED this 10th day of March 1998.
CITY OF PANAMA CITY, FLORIDA
By: /s/ Girard L. Clemons, Jr.
-----------------------------
Girard L. Clemons, Jr.
Mayor
ATTEST:
/s/ Michael Bush
- --------------------
Michael Bush
City Clerk
15
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
<TABLE>
<CAPTION>
FOR THE EIGHT FOR THE YEAR FOR THE YEAR
MONTHS ENDED ENDED ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Weighted Average Shares Outstanding (a) 7,520 13,626 28,835
Common Stock Equivalents:
Stock Options 0 0 0
Warrants 0 0 0
--------- --------- ---------
Total Shares for Pro Forma Primary
Earnings Per Share 7,520 13,626 28,835
Net Loss 1,185,534 3,125,428 9,091,533
--------- --------- ---------
Primary Loss per Share $157.65 $229.37 $315.30
======= ======= =======
</TABLE>
(a) Net loss per share is computed using the weighted average number of
shares of common stock and dilutive common stock equivalent shares
from convertible preferred stock (using the if converted method). As
the Company has no common stock outstanding, the Preferred Stock is
assumed to be converted for purposes of this calculation. The
Predecessor Company net losses per share are not shown, as they are
not comparable with the Successor Company's.
<PAGE> 1
EXHIBIT 12.1
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED EIGHT MONTHS ENDED
DECEMBER 31, 1994 APRIL 30, 1995 DECEMBER 31, 1995
----------------- -------------- -----------------
<S> <C> <C> <C>
FIXED CHARGES:
Interest expense and amortization
of debt issuance costs 230,575 21,878 567,913
Interest element of rent expense 25,667 9,000 22,000
------- ------ -------
256,242 30,878 589,913
======= ====== =======
EARNINGS:
Consolidated Net Loss (874,235) (123,985) (1,185,534)
Minority Interest - - 109,837
Income Tax Benefit - - 334,451
Fixed Charges 256,242 30,878 589,913
-------- ------- ----------
(617,993) (93,107) (1,039,909)
======== ======= ==========
RATIO OF EARNINGS TO FIXED CHARGES (2.41) (3.02) (1.76)
===== ===== ======
COVERAGE DEFICIENCY 874,235 123,985 1,629,822
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
FIXED CHARGES:
Interest expense and amortization
of debt issuance costs 1,055,498 6,406,811
Interest element of rent expense 23,333 31,000
--------- ---------
1,078,831 6,437,811
========= =========
EARNINGS:
Consolidated Net Loss (3,125,428) (9,091,533)
Minority Interest -
Income Tax Benefit 373,323 -
Fixed Charges 1,078,831 6,437,811
---------- ----------
(2,419,920) (2,653,722)
========== ==========
RATIO OF EARNINGS TO FIXED CHARGES (2.24) (.41)
===== ======
COVERAGE DEFICIENCY 3,498,751 9,091,533
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 6, 1998 included in this Form 10-K. It should be noted that we have
not audited any financial statements of the company subsequent to December 31,
1997 or performed any audit procedures subsequent to the date of the report.
ARTHUR ANDERSEN LLP
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This financial data schedule contains summary financial information extracted
from the balance sheet of KNOLOGY Holdings, Inc. as of December 31, 1997 and the
related combined statements of operations for the year ended December 31, 1997.
This information is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,144,581
<SECURITIES> 227,880,923
<RECEIVABLES> 1,716,388
<ALLOWANCES> 108,529
<INVENTORY> 5,806,320
<CURRENT-ASSETS> 235,670,423
<PP&E> 61,932,725
<DEPRECIATION> 5,171,309
<TOTAL-ASSETS> 316,198,100
<CURRENT-LIABILITIES> 8,840,263
<BONDS> 253,232,923
0
500
<COMMON> 0
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</TABLE>
