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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1998
REGISTRATION NO. 333-43339
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KNOLOGY HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
4812
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
58-2203141
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
1241 O.G. SKINNER DRIVE
WEST POINT, GEORGIA 31833
(706) 645-8553
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
WILLIAM E. MORROW
KNOLOGY HOLDINGS, INC.
1241 O.G. SKINNER DRIVE
WEST POINT, GEORGIA 31833
(706) 645-8553
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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Copies to:
STEVEN M. KAUFMAN, ESQ.
HOGAN & HARTSON L.L.P.
555 THIRTEENTH STREET, N.W.
WASHINGTON, D.C. 20004
(202) 637-5600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PROSPECTUS
DATED FEBRUARY 5, 1998
KNOLOGY HOLDINGS INC.
$444,100,000
OFFER TO EXCHANGE ALL OUTSTANDING 11 7/8% SENIOR
DISCOUNT NOTES DUE
OCTOBER 15, 2007
FOR
11 7/8% SENIOR DISCOUNT NOTES DUE OCTOBER 15, 2007
OF
KNOLOGY HOLDINGS, INC.
------------------------
INTEREST PAYABLE APRIL 15 AND OCTOBER 15,
COMMENCING APRIL 15, 2003
------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED.
KNOLOGY Holdings, Inc. (the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus (as the same may be
amended or supplemented from time to time) and in the accompanying Letter of
Transmittal (the "Letter of Transmittal") (which together constitute the
"Exchange Offer"), to exchange $1,000 principal amount at maturity of its
11 7/8% Senior Discount Notes due October 15, 2007 (the "Exchange Notes") which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), for each $1,000 principal amount at maturity of its
outstanding unregistered 11 7/8% Senior Discount Notes due October 15, 2007, of
which $444,100,000 in aggregate principal amount at maturity is outstanding as
of the date hereof (the "Senior Discount Notes" and, together with the Exchange
Notes, the "Notes").
The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Senior Discount Notes, except that (i) the
Exchange Notes will have been registered under the Securities Act and therefore
will not be subject to certain restrictions on transfer applicable to the Senior
Discount Notes and (ii) holders of the Exchange Notes will not be entitled to
certain rights of holders of the Senior Discount Notes under the Registration
Rights Agreement dated October 22, 1997 (the "Registration Rights Agreement")
among Morgan Stanley & Co. Incorporated, J.P. Morgan & Co. and First Union
Capital Markets Corp. (collectively, the "Placement Agents"), the Company and
SCANA Communications, Inc. ("SCANA"). The Exchange Notes will evidence the same
indebtedness as the Senior Discount Notes (which they will replace) and will be
issued pursuant to, and entitled to the benefits of, an indenture dated as of
October 22, 1997 between the Company and the United States Trust Company of New
York, as trustee (the "Trustee"), governing the Senior Discount Notes and the
Exchange Notes (the "Indenture").
SEE "RISK FACTORS" COMMENCING ON PAGE 14 FOR A DISCUSSION OF CERTAIN
FACTORS WHICH INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER
AND AN INVESTMENT IN THE EXCHANGE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
The Exchange Notes will mature on October 15, 2007. Interest will not
accrue on the Exchange Notes prior to October 15, 2002. Thereafter, interest on
the Exchange 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. See "Description of the Exchange Notes." The Exchange Notes will be
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 Senior Discount Notes
and the Exchange Notes from the proceeds of one or more Public Equity Offerings
(as defined herein) at 111.875% of their Accreted Value on the redemption date;
provided that after any such redemption at least $288.7 million aggregate
principal amount at maturity of the Senior Discount Notes and the Exchange Notes
remains outstanding. See "Description of the Exchange Notes -- Certain
Definitions."
The Exchange Notes will be unsubordinated indebtedness of the Company,
ranking pari passu in right of payment with the Senior Discount Notes and 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. As of September 30,
1997, on a pro forma basis after giving effect to the Offering and the Equity
Private Placement (each as defined herein), the Company would have had (on an
unconsolidated basis) $124,000 of indebtedness other than the Senior Discount
Notes and the Exchange Notes, which is a capital lease (and accordingly is
secured debt). In addition, the Company is a holding company and the Senior
Discount Notes are, and the Exchange Notes will be, effectively subordinated to
all existing and future liabilities (including trade payables) of the Company's
subsidiaries. As of September 30, 1997, on the same pro forma basis, the
Company's subsidiaries would have had $4.1 million in liabilities (excluding
intercompany payables). Additionally, in October 1997 the Company received a
commitment letter for a $50.0 million, five-year senior secured credit facility
from First Union (as defined below) (the "New Credit Facility") to be used for
working capital and other purposes. It is currently contemplated that the
Company's obligations under the New Credit Facility will be secured by all
current and future assets of the Company. The Senior Discount Notes and the
Exchange Notes will be effectively subordinated to the obligations of the
Company under the New Credit Facility.
The Senior Discount Notes, together with warrants (the "Warrants") to
purchase preferred stock, par value $.01 per share of the Company (the
"Preferred Stock"), were originally issued and sold on October 22, 1997 in a
transaction not registered under the Securities Act (the "Offering").
Accordingly, the Senior Discount Notes may not be offered for resale, resold or
otherwise transferred unless so registered or unless an applicable exemption
from the registration requirements of the Securities Act is available. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), as set forth in no-action letters issued to third parties
unrelated to the Company, the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by holders thereof (other than any holder that is (i) a
broker-dealer that acquired Senior Discount Notes as a result of market-making
activities or other trading activities or (ii) an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration or prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement or understanding with any
person to participate in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. Any holder who tenders Senior Discount Notes in the
Exchange Offer with the intention to participate, or for the purpose of
participating, in a distribution of the Exchange Notes or who is an affiliate of
the Company may not rely upon such interpretations by the staff of the
Commission and, in the absence of an exemption therefrom, must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Failure to comply with such
requirements in such instance may result in such holder incurring liabilities
under the Securities Act for which the holder is not indemnified by the Company.
The staff of the Commission has not considered the Exchange Offer in the context
of a no-action letter, and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange Offer
as in such other circumstances.
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By tendering Senior Discount Notes in exchange for Exchange Notes, each
holder will represent to the Company, among other things, that: (i) any Exchange
Notes to be received by such holder will be acquired in the ordinary course of
such holder's business; (ii) such holder has no arrangement or understanding
with any person to participate in a distribution (within the meaning of the
Securities Act) of the Exchange Notes; and (iii) such holder is not an
"affiliate" of the Company (within the meaning of Rule 405 under the Securities
Act), or if such holder is an affiliate, that such holder will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Senior Discount Notes, where such Senior Discount Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Senior Discount Notes where such Senior
Discount Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period not to exceed 180 days after the Expiration Date (as defined herein), it
will furnish additional copies of this Prospectus, as amended or supplemented,
to any broker-dealer that reasonably requests such documents for use in
connection with any such resale. See "Plan of Distribution."
The Company does not intend to apply for listing of the Exchange Notes for
trading on any securities exchange or for inclusion of the Exchange Notes in any
automated quotation system. The Senior Discount Notes, however, have been
designated for trading in the Private Offerings, Resales and Trading through
Automatic Linkages ("PORTAL") Market of the National Association of Securities
Dealers, Inc. Any Senior Discount Notes not tendered and accepted in the
Exchange Offer will remain outstanding. To the extent that Senior Discount Notes
are not tendered and accepted in the Exchange Offer, a holder's ability to sell
such Senior Discount Notes could be adversely affected. Following consummation
of the Exchange Offer, the holders of Senior Discount Notes will continue to be
subject to the existing restrictions on transfer thereof and the Company will
have no further obligation to such holders to provide for the registration under
the Securities Act of the Senior Discount Notes. See "Description of the
Exchange Notes -- Exchange Offer; Registration Rights." No assurance can be
given as to the liquidity of either the Senior Discount Notes or the Exchange
Notes.
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF SENIOR DISCOUNT NOTES ARE URGED TO READ THIS PROSPECTUS
AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO
TENDER THEIR SENIOR DISCOUNT NOTES PURSUANT TO THE EXCHANGE OFFER.
Senior Discount Notes may be tendered for exchange prior to 5:00 p.m., New
York City time, on , 1998 (such time on such date being hereinafter
called the "Expiration Date"), unless the Exchange Offer is extended by the
Company (in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended). Tenders of Senior Discount Notes
may be withdrawn at any time prior to the Expiration Date. The Exchange Offer is
not conditioned upon any minimum aggregate principal amount of Senior Discount
Notes being tendered for exchange. The Exchange Offer is, however, subject to
certain events and conditions and to the terms of the Registration Rights
Agreement. Senior Discount Notes may be tendered only in integral multiples of
aggregate principal amount at maturity of $1,000. The Company has agreed to pay
all expenses of the Exchange Offer. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Senior Discount Notes as
of , 1998.
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The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No underwriter is being used in connection with
the Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................................................................... 5
Risk Factors.......................................................................... 15
The Exchange Offer.................................................................... 24
Use of Proceeds....................................................................... 32
Dividend Policy....................................................................... 33
Capitalization........................................................................ 34
Selected Consolidated Financial Data.................................................. 35
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 37
Business.............................................................................. 42
Legislation and Regulation............................................................ 59
Management............................................................................ 71
Certain Transactions.................................................................. 77
Principal Stockholders................................................................ 80
Description of Certain Indebtedness................................................... 81
Description of the Exchange Notes..................................................... 83
Description of the Warrants........................................................... 110
Description of Capital Stock.......................................................... 115
Certain United States Federal Income Tax Consequences................................. 117
Plan of Distribution.................................................................. 123
Legal Matters......................................................................... 124
Experts............................................................................... 124
Additional Information................................................................ 124
Index to Financial Statements......................................................... F-1
</TABLE>
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KNOLOGY, OLOVision(R), OLOBahn(R) and OLOTel(R) are trademarks of the
Company and are registered in certain jurisdictions and "The Bundle" and
"Sterling Service" are service marks of the Company. This Prospectus also
includes trademarks of companies other than the Company.
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless the context
indicates or requires otherwise, any reference in this Prospectus to "KNOLOGY"
or the "Company" refers to KNOLOGY Holdings, Inc. and its subsidiaries. Each
prospective investor is urged to read this Prospectus in its entirety. Unless
otherwise indicated, the information in this Prospectus does not give effect to
an anticipated 150 for 1 split of the Company's outstanding common stock, par
value $.01 per share (the "Common Stock").
THE COMPANY
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 two cities, Montgomery, Alabama and Columbus, Georgia, 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 575 miles with 18,267 subscribers and 52,138 homes
passed as of September 30, 1997. Since its acquisition of the Columbus system
(the "Columbus System," and together with the Montgomery System, the "Systems")
in September 1995, the Company has extended the Columbus network from
approximately 180 miles and 5,109 subscribers to approximately 434 miles with
11,741 subscribers and 38,620 homes passed as of September 30, 1997. The
Company's penetration rates (the ratio of the number of subscribers to homes
passed) were 35.0% and 30.4% in Montgomery and Columbus, respectively, as of
September 30, 1997. 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 expects the number of its cable television
subscribers to continue to increase as it expands its Systems in Montgomery and
Columbus, 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. These services are presently offered 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 has begun to target small- and medium-sized
businesses using a bundled offering emphasizing telephone and Internet access
services. As of January 31, 1998, the Company provided a bundle of at least two
services to approximately 340 subscribers in Montgomery and to approximately 60
subscribers in Columbus. KNOLOGY offers its OLOTel(R) services using its
Interactive Broadband Network and interconnections with BellSouth under a
nine-state interconnection agreement, and it resells long distance service to
customers in Montgomery to provide telephone service outside the reach of the
Company's networks. In addition, the Company also offers long distance access
services to long distance carriers over its Interactive Broadband Networks.
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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 a cable
television system in Panama City Beach, Florida (the "Beach Cable System") 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 intends to apply
for a cable franchise in adjacent Panama City. The Beach Cable System, which
currently passes approximately 10,500 homes, consists of a new cable television
network which the Company believes can be adapted for delivery of Broadband
Services. The Company plans to start construction of an Interactive Broadband
Network that would significantly expand the existing Beach Cable System into
Panama City (the Beach Cable System, as proposed to be expanded, is referred to
herein as the "Panama City System"). The Company's application for a cable
franchise in Augusta, Georgia was approved in January 1998. The Company expects
the Augusta franchise to be awarded in February 1998. The Company has applied
for a cable franchise in Charleston, South Carolina and intends to apply for
additional franchises in other cities.
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 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 and Columbus and intends to be the
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. The Company believes that a large number of companies may
seek to provide multiple Broadband Services over the next
6
<PAGE> 8
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
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 is building 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 serving communities in western Georgia and eastern Alabama for
over 100 years, and 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 backup 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 and access to
sites for its equipment, which is an important part of network construction.
INVESTORS; EQUITY PRIVATE PLACEMENT; NEW CREDIT FACILITY
KNOLOGY has been supported by ITC Holding and other strategic investors,
including SCANA, Century Telephone Enterprises, Inc. ("Century Telephone"),
South Atlantic Venture Fund III, Limited Partnership and related funds
(collectively, "South Atlantic") and AT&T Venture Fund II, L.P. and related
funds (collectively, "AT&T Venture Funds"). These entities have contributed most
of the equity raised by the Company to date. In connection with the Offering,
ITC Holding, SCANA, Century Telephone, South Atlantic and AT&T Venture Funds
purchased an aggregate of 18,662 shares of Preferred Stock for an aggregate
purchase price of approximately $28.0 million as part of a $32.2 million private
placement (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 wholly owned subsidiaries) owns
approximately 42.0%, South Atlantic owns approximately 15.0%, AT&T Venture Funds
7
<PAGE> 9
owns approximately 14.2% and SCANA owns approximately 7.3% (excluding warrants
to purchase Preferred Stock to be issued to SCANA) of the outstanding capital
stock of the Company.
The Company received a commitment letter for a $50.0 million, five-year
senior secured credit facility from First Union (as defined below) (the "New
Credit Facility") to be used for working capital and other purposes, including
capital expenditures. It is currently contemplated that the Company's
obligations under the New Credit Facility will be secured by all current and
future assets of the Company. See "Description of Certain Indebtedness -- New
Credit Facility."
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 312 West 8th Street, West Point, Georgia 31833
and its telephone number is (706)645-8553.
THE EXCHANGE OFFER
The Exchange Offer......... Up to $444.1 million aggregate principal amount at
maturity of Exchange Notes are being offered in
exchange for a like aggregate principal amount at
maturity of Senior Discount Notes. Senior Discount
Notes may be tendered for exchange in whole or in
part in integral multiples of $1,000 principal
amount at maturity. The Company is making the
Exchange Offer in order to satisfy its obligations
under the Registration Rights Agreement relating to
the Senior Discount Notes. For a description of the
procedures for tendering Senior Discount Notes, see
"The Exchange Offer -- Procedures for Tendering
Senior Discount Notes."
Expiration Date............ 5:00 p.m., New York City time, on
, 1998 unless the Exchange
Offer is extended by the Company (in which case the
term "Expiration Date" shall mean the latest date
and time to which the Exchange Offer is extended).
See "The Exchange Offer -- Expiration Date;
Extensions; Amendments."
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain conditions
which may be waived by the Company in its sole
discretion. The Exchange Offer is not conditioned
upon any minimum aggregate principal amount at
maturity of Senior Discount Notes being tendered.
See "The Exchange Offer -- Conditions to the
Exchange Offer."
The Company reserves the right in its sole and
absolute discretion, subject to applicable law, at
any time and from time to time, (i) to delay the
acceptance of the Senior Discount Notes, (ii) to
terminate the Exchange Offer if certain specified
conditions have not been satisfied, (iii) to extend
the Expiration Date of the Exchange Offer and
retain all Senior Discount Notes tendered pursuant
to the Exchange Offer, subject, however, to the
right of holders of Senior Discount Notes to
withdraw their tendered Senior Discount Notes, and
(iv) to waive any condition or otherwise amend the
terms of the Exchange Offer in any respect. See
"The Exchange Offer -- Expiration Date; Extensions;
Amendments."
Withdrawal Rights.......... Tenders of Senior Discount Notes may be withdrawn
at any time prior to the Expiration Date by
delivering a written notice of such withdrawal to
the Exchange Agent (as defined herein) in
conformity with certain procedures as set forth
below under "The Exchange Offer -- Withdrawal
Rights."
8
<PAGE> 10
Procedures for Tendering
Senior Discount Notes...... Tendering holders of Senior Discount Notes must
complete and sign a Letter of Transmittal in
accordance with the instructions contained therein
and forward the same by mail, facsimile
transmission or hand delivery, together with any
other required documents, to the Exchange Agent,
either with the Senior Discount Notes to be
tendered or in compliance with the specified
procedures for guaranteed delivery of Senior
Discount Notes. Certain brokers, dealers,
commercial banks, trust companies and other
nominees may also effect tenders by book-entry
transfer. Holders of Senior Discount Notes
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee are
urged to contact such person promptly if they wish
to tender Senior Discount Notes pursuant to the
Exchange Offer. See "The Exchange
Offer -- Procedures for Tendering Senior Discount
Notes."
Letters of Transmittal and certificates
representing Senior Discount Notes should not be
sent to the Company. Such documents should only be
sent to the Exchange Agent. Questions regarding how
to tender and requests for information should be
directed to the Exchange Agent. See "The Exchange
Offer -- Exchange Agent."
Resales of Exchange
Notes...................... Based on interpretations by the staff of the
Commission, as set forth in no-action letters
issued to third parties, the Company believes that
holders of Senior Discount Notes (other than any
holder that is (i) a broker-dealer that acquired
Senior Discount Notes as a result of market-making
activities or other trading activities, or (ii) an
"affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who exchange
their Senior Discount Notes for Exchange Notes
pursuant to the Exchange Offer may offer for
resale, resell and otherwise transfer such Exchange
Notes without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business
and such holders have no arrangement or
understanding with any person to participate in a
distribution (within the meaning of the Securities
Act) of such Exchange Notes. Any holder who tenders
Senior Discount Notes in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes or who is an affiliate of the Company may not
rely upon such interpretations by the staff of the
Commission and, in the absence of an exemption
therefrom, must comply with the registration and
prospectus delivery requirements of the Securities
Act in connection with any secondary resale
transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liabilities under the Securities
Act for which the holder is not indemnified by the
Company. The staff of the Commission has not
considered the Exchange Offer in the context of a
no-action letter, and there can be no assurance
that the staff of the Commission would make a
similar determination with respect to the Exchange
Offer. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Senior
Discount Notes, where such Senior Discount Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a
prospectus, a broker-dealer will not
9
<PAGE> 11
be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. The
Company has agreed that, for a period not to exceed
180 days after the Expiration Date, it will furnish
additional copies of this Prospectus, as amended or
supplemented, to any broker-dealer that reasonably
requests such documents for use in connection with
any such resale. See "Plan of Distribution."
Exchange Agent............. The exchange agent with respect to the Exchange
Offer is United States Trust Company of New York
(the "Exchange Agent"). The address, telephone
number and facsimile number of the Exchange Agent
are set forth in "The Exchange Offer -- Exchange
Agent" and in the Letter of Transmittal.
Use of Proceeds............ The Company will not receive any cash proceeds from
the issuance of the Exchange Notes offered hereby.
The net proceeds from the Offering and the Equity
Private Placement have been and will be used to
repay certain outstanding indebtedness of the
Company; to fund expansion of the Company's
telecommunications business, including development
and construction of Interactive Broadband Networks;
and for additional working capital and general
corporate purposes, including funding operating
deficits. See "Use of Proceeds."
Certain United States
Federal Income Tax
Consequences............. The exchange of the Senior Discount Notes for the
Exchange Notes will not be a taxable exchange for
federal income tax purposes, and holders of Senior
Discount Notes should not recognize any taxable
gain or loss or any interest income as a result of
such exchange. See "Certain United States Federal
Income Tax Consequences."
THE EXCHANGE NOTES
Securities Offered......... $444.1 million aggregate principal amount at
maturity of 11 7/8% Senior Discount Notes due
October 15, 2007. The terms of the Exchange Notes
will be identical in all material respects to the
terms of the Senior Discount Notes, except that (i)
the Exchange Notes will have been registered under
the Securities Act and therefore will not be
subject to certain restrictions on transfer
applicable to the Senior Discount Notes and (ii)
holders of the Exchange Notes will not be entitled
to certain rights of holders of the Senior Discount
Notes under the Registration Rights Agreement. The
Exchange Notes will evidence the same debt as the
Senior Discount Notes and will be issued pursuant
to and entitled to the benefits of the Indenture.
Maturity................... October 15, 2007.
Yield and Interest......... The Senior Discount Notes were issued at a
substantial discount from their principal amount at
maturity and there will not be any payment of
interest on the Notes prior to April 15, 2003. For
a discussion of the federal income tax treatment of
the Exchange Notes under the original issue
discount rules, see "Certain United States Federal
Income Tax Consequences." The Exchange Notes will
fully accrete to face value on October 15, 2002.
From and after October 15, 2002, the Exchange Notes
will bear interest, which will be payable in cash,
at a rate of 11 7/8% per annum on each April 15 and
October 15, commencing April 15, 2003.
Optional Redemption........ The Exchange Notes may be redeemed at any time on
or after October 15, 2002, at the option of the
Company, in whole or in part, at 105.9375% of their
principal amount at maturity, plus accrued
interest,
10
<PAGE> 12
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, up to 35% of the aggregate
principal amount at maturity of the Senior Discount
Notes and the Exchange Notes may be redeemed 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 aggregate
principal amount at maturity of the Senior Discount
Notes and the Exchange Notes remains outstanding.
Change of Control.......... Upon a Change of Control (as defined herein), the
Company will be required to make an offer to
purchase the Exchange Notes at a purchase price
equal to 101% of their Accreted Value on the date
of purchase, plus accrued interest, if any. In
addition, a Change of Control would constitute an
event of default under the New Credit Facility, and
upon the occurrence of such an event of default,
the lenders thereunder would have the right to
accelerate the repayment of all indebtedness
thereunder and to exercise their other remedies for
default, thereby reducing the funds available for
the offer to purchase Exchange Notes. See
"Description of Certain Indebtedness -- New Credit
Facility." There can be no assurance that the
Company will have sufficient funds available at the
time of any Change of Control to make any required
debt repayment (including repurchases of the
Exchange Notes or the repayment of all indebtedness
with respect to the New Credit Facility). See
"Description of the Exchange Notes -- Repurchase of
Exchange Notes upon a Change of Control," and
"Description of the Exchange Notes -- Certain
Definitions."
Ranking.................... The Exchange Notes will be unsubordinated
indebtedness of the Company, ranking pari passu in
right of payment with the Senior Discount Notes and
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. As of September 30,
1997, on a pro forma basis after giving effect to
the Offering and the Equity Private Placement, the
Company would have had (on an unconsolidated basis)
$124,000 of indebtedness other than the Senior
Discount Notes, which is a capital lease (and
accordingly is secured debt). In addition, the
Company is a holding company and the Senior
Discount Notes are, and the Exchange Notes will be,
effectively subordinated to all existing and future
liabilities (including trade payables) of the
Company's subsidiaries. As of September 30, 1997,
on the same pro forma basis, the subsidiaries of
the Company would have had $4.1 million of
liabilities (excluding intercompany payables). In
October 1997, the Company received a commitment
letter for a $50.0 million New Credit Facility from
First Union National Bank and First Union Capital
Markets Corp. (collectively, "First Union") to be
used for working capital and other purposes,
including capital expenditures. It is currently
contemplated that the Company's obligations under
the New Credit Facility will be secured by all
current and future assets of the Company. The
Senior Discount Notes and the Exchange Notes will
be effectively subordinated to the obligations of
the Company under the New Credit Facility. See
"Risk Factors -- Holding Company Structure;
Priority of Secured Debt" and "Description of
Certain Indebtedness -- New Credit Facility."
11
<PAGE> 13
Certain Covenants.......... The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its subsidiaries 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. However, these limitations are
subject to a number of important qualifications and
exceptions. See "Description of the Exchange
Notes -- Covenants."
RISK FACTORS
Potential participants in the Exchange Offer should consider carefully
certain factors relating to the Company, its business and an investment in the
Exchange Notes before tendering their Senior Discount Notes for Exchange Notes.
See "Risk Factors."
12
<PAGE> 14
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial and operating data set forth below
should be read in conjunction with "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto, included elsewhere in this Prospectus. The
financial and operating data for periods after April 28, 1995 (the date the
Company acquired (the "Montgomery Acquisition") Montgomery Cablevision &
Entertainment, Inc. ("Montgomery Cablevision" or 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 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
Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(a) SUCCESSOR COMPANY(a)
--------------------------- ---------------------------------------------------------------
YEAR FOUR MONTHS EIGHT MONTHS YEAR NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, APRIL 30, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1995(B) 1996 1996 1997
------------ ----------- ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ 2,111,952 $ 857,161 $ 2,196,998 $ 5,334,183 $ 3,825,728 $ 7,044,686
Operating expenses:
General and
administrative....... 587,579 175,724 1,027,001 2,346,201 1,588,764 2,368,525
Programming charges.... 1,042,186 409,325 1,029,959 2,513,693 1,781,851 3,263,652
Depreciation and
amortization......... 768,496 259,336 745,004 1,640,025 (c) 1,118,403 2,263,982 (c)
Field and technical.... 303,600 98,293 417,273 877,870 666,090 988,435
Sales and marketing.... 128,909 16,590 58,414 659,667 339,934 947,284
----------- --------- ----------- ----------- ------------ ------------
Total operating
expenses........... 2,830,770 959,268 3,277,651 8,037,456 5,495,042 9,831,878
----------- --------- ----------- ----------- ------------ ------------
Operating loss........... (718,818) (102,107) (1,080,653) (2,703,273) (1,669,314) (2,787,192)
----------- --------- ----------- ----------- ------------ ------------
Other income and
expenses............... (155,417) (21,878) (549,169) (795,478) (c) (536,873) (1,049,583) (c)
----------- --------- ----------- ----------- ------------ ------------
Loss before minority
interest and income tax
benefit................ (874,235) (123,985) (1,629,822) (3,498,751) (2,206,187) (3,836,775)
Minority interest........ -- -- 109,837 -- -- --
Income tax benefit....... -- -- 334,451 373,323 373,323 --
----------- --------- ----------- ----------- ------------ ------------
Net loss................. (874,235) (123,985) (1,185,534) (3,125,428) (1,832,864) (3,836,775)
Preferred stock
dividends.............. (591,175) (230,407) -- -- -- --
----------- --------- ----------- ----------- ------------ ------------
Net loss after preferred
stock dividends........ $(1,465,410) $(354,392) $(1,185,534) $(3,125,428) (c) $ (1,832,864) $ (3,836,775) (c)
=========== ========= =========== =========== =========== ============
PER SHARE DATA:
Net loss per share(d).... $ 157.65 $ 229.37 (e) 147.12 159.10 (e)
Weighted average common
share equivalents
outstanding............ 7,520 13,626 (e) 12,458 24,116 (e)
OTHER FINANCIAL DATA:
Capital expenditures..... $ 717,325 $ 42,504 $ 1,291,080 $14,416,135 $ 10,822,681 $ 22,034,377
Net cash provided by
(used in) operating
activities............. 82,590 144,076 (742,928) (1,998,007) (1,245,653) (320,854)
Net cash used in
investing activities... (717,325) (42,504) (1,744,816) (14,441,268) (10,340,019) (22,105,256)
Net cash provided by
(used in) financing
activities............. 596,947 (104,889) 2,771,619 16,221,873 11,755,741 22,343,018
EBITDA(f)................ 124,836 157,229 (207,068) (803,228) (292,719) (473,328)
Ratio of earnings to
fixed charges(g)....... -- -- -- -- -- --
OTHER OPERATING DATA:
Cable subscribers........ 14,219 18,169 16,570 30,008
Average monthly cable
revenue per
subscriber............. $ 25.47 $ 26.71 $ 25.25 $ 27.34
Homes passed............. 47,131 91,457
Cable penetration
level(h)............... 35.16% 32.81%
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
SUCCESSOR COMPANY(a)
--------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, 1997
---------------------------- ------------------------------
1995 1996 ACTUAL AS ADJUSTED(i)
------------ ------------ ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $ 3,498,482 $(3,201,202) $(16,204,619) $247,363,802
Property and equipment, net............................. 6,976,268 21,477,209 41,493,409 41,493,409
Total assets............................................ 19,346,317 29,941,745 50,073,981 308,738,108
Total liabilities....................................... 12,992,682 15,743,318 29,006,927 253,030,503
Accumulated deficit..................................... (1,185,534) (4,310,962) (8,147,737) (8,147,737)
Total stockholders' equity.............................. 6,269,156 14,198,427 21,067,054 55,707,605
</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
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
Prospectus.
(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 Prospectus.
(c) On a pro forma basis, after giving effect to the Offering and the Equity
Private Placement and the application of the net proceeds therefrom, the
Company's interest expense would have increased by approximately $19,030,000
and $13,879,000 and depreciation and amortization would have increased by
approximately $577,000 and $430,000 as a result of amortization of debt
issuance costs for the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively, and its net loss after Preferred
Stock dividends would have been approximately $22,733,000 and $18,145,000
for the year ended December 31, 1996 and the nine months ended September 30,
1997, respectively.
(d) 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.
(e) On a pro forma basis, after giving effect to the Offering and the Equity
Private Placement and the application of the net proceeds therefrom, net
loss per share would have been $648.14 and $398.23 for the year ended
December 31, 1996 and the nine months ended September 30, 1997,
respectively, and the weighted average common share equivalents outstanding
would have been 35,074 and 45,564 at December 31, 1996 and September 30,
1997, respectively. All options and warrants have been excluded from the
calculations of net loss per share as they are anti-dilutive.
(f) EBITDA represents earnings before preferred stock dividends, interest
expense, 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.
(g) Earnings consist of income before minority interests, 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 year ended December 31, 1994, the four months ended April 30, 1995, the
eight months ended December 31, 1995, the year ended December 31, 1996 and
the nine months ended September 30, 1996 and 1997 by $874,235, $123,985,
$1,629,822, $3,498,751, $2,206,187 and $3,836,775, respectively. On a pro
forma basis, after giving effect to the Offering and the Equity Private
Placement, the Company's earnings would have been insufficient to cover its
fixed charges for the year ended December 31, 1996 and the nine months ended
September 30, 1997 by $23,106,207 and $18,145,103, respectively.
(h) 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.
(i) Adjusted to give effect to the Offering and the Equity Private Placement and
application of the net proceeds therefrom. See "Use of Proceeds."
14
<PAGE> 16
RISK FACTORS
An investment in the Exchange Notes involves a significant degree of risk.
In determining whether to tender their Senior Discount Notes for Exchange Notes,
potential investors should consider carefully all of the information set forth
in this Prospectus and, in particular, the following factors. This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in
such forward-looking statements.
HISTORY OF LOSSES; EXPECTATION OF FUTURE LOSSES AND NEGATIVE CASH FLOWS FROM
OPERATIONS
Each of the Systems has had 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
Systems have incurred aggregate net losses, as of September 30, 1997, in excess
of $8.1 million and aggregate negative cash flow from operations of $3.1
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, including its obligations under
the Notes. See "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 Tele-Communications,
Inc. ("TCI") in Montgomery, TCI and Charter Communications ("Charter") in
Columbus and Comcast Cablevision 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
Federal Communications Commission (the "FCC"), for which spectrum is expected to
be auctioned by the FCC in February 1998. In addition, the Telecommunications
Act of 1996 (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 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.
15
<PAGE> 17
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 Corp. ("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 Corp. ("AT&T "), MCI
Communications Corporation ("MCI ") and Sprint Corporation ("Sprint")). Other
competitors are likely to include independent local exchange carriers, including
other Regional Bell Operating Companies ("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 Integrated Services Digital Network ("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 Internet service providers ("ISPs").
HIGH LEVERAGE; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS
At September 30, 1997, on a pro forma basis, giving effect to the Offering,
the Equity Private Placement and the application of the net proceeds therefrom,
the Company would have had $248.0 million of indebtedness and its stockholders'
equity would have been $55.7 million. In addition, the Company expects to have
$50.0 million of availability under the New Credit Facility and the accretion of
original issue discount on the Notes will cause an increase in indebtedness of
approximately $196.7 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.
On a pro forma basis, giving effect to the Offering and the Equity Private
Placement and the application of the net proceeds therefrom, the Company's
earnings would have been insufficient to cover its fixed charges for the year
ended December 31, 1996 and the nine months ended September 30, 1997 by
$23,106,207 million and $18,145,103 million, respectively, and its EBITDA less
capital expenditures and interest expense would have been $16,274,861 and
$23,607,170, 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, including its obligations on the
Notes. 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. Such defaults could result in
a default on the Notes and could delay or preclude payment of interest or
principal on the Notes. 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" and "Description of the
Notes -- Covenants."
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
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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, including its obligations under the Notes. 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,
including its obligations with respect to the Notes.
The Indenture imposes, and the 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 New
Credit Facility is expected to require the Company to maintain certain financial
ratios. See "Description of Certain Indebtedness -- New Credit Facility" and
"Description of the Exchange Notes." 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.
HOLDING COMPANY STRUCTURE; PRIORITY OF SECURED DEBT
The Company is a holding company with no direct operations and no
significant assets other than the stock of its subsidiaries. The Company is
dependent on the cash flows of its subsidiaries to meet its obligations,
including the payment of interest and principal on the Notes. The Company's
subsidiaries are separate legal entities that have no obligation to pay any
amounts due pursuant to the Notes or to make any funds available therefor,
whether by dividends, loans or other payments. Because the Company's
subsidiaries will not guarantee the payment of the principal or interest on the
Notes, any right of the Company to receive assets of any of its subsidiaries
upon its liquidation or reorganization (and consequent right of holders of the
Notes to participate in the distribution or realize proceeds from those assets)
will be effectively subordinated to the claims of the creditors of any such
subsidiary (including trade creditors and holders of indebtedness of such
subsidiary), except if and to the extent the Company is itself a creditor of
such subsidiary, in which case the claims of the Company would still be
effectively subordinated to any security interest in the assets of such
subsidiary held by other creditors. As of September 30, 1997, after giving
effect to the Offering and the Equity Private Placement, the subsidiaries of the
Company would have had approximately $4.1 million of liabilities (excluding
intercompany payables).
The Exchange Notes are unsecured and therefore will be effectively
subordinated in right of payment to any secured indebtedness of the Company. The
Indenture will permit 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 other
secured indebtedness pursuant to one or more credit facilities. In October 1997,
the Company received a commitment letter for a $50.0 million New Credit Facility
from First Union to be used for working capital and other purposes. It is
currently contemplated that the Company's obligations under the New Credit
Facility will be secured by all current and future assets of the Company. In the
event of a bankruptcy, liquidation, dissolution, reorganization or similar
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<PAGE> 19
proceeding with respect to the Company, the holders of any secured indebtedness
will be entitled to proceed against the collateral that secures such
indebtedness and such collateral will not be available for satisfaction of any
amounts owed under the Exchange Notes. In addition, to the extent such assets
did not satisfy in full the secured indebtedness, the holders of such
indebtedness would have a claim for any shortfall that would be pari passu (or
effectively senior if the indebtedness were issued by a subsidiary) with the
Exchange Notes. Accordingly, there may only be a limited amount of assets
available to satisfy any claims of the holders of the Exchange Notes upon an
acceleration of the Exchange Notes.
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 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 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 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
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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 $36.0 million in the
fourth quarter of 1997 and through 1998 to expand and upgrade the Montgomery and
Columbus networks. 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. Although there can be no assurance, the
Company believes that the proceeds from the Offering and the Equity Private
Placement and amounts expected to be available under the 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 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, and the Company's initial
franchise for the Beach Cable System expires in July 2007. The Company's
application for a cable franchise in Augusta, Georgia was approved in January
1998. The Company expects the Augusta franchise to be awarded in February 1998.
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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 and Alabama 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 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.
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
could be materially adversely affected if demand for an integrated bundle of
Broadband Services is materially lower than anticipated.
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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 Cable Television Consumer
Protection and Competition Act of 1992 (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 "-- 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 long distance access services to small- and medium-sized
businesses and other customers by carrying traffic to ITC'DeltaCom's point of
presence ("POP") in Montgomery, and shortly will offer these services in
Columbus. The Company obtains telephone billing and switching services from
Interstate Telephone Company, another ITC Company. See "Certain 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 "-- 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 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
"Management."
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 Funds owned approximately 14.2%, South
Atlantic owned approximately 15.0% and SCANA
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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 Exchange
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 Exchange 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 Exchange Notes.
ABSENCE OF PUBLIC MARKET
The Senior Discount Notes have been designated for trading by qualified
buyers in the PORTAL Market. The Senior Discount Notes have not been registered
under the Securities Act, however, and will continue to be subject to
restrictions on transferability to the extent that they are not exchanged for
Exchange Notes. Furthermore, the Exchange Offer will not be conditioned upon any
minimum or maximum aggregate principal amount of Senior Discount Notes being
tendered for exchange. No assurance can be given as to the liquidity of the
trading market of the Senior Discount Notes following the Exchange Offer.
Although the Exchange Notes will generally be permitted to be resold or
otherwise transferred by the holders thereof (other than any holder that is (i)
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) a broker-dealer that acquired Senior Discount Notes as a
result of market-making activities or other trading activities) without
compliance with the registration requirements under the Securities Act, the
Exchange Notes will constitute a new issue of securities for which there is
currently no established trading market. If a trading market does not develop or
is not maintained, holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the Exchange Notes develops, any such market may cease at any time. If a
public trading market develops for the Exchange Notes, future trading prices of
the Exchange Notes will depend on many factors, including, among other things,
prevailing interest rates, the market for similar securities, the financial
conditions and results of operations of the Company and other factors beyond the
control of the Company, including general economic conditions. The Company does
not intend to list the Exchange Notes on any national securities exchange or to
seek approval for quotation through any automated quotation system. The Company
has been advised by the Placement Agents that following completion of the
Exchange Offer, the Placement Agents intend to make a market in the Exchange
Notes. However, the Placement Agents are not obligated to do so and any
market-making activities with respect to the Exchange Notes may be discontinued
at any time without notice. Accordingly, no assurance can be given that an
active public or other market will develop for the Exchange Notes or as to the
liquidity of or the trading market for the Exchange Notes.
Notwithstanding the registration of the Exchange Notes in the Exchange
Offer, holders who are "affiliates" of the Company (within the meaning of Rule
405 under the Securities Act) may publicly offer for sale or resell the Exchange
Notes only in compliance with the provisions of Rule 144 under the Securities
Act or any other available exemptions under the Securities Act.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Senior Discount Notes, where such Senior Discount Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
CONSEQUENCES OF ORIGINAL ISSUE DISCOUNT ON EXCHANGE NOTES
The Senior Discount Notes were issued at a substantial discount from their
principal amount. Consequently, holders of Exchange Notes generally will be
required to include amounts in gross income for
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federal income tax purposes in advance of receipt of the cash payments to which
the income is attributable, and no cash payments of interest will be made until
April 15, 2003.
Moreover, the Exchange Notes will constitute "applicable high yield
discount obligations" ("AHYDOs") because the yield to maturity of the Exchange
Notes (treated as a continuation of the Senior Discount Notes) exceeds the
relevant applicable federal rate (the "AFR") at the time of issue by more than 5
percentage points. For October 1997, the long term AFR is 6.57% and the mid-term
AFR is 6.24% (based on semi-annual corresponding). The appropriate AFR depends
upon the weighted average maturity of the Exchange Notes. Since the Exchange
Notes constitute AHYDOs, the Company will not be entitled to deduct original
issue discount ("OID") accruing with respect thereto until such amounts are
actually paid. See "Certain United States Federal Income Tax Consequences" for a
more detailed discussion of the federal income tax consequences to participants
in the Exchange Offer.
If a bankruptcy proceeding is commenced by or against the Company under the
United States Bankruptcy Code after the issuance of the Exchange Notes, the
claim of a holder of Exchange Notes may be limited to an amount equal to the sum
of (i) the initial public offering price of the Senior Discount Notes and (ii)
that portion of the original issue discount that is not deemed to constitute
"unmatured interest" for purposes of the United States Bankruptcy Code. Any
original issue discount that was not amortized as of the commencement of any
such bankruptcy proceeding would constitute "unmatured interest."
CONSEQUENCES OF A FAILURE TO EXCHANGE SENIOR DISCOUNT NOTES
The Senior Discount Notes have not been registered under the Securities Act
or any state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. Senior Discount Notes
that remain outstanding after consummation of the Exchange Offer will continue
to bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Senior Discount Notes that remain
outstanding will not be entitled to any rights to have such Senior Discount
Notes registered under the Securities Act, except under certain limited
circumstances. The Company does not intend to register under the Securities Act
any Senior Discount Notes that remain outstanding after consummation of the
Exchange Offer. See "The Exchange Offer." To the extent that Senior Discount
Notes are not tendered and accepted in the Exchange Offer, a holder's ability to
sell such Senior Discount Notes could be adversely affected.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Senior Discount Notes
pursuant to the Exchange Offer will be made only after a timely receipt by the
Exchange Agent of (i) such Senior Discount Notes or a book-entry confirmation of
a book-entry transfer of the Senior Discount Notes into the Exchange Agent's
account at The Depository Trust Company ("DTC"); (ii) the Letter of Transmittal
(or a facsimile thereof), properly completed and duly executed, with any
required signature guarantees; and (iii) any other documents required by the
Letter of Transmittal. Holders of the Senior Discount Notes desiring to tender
such Senior Discount Notes in exchange for Exchange Notes should allow
sufficient time to ensure timely delivery. The Company and the Exchange Agent
are under no duty to give notification of defects or irregularities with respect
to the tenders of Senior Discount Notes for exchange. See "The Exchange Offer."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the Senior Discount Notes, the Company
entered into the Registration Rights Agreement with the Placement Agents,
pursuant to which the Company agreed to file and to use its best efforts to
cause to become effective with the Commission a registration statement with
respect to the exchange of the Senior Discount Notes for Exchange Notes with
terms identical in all material respects to the terms of the Senior Discount
Notes. A copy of the Registration Rights Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part (the
"Registration Statement"). The Exchange Offer is being made to satisfy the
contractual obligations of the Company under the Registration Rights Agreement.
By tendering Senior Discount Notes in exchange for Exchange Notes, each
holder will represent to the Company that: (i) any Exchange Notes to be received
by such holder will be acquired in the ordinary course of such holder's
business; (ii) such holder has no arrangement or understanding with any person
to participate in a distribution (within the meaning of the Securities Act) of
the Exchange Notes; (iii) such holder is not an "affiliate" of the Company
(within the meaning of Rule 405 under the Securities Act), or if such holder is
an affiliate, that such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable; (iv) such
holder has full power and authority to tender, exchange, sell, assign and
transfer the tendered Senior Discount Notes; (v) the Company will acquire good,
marketable and unencumbered title to the tendered Senior Discount Notes, free
and clear of all liens, restrictions, charges and encumbrances; and (vi) the
Senior Discount Notes tendered for exchange are not subject to any adverse
claims or proxies. Each tendering holder also will warrant and agree that such
holder will, upon request, execute and deliver any additional documents deemed
by the Company or the Exchange Agent to be necessary or desirable to complete
the exchange, sale, assignment, and transfer of the Senior Discount Notes
tendered pursuant to the Exchange Offer. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Senior Discount Notes, where
such Senior Discount Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, holders of Senior Discount Notes in any jurisdiction
in which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the Senior Discount Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any participant in
DTC whose name appears on a security position listing as a holder of Senior
Discount Notes (which, for purposes of the Exchange Offer, include beneficial
interests in the Senior Discount Notes held by direct or indirect participants
in DTC and Senior Discount Notes held in definitive form).
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange $1,000 principal amount at maturity of Exchange Notes for each $1,000
principal amount at maturity of Senior Discount Notes properly tendered prior to
the Expiration Date and not properly withdrawn in accordance with the procedures
described below. Holders may tender their Senior Discount Notes in whole or in
part in integral multiples of $1,000 principal amount at maturity.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Senior Discount Notes except that (i) the Exchange Notes will have
been registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Senior Discount Notes and
(ii) holders of the Exchange Notes will not be entitled to certain rights of
holders of the Senior Discount Notes under the Registration Rights Agreement.
The Exchange Notes will evidence the same indebtedness as
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the Senior Discount Notes (which they will replace) and will be issued pursuant
to, and entitled to the benefits of, the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Discount Notes being tendered for exchange. The Company
reserves the right in its sole discretion to purchase or make offers for any
Senior Discount Notes that remain outstanding after the Expiration Date or, as
set forth under "-- Conditions to the Exchange Offer," to terminate the Exchange
Offer and, to the extent permitted by applicable law, purchase Senior Discount
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer. As of the date of this Prospectus, $444.1 million aggregate
principal amount at maturity of Senior Discount Notes is outstanding.
Holders of Senior Discount Notes do not have any appraisal or dissenters'
rights in connection with the Exchange Offer. Senior Discount Notes that are not
tendered, or are tendered but not accepted, in connection with the Exchange
Offer will remain outstanding and, from and after October 15, 2002, will
continue to accrue interest in accordance with their terms. Following
consummation of the Exchange Offer, the holders of Senior Discount Notes will
continue to be subject to the existing restrictions on transfer thereof and will
not be entitled to any rights to have such Senior Discount Notes registered
under the Securities Act, except under limited circumstances. The Company does
not intend to register under the Securities Act any Senior Discount Notes that
remain outstanding after consummation of the Exchange Offer. See "Risk
Factors -- Consequences of a Failure to Exchange Senior Discount Notes."
If any tendered Senior Discount Notes are not accepted for exchange because
of an invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Senior Discount Notes will be
returned, without expense, to the tendering holder thereof promptly after the
Expiration Date.
Holders who tender Senior Discount Notes in connection with the Exchange
Offer will not be required to pay brokerage commissions or fees or, subject to
the instructions in the Letter of Transmittal, transfer taxes with respect to
the exchange of Senior Discount Notes in connection with the Exchange Offer. The
Company will pay all charges and expenses, other than certain applicable taxes
described below, in connection with the Exchange Offer. See "-- Fees and
Expenses."
THE BOARD OF DIRECTORS OF THE COMPANY MAKES NO RECOMMENDATION TO HOLDERS OF
SENIOR DISCOUNT NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR
ANY PORTION OF THEIR SENIOR DISCOUNT NOTES PURSUANT TO THE EXCHANGE OFFER. IN
ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF
SENIOR DISCOUNT NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO
THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF SENIOR DISCOUNT NOTES TO
TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND
CONSULTING WITH THEIR ADVISERS, IF ANY, BASED ON THEIR FINANCIAL POSITION AND
REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS, AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on
, 1998 unless the Exchange Offer is extended by the Company (in which
case the term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i) to
delay the acceptance of the Senior Discount Notes for exchange; (ii) to
terminate the Exchange Offer (whether or not any Senior Discount Notes have
theretofore been accepted for exchange) if the Company determines, in its sole
and absolute discretion, that any of the events or conditions referred to under
"-- Conditions to the Exchange Offer" has occurred or exists or has not been
satisfied; (iii) to extend the Expiration Date of the Exchange Offer and retain
all Senior Discount Notes tendered pursuant to the Exchange Offer, subject,
however, to the right of holders of Senior Discount Notes to
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<PAGE> 27
withdraw their tendered Senior Discount Notes as described under "-- Withdrawal
Rights;" and (iv) to waive any condition or otherwise amend the terms of the
Exchange Offer in any respect (whether or not any Senior Discount Notes have
theretofore been accepted for exchange). If the Exchange Offer is amended in a
manner determined by the Company to constitute a material change, or if the
Company waives a material condition of the Exchange Offer, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders of the Senior Discount Notes, and the
Company will extend the Exchange Offer to the extent required by Rule 14e-1
under the Exchange Act.
Any such delay in acceptance, termination, extension or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent (any
such oral notice to be promptly confirmed in writing) and by making a public
announcement thereof, and such announcement in the case of an extension will be
made no later than 9:00 a.m., New York City time, on the next business day after
the previously scheduled Expiration Date. Without limiting the manner in which
the Company may choose to make any public announcement, and subject to
applicable laws, the Company shall have no obligation to publish, advertise or
otherwise communicate any such public announcement other than by issuing a
release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, Exchange Notes for
Senior Discount Notes validly tendered and not withdrawn (pursuant to the
withdrawal rights described under "-- Withdrawal Rights") promptly after the
Expiration Date.
In all cases, delivery of Exchange Notes in exchange for Senior Discount
Notes tendered and accepted for exchange pursuant to the Exchange Offer will be
made only after timely receipt by the Exchange Agent of (i) Senior Discount
Notes or a book-entry confirmation of a book-entry transfer of Senior Discount
Notes into the Exchange Agent's account at DTC; (ii) the Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, with any required
signature guarantees; and (iii) any other documents required by the Letter of
Transmittal. Accordingly, the delivery of Exchange Notes might not be made to
all tendering holders at the same time, and will depend upon when Senior
Discount Notes, book-entry confirmations with respect to Senior Discount Notes
and other required documents are received by the Exchange Agent.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Senior Discount Notes into the Exchange Agent's account
at DTC.
Subject to the terms and conditions of the Exchange Offer, the Company will
be deemed to have accepted for exchange, and thereby exchanged, Senior Discount
Notes validly tendered and not withdrawn as, if and when the Company gives oral
or written notice to the Exchange Agent (any such oral notice to be promptly
confirmed in writing) of the Company's acceptance of such Senior Discount Notes
for exchange pursuant to the Exchange Offer. The Company's acceptance for
exchange of Senior Discount Notes tendered pursuant to any of the procedures
described above will constitute a binding agreement between the tendering holder
and the Company upon the terms and subject to the conditions of the Exchange
Offer. The Exchange Agent will act as agent for the Company for the purpose of
receiving tenders of Senior Discount Notes, Letters of Transmittal and related
documents, and as agent for tendering holders for the purpose of receiving
Senior Discount Notes, Letters of Transmittal and related documents and
transmitting Exchange Notes to holders who validly tendered Senior Discount
Notes. Such exchange will be made promptly after the Expiration Date. If for any
reason whatsoever the acceptance for exchange or the exchange of any Senior
Discount Notes tendered pursuant to the Exchange Offer is delayed (whether
before or after the Company's acceptance for exchange of Senior Discount Notes),
or the Company extends the Exchange Offer or is unable to accept for exchange or
exchange Senior Discount Notes tendered pursuant to the Exchange Offer, then,
without prejudice to the Company's rights set forth herein, the Exchange Agent
may, nevertheless, on behalf of the Company and subject to Rule 14e-1(c) under
the Exchange Act, retain tendered Senior Discount Notes and such Senior Discount
Notes may not be withdrawn except to the extent tendering holders are entitled
to withdrawal rights as described under "-- Withdrawal Rights."
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PROCEDURES FOR TENDERING SENIOR DISCOUNT NOTES
VALID TENDER. Except as set forth below, in order for Senior Discount
Notes to be validly tendered pursuant to the Exchange Offer, either (i) (a) a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees and any other required
documents, must be received by the Exchange Agent at the address set forth under
"-- Exchange Agent" prior to the Expiration Date and (b) tendered Senior
Discount Notes must be received by the Exchange Agent, or such Senior Discount
Notes must be tendered pursuant to the procedures for book-entry transfer set
forth below and a book-entry confirmation must be received by the Exchange
Agent, in each case prior to the Expiration Date, or (ii) the guaranteed
delivery procedures set forth below must be complied with.
If less than all of the Senior Discount Notes held by a holder are tendered
by such holder, such holder should fill in the amount of Senior Discount Notes
being tendered in the appropriate box on the Letter of Transmittal. The entire
amount of Senior Discount Notes delivered to the Exchange Agent will be deemed
to have been tendered unless otherwise indicated.
If any Letter of Transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company, in its sole discretion, of such person's
authority to so act must be submitted.
Any beneficial owner of Senior Discount Notes that are held by or
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee or custodian is urged to contact such entity promptly if such
beneficial holder wishes to participate in the Exchange Offer.
THE METHOD OF DELIVERY OF SENIOR DISCOUNT NOTES, THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY AND PROPER INSURANCE SHOULD BE OBTAINED. NO
LETTER OF TRANSMITTAL OR SENIOR DISCOUNT NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS.
BOOK-ENTRY TRANSFER. The Exchange Agent will make a request to establish
an account with respect to the Senior Discount Notes at DTC for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in DTC's book-entry transfer
facility system may make a book-entry delivery of the Senior Discount Notes by
causing DTC to transfer such Senior Discount Notes into the Exchange Agent's
account at DTC in accordance with DTC's procedures for transfers. However,
although delivery of Senior Discount Notes may be effected through book-entry
transfer into the Exchange Agent's account at DTC, the Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees and any other required documents, must in any case be
delivered to and received by the Exchange Agent at its address set forth under
"-- Exchange Agent" prior to the Expiration Date, or the guaranteed delivery
procedure set forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
SIGNATURE GUARANTEES. Certificates for Senior Discount Notes need not be
endorsed and signature guarantees on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are unnecessary unless (a) a certificate for
Senior Discount Notes is registered in a name other than that of the person
surrendering the certificate or (b) a registered holder completes the box
entitled "Special Issuance Instructions" or
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<PAGE> 29
"Special Delivery Instructions" in the Letter of Transmittal. In the case of (a)
or (b) above, such certificates for Senior Discount Notes must be duly endorsed
or accompanied by a properly executed bond power, with the endorsement or
signature on the bond power and on the Letter of Transmittal or the notice of
withdrawal, as the case may be, guaranteed by a firm or other entity identified
in Rule 17Ad-15 under the Exchange Act as an "eligible guarantor institution,"
including (as such terms are defined therein) (i) a bank; (ii) a broker, dealer,
municipal securities broker or dealer or government securities broker or dealer;
(iii) a credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association (each an "Eligible
Institution"), unless surrendered on behalf of such Eligible Institution. See
Instructions 2 and 5 to the Letter of Transmittal.
GUARANTEED DELIVERY. If a holder desires to tender Senior Discount Notes
pursuant to the Exchange Offer and the certificates for such Senior Discount
Notes are not immediately available or time will not permit all required
documents to reach the Exchange Agent before the Expiration Date, or the
procedures for book-entry transfer cannot be completed on a timely basis, such
Senior Discount Notes may nevertheless be tendered, provided that all of the
following guaranteed delivery procedures are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form accompanying the Letter of
Transmittal, setting forth the name and address of the holder of Senior
Discount Notes and the amount of Senior Discount Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three
New York Stock Exchange trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered
Senior Discount Notes, in proper form for transfer, or a book-entry
confirmation, as the case may be, and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent. The Notice of Guaranteed Delivery may be delivered by
hand, or transmitted by facsimile or mail to the Exchange Agent and must
include a guarantee by an Eligible Institution in the form set forth in the
Notice of Guaranteed Delivery; and
(iii) the certificates (or book-entry confirmation) representing all
tendered Senior Discount Notes, in proper form for transfer, together with
a properly completed and duly executed Letter of Transmittal, with any
required signature guarantees and any other documents required by the
Letter of Transmittal, are received by the Exchange Agent within three New
York Stock Exchange trading days after the date of execution of the Notice
of Guaranteed Delivery.
DETERMINATION OF VALIDITY. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered Senior Discount Notes will be determined by the Company, in its
sole discretion, which determination shall be final and binding on all parties.
The Company reserves the absolute right, in its sole and absolute discretion, to
reject any and all tenders determined by it not to be in proper form or the
acceptance for exchange of which may, in the view of counsel to the Company, be
unlawful. The Company also reserves the absolute right, subject to applicable
law, to waive any of the conditions of the Exchange Offer as set forth under
"-- Conditions to the Exchange Offer" or any defect or irregularity in any
tender of Senior Discount Notes of any particular holder whether or not similar
defects or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal and the instructions thereto) will be
final and binding on all parties. No tender of Senior Discount Notes will be
deemed to have been validly made until all defects or irregularities with
respect to such tender have been cured or waived. Neither the Company, any
affiliates or assigns of the Company, the Exchange Agent or any other person
shall be under any duty to give any notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification.
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RESALES OF EXCHANGE NOTES
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties unrelated to the Company, the Company
believes that holders of Senior Discount Notes (other than any holder that is
(i) a broker-dealer that acquired Senior Discount Notes as a result of
market-making activities or other trading activities or (ii) an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act), who
exchange their Senior Discount Notes for Exchange Notes pursuant to the Exchange
Offer may offer for resale, resell and otherwise transfer such Exchange Notes
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Notes. Any holder who tenders
Senior Discount Notes in the Exchange Offer with the intention to participate,
or for the purpose of participating, in a distribution of the Exchange Notes or
who is an affiliate of the Company may not rely upon such interpretations by the
staff of the Commission and, in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction. Failure to
comply with such requirements in such instance may result in such holder
incurring liabilities under the Securities Act for which the holder is not
indemnified by the Company. The staff of the Commission has not considered the
Exchange Offer in the context of a no-action letter, and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Senior Discount Notes, where such
Senior Discount Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The Company has agreed
that, for a period not to exceed 180 days after the Expiration Date, it will
furnish additional copies of this Prospectus, as amended or supplemented, to any
broker-dealer that reasonably requests such documents for use in connection with
any such resale. See "Plan of Distribution."
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Senior Discount Notes may
be withdrawn at any time prior to the Expiration Date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its address set forth under "-- Exchange Agent" prior to
the Expiration Date. Any such notice of withdrawal must specify the name of the
person who tendered the Senior Discount Notes to be withdrawn, the aggregate
principal amount of Senior Discount Notes to be withdrawn, and (if certificates
for such Senior Discount Notes have been tendered) the name of the registered
holder of the Senior Discount Notes as set forth on the Senior Discount Notes,
if different from that of the person who tendered such Senior Discount Notes. If
certificates for Senior Discount Notes have been delivered or otherwise
identified to the Exchange Agent, the notice of withdrawal must specify the
certificate number on the particular Senior Discount Notes to be withdrawn and
the signature on the notice of withdrawal must be guaranteed by an Eligible
Institution, except in the case of Senior Discount Notes tendered for the
account of an Eligible Institution. If Senior Discount Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in "-- Procedures
for Tendering Senior Discount Notes," the notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawal of
Senior Discount Notes and must otherwise comply with the procedures of DTC.
Withdrawals of tenders of Senior Discount Notes may not be rescinded. Senior
Discount Notes properly withdrawn will not be deemed validly tendered for
purposes of the Exchange Offer, but may be retendered at any subsequent time
prior to the Expiration Date by following any of the procedures described above
under "-- Procedures for Tendering Senior Discount Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, which determination shall be final and binding on all
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<PAGE> 31
parties. Neither the Company, any affiliates of the Company, the Exchange Agent
or any other person shall be under any duty to give any notification of any
defects or irregularities in any notice of withdrawal or incur any liability for
failure to give any such notification. Any Senior Discount Notes which have been
tendered but which are withdrawn will be returned to the holder thereof promptly
after withdrawal.
INTEREST ON THE EXCHANGE NOTES
Interest will not accrue on the Exchange Notes prior to October 15, 2002.
From and after October 15, 2002, the Exchange Notes will bear interest, which
will be payable in cash, at a rate of 11 7/8% per annum on each April 15 and
October 15, commencing April 15, 2003.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer or any extension
of the Exchange Offer, the Company will not be required to accept for exchange,
or to exchange, any Senior Discount Notes for any Exchange Notes, and may, at
any time and from to time, terminate the Exchange Offer or waive any conditions
to or amend the Exchange Offer in any respect (whether or not any Senior
Discount Notes have theretofore been accepted for exchange), if the Exchange
Offer is determined by the Company, in its sole and absolute discretion, to
violate applicable law or any applicable interpretation of the staff of the
Commission.
If such waiver or amendment constitutes a material change to the Exchange
Offer, the Company will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the registered holders of the Senior
Discount Notes, and the Company will extend the Exchange Offer to the extent
required by Rule 14e-1 under the Exchange Act.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Delivery of the Letters of Transmittal and any
other required documents, questions, requests for assistance, and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent as follows:
BY FACSIMILE
(212) 780-0592
Attention: Customer Service
Confirm by telephone: (800) 548-6565
BY MAIL
United States Trust Company of New York
P.O. Box 843
Cooper Station
New York, New York 10276
Attention: Corporate Trust Services
BY HAND BEFORE 4:30 P.M.
United States Trust Company of New York
111 Broadway
New York, New York 10006
Attention: Lower Level Corporate Trust Window
BY OVERNIGHT COURIER AND BY HAND AFTER 4:30 P.M.
United States Trust Company of New York
770 Broadway, 13th Floor
New York, New York 10003
DELIVERY TO OTHER THAN THE ABOVE ADDRESSES OR FACSIMILE NUMBER WILL NOT
CONSTITUTE A VALID DELIVERY.
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FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail. Additional solicitation may be
made personally or by telephone or other means by officers, directors or
employees of the Company.
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company has
agreed to pay the Exchange Agent reasonable and customary fees for its services
and will reimburse it for its reasonable out-of-pocket expenses in connection
therewith. The Company will also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus and related documents to the beneficial
owners of Senior Discount Notes, and in handling or tendering for their
customers.
Holders who tender their Senior Discount Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that if
Exchange Notes are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of the Senior Discount Notes tendered,
or if a transfer tax is imposed for any reason other than the exchange of Senior
Discount Notes in connection with the Exchange Offer, then the amount of any
such transfer tax (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
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USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive, in exchange, an equal number of Senior Discount Notes
in like principal amount at maturity. The form and terms of the Exchange Notes
will be identical in all material respects to the form and terms of the Senior
Discount Notes, except as otherwise described under "The Exchange Offer -- Terms
of the Exchange Offer."
The net proceeds to the Company from the sale of the Senior Discount Notes
were approximately $242.4 million, after deducting the estimated discount and
commissions and other expenses payable by the Company. The net proceeds to the
Company from the Equity Private Placement were approximately $32.2 million. As
of December 15, 1997, the Company has applied approximately $25.7 million of
such net proceeds to repay outstanding indebtedness (plus accrued interest of
the Company consisting of notes to SCANA, First National Bank of West Point and
notes issued in payment of the purchase prices for the Montgomery System and
Columbus System). The Company has applied or intends to apply the remaining net
proceeds of the Offering and the Equity Private Placement as follows: (i) for
capital expenditures associated with the continued expansion of the Company's
networks in Montgomery and Columbus; (ii) for capital expenditures associated
with construction of Integrated Broadband Networks in Panama City Beach/Panama
City, Charleston and Augusta as part of the Company's expansion plan (which
includes approximately $3.9 million for the cash portion of the purchase price
of the Beach Cable System); (iii) to fund development and initial construction
costs associated with expansion to new cities, including possible strategic
acquisitions of businesses that become part of the Company's expansion plan; and
(iv) for additional working capital and other general corporate purposes,
including funding operating deficits. The actual allocation of funds among these
uses will depend on future developments in or affecting the Company's business,
the competitive climate in which it operates and the emergence of future
opportunities. Prior to the application of the net proceeds from the Offering
and Equity Private Placement as described above, such funds will be invested in
short-term, investment grade securities.
The note to SCANA that was repaid consisted of $11.0 million of principal
plus accrued interest (approximately $305,300). The note accrued interest at the
rate of 12% per annum and was payable upon demand after January 1, 1998.
The note to First National Bank of West Point that was repaid consisted of
$3.0 million of principal plus accrued interest (approximately $51,000). The
note accrued interest at the rate of prime plus .5% per annum and was payable on
December 15, 1997.
The note that was repaid that was issued in payment of the purchase price
for the Montgomery System (the "Montgomery Note") consisted of $6.0 million of
principal plus accrued interest (approximately $163,500). The Montgomery Note
bore interest at 9% per year, and the Montgomery Note was due and payable on
March 31, 2000. ITC Holding was a co-obligor under the Montgomery Note. See
"Certain Transactions."
The note that was repaid that was issued in payment of the purchase price
for the Columbus System (the "Columbus Note") consisted of $5.0 million of
principal plus accrued interest (approximately $136,300). The Columbus Note bore
interest at 9% per year, and the Columbus Note was due and payable on September
29, 2000. ITC Holding was a guarantor of the Columbus Note. See "Certain
Transactions."
The Company estimates the cost of constructing an Interactive Broadband
Network in a city at approximately $35 million to $50 million. 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 the proceeds from the Offering and the Equity Private
Placement and amounts expected to be available under the New
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<PAGE> 34
Credit Facility, will provide sufficient funds to expand the Montgomery and
Columbus networks 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 New Credit Facility is not entered into or
actual costs vary. In addition, the Company will need to seek 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. See "Risk Factors -- Significant Capital Requirements."
In addition, as part of its business strategy, the Company intends to
continue to expand into additional cities in the southeastern United States and
will continue to evaluate potential acquisitions, joint ventures and strategic
alliances. Except for the recent acquisition of the Beach Cable System, the
Company currently has no agreement with respect to any acquisition, although
from time to time it has discussions with other companies and assesses
opportunities on an on-going basis. A portion of the proceeds of the Offering,
as well as additional sources of capital such as credit facilities and other
borrowings, and public and private debt and equity issuances, may be used to
fund any such construction in additional cities, acquisitions, joint ventures
and strategic alliances. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
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 and is expected to be limited by the terms
of the New Credit Facility. See "Description of Certain Indebtedness -- New
Credit Facility" and "Description of the Exchange Notes."
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CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of September 30, 1997 on a historical basis and as adjusted to reflect the
Offering, the Equity Private Placement and the application of the net proceeds
therefrom. See "Use of Proceeds," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's financial statements and the notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------
AS
ACTUAL ADJUSTED(a)
----------- ------------
<S> <C> <C>
Cash................................................... $ 0 $251,068,421
=========== ============
Long-term debt, including current maturities:
Montgomery Note...................................... $ 6,000,000 $ --
Columbus Note........................................ 5,000,000 --
SCANA line of credit................................. 11,000,000 --
Senior Discount Notes and Exchange Notes............. -- 247,523,576
Other long term debt................................. 1,956,785 456,785
----------- ------------
Total long-term debt, including current
maturities...................................... 23,956,785 247,980,361(c)
----------- ------------
Warrants............................................... 2,486,960(b)
------------
Stockholders equity:
Preferred Stock, $.01 par value, 50,000 shares
authorized at September 30, 1997, 26,052 shares
issued and outstanding at September 30, 1997;
47,500 shares issued and outstanding, as
adjusted.......................................... 261 475(d)
Common Stock $.01 par value, 15,000 shares authorized
at September 30, 1997, 0 shares issued and
outstanding at September 30, 1997 and as
adjusted.......................................... -- --
Additional paid-in-capital........................... 29,214,530 61,367,907(b)
Accumulated deficit.................................. (8,147,737) (8,147,737)
----------- ------------
Total stockholders' equity........................ 21,067,054 53,220,645
----------- ------------
Total capitalization.............................. $45,023,839 $303,687,966
=========== ============
</TABLE>
- ---------------
(a) Since the Exchange Notes are substantially identical to the Senior Discount
Notes, no adjustments have been made or are necessary to reflect the
exchange.
(b) Of the $250.0 million gross proceeds from the Offering, $247.5 million has
been allocated to the initial Accreted Value of the Notes and $2.5 million
has been allocated to liabilities to reflect the issuance of the Warrants.
No assurance can be given that the value allocated to the Warrants will be
indicative of the price at which the Warrants may actually trade.
(c) Excludes $50.0 million expected to be available under the New Credit
Facility.
(d) Excludes the 1,658 shares of Preferred Stock issuable upon exercise of the
Warrants issued in the Offering. See "Description of the Warrants."
Additionally, excludes 753 shares of Preferred Stock issuable to SCANA upon
exercise of warrants. See "Description of Capital Stock."
34
<PAGE> 36
SELECTED CONSOLIDATED 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, 1992, 1993 and 1994, the four months ended
April 30, 1995, the eight months ended December 31, 1995 and the year ended
December 31, 1996 have been derived from the audited financial statements of the
Predecessor Company and the Company. The selected financial and operating data
as of and for the nine months ended September 30, 1996 and 1997 have been
derived from the unaudited consolidated financial statements of the Company and,
in the opinion of the Company, include all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of such information.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
The selected financial and operating data set forth below should be read in
conjunction with "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
the notes thereto included elsewhere in this Prospectus. 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
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 Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY (a)
---------------------------------------------------------
YEAR YEAR YEAR FOUR MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 30,
1992 1993 1994 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $ 1,306,883 $ 1,706,138 $ 2,111,952 $ 857,161
Operating expenses:
General and
administrative......... 566,248 479,868 587,579 175,724
Programming charges...... 604,820 710,158 1,042,186 409,325
Depreciation and
amortization........... 607,080 641,583 768,496 259,336
Field and technical...... 398,142 365,780 303,600 98,293
Sales and marketing...... 211,664 202,813 128,909 16,590
----------- ----------- ----------- -----------
Total operating
expenses............... 2,387,954 2,400,202 2,830,770 959,268
----------- ----------- ----------- -----------
Operating loss............. (1,081,071) (694,064) (718,818) (102,107)
----------- ----------- ----------- -----------
Other income and
expenses................. (372,432) (255,933) (155,417) (21,878)
----------- ----------- ----------- -----------
Loss before minority
interest and income tax
benefit.................. (1,453,503) (949,997) (874,235) (123,985)
Minority interest.......... -- -- -- --
Income tax benefit......... -- -- -- --
----------- ----------- ----------- -----------
Net loss................... (1,453,503) (949,997) (874,235) (123,985)
Preferred stock
dividends................ -- (285,645) (591,175) (230,407)
----------- ----------- ----------- -----------
Net loss after preferred
stock dividends.......... $(1,453,503) $(1,235,642) $(1,465,410) $ (354,392)
=========== =========== =========== ===========
PER SHARE DATA:
Net loss per share (d).....
Weighted average common
share equivalents
outstanding..............
OTHER FINANCIAL DATA:
Capital expenditures....... $ 504,313 $ 1,427,433 $ 717,325 $ 42,504
Net cash provided by (used
in) operating
activities............... (1,174,278) 5,062 82,590 144,076
Net cash used in investing
activities............... (466,751) (1,402,113) (717,325) (42,504)
Net cash provided by (used
in) financing
activities............... 1,623,478 1,450,080 596,947 (104,889)
EBITDA (f)................. (466,783) 52,481 124,836 157,229
Ratio of earnings to fixed
charges (g).............. -- -- -- --
OTHER OPERATING DATA:
Cable subscribers..........
Average monthly cable
revenue per subscriber...
Homes passed...............
Cable penetration level
(h)......................
<CAPTION>
SUCCESSOR COMPANY (a)
------------------------------------------------------------
EIGHT
MONTHS NINE NINE
ENDED YEAR MONTHS MONTHS
DECEMBER ENDED ENDED ENDED
31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 (B) 1996 1996 1997
----------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $2,196,998 $ 5,334,183 $ 3,825,728 $ 7,044,686
Operating expenses:
General and
administrative......... 1,027,001 2,346,201 1,588,764 2,368,525
Programming charges...... 1,029,959 2,513,693 1,781,851 3,263,652
Depreciation and
amortization........... 745,004 1,640,025(c) 1,118,403 2,263,982(c)
Field and technical...... 417,273 877,870 666,090 988,435
Sales and marketing...... 58,414 659,667 339,934 947,284
---------- ------------ ------------- -------------
Total operating
expenses............... 3,277,651 8,037,456 5,495,042 9,831,878
---------- ------------ ------------- -------------
Operating loss............. (1,080,653) (2,703,273) (1,669,314) (2,787,192)
---------- ------------ ------------- -------------
Other income and
expenses................. (549,169) (795,478)(c) (536,873) (1,049,583)(c)
---------- ------------ ------------- -------------
Loss before minority
interest and income tax
benefit.................. (1,629,822) (3,498,751) (2,206,187) (3,836,775)
Minority interest.......... 109,837 -- -- --
Income tax benefit......... 334,451 373,323 373,323 --
---------- ------------ ------------- -------------
Net loss................... (1,185,534) (3,125,428) (1,832,864) (3,836,775)
Preferred stock
dividends................ -- -- -- --
---------- ------------ ------------- -------------
Net loss after preferred
stock dividends.......... $(1,185,534) $ (3,125,428)(c) $ (1,832,864) $ (3,836,775)(c)
=========== ============ ============= =============
PER SHARE DATA:
Net loss per share (d)..... $ 157.65 $ 229.37(e) $ 147.12 $ 159.10(e)
Weighted average common
share equivalents
outstanding.............. 7,520 13,626(e) 12,458 24,116(e)
OTHER FINANCIAL DATA:
Capital expenditures....... $1,291,080 $ 14,416,135 $ 10,822,681 $ 22,034,377
Net cash provided by (used
in) operating
activities............... (742,928) (1,998,007) (1,245,653) (320,854)
Net cash used in investing
activities............... (1,744,816) (14,441,268) (10,340,019) (22,105,256)
Net cash provided by (used
in) financing
activities............... 2,771,619 16,221,873 11,755,741 22,343,018
EBITDA (f)................. (207,068) (803,228) (292,719) (473,328)
Ratio of earnings to fixed
charges (g).............. -- -- -- --
OTHER OPERATING DATA:
Cable subscribers.......... 14,219 18,169 16,570 30,008
Average monthly cable
revenue per subscriber... $ 25.47 $ 26.71 $ 25.25 $ 27.34
Homes passed............... 47,131 91,457
Cable penetration level
(h)...................... 35.16% 32.81%
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
PREDECESSOR COMPANY (a) SUCCESSOR COMPANY (a)
------------------------------------------ -------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ (5,509,640) $ (1,394,676) $ (3,559,715) $ 3,498,482 $ (3,201,202) $ (16,204,619)
Property and equipment, net............ 4,115,575 4,684,479 4,833,142 6,976,268 21,477,209 41,493,409
Total assets........................... 4,314,146 4,972,191 4,987,354 19,346,317 29,941,745 50,073,981
Total liabilities...................... 5,779,937 2,968,729 4,734,947 12,992,682 15,743,318 29,006,927
Minority interest...................... -- -- -- 84,479 -- --
Accumulated deficit.................... (3,355,146) (4,305,143) (6,056,198) (1,185,534) (4,310,962) (8,147,737)
Total stockholders' equity............. (1,465,791) 2,003,462 252,407 6,269,156 14,198,427 21,067,054
</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
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
Prospectus.
(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 Prospectus.
(c) On a pro forma basis, after giving effect to the Offering and the Equity
Private Placement and the application of the net proceeds therefrom, the
Company's interest expense would have increased by approximately $19,030,000
and $13,879,000 and depreciation and amortization would have increased by
approximately $577,000 and $430,000 as a result of amortization of debt
issuance costs for the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively, and its net loss after preferred
stock dividends would have been approximately $22,733,000 and $18,145,000
for the year ended December 31, 1996 and the nine months ended September 30,
1997, respectively.
(d) 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.
(e) On a pro forma basis net loss per share after giving effect to the Offering
and the Equity Private Placement and the application of the net proceeds
therefrom, would have been $648.14 and $398.23 for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively and the
weighted average common share equivalents outstanding would have been 35,074
and 45,564 at December 31, 1996 and September 30, 1997, respectively. All
options and warrants have been excluded from the calculation of net loss per
share as they are anti-dilutive.
(f) EBITDA represents earnings before preferred stock dividends, interest
expense, 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.
(g) 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, 1992, 1993 and 1994, the four months ended
April 30, 1995, the eight months ended December 31, 1995, the year ended
December 31, 1996 and the nine months ended September 30, 1996 and 1997 by
$1,453,503, $949,997, $874,235, $123,985, $1,629,822, $3,498,751, $2,206,187
and $3,836,775, respectively. On a pro forma basis, after giving effect to
the Offering and the Equity Private Placement, the Company's earnings would
have been insufficient to cover its fixed charges for the year ended
December 31, 1996 and the nine months ended September 30, 1997 by
$23,106,207 and $18,145,103, respectively.
(h) 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.
36
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus. Unless
otherwise noted, dollar amounts have been rounded.
GENERAL
KNOLOGY offers its customers Broadband Services, including cable
television, telephone service (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 in two cities,
Montgomery, Alabama and Columbus, Georgia over its Interactive Broadband
Networks. The Company plans to expand its networks in these cities 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) 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 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 Prospectus.
Substantially all of the Company's revenues through September 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. 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 are expected to consist primarily of fixed monthly fees, and
revenues from the Company's telephone services are expected to 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, and TCI and Charter
in Columbus have been and are expected to continue to compete aggressively on
price for cable services.
The Company's principal operating expenses through September 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, Inc. (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
37
<PAGE> 39
Interactive Broadband Networks and equipment, and amortization of goodwill 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 personnel and marketing expenses.
Operating expenses related to the Company's Internet access services and
telephone services are expected to 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 the Systems and preparing to introduce new Broadband Services.
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 Systems and expands into new markets.
The Company has incurred net losses in each quarter since its inception,
and as of September 30, 1997, the Company had an accumulated deficit of $8.1
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 "Risk Factors -- History of
Losses; Expectation of Future Losses and Negative Cash Flows from Operations."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. The Company's revenues increased 84.1%, or $3.2 million, from
$3.8 million for the nine months ended September 30, 1996 to $7.0 million for
the nine months ended September 30, 1997. The Company generated subscriber
revenues of $3.4 million for the nine months ended September 30, 1996, as
compared to $6.1 million for the nine months ended September 30, 1997,
respectively, and included approximately $85,000 and $228,000 for pay-per-view
fees for the nine months ended September 30, 1996 and September 30, 1997,
respectively. The increase in subscriber revenues resulted principally from
additional subscribers being added as the Company's Systems were extended to new
areas within Montgomery and Columbus and, to some extent, from higher revenue
per subscriber resulting from increased demand for premium services.
Miscellaneous revenues for the nine months ended September 30, 1996 and for the
nine-month period ended September 30, 1997 were $489,000 and $899,000,
respectively. The increase in miscellaneous revenues was due to the increased
number of subscribers and expansion of the Systems.
EXPENSES. The Company's operating expenses increased 78.9%, or $4.3
million from $5.5 million, for the nine months ended September 30, 1996, to $9.8
million for the nine months ended September 30, 1997. Programming charges were
$1.8 million and $3.3 million which represent 46.6% and 46.3% of sales,
respectively. General and administrative expenses were $1.6 million and $2.4
million, depreciation and amortization costs were $1.1 million and $2.3 million,
field and technical expenses were $666,000 and $988,000, and sales and marketing
costs were $340,000 and $947,000, respectively, for such periods. The increases
in the Company's programming charges, general and administrative expenses, field
and technical costs and sales and marketing expenses reflect the Company
expanding the Systems, increasing its number of employees in connection with
such expansion and preparing to introduce Broadband Services.
NET LOSS. For the nine months ended September 30, 1996, the Company
incurred net losses of $1.8 million, and for the nine months ended September 30,
1997, the Company incurred net losses of $3.8 million. The Company expects its
net losses to continue to increase as new Broadband Services are introduced and
as the Company continues to expand its business. See "Risk Factors -- History of
Losses; Expectation of Future Losses and Negative Cash Flows from Operations."
38
<PAGE> 40
YEAR ENDED DECEMBER 31, 1994, FOUR MONTHS ENDED APRIL 30, 1995, EIGHT
MONTHS ENDED DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
REVENUES. The Company generated revenues of $2.1 million for the year
ended December 31, 1994, $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 $2.0
million, $811,000 and $2.0 million and $4.7 million, respectively, and included
approximately $23,000, $7,000, $58,000 and $141,000 for pay-per-view fees,
respectively, for such periods. Miscellaneous revenues for the year ended
December 31, 1994, four months ended April 30, 1995, the eight months ended
December 31, 1995 and the year ended December 31, 1996 were $108,000, $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 and for
the twelve months ended December 31, 1995 compared to the year ended December
31, 1994 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, respectively, and expansion of the Systems.
EXPENSES. The Company's operating expenses for the year ended December 31,
1994 were $2.8 million, 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 $1.0
million, $409,000, $1.0 million and $2.5 million, general and administrative
expenses were $588,000, $176,000, $1.0 million and $2.3 million, depreciation
and amortization costs were $768,000, $259,000, $745,000 and $1.6 million, field
and technical expenses were $304,000, $98,000, $417,000 and $878,000, and sales
and marketing costs were $129,000, $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 and for the
twelve months ended December 31, 1995 compared to the year ended December 31,
1994 was due primarily to an increase in the number of subscribers and the
number of employees resulting from the acquisition and expansion of the Systems.
NET LOSS. For the year ended December 31, 1994, the Company incurred net
losses of $874,000. 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 and for the twelve months ended December 31, 1995 compared to
the year ended December 31, 1994 was due to continued expansion of the Systems.
LIQUIDITY AND CAPITAL RESOURCES
The Company has required significant capital for operating and investing
activities in the development of its business. For the year ended December 31,
1996 and nine months ended September 30, 1997, the Company invested
approximately $16.4 million and $22.4 million, respectively, in operating and
investing activities. The Company's investing activities for the year ended
December 31, 1996 and the nine months ended September 30, 1997, primarily
consisted of capital expenditures (including inventory) of $14.4 million and
$22.0 million, respectively. Increased inventory at September 30, 1997 (as is
also the case in prior periods) is due to expansion of the Interactive Broadband
Networks resulting in an increase in subscribers compared to prior periods.
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 $2.0 million and $321,000 for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively. The
Company's funding through September 30, 1997 has been provided primarily by
private sales of equity securities aggregating $29.2 million (not including the
Equity Private Placement) 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. As of September 30, 1997, the Company had negative working
capital of approximately $16.2 million, compared to negative working capital of
$3.2 million as of December 31, 1996.
39
<PAGE> 41
On May 7, 1997, the Company signed a letter of intent with SCANA, whereby
SCANA agreed to provide the Company with a revolving credit facility of up to
$40.0 million. Although definitive documents were not executed, the Company and
SCANA negotiated an interim agreement and note under which the Company has
borrowed $11.0 million as of September 30, 1997 to fund its operations. A
portion of the proceeds from the Equity Private Placement and the Offering have
been used to repay the borrowings from SCANA. See "Use of Proceeds."
On October 22, 1997, the Company received net proceeds of approximately
$242.4 million from the Offering. Interest will not accrue on the Exchange 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. See "Description of
the Exchange 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 "Description of Certain
Indebtedness -- New Credit Facility." It is currently contemplated that the
Company's obligations under the New Credit Facility will be secured by all
current and future assets of the Company. The New Credit Facility will require
the Company to maintain certain financial ratios. See "Description of Certain
Indebtedness -- New Credit Facility." The failure of the Company to maintain
such ratios would constitute an event of default under the New Credit Facility,
notwithstanding the ability of the Company to meet its debt service obligations.
An event of default under the New Credit Facility would allow the lenders
thereunder to accelerate the maturity of the indebtedness under the 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 $36.0 million in the
fourth quarter of 1997 and through 1998 to expand and upgrade the Montgomery and
Columbus networks. 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 the proceeds from the Offering and the Equity Private
Placement and amounts expected to be available under the 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 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 "Risk
Factors -- Significant Capital Requirements."
EFFECTS OF ACCOUNTING STANDARDS
In October 1995, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock Based Compensation, which is
effective for awards after January 1, 1996. The Company has elected to continue
to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued
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to Employees" and related interpretations in accounting for its employee stock
based award programs. See note 7 to the Company's Consolidated Financial
Statements included elsewhere in this Prospectus.
SFAS No. 128, Earnings Per Share, issued by the Financial Accounting
Standards Board, sets out new guidelines for the calculation and presentation of
earnings per share. The Company does not anticipate that the adoption of the
statement will materially impact its earnings per share calculation.
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on the
results of operations to date.
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BUSINESS
GENERAL
KNOLOGY offers residential and business customers 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. The Company operates
Interactive Broadband Networks in two cities, Montgomery, Alabama and Columbus,
Georgia, 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 in April 1995, the Company has extended the Montgomery network
from approximately 275 miles and 8,252 subscribers to approximately 575 miles
with 18,267 subscribers and 52,138 homes passed as of September 30, 1997. Since
its acquisition of the Columbus System in September 1995, the Company has
extended the Columbus network from approximately 180 miles and 5,109 subscribers
to approximately 434 miles with 11,741 subscribers and 38,620 homes passed as of
September 30, 1997. The Company's penetration rates (the ratio of the number of
subscribers to homes passed) were 35.0% and 30.4% in Montgomery and Columbus,
respectively, as of September 30, 1997. 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 expects the number of its cable
television subscribers to continue to increase as it expands its Systems in
Montgomery and Columbus, 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. These services are presently offered 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 has begun to target small- and medium-sized
businesses using a bundled offering emphasizing telephone and Internet access
services. As of January 31, 1998, the Company provided a bundle of at least two
services to approximately 340 subscribers in Montgomery and to approximately 60
subscribers in Columbus. KNOLOGY offers its OLOTel(R) services using its
Interactive Broadband Networks and interconnections with BellSouth under a
nine-state interconnection agreement, and it resells long distance service to
customers in Montgomery to provide telephone service outside the reach of the
Company's networks. In addition, the Company also offers long distance access
services over its Interactive Broadband Networks to long distance 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
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2,485 shares of Preferred Stock valued at approximately $3.7 million, subject to
adjustment. The Company intends to apply for a cable franchise in the adjacent
Panama City. The Beach Cable System, which currently passes approximately 10,500
homes, consists of a new cable television network which the Company believes can
be adapted for delivery of Broadband Services. The Company plans to start
construction of an Interactive Broadband Network that would significantly expand
the Beach Cable System into Panama City. See "-- Markets and Subscribers -- New
Markets." The Company's application for a cable franchise in Augusta, Georgia
was approved in January 1998. The Company expects the Augusta franchise to be
awarded in February 1998. The Company has applied for a cable franchise in
Charleston, South Carolina and intends to apply for additional franchises in
other cities.
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 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 and Columbus 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 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
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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 is building 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 ITC Holding, which holds
significant interests in a variety of communications companies, including
Interstate Telephone Company, an independent local exchange carrier serving
communities in western Georgia and eastern Alabama for over 100 years, and
MindSpring, a large Internet service provider and which until October 1997
included 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, 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 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 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."
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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. 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 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
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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 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 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 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.
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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 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 in Montgomery by reselling the services of long distance providers.
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, enhanced basic and premium. Enhanced 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, Entertainment and Sports Programming Network
("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 enhanced 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. Each customer receives one television set-top
terminal for no additional charge but then pays a nominal monthly rental fee for
each additional set-top terminal. The Company also provides its
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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 access to the Sega Channel interface, which allows for
downloading of video games). Digital audio service is also available for an
additional monthly subscription fee.
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, 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.
The Company intends to offer its OLOVision(R) digital video service
beginning in 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 RBOCs, including 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 long distance access services to long distance
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-
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speed Internet service to customers who also receive the Company's cable
television service or telephone service. The Company offers discounts on and
co-markets MindSpring's on-line services for those customers who want Internet
services through an ISP. 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."
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 and Columbus, Georgia.
The Company acquired substantially all of the outstanding stock of
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 575 miles and passes approximately 52,138 homes, or about 62.1% 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 430 miles and passes approximately 38,620 homes, or about 64.4% 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.
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The following table sets forth cable television delivery data with respect
to each of these service areas and the Company's service as of September 30,
1997:
<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................. 151,010 84,000 575 52,138 18,267 35.0% 78
Columbus, GA................... 131,250 60,000 434 38,620 11,741 30.4% 78
</TABLE>
- ---------------
(1) Represents cable households in Designated Market Areas as determined by
Nielsen Media Research. Source: Broadcasting and Cable Yearbook 1997, a
Broadcasting(R) and R.R. Bowker(R) Publication.
(2) Represents the total homes in the Company's franchise area. Source: TV and
Cable Factbook, 1997 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.
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 has begun to target small- and medium-sized
businesses using a bundled offering emphasizing telephone and Internet services.
KNOLOGY offers its OLOTel(R) services using its Interactive Broadband Network
and interconnections with BellSouth under a nine-state interconnection
agreement, and it resells long distance service to provide telephone service
outside the reach of the Company's networks. In addition, the Company also
offers long distance access services to long distance 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 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 Company intends to apply
for a cable franchise in adjacent Panama City. The Beach Cable System, which
currently passes approximately 10,500 homes, consists of a new cable television
network which the Company believes can be adapted for delivery of Broadband
Services. The Company plans to start construction of an Interactive Broadband
Network that would significantly expand the existing Beach Cable System into
Panama City. The Company's application for a cable franchise in Augusta, Georgia
was approved in January 1998. The Company expects the Augusta franchise to be
awarded in February 1998. The Company has applied for a cable franchise in
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."
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The table below shows cable data for Panama City, Florida, Charleston,
South Carolina and Augusta, Georgia.
<TABLE>
<CAPTION>
CABLE
CABLE PENETRATION CHANNELS
SERVICE AREA HOUSEHOLDS(1) LEVEL(1) CURRENT CABLE PROVIDERS OFFERED
- ----------------------------------------- ---------- ----------- ----------------------- --------
<S> <C> <C> <C> <C>
Panama City, FL(2)....................... 75,750 67% Comcast Cablevision 62
Charleston, SC........................... 140,300 63% Comcast Cablevision 60
Augusta, GA.............................. 137,820 62% Charter Communications 60
Jones Intercable 60
</TABLE>
- ---------------
(1) Represents cable households in Designated Market Areas as determined by
Nielsen Media Research. Source: Broadcasting and Cable Yearbook 1997, a
Broadcasting(R) and R.R. Bowker(R) Publication.
(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 10 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 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
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.
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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
and Panama City Beach 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 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 mid-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 and Alabama 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 charges for access to 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.
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<PAGE> 54
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 and Columbus 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 has begun to target small- and medium-sized
businesses using a bundled offering emphasizing telephone and Internet access
services. As of January 31, 1998, the Company provided a bundle of at least two
services to approximately 340 subscribers in Montgomery and to approximately 60
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 8 to 10 sales
representatives and 10 to 12 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 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.
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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 is building 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.
COMPETITION
TELEVISION
Cable television competes for customers in local markets with other
providers of television services 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 and Columbus, 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 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. The Company believes that TCI's
facility is not interactive and presently does not have the capability to
provide telephone or other Broadband Services. 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 serves approximately 32,300
homes, and (2) Charter, a large, multiple systems operator based in St. Louis,
Missouri, which operates a network that serves 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. The Company believes that TCI's and Charter's facilities are not
interactive, and that neither presently has the capability to provide telephone
or other Broadband Services. At present, TCI and Charter are competing
aggressively on price to maintain or increase their market shares.
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").
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<PAGE> 56
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 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, local exchange carriers
("LECs") were prohibited from offering video programming directly to subscribers
in their telephone service areas (except in limited
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<PAGE> 57
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
acquire cable television systems or provide video services to the home through
fiber optic 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.
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, MCI, 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 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.
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INTERNET SERVICES
Internet service is provided by 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 five free hours of
Internet access per month for a one-year period. 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 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.
EMPLOYEES
At September 30, 1997, the Company had 120 full-time employees of which 20
are customer service representatives, 34 are technicians or others performing
installation, maintenance and repair on the Company's networks, 22 are involved
principally in sales and marketing, 10 are involved in matters relating to
construction of the Company's networks and 34 have management or administrative
responsibilities.
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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.
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.
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 and Columbus 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.
LEGAL PROCEEDINGS
The Company is a party to legal proceedings 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 also is a
party to regulatory proceedings affecting the relevant segments of
communications industry generally.
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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 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. 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
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. Some of the
provisions of the 1996 Telecom Act became effective immediately, but other
provisions will not take effect until they are implemented by the FCC. 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
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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 requested 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 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.
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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.
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
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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 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
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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 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.
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-
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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.
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
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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 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 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
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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.
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 requested 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. A decision on the Louisiana application is expected in
February 1998. If such application is approved, BellSouth likely would 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.
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);
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(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,
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.
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's subsidiary, KNOLOGY of Columbus, holds a
franchise providing the right to operate a cable system within the corporate
limits of Columbus, Georgia, through June 1, 1998. The franchise requires the
Company to provide a minimum of 11 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,
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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, 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.
The Company also holds a franchise with Harris County, Georgia (adjacent to
the city of Columbus and part of the Columbus System), extending through the
year 2006. 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. 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. KNOLOGY of Panama City Beach, Inc. has a
non-exclusive franchise to operate a cable television system in the City of
Panama City Beach, Florida, during a fifteen-year term (which began on July 23,
1992). Pursuant to the franchise agreement, KNOLOGY of Panama City Beach, 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 Beach, 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.
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
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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, on an unbundled basis, 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.
The APSC has commenced a proceeding to determine whether BellSouth has
satisfied the "competitive checklist" and other prerequisites for obtaining
authority to provide long distance services. Any decision issued by the APSC
will be 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
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 Telecommunication and Competition
Development Act of 1995 (the "Georgia Competition Act"), until July 1, 1998 only
previously certificated "Tier 2" LECs, with under two million access lines, were
authorized to obtain operating authority to provide service in an area currently
served by another Tier 2 LEC. This restriction may limit the ability of CLECs to
compete with small ILECs.
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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
and Harris County, 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
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. 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 ability of the
city of Columbus to impose 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."
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 will also need to obtain the approval of its
interconnection agreement with BellSouth from the state public service
commission.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
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
November 30, 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(2).... 50 Director
Andrew M. Walker............ 55 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.
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
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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 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
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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: Lin Television, 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 in various capacities in the entities
comprising the South Atlantic venture funds, including as general partner and
managing partner. Mr. Burton has been the general partner of The Burton
Partnership, L.P. since January 1979. Since January 1981, he has served as
President of South Atlantic Capital Corporation. Mr. Burton also serves as a
director of ITC Holding, ITC'DeltaCom, PowerTel, Inc., of MTL Inc. (a bulk
transportation service company), the Heritage Group of Mutual Funds and several
private companies.
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 (a discount retailer of men's clothing), Vice Chairman of the
Board of AvData Systems, Inc. ("AvData") (a company providing data
communications networks) 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, 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.
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<PAGE> 75
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. Pending the nomination of an additional member, the current member
of the Audit Committee is Mr. Bodman.
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 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 September 30, 1997, options to purchase 919.94 shares of Common Stock
were outstanding pursuant to the Stock Option Plan.
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<PAGE> 76
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, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------------ UNDERLYING ALL OTHER
YEAR(1) SALARY BONUS OPTIONS COMPENSATION(2)
------- ------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Andrew M. Walker 1996 $ 0 $ 0 -- --
President and Chief Executive
Officer(3)
Felix L. Boccucci, Jr. 1996 $84,015 $46,102(5) 110.11 $68,464(6)
Vice President of Business 1995 $71,262 $ 5,070 -- $34,222
Development(4)
</TABLE>
- ---------------
(1) Under rules promulgated by the 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. Compensation for the year ended 1995 was
paid by ITC Holding.
(2) Includes premiums on life insurance, car allowances and relocation expenses.
(3) 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.
(4) Mr. Boccucci served as Chief Financial Officer, Treasurer and Secretary of
the Company from November 1995 through August 1997.
(5) Includes a $46,000 bonus earned in 1995 and paid in 1996.
(6) Includes grants of ITC Holding capital stock valued at $63,448 at the time
of grant.
During 1997 Messrs. Morrow, McCormick, Boccucci, McCants and Luke (the
"Named Executive Officers") earned salaries at annual rates of approximately
$120,000, $100,000, $93,500, $90,000, and $90,000, respectively. Upon meeting
certain performance goals, Messrs. Morrow, McCormick, Boccucci, McCants and Luke
earned bonuses of approximately $22,600, $17,600, $9,500, $21,200, and $6,100,
respectively. 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.
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<PAGE> 77
OPTION GRANTS
The following table sets forth information with respect to grants of stock
options to Mr. Walker and to certain Named Executive Officers during the fiscal
year ended December 31, 1996.
OPTION GRANTS DURING 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZED
INDIVIDUAL GRANTS(1) VALUE AT
-------------------------------------------------------------------------- ASSUMED ANNUAL
PERCENT OF RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE GRANT EXPIRATION -------------------
NAME GRANTED FISCAL YEAR(2) PRICE DATE DATE 5% 10%
- ----------------------------- ---------- -------------- -------- ------------- ------------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Andrew M. Walker
President and Chief
Executive Officer -- -- -- -- -- -- --
Felix L. Boccucci, Jr. 110.11 21.9% $1,200 April 1, 1996 April 1, 2006 $1,955 $3,112
Vice President of Business
Development(4)
</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 502.95 options granted in fiscal 1996.
(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. Boccucci served as Chief Financial Officer, Treasurer and Secretary of
the Company from November 1995 through August 1997.
On March 12, 1997, the Company granted Mr. Morrow options to purchase 300
shares of Common Stock. On August 28, 1997, the Company granted Mr. McCormick
options to purchase 100 shares of Common Stock. On May 18, 1997, the Company
granted Mr. McCants options to purchase 70 shares of Common Stock. On April 1,
1996, the Company granted Mr. Luke options to purchase 42.70 shares of Common
Stock. All such options have an exercise price of $1,200 per share, and were
granted under the Stock Option Plan. These 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.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
None of the Named Executive Officers exercised stock options during the
fiscal year ended December 31, 1996.
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<PAGE> 78
CERTAIN 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
and January 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 "Principal Stockholders." 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.
"See Management -- Directors and Executive Officers."
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.
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 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 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.
77
<PAGE> 79
ITC Holding provides certain administrative services to the Company,
including legal and tax planning services. In 1995 and 1996, the Company paid
ITC Holding approximately $1,000 and $24,000, respectively, for these services.
The Company leases its office space in West Point, Georgia from J. Smith
Lanier & Co., Inc. In 1995 and 1996, the Company paid approximately $36,000 and
$86,000, 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, the Company paid the following additional
amounts to ITC Companies: approximately $1,350 to Interstate FiberNet for the
lease of circuits; approximately $16,145 to Interstate Telephone Company for
local telephone service; and approximately $11,373 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 $28,400 for
telecommunications services pursuant to such agreement.
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 Preferred Stock of 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
78
<PAGE> 80
(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 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.
79
<PAGE> 81
PRINCIPAL STOCKHOLDERS
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>
AMOUNT AND NATURE AND PERCENT OF
NATURE OF SHARES TOTAL SHARES OF CAPITAL
NAME AND ADDRESS OF BENEFICIAL OWNERS AND DIRECTORS BENEFICIALLY OWNED(1)(2) STOCK 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.(11) .......................... 2,485 5.0
Campbell B. Lanier, III(7)(11)....................... 1,023 2.0
O. Gene Gabbard(11).................................. 312 *
William H. Scott, III(11)............................ 256 *
Andrew M. Walker(11)................................. 81 *
Felix L. Boccucci, Jr.(8)(10)(11).................... 54 *
Marcus R. Luke(9)(10)(11)............................ 40 *
William E. Morrow(10)(11)............................ 20 *
James McCormick(10)(11).............................. 20 *
Bret McCants(10)(11)................................. 8 *
Ancel A. Hamilton, Jr.(11)........................... -- *
Peggy B. Warner(11).................................. -- *
All executive officers and directors as a group (13
persons)(8)(9)(10)................................. 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.
(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.
(3) The address of ITC Holding is 206 West 9th Street, P.O. Box 510, West
Point, Georgia 31833. Includes 21,014 shares held by ITC Service Company, a
wholly owned subsidiary of ITC Holding.
(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.
(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.
(10) Does not include options to purchase 25.7, 66.11, 300, 100 and 70 shares of
Common Stock held by Messrs. Luke, Boccucci, Morrow, McCormick and McCants
respectively, which are not exercisable within 60 days from January 31,
1998.
(11) 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.
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<PAGE> 82
DESCRIPTION OF CERTAIN INDEBTEDNESS
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 closing of the
Offering and the Equity Private Placement, the negotiation of definitive loan
documents and satisfactory completion by First Union of its due diligence
review), to provide a New Credit Facility of up to $50.0 million 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 guaranteed by the Company, to be used
for working capital and other general corporate purposes, including capital
expenditures and permitted acquisitions.
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 to the Registration Statement (of which this Prospectus is a part).
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 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 New Credit Facility will mature on the fifth anniversary of its
closing. Amounts drawn under the 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 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 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 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 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 New Credit Facility will contain affirmative covenants,
including, 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 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 this Offering and Equity Private Placement to expand
network operations, to consummate permitted acquisitions or for working capital.
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<PAGE> 83
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 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 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 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, thereby reducing the funds available for the offer to
purchase Exchange Notes.
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DESCRIPTION OF THE EXCHANGE NOTES
The Senior Discount Notes were, and the Exchange Notes will be, issued
under the Indenture, dated as of October 22, 1997, between the Company and
United States Trust Company of New York, trustee under the Indenture (the
"Trustee"). A copy of the Indenture is filed as an exhibit to the Registration
Statement (of which this Prospectus is a part). The following summary contains a
description of certain provisions of the Indenture, but does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Indenture, including the definitions of certain terms
therein and those terms made a part thereof by the Trust Indenture Act of 1939,
as amended. For definitions of certain capitalized terms used in the following
summary, see "-- Certain Definitions."
GENERAL
The terms of the Exchange Notes will be identical in all material respects
to the Senior Discount Notes, except that (i) the Exchange Notes will have been
registered under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Senior Discount Notes and (ii)
Holders of the Exchange Notes will not be entitled to certain rights of Holders
of Senior Discount Notes under the Registration Rights Agreement.
The Exchange Notes will be unsecured unsubordinated obligations of the
Company, initially limited to $444,100,000 aggregate principal amount at
maturity, and will mature on October 15, 2007. Although for federal income tax
purposes a significant amount of original issue discount, taxable as ordinary
income, will be recognized by a Holder as such discount accrues from the issue
date of the Exchange Notes, no interest will be payable on the Exchange Notes
prior to April 15, 2003. From and after October 15, 2002, interest on the
Exchange Notes will accrue at the rate of 11 7/8% per annum from October 15,
2002 or from the most recent Interest Payment Date to which interest has been
paid or provided for, payable semiannually (to Holders of record at the close of
business on April 1 or October 1 immediately preceding the Interest Payment
Date) on April 15 and October 15 of each year, commencing April 15, 2003.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
If, by the date that is six months after the Closing Date, the Company has
not consummated the Exchange Offer or caused a shelf registration statement with
respect to resales of the Exchange Notes to be declared effective, interest on
the Exchange Notes (in addition to the accrual of original issue discount during
the period ending October 15, 2002 and in addition to interest otherwise due on
the Exchange Notes after such date) will accrue at the rate of .5% per annum of
the Accreted Value on the preceding Semi-Annual Accrual Date and be payable in
cash semiannually on April 15 and October 15 of each year, commencing October
15, 1998, until the consummation of the registered Exchange Offer or the
effectiveness of a shelf registration statement. See "-- Registration Rights."
Principal of, premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes may be exchanged or transferred, at the office
or agency of the Company in the Borough of Manhattan, The City of New York
(which initially will be the corporate trust office of the Trustee at 114 West
47th Street, New York, New York 10036-1532); provided that, at the option of the
Company, payment of interest may be made by check mailed to the Holders at their
addresses as they appear in the Security Register.
The Exchange Notes will be issued only in fully registered form, without
interest coupons, in denominations of $1,000 of principal amount and any
integral multiple thereof. See "-- Book-Entry; Delivery and Form." No service
charge will be made for any registration of transfer or exchange of Exchange
Notes, but the Company may require payment of a sum sufficient to cover any
transfer tax or other similar governmental charge payable in connection
therewith.
Subject to the covenants described below under "Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The Exchange
Notes offered hereby and any additional Notes subsequently issued would be
treated as a single class for all purposes under the Indenture.
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OPTIONAL REDEMPTION
The Exchange Notes will be redeemable, at the Company's option, in whole or
in part, at any time or from time to time, on or after October 15, 2002 and
prior to maturity, upon not less than 30 nor more than 60 days' prior notice
mailed by first class mail to each Holder's last address, as it appears in the
Security Register, at the following Redemption Prices (expressed in percentages
of principal amount at maturity), plus accrued and unpaid interest, if any, to
the Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is prior to the Redemption Date to receive interest due
on an Interest Payment Date), if redeemed during the 12-month period commencing
October 15, of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
----------------------------------------------------- ----------------
<S> <C>
2002................................................. 105.93750%
2003................................................. 102.96875
2004 and thereafter.................................. 100.00000
</TABLE>
In addition, at any time prior to October 15, 2000, the Company may redeem
up to 35% of the Accreted Value of the Senior Discount Notes and the Exchange
Notes with the proceeds of one or more Public Equity Offerings following which a
Public Market occurs, at any time or from time to time in part, at a Redemption
Price (expressed as a percentage of Accreted Value on the Redemption Date) of
111.875%; provided that at least $288,665,000 aggregate principal amount at
maturity of Senior Discount Notes and Exchange Notes remains outstanding after
each such redemption.
If less than all of the Notes are to be redeemed at any time, the Trustee
will select the Notes, or portions thereof, for redemption in compliance with
the requirements of the principal national securities exchange, if any, on which
the Notes are listed or, if the Notes are not listed on a national securities
exchange, on a pro rata basis, by lot or by such other method as the Trustee in
its sole discretion shall deem to be fair and appropriate; provided that no Note
of $1,000 in principal amount at maturity or less shall be redeemed in part. If
any Note is to be redeemed in part only, the notice of redemption relating to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original Note.
REGISTRATION RIGHTS
The Company entered into the Registration Rights Agreement with the
Placement Agents and SCANA, for the benefit of the holders of the Senior
Discount Notes, pursuant to which the Company has agreed to file the
Registration Statement (of which this Prospectus is a part) with the Commission.
The Registration Rights Agreement provides that the Company will use its best
efforts, at its cost, to file and cause to become effective the Registration
Statement with respect to the Exchange Offer. Upon the effectiveness of the
Registration Statement, the Company will offer the Exchange Notes in exchange
for surrender of the Senior Discount Notes. The Company has agreed to keep the
Exchange Offer open for not less than 20 business days after the date notice of
the Exchange Offer is mailed to holders of the Senior Discount Notes. For each
Senior Discount Note surrendered to the Company pursuant to the Exchange Offer,
the holder of such Senior Discount Note will receive an Exchange Note of equal
principal amount at maturity. The accreted value of each Exchange Note shall be
identical to, and shall be determined in the same manner as, the Accreted Value
of the Senior Discount Notes so surrendered and exchanged therefor. Under
existing Commission interpretations, the Exchange Notes would be freely
transferable by holders other than affiliates of the Company after the Exchange
Offer without further registration under the Securities Act if the holder of the
Exchange Notes represents that it is acquiring the Exchange Notes in the
ordinary course of its business, that it has no arrangement or understanding
with any person to participate in the distribution of the Exchange Notes and
that it is not an affiliate of the Company, as such terms are interpreted by the
Commission; provided that broker-dealers ("Participating Broker-Dealers")
receiving Exchange Notes in the Exchange Offer will have a prospectus delivery
requirement with respect to resales of such Exchange Notes. The Commission has
taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to Exchange Notes with the
prospectus contained in the Registration Statement under certain circumstances.
Under the Registration Rights Agreement, the Company is required to allow
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Participating Broker-Dealers and other persons, if any, with similar prospectus
delivery requirements to use this Prospectus in connection with the resale of
such Exchange Notes.
A holder of Senior Discount Notes who wishes to exchange such Senior
Discount Notes for Exchange Notes in the Exchange Offer will be required to
represent that, among other things, any Exchange Notes to be received by it will
be acquired in the ordinary course of its business and that at the time of the
commencement of the Exchange Offer it has no arrangement or understanding with
any person to participate in a distribution (within the meaning of the
Securities Act) of the Exchange Notes and that it is not an "affiliate" of the
Company, as defined in Rule 405 of the Securities Act, or if it is an affiliate,
that it will comply with the registration and prospectus delivery requirements
of the Securities Act to the extent applicable.
The Company has filed the Registration Statement (of which this Prospectus
is a part) and will commence the Exchange Offer pursuant to the Registration
Rights Agreement. In the event that applicable interpretations of the staff of
the Commission do not permit the Company to effect the Exchange Offer, or under
certain other circumstances, the Company shall, at its cost, use its best
efforts to cause to become effective a shelf registration statement (the "Shelf
Registration Statement") with respect to resales of the Senior Discount Notes
and to keep the Shelf Registration Statement effective until the expiration of
the time period referred to in Rule 144(k) under the Securities Act (or for so
long as any Holder is an Affiliate of the Company), or such shorter period that
will terminate when all Senior Discount Notes covered by the Shelf Registration
Statement have been sold pursuant to the Shelf Registration Statement. The
Company has agreed, in the event a Shelf Registration Statement is filed, among
other things, to provide to each holder for whom the Shelf Registration
Statement was filed copies of the prospectus which is a part of the Shelf
Registration Statement, to notify each holder when the Shelf Registration
Statement for the Senior Discount Notes has become effective and to take certain
other actions as are required to permit unrestricted resales of the Senior
Discount Notes. A holder that sells its Senior Discount Notes pursuant to the
Shelf Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
Holder (including certain provisions containing indemnification obligations).
In the event that the Exchange Offer is not consummated and a Shelf
Registration Statement is not declared effective on or prior to the date that is
six months after the Closing Date, interest on the Senior Discount Notes (in
addition to the accrual of original issue discount during the period ending
October 15, 2002 and in addition to interest otherwise due on the Senior
Discount Notes after such date) will accrue at the rate of .5% per annum of the
Accreted Value on the preceding Semi-Annual Accrual Date and be payable in cash
semiannually on April 15 and October 15 of each year, commencing October 15,
1998, until the Exchange Offer is consummated or the Shelf Registration
Statement is declared effective.
Senior Discount Notes not tendered in the Exchange Offer shall accrue
interest at the rate of 11 7/8% per annum and be subject to all of the terms and
conditions specified in the Indenture and to the transfer restrictions described
in "Transfer Restrictions."
This summary of certain provisions of the Registration Rights Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
RANKING
The Indebtedness evidenced by the Exchange Notes will rank pari passu in
right of payment with the Senior Discount Notes and all other existing and
future unsubordinated indebtedness of the Company and senior in right of payment
to all existing and future subordinated indebtedness of the Company. After
giving pro forma effect to the Offering and the Equity Private Placement, as of
September 30, 1997, the Company would have had (on an unconsolidated basis)
$456,785 of indebtedness outstanding other than the Senior Discount Notes and
the Exchange Notes. The Company is permitted to incur additional indebtedness to
finance the acquisition of equipment, inventory and network assets and up to $50
million of other indebtedness
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<PAGE> 87
and is permitted to secure any such indebtedness. The Exchange Notes will be
effectively subordinated to such security interests to the extent of such
security interests.
The Company is a holding company which conducts substantially all of its
business through subsidiaries. The Company's subsidiaries will have no direct
obligation to pay amounts due on the Senior Discount Notes and the Exchange
Notes and will not guarantee the Senior Discount Notes and the Exchange Notes.
As a result, the Senior Discount Notes are, and the Exchange Notes will be,
effectively subordinated to all existing and future indebtedness and other
liabilities (including trade payables) of the Company's subsidiaries. After
giving pro forma effect to the Offering and the Equity Private Placement as of
September 30, 1997, the Company's subsidiaries would have had approximately $4.1
million of liabilities (excluding intercompany payables). The Company will be
dependent upon access to the cash flow or assets of its subsidiaries to make
payments on the Exchange Notes and the Company's ability to obtain such access
may be limited by law. See "Risk Factors -- Holding Company Structure; Priority
of Secured Debt."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for which
no definition is provided.
"Accreted Value" is defined to mean, for any Specified Date, the amount
calculated pursuant to (i), (ii), (iii) or (iv) for each $1,000 of principal
amount at maturity of Notes:
(i) if the Specified Date occurs on one or more of the following dates
(each a "Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
------------------------------------------ ---------
<S> <C>
April 15, 1998............................ $ 595.04
October 15, 1998.......................... $ 630.37
April 15, 1999............................ $ 667.80
October 15, 1999.......................... $ 707.45
April 15, 2000............................ $ 749.46
October 15, 2000.......................... $ 793.96
April 15, 2001............................ $ 841.10
October 15, 2001.......................... $ 891.04
April 15, 2002............................ $ 943.95
October 15, 2002.......................... $1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) $562.96 and (b) an
amount equal to the product of (1) the Accreted Value for the first
Semi-Annual Accrual Date less $562.96 multiplied by (2) a fraction, the
numerator of which is the number of days from the issue date of the Notes
to the Specified Date, using a 360-day year of twelve 30-day months, and
the denominator of which is the number of days elapsed from the issue date
of the Notes to the first Semi-Annual Accrual Date, using a 360-day year of
twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
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<PAGE> 88
"Acquired Assets" means (i) the Capital Stock of any Person that becomes a
Restricted Subsidiary after the Closing Date and (ii) the real or personal
property of any Person that becomes a Restricted Subsidiary after the Closing
Date.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary; provided that Indebtedness of such
Person which is redeemed, defeased, retired or otherwise repaid at the time of
or immediately upon consummation of the transactions by which such Person
becomes a Restricted Subsidiary or such Asset Acquisition shall not be Acquired
Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person (other than a Restricted Subsidiary)
in which any Person (other than the Company or any of its Restricted
Subsidiaries) has a joint interest and the net income (or loss) of any
Unrestricted Subsidiary, except (x) with respect to net income, to the extent of
the amount of dividends or other distributions actually paid to the Company or
any of its Restricted Subsidiaries by such other Person or such Unrestricted
Subsidiary during such period and (y) with respect to net losses, to the extent
of the amount of cash contributed by the Company or any Restricted Subsidiary to
such Person during such period; (ii) solely for the purposes of calculating the
amount of Restricted Payments that may be made pursuant to clause (C) of the
first paragraph of the "Limitation on Restricted Payments" covenant described
below (and in such case, except to the extent includable pursuant to clause (i)
above), the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with the
Company or any of its Restricted Subsidiaries or all or substantially all of the
property and assets of such Person are acquired by the Company or any of its
Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary to
the extent that the declaration or payment of dividends or similar distributions
by such Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
such Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis)
attributable to Asset Sales; (v) except for purposes of calculating, the amount
of Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant described below,
any amount paid or accrued as dividends on Preferred Shares (other than accrued
dividends which, pursuant to the terms of the Preferred Shares, will not be
payable prior to the first anniversary after the Stated Maturity of the Notes)
of the Company or any Restricted Subsidiary owned by Persons other than the
Company and any of its Restricted Subsidiaries; and (vi) all extraordinary gains
and extraordinary losses.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; provided that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the
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Capital Stock of any Restricted Subsidiary or (ii) all or substantially all of
the assets that constitute a division or line of business of the Company or any
of its Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
all or substantially all of the assets of the Company; provided that "Asset
Sale" shall not include (a) sales, transfers or other dispositions of inventory,
receivables and other current assets, (b) sales, transfers or other dispositions
of assets with a fair market value (as certified in an Officers' Certificate)
not in excess of $500,000 in any transaction or series of related transactions
or (c) sales, transfers or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold, transferred or
otherwise disposed of to the extent the consideration received would constitute
property or assets of the kind described in clause (B) of the "Limitation on
Assets Sales" covenant described below, provided that after giving pro forma
effect to such exchange, the Consolidated Leverage Ratio shall be no greater
than the Consolidated Leverage Ratio immediately prior to such exchange.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Shares and Preferred Shares.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i)(a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by the Existing Stockholders on such date
and (b) after the occurrence of a Public Market, a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
more than 35% of the total voting power of the Voting Stock of the Company, on a
fully diluted basis, and such ownership represents a greater percentage of the
total voting power of the Voting Stock of the Company, on a fully diluted basis,
than is held by the Existing Stockholders on such date; or (ii) individuals who
on the Closing Date constitute the Board of Directors (together with any new
directors whose election by the Board of Directors or whose nomination by the
Board of Directors for election by the Company's stockholders was approved by a
vote of at least two-thirds of the members of the Board of Directors then in
office who either were members of the Board of Directors on the Closing Date or
whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the members of the Board of Directors
then in office.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
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<PAGE> 90
"Common Shares" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Shares of
such Person, whether outstanding on the Closing Date or issued thereafter,
including, without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of outstanding Common Shares of such Restricted Subsidiary not owned
on the last day of such period by the Company or any of its Restricted
Subsidiaries divided by (2) the total number of outstanding Common Shares of
such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting, all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the offering of the Notes and the Warrants, all as determined on a
consolidated basis (without taking into account Unrestricted Subsidiaries) in
conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described below (such four fiscal
quarter period being the "Four Quarter Period"); provided that, in making the
foregoing calculation, (A) pro forma effect shall be given to any Indebtedness
to be Incurred or repaid on the Transaction Date; (B) pro forma effect shall be
given to Asset Dispositions and Asset Acquisitions (including giving pro forma
effect to the application of proceeds of any Asset Disposition) that occur from
the beginning of the Four Quarter Period through the Transaction Date (the
"Reference Period"), as if they had occurred and such proceeds had been applied
on the first day of such Reference Period; (C) pro forma effect shall be given
to asset dispositions and asset acquisitions (including giving pro forma effect
to the application of proceeds of any asset disposition) that have been made by
any Person that has become a Restricted Subsidiary or has been merged with or
into the Company or any Restricted Subsidiary during such Reference Period and
that would have constituted Asset Dispositions or Asset Acquisitions had such
transactions occurred when
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such Person was a Restricted Subsidiary as if such asset dispositions or asset
acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the
first day of such Reference Period; provided that to the extent that clause (B)
or (C) of this sentence requires that pro forma effect be given to an Asset
Acquisition or Asset Disposition, such pro forma calculation shall be based upon
the four full fiscal quarters immediately preceding the Transaction Date of the
Person, or division or line of business of the Person, that is acquired or
disposed of for which financial information is available; and (D) the aggregate
amount of Indebtedness outstanding as of the end of the Reference Period will be
deemed to include the total amount of funds outstanding and/or available on the
Transaction Date under any revolving credit or similar facilities of the Company
or its Restricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Credit Agreement" means the $50.0 million credit facility to be entered
into by the Company and its Restricted Subsidiaries, First Union National Bank
and First Union Capital Markets Corp. pursuant to a commitment letter dated
September 29, 1997.
"Credit Facilities" means revolving credit or working capital facilities or
similar facilities made available from time to time to the Company and its
Restricted Subsidiaries.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Existing Stockholders" means ITC Holding, Campbell B. Lanier, III and
SCANA Corporation and their Affiliates, and Campbell B. Lanier, III's spouse and
any one or more of his lineal descendants and their spouses; provided, however,
that any such person other than Campbell B. Lanier, III shall only be deemed to
be an "Existing Stockholder" to the extent such person's Capital Stock of the
Company was received, directly or indirectly, from Campbell B. Lanier, III.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; provided that for purposes of clause (viii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the capital contribution or sale
of Capital Stock and (y) in the event the aggregate fair market value of any
other property (other than cash or cash equivalents) received by the Company
exceeds $10 million, the fair market value of such property shall be determined
by a nationally recognized investment banking firm and set forth in their
written opinion which shall be delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including, without limitation, those
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
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basis, except that computations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Notes and the Warrants and (ii) except as
otherwise provided, the amortization of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Holder" means the registered holder of any Note.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an Incurrence of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except Trade Payables, (v) all Capitalized Lease Obligations of
such Person, (vi) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided that the amount of such Indebtedness shall be the lesser of (A)
the fair market value of such asset at such date of determination and (B) the
amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed
by such Person to the extent such Indebtedness is Guaranteed by such Person and
(viii) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date (or, in the case of a revolving credit or other similar facility, the total
amount of funds outstanding and/or available on the date of determination) of
all unconditional obligations as described above and, with respect to contingent
obligations, the maximum liability upon the occurrence of the contingency giving
rise to the obligation, provided (A) that the amount outstanding at any time of
any Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at the time of its issuance as determined in
conformity with GAAP, (B) that money borrowed and set aside at the time of the
Incurrence of any Indebtedness in order to prefund the payment of the interest
on such Indebtedness shall not be deemed to be "Indebtedness" and (C) that
Indebtedness shall not include any liability for federal, state, local or other
taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or futures contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to
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customers in the ordinary course of business that are, in conformity with GAAP,
recorded as accounts receivable on the balance sheet of the Company or its
Restricted Subsidiaries) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other similar instruments issued by, such Person and
shall include (i) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary and (ii) the fair market value of the Capital Stock (or any other
Investment), held by the Company or any of its Restricted Subsidiaries, of (or
in) any Person that has ceased to be a Restricted Subsidiary, including, without
limitation, by reason of any transaction permitted by clause (iii) of the
"Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant described below. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant
described below, (i) "Investment" shall include the fair market value of the
assets (net of liabilities (other than liabilities to the Company or any of its
Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market value
of the assets (net of liabilities (other than liabilities to the Company or any
of its Subsidiaries)) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary shall be
considered a reduction in outstanding Investments and (iii) any property
transferred to or from any Person shall be valued at its fair market value at
the time of such transfer.
"ITC Holding" means ITC Holding Company, Inc., a Delaware corporation, and
after ITC Holding transfers its shares of capital stock in the Company to ITC
West Point, Inc., ITC West Point, Inc.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP, and (b) with respect
to any capital contribution or issuance or sale of Capital Stock, options,
warrants or other rights to acquire Capital Stock or Indebtedness, the proceeds
of such capital contribution or issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of attorney's fees, accountants'
fees, underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such issuance
or sale and net of taxes paid or payable as a result thereof.
"Offer to Purchase" means an offer by the Company to purchase Notes from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to
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accrue interest (or original issue discount) pursuant to its terms; (iv) that,
unless the Company defaults in the payment of the purchase price, any Note
accepted for payment pursuant to the Offer to Purchase shall cease to accrue
interest (or original issue discount) on and after the Payment Date; (v) that
Holders electing to have a Note purchased pursuant to the Offer to Purchase will
be required to surrender the Note, together with the form entitled "Option of
the Holder to Elect Purchase" on the reverse side of the Note completed, to the
Paying Agent at the address specified in the notice prior to the close of
business on the Business Day immediately preceding the Payment Date; (vi) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
immediately preceding the Payment Date, a facsimile transmission or letter
setting forth the name of such Holder, the principal amount at maturity of Notes
delivered for purchase and a statement that such Holder is withdrawing his
election to have such Notes purchased; and (vii) that Holders whose Notes are
being purchased only in part will be issued new Notes equal in principal amount
to the unpurchased portion of the Notes surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount at maturity of
$1,000 or integral multiples thereof. On the Payment Date, the Company shall (i)
accept for payment on a pro rata basis Notes or portions thereof tendered
pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent money
sufficient to pay the purchase price of all Notes or portions thereof so
accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes
or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Company.
The Paying Agent shall promptly mail to the Holders of Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount at
maturity to any unpurchased portion of the Note surrendered; provided that each
Note purchased and each new Note issued shall be in a principal amount at
maturity of $1,000 or integral multiples thereof. The Company will publicly
announce the results of an Offer to Purchase as soon as practicable after the
Payment Date. The Trustee shall act as the Paying Agent for an Offer to
Purchase. The Company will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that the Company is required to
repurchase Notes pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such Person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) a Temporary Cash
Investment; (iii) commission, payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with GAAP; (iv) stock, obligations or securities
received in satisfaction of judgments; (v) Investments in prepaid expenses,
negotiable instruments held for collection, and lease, utility and workers'
compensation, performance and other similar deposits; (vi) loans or advances to
employees of the Company or a Restricted Subsidiary made in the ordinary course
of business that do not in the aggregate exceed $500,000 at any time
outstanding; and (vii) Interest Rate Agreements and Currency Agreements to the
extent permitted under clause (iv) of the "Limitation on Indebtedness" covenant
described below.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provisions, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provisions, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the
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ordinary course of business (exclusive of obligations for the payment of
borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances
and similar charges, encumbrances, title defects or other irregularities that do
not materially interfere with the ordinary course of business of the Company or
any of its Restricted Subsidiaries; (vi) Liens (including extensions and
renewals thereof) upon real or personal property (including, without limitation,
Acquired Assets) acquired after the Closing Date; provided that (a) such Lien is
created solely for the purpose of securing Indebtedness Incurred, in accordance
with the "Limitation on Indebtedness" covenant described below, to finance the
cost (including, without limitation, the cost of design, development,
construction, acquisition, installation, improvement, transportation or
integration) of the real or personal property subject thereto and such Lien is
created prior to, at the time of or within six months after the latest of the
acquisition, the completion of construction or the commencement of full
operation of such real or personal property; provided that in the case of
Acquired Assets, the Lien secures the Indebtedness Incurred to purchase the
Capital Stock of the Person to make such Person a Restricted Subsidiary, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such cost and (c) any such Lien shall not extend to or cover any real or
personal property other than such real or personal property and any improvements
on such real or personal property and any proceeds thereof; (vii) leases or
subleases granted to others that do not materially interfere with the ordinary
course of business of the Company and its Restricted Subsidiaries, taken as a
whole; (viii) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of the Company or its Restricted
Subsidiaries relating to such property or assets; (ix) any interest or title of
a lessor in the property subject to any Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xi) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or becomes
a part of, any Restricted Subsidiary; provided that such Liens do not extend to
or cover any property or assets of the Company or any Restricted Subsidiary
other than the property or assets acquired and any proceeds thereof; (xii) Liens
in favor of the Company or any Restricted Subsidiary; (xiii) Liens arising from
the rendering of a final judgment or order against the Company or any Restricted
Subsidiary that does not give rise to an Event of Default; (xiv) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof; (xv) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the importation of goods; (xvi) Liens encumbering customary initial
deposits and margin deposits, and other Liens that are either within the general
parameters customary in the industry and incurred in the ordinary course of
business, in each case securing Indebtedness under Interest Rate Agreements and
Currency Agreements and forward contracts, options, futures contracts, futures
options or similar agreements or arrangements designed solely to protect the
Company or any of its Restricted Subsidiaries from fluctuations in interest
rates, currencies or the price of commodities; (xvii) Liens arising out of
conditional sale, title retention, consignment or similar arrangements for the
sale of goods entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business in accordance with the past practices of the
Company and its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens
on or sales of receivables, including related intangible assets and proceeds
thereof; (xix) Liens that secure Indebtedness with an aggregate principal amount
not to exceed $5 million at any time outstanding; and (xx) Liens made in the
ordinary course of business on assets subject to rights-of-way, pole attachment,
use of conduit, use of trenches or similar agreements securing the Company's or
any Restricted Subsidiary's obligations under such agreements.
"Preferred Shares" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference equity, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of such preferred or preference stock.
"Public Equity Offering" means an underwritten primary public offering of
Common Shares of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Shares of the Company has been distributed by
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means of an effective registration statement under the Securities Act or sales
pursuant to Rule 144 under the Securities Act.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Redeemable Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable in any material respect
to the holders of such Capital Stock than the provisions contained in
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below are to the holders of the Notes and such Capital Stock
specifically provides that such Person will not repurchase or redeem any such
stock pursuant to such provisions prior to the Company's repurchase of such
Notes as are required to be repurchased pursuant to the "Limitation on Asset
Sales" and "Repurchase of Notes upon a Change of Control" covenants described
below.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"Specified Date" means any Redemption Date, any Payment Date for an Offer
to Purchase or any date on which the Notes first become due and payable after an
Event of Default.
"Stated Maturity" means (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in the
Telecommunications Business that by its terms, or by the terms of any agreement
or instrument pursuant to which such Indebtedness is Incurred, (i) is expressly
made subordinate in right of payment to the Notes and (ii) provides that no
payment of principal, premium or interest on, or any other payment with respect
to, such Indebtedness may be made prior to the payment in full of all of the
Company's obligations under the Notes; provided that such Indebtedness may
provide for and be repaid at any time from the proceeds of the sale of Capital
Stock (other than Redeemable Stock) of the Company after the Incurrence of such
Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Telecommunications Business" means the development, ownership or operation
of one or more cable television, telephone, telecommunications or information
systems or the provision of telephony, telecommunications or information
services (including, without limitation, any voice, video transmission, data or
Internet services) and any related, ancillary or complementary business.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits
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maturing within one year of the date of acquisition thereof issued by a bank or
trust company which is organized under the laws of the United States of America,
any state thereof or any foreign country recognized by the United States of
America, and which bank or trust company has capital, surplus and undivided
profits aggregating in excess of $50 million (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than one year after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America, any state thereof
or any foreign country recognized by the United States of America with a rating
at the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's Investors Service, Inc. or "A-1" (or higher) according to
Standard & Poor's Ratings Services, and (v) securities with maturities of six
months or less from the date of acquisition issued or fully and unconditionally
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by Standard & Poor's Ratings Services or Moody's Investors Service,
Inc.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, such designation would be permitted under the
"Limitation on Restricted Payments" covenant described below. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that (i) no Default or Event of Default shall have occurred
and be continuing at the time of or after giving effect to such designation and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately after such designation would, if Incurred at such time, have been
permitted to be Incurred for all purposes of the Indenture. Any such designation
by the Board of Directors shall be evidenced to the Trustee by promptly filing
with the Trustee a copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" means, with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
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COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company may Incur Indebtedness
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds thereof, the Consolidated Leverage Ratio would
be greater than zero and (x) less than or equal to 7 to 1, for Indebtedness
Incurred on or prior to September 30, 1999, or (y) less than or equal to 5 to 1,
for Indebtedness Incurred thereafter.
Notwithstanding the foregoing, the Company, and (except as specified below)
any Restricted Subsidiary, may Incur each and all of the following: (i)
Indebtedness in an aggregate principal amount outstanding or available at any
time not to exceed $50 million, less any amount of such Indebtedness permanently
repaid as provided under the "Limitation on Asset Sales" covenant described
below; (ii) Indebtedness owed (A) to the Company and evidenced by an
unsubordinated promissory note or (B) to any Restricted Subsidiaries; provided
that any event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such Indebtedness (other
than to the Company or another Restricted Subsidiary) shall be deemed, in each
case, to constitute an Incurrence of such Indebtedness not permitted by this
clause (ii); (iii) Indebtedness issued in exchange for, or the net proceeds of
which are used to refinance or refund, then outstanding Indebtedness (other than
Indebtedness Incurred under clause (i), (ii), (iv), (vi), (ix) or (x) of this
paragraph) and any refinancings of such new Indebtedness in an amount not to
exceed the amount so refinanced or refunded (plus premiums, accrued interest,
fees and expenses); provided that Indebtedness the proceeds of which are used to
refinance or refund the Notes or Indebtedness that is pari passu in right of
payment with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (iii) if (A) in case the Notes are refinanced in
part or the Indebtedness to be refinanced is pari passu in right of payment with
the Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is outstanding, is
expressly made pari passu in right of payment with, or subordinate in right of
payment to, the remaining Notes, (B) in case the Indebtedness to be refinanced
is subordinated in right of payment to the Notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made subordinate in
right of payment to the Notes at least to the extent that the Indebtedness to be
refinanced is subordinated to the Notes and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Indebtedness to be refinanced or refunded; and
provided further that in no event may Indebtedness of the Company be refinanced
by means of any Indebtedness of any Restricted Subsidiary pursuant to this
clause (iii); (iv) Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business, (B) under Currency Agreements
and Interest Rate Agreements; provided that such agreements (a) are designed
solely to protect the Company or its Subsidiaries against fluctuations in
foreign currency exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by reason
of fees, indemnities and compensation payable thereunder or (C) arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business, assets or Restricted Subsidiary
(other than Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of the Company, to the extent
the net proceeds thereof are promptly (A) used to purchase Notes tendered in an
Offer to Purchase made as a result of a Change of Control or (B) deposited to
defease
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all of the Notes as described below under "Defeasance;" (vi) Guarantees of the
Notes and Guarantees of Indebtedness of the Company by any Restricted
Subsidiary, provided the Guarantee of such Indebtedness is permitted by and made
in accordance with the "Limitation on Issuance of Guarantees by Restricted
Subsidiaries" covenant described below; (vii) Indebtedness Incurred to finance
the cost (including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) to acquire equipment,
inventory or network assets (including acquisitions by way of Capitalized Lease
and acquisitions of the Capital Stock of a Person that becomes a Restricted
Subsidiary to the extent of the fair market value of the equipment, inventory or
network assets so acquired) by the Company or a Restricted Subsidiary after the
Closing Date; (viii) Indebtedness of the Company not to exceed, at any one time
outstanding, two times (A) the Net Cash Proceeds received by the Company after
the Closing Date as a capital contribution or from the issuance and sale of its
Capital Stock (other than Redeemable Stock) to a Person that is not a Subsidiary
of the Company, to the extent such Net Cash Proceeds have not been used pursuant
to clause (C)(2) of the first paragraph or clause (iii), (iv) or (vi) of the
second paragraph of the "Limitation on Restricted Payments" covenant described
below to make a Restricted Payment and (B) 80% of the fair market value of
property (other than cash and cash equivalents) received by the Company after
the Closing Date from a capital contribution or from the issuance and sale of
its Capital Stock (other than Redeemable Stock) to a Person that is not a
Subsidiary of the Company, to the extent such capital contribution or sale of
Capital Stock has not been used pursuant to clause (iii), (iv) or (ix) of the
second paragraph of the "Limitation on Restricted Payments" covenant described
below to make a Restricted Payment; provided that such Indebtedness does not
mature prior to the Stated Maturity of the Notes and has an Average Life longer
than the Notes; (ix) Strategic Subordinated Indebtedness; and (x) Indebtedness
(in addition to Indebtedness permitted under clauses (i) through (ix) above) in
an aggregate principal amount outstanding or available at any time not to exceed
$25 million, less any amount of such Indebtedness permanently repaid as provided
under the "Limitation on Asset Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded due solely to the result of
fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included and (2) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Redeemable Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Shares
of Restricted Subsidiaries held by minority stockholders, provided that such
dividends do not in the aggregate exceed the minority stockholders' pro rata
share of such Restricted Subsidiaries' net income from the first day of the
fiscal quarter beginning immediately following the Closing Date) held by Persons
other than the Company or any of its Restricted Subsidiaries, (ii) purchase,
redeem, retire or otherwise acquire for value any shares of Capital Stock of (A)
the Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of the Company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or
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any Affiliate of such holder) of 5% or more of the Capital Stock of the Company,
(iii) make any voluntary or optional principal payment, or voluntary or optional
redemption, repurchase, defeasance, or other acquisition or retirement for
value, of Indebtedness of the Company that is subordinated in right of payment
to the Notes (other than, in each case, the purchase, repurchase or acquisition
of Indebtedness in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in any case due within one year after
the date of such purchase, repurchase or acquisition) or (iv) make any
Investment, other than a Permitted Investment, in any Person (such payments or
any other actions described in clauses (i) through (iv) above being collectively
"Restricted Payments") if, at the time of, and after giving effect to, the
proposed Restricted Payment: (A) a Default or Event of Default shall have
occurred and be continuing, (B) the Company could not Incur at least $1.00 of
Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant or (C) the aggregate amount of all Restricted Payments (the amount, if
other than in cash, to be determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a Board Resolution)
made after the Closing Date shall exceed the sum of (1) 50% of the aggregate
amount of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated
Net Income is a loss, minus 100% of the amount of such loss) (excluding, for
purposes of such computation, income resulting from transfers of assets by the
Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period) beginning on
the first day of the fiscal quarter immediately following the Closing Date and
ending on the last day of the last fiscal quarter preceding the Transaction Date
for which reports have been filed with the Commission or provided to the Trustee
pursuant to the "Commission Reports and Reports to Holders" covenant plus (2)
the aggregate Net Cash Proceeds received by the Company after the Closing Date
from a capital contribution or the issuance and sale permitted by the Indenture
to a Person who is not a Subsidiary of the Company of (a) its Capital Stock
(other than Redeemable Stock), (b) any options, warrants or other rights to
acquire Capital Stock of the Company (in each case, exclusive of any Redeemable
Stock or any options, warrants or other rights that are redeemable at the option
of the holder, or are required to be redeemed, prior to the Stated Maturity of
the Notes) and (c) Indebtedness of the Company that has been exchanged for or
converted into Capital Stock of the Company (other than Redeemable Stock), in
each case except to the extent such Net Cash Proceeds are used to Incur
Indebtedness pursuant to clause (viii) of the second paragraph under the
"Limitation on Indebtedness" covenant, plus (3) an amount equal to the net
reduction in Investments (other than reductions in Permitted Investments and
reductions in Investments made pursuant to clause (vi) of the second paragraph
of this "Limitation on Restricted Payments" covenant) in any Person resulting
from payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to the Company or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale of any such
Investment (except, in each case, to the extent any such payment or proceeds are
included in the calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of "Investments"), not to exceed, in
each case, the amount of Investments previously made by the Company or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at such
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes,
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company (or
options, warrants or other rights to acquire such Capital Stock) in exchange
for, or out of the proceeds of a substantially concurrent offering of, shares of
Capital Stock (other than Redeemable Stock) of the Company (or options, warrants
or other rights to acquire such Capital Stock); (iv) the making of any principal
payment or the repurchase, redemption, retirement, defeasance or other
acquisition for value of Indebtedness of the Company which is subordinated in
right of payment to the Notes in exchange for, or out of the proceeds of, a
substantially concurrent offering of shares of the Capital Stock (other than
Redeemable Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (v) payments or distributions to dissenting
stockholders pursuant to applicable
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law in connection with a consolidation, merger or transfer of assets that
complies with the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of the Company; (vi) Investments in any Person the primary business of
which is related, ancillary or complementary to the business of the Company and
its Restricted Subsidiaries on the date of such Investments; provided that the
aggregate amount of Investments made pursuant to this clause (vi) does not
exceed the sum of (x) $25 million plus (y) the amount of Net Cash Proceeds
received by the Company after the Closing Date as a capital contribution or from
the sale of its Capital Stock (other than Redeemable Stock) to a Person who is
not a Subsidiary of the Company, except to the extent such Net Cash Proceeds are
used to Incur Indebtedness pursuant to clause (viii) under the "Limitation on
Indebtedness" covenant or to make Restricted Payments pursuant to clause (C)(2)
of the first paragraph, or clauses (iii) or (iv) of this paragraph, of this
"Limitation on Restricted Payments" covenant, plus (z) the net reduction in
Investments made pursuant to this clause (vi) resulting from distributions on or
repayments of such Investments or from the Net Cash Proceeds from the sale of
any such Investment (except in each case to the extent any such payment or
proceeds are included in the calculation of Adjusted Consolidated Net Income) or
from such Person becoming a Restricted Subsidiary (valued in each case as
provided in the definition of "Investments"), provided that the net reduction in
any Investment shall not exceed the amount of such Investment; (vii) the
purchase, redemption, acquisition, cancellation or other retirement for value of
shares of Capital Stock of the Company to the extent necessary, in the judgment
of the Board of Directors, to prevent the loss or secure the renewal or
reinstatement of any license or franchise held by the Company or any Restricted
Subsidiary from any governmental agency; (viii) the purchase, redemption,
retirement or other acquisition for value of shares of Capital Stock of the
Company, or options to purchase such shares, held by directors, employees, or
former directors or employees of the Company or any Restricted Subsidiary (or
their estates or beneficiaries under their estates) upon their death,
disability, retirement, termination of employment or pursuant to the terms of
any agreement under which such shares of Capital Stock or options were issued;
provided that the aggregate consideration paid for such purchase, redemption,
retirement or other acquisition for value of such shares of Capital Stock or
options after the Closing Date does not exceed $2 million in any calendar year,
or $5 million in the aggregate; (ix) Investments acquired as a capital
contribution to the Company or in exchange for Capital Stock (other than
Redeemable Stock) of the Company; (x) repurchases of Warrants pursuant to a
Repurchase Offer; or (xi) any purchase of any fractional share of Preferred
Stock (or other Capital Stock of the Company issuable upon exercise of the
Warrants) in connection with an exercise of the Warrants; provided that, except
in the case of clauses (i), (iii) and (iv), no Default or Event of Default shall
have occurred and be continuing, or occur as a consequence of the actions or
payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment referred to in clause (ix)
thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred
to in clauses (iii), (iv) and (vi) thereof, shall be included in calculating
whether the conditions of clause (C) of the first paragraph of this "Limitation
on Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is pari passu in right of payment with the
Notes, then the Net Cash Proceeds of such issuance shall be included in clause
(C) of the first paragraph of this "Limitation on Restricted Payments" covenant
only to the extent such proceeds are not used for such redemption, repurchase or
other acquisition of Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
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The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any Restricted Subsidiary and existing at the time of
such acquisition and not incurred in contemplation thereof, which encumbrances
or restrictions are not applicable to any Person or the property or assets of
any Person other than such Person or the property or assets of such Person so
acquired; (iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or assets
of the Company or any Restricted Subsidiary in any manner material to the
Company or any Restricted Subsidiary; (v) with respect to a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Subsidiary; or (vi) contained in the
terms of any Indebtedness or any agreement pursuant to which such Indebtedness
was issued if (A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant contained in
such Indebtedness or agreement; provided that in the case of the Credit
Agreement the encumbrance or restriction may apply if an event of default (other
than an event of default resulting solely from the breach of a representation or
warranty) occurs and is continuing under the Credit Agreement; provided that,
with respect to any event of default (other than a payment default, a bankruptcy
event with respect to the Company or the loss of a material license or fiber
network) under the Credit Agreement, such encumbrance or restriction may not
prohibit dividends to the Company to pay scheduled interest on the Notes for
more than 180 days in any consecutive 360-day period, (B) the encumbrance or
restriction is not materially more disadvantageous to the Holders than is
customary in comparable financings (as determined by the Company) and (C) the
Company determines (as evidenced by a resolution of the Board of Directors) that
any such encumbrance or restriction is not reasonably expected to materially
affect the Company's ability to make principal or interest payments on the
Notes.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the
Company or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant described below or (2) restricting the sale or other disposition of
property or assets of the Company or any of its Restricted Subsidiaries that
secure Indebtedness of the Company or any of its Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary, (ii) issuances of director's qualifying shares, or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law, (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been permitted
to be made under the "Limitation on Restricted Payments" covenant if made on the
date of such issuance or sale or (iv) issuances or sales of Common Shares of a
Restricted Subsidiary, provided that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale in accordance with
clause (A) or (B) of the first paragraph of the "Limitation on Asset Sales"
covenant described below.
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Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu in
right of payment with, or subordinate in right of payment to, the Notes
("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee (a "Subsidiary Guarantee") of payment of the Notes by
such Restricted Subsidiary and (ii) such Restricted Subsidiary waives, and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Subsidiary Guarantee; provided that this
paragraph shall not be applicable to (x) any Guarantee of any Restricted
Subsidiary that existed at the time such Person became a Restricted Subsidiary
and was not Incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or (y) any Guarantee of any Restricted
Subsidiary of Indebtedness Incurred (I) under Credit Facilities pursuant to
clause (i) of the second paragraph of the "Limitation on Indebtedness" covenant
or (II) pursuant to clause (vii) of the second paragraph of the "Limitation on
Indebtedness" covenant. If the Guaranteed Indebtedness is (A) pari passu in
right of payment with the Notes, then the Guarantee of such Guaranteed
Indebtedness shall be pari passu in right of payment with, or subordinated in
right of payment to, the Subsidiary Guarantee or (B) subordinated in right of
payment to the Notes, then the Guarantee of such Guaranteed Indebtedness shall
be subordinated in right of payment to the Subsidiary Guarantee at least to the
extent that the Guaranteed Indebtedness is subordinated in right of payment to
the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
Limitation on Transactions with Stockholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable in any material respect to the Company or
such Restricted Subsidiary than could be obtained, at the time of such
transaction or, if such transaction is pursuant to a written agreement, at the
time of the execution of the agreement providing therefor, in a comparable
arm's-length transaction with a Person that is not such a holder or an
Affiliate.
The foregoing limitation does not limit, and shall not apply to: (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the Company; (iv) any payments or other transactions pursuant to
any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant. Notwithstanding
the foregoing, any transaction covered by the first paragraph of this
"Limitation on Transactions with Stockholders and Affiliates" covenant and not
covered by clauses (ii) through (v) of this paragraph, the aggregate amount of
which exceeds $5 million in value, must be approved or determined to be fair in
the manner provided for in clause (i)(A) or (B) above.
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Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the Notes, prior to) the
obligation or liability secured by such Lien.
The foregoing limitation does not apply to: (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries created in favor of the
Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Company or such other
Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to
refinance secured Indebtedness which is permitted to be Incurred under clause
(iii) of the second paragraph of the "Limitation on Indebtedness" covenant;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets securing
the Indebtedness being refinanced; (v) Liens securing obligations under Credit
Facilities Incurred under clause (i) of the second paragraph of the "Limitation
on Indebtedness" covenant; or (vi) Permitted Liens.
Limitation on Sale-Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of cash or Temporary Cash Investments. In the event and to the extent
that the Net Cash Proceeds received by the Company or any of its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Closing Date
in any period of 12 consecutive months exceed $5 million, then the Company shall
or shall cause the relevant Restricted Subsidiary to (i) within 12 months after
the date Net Cash Proceeds so received exceed $5 million (A) apply an amount
equal to such excess Net Cash Proceeds to permanently repay unsubordinated
Indebtedness of the Company or any Restricted Subsidiary providing a Subsidiary
Guarantee pursuant to the "Limitation on Issuances of Guarantees by Restricted
Subsidiaries" covenant described above or Indebtedness of any other Restricted
Subsidiary, in each case owing to a Person other than the Company or any of its
Subsidiaries, or (B) invest an amount equal to such excess Net Cash Proceeds, or
the amount of such Net Cash Proceeds not so applied pursuant to clause (A) (or
enter into a definitive agreement committing to so invest within 12 months after
the date of such agreement), in capital assets of a nature or type or that are
used in a business (or in a Person having capital assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, the Company
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and its Restricted Subsidiaries existing on the date of such investment (as
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution) and (ii) apply (no later than
the end of the 12-month period referred to in clause (i)) such excess Net Cash
Proceeds (to the extent not applied pursuant to clause (i)) as provided in the
following paragraph of this "Limitation on Asset Sales" covenant. The amount of
such excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate Accreted Value of Notes equal to the Excess Proceeds on such date, at
a purchase price equal to 100% of the Accreted Value of the Notes on the
relevant Payment Date plus, in each case, accrued interest (if any) to the
Payment Date.
Commission Reports and Reports to Holders
The Company shall file with the Commission all such reports and other
information as it would be required to file with the Commission by Sections
13(a) or 15(d) under the Exchange Act if it were subject thereto (unless the
Commission will not accept such a filing, in which case the Company shall
provide such documents to the Trustee). The Company shall supply the Trustee and
each Holder or shall supply to the Trustee for forwarding to each such Holder,
without cost to such Holder, copies of such reports and other information;
provided, however, that copies of such reports may omit exhibits, which the
Company will deliver at its cost to any Holder upon request.
REPURCHASE OF EXCHANGE NOTES UPON A CHANGE OF CONTROL
The Company shall commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Exchange Notes then
outstanding, at a purchase price equal to 101% of the Accreted Value thereof on
the relevant Payment Date, plus accrued interest (if any) to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Exchange Notes) required by the foregoing covenant (as
well as may be contained in other securities of the Company which might be
outstanding at the time). The foregoing covenant requiring the Company to
repurchase the Exchange Notes will, unless consents are obtained, require the
Company to repay all indebtedness then outstanding which by its terms would
prohibit such Exchange Note repurchase, either prior to or concurrently with
such Exchange Note repurchase. In addition, a Change of Control would constitute
an event of default under the New Credit Facility, and upon the occurrence of
such an event of default, the lenders thereunder would have the right to
accelerate the repayment of all indebtedness thereunder and to exercise 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, thereby reducing the funds available for the offer to purchase
Exchange Notes.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) defaults in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) defaults in the payment of interest on any Note
when the same becomes due and payable, which default continues for a period of
30 days; (c) defaults in the performance of or breaches of the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of the Company or the failure to make or
consummate an Offer to Purchase in accordance with the "Limitation on Asset
Sales" or the "Repurchase of Exchange Notes upon a Change of Control" covenant
described above; (d) defaults in the performance of or breaches of any covenant
or
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agreement of the Company in the Indenture or under the Notes (other than a
default specified in clause (a), (b) or (c) above), which default or breach
continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Notes then outstanding; (e) there occurs with respect to any issue or issues of
Indebtedness of the Company or any Significant Subsidiary having an outstanding
principal amount of $5 million or more in the aggregate for all such issues of
all such Persons, whether such Indebtedness now exists or shall hereafter be
created, (I) an event of default that has caused the holder thereof to declare
such Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled within 30 days of such acceleration and/or (II) the
failure to make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or extended
within 30 days of such payment default; (f) any final judgment or order (not
covered by insurance) for the payment of money in excess of $5 million in the
aggregate for all such final judgments or orders against all such Persons
(treating any deductibles, self-insurance or retention as not so covered) shall
be rendered against the Company or any Significant Subsidiary and shall not be
paid or discharged, and there shall be any period of 30 consecutive days
following entry of the final judgment or order that causes the aggregate amount
for all such final judgments or orders outstanding and not paid or discharged
against all such Persons to exceed $5 million during which a stay of enforcement
of such final judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect; (g) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or (C) the
winding up or liquidation of the affairs of the Company or any Significant
Subsidiary and, in each case, such decree or order shall remain unstayed and in
effect for a period of 60 consecutive days; or (h) the Company or any
Significant Subsidiary (A) commences a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case under any
such law, (B) consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or (C) effects
any general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the Accreted Value
of, premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such Accreted Value, premium, if
any, and accrued interest shall be immediately due and payable. In the event of
a declaration of acceleration because an Event of Default set forth in clause
(e) above has occurred and is continuing, such declaration of acceleration shall
be automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs with respect to the Company, the Accreted Value of, premium, if any, and
accrued interest on the Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. The Holders of at least a majority in principal
amount of the outstanding Notes, by written notice to the Company and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (i) all existing Events of Default, other
than the nonpayment of the Accreted Value of, premium, if any, and interest on
the Notes that have become due solely by such declaration of acceleration, have
been cured or waived and (ii) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. For information as to
the waiver of defaults, see "-- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising
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any trust or power conferred on the Trustee. However, the Trustee may refuse to
follow any direction that conflicts with law or the Indenture, that may involve
the Trustee in personal liability, or that the Trustee determines in good faith
may be unduly prejudicial to the rights of Holders of Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from Holders of Notes. A
Holder may not pursue any remedy with respect to the Indenture or the Notes
unless: (i) the Holder gives the Trustee written notice of a continuing Event of
Default; (ii) the Holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the remedy;
(iii) such Holder or Holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense; (iv) the Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the Holders of a majority
in aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
Accreted Value of, premium, if any, or interest on, such Note or to bring suit
for the enforcement of any such payment, on or after the due date expressed in
the Notes, which right shall not be impaired or affected without the consent of
the Holder.
The Indenture will require certain officers of the Company to certify, on
or before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the performance of the Company and its Restricted Subsidiaries
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company shall not consolidate with, merge with or into, or sell,
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof, and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of the Company on
all of the Notes and under the Indenture; (ii) immediately after giving effect
to such transaction, no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a pro
forma basis, the Company or any Person becoming the successor obligor of the
Notes shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction;
(iv) immediately after giving effect to such transaction on a pro forma basis,
the Company, or any Person becoming the successor obligor of the Notes, as the
case may be, could Incur at least $1.00 of Indebtedness under the first
paragraph of the "Limitation on Indebtedness" covenant described above;
provided, however, that this clause (iv) shall not apply to a consolidation,
merger or sale of all (but not less than all) of the assets of the Company if
all Liens and Indebtedness of the Company or any Person becoming the successor
obligor of the Notes, as the case may be, and its Restricted Subsidiaries
outstanding immediately after such transaction would, if Incurred at such time,
have been permitted to be Incurred (and all such Liens and Indebtedness, other
than Liens or Indebtedness of the Company and its Restricted Subsidiaries
outstanding immediately prior to the transaction, shall be deemed to have been
Incurred) for all purposes of the Indenture; and (v) the Company delivers to the
Trustee an Officers' Certificate (attaching the arithmetic computations to
demonstrate compliance with clauses (iii) and (iv) above) and an Opinion of
Counsel, in each case stating that such consolidation, merger or transfer and
such supplemental indenture comply with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with; provided, however, that clauses (iii) and (iv) above do not apply if, in
the good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the
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principal purpose of such transaction is to change the state of incorporation of
the Company, and such transaction shall not have as one of its purposes the
evasion of the foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that the Company will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default, shall have occurred and be continuing
on the date of such deposit or during the period ending on the 123rd day after
the date of such deposit, and such deposit shall not result in a breach or
violation of, or constitute a default under, any other agreement or instrument
to which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound, and (D) if at such time the Notes
are listed on a national securities exchange, the Company has delivered to the
Trustee an Opinion of Counsel to the effect that the Notes will not be delisted
as a result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further will provide that the provisions of the Indenture will no
longer be in effect with respect to clauses (iii) and (iv) under "Consolidation,
Merger and Sale of Assets" and all the covenants described herein under
"Covenants," clause (d) under "Events of Default" with respect to such
covenants, clause (c) under "Events of Default" with respect to clauses (iii)
and (iv) under "Consolidation, Merger and Sale of Assets," and clauses (e) and
(f) under "Events of Default" shall be deemed not to be Events of Default, upon,
among other things, the deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments in accordance with the terms of
the Indenture and the Notes, the satisfaction of the provisions described in
clauses (B)(ii), (C) and (D) of the preceding paragraph and the delivery by the
Company to the Trustee of an Opinion of Counsel to the effect that, among other
things, the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in
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the immediately preceding paragraph and the Notes are declared due and payable
because of the occurrence of an Event of Default that remains applicable, the
amount of money and/or U.S. Government Obligations on deposit with the Trustee
will be sufficient to pay amounts due on the Notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the Notes at the time
of the acceleration resulting from such Event of Default. However, the Company
will remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the Accreted Value or principal of, or
premium, if any, or interest on, any Note, (iii) change the place or currency of
payment of principal of, or premium, if any, or interest on, any Note, (iv)
impair the right to institute suit for the enforcement of any payment on or
after the Stated Maturity (or, in the case of a redemption, on or after the
Redemption Date) of any Note, (v) reduce the above-stated percentage of
outstanding Notes the consent of whose Holders is necessary to modify or amend
the Indenture, (vi) waive a default in the payment of principal of, premium, if
any, or interest on the Notes or (vii) reduce the percentage or aggregate
principal amount of outstanding Notes the consent of whose Holders is necessary
for waiver of compliance with certain provisions of the Indenture or for waiver
of certain defaults.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Exchange Notes will initially be
represented by one or more permanent global Notes in definitive, fully
registered form without interest coupons (each a "Global Note") and will be
deposited with the Trustee as custodian for, and registered in the name of, a
nominee of DTC. Except in the limited circumstances described below under
"Certificated Notes," owners of beneficial interests in a Global Note will not
be entitled to receive physical delivery of Certificated Notes (as defined
below).
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Note for
all purposes under the Indenture and the Exchange Notes. No beneficial owner of
an interest in a Global Note will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those provided for
under the Indenture.
Payments of the principal of, and interest on, a Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof. None
of the Company, the Trustee, or any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a Global Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
DTC or its nominee. The Company also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
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Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by
a holder of Exchange Notes (including the presentation of Exchange Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in a Global Note is credited and only in
respect of such portion of the aggregate principal amount of Exchange Notes as
to which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Exchange Notes, DTC will
exchange the applicable Global Note for Certificated Exchange Notes, which it
will distribute to its participants.
The Company understands that DTC is a limited-purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among participants of DTC,
it is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Certificated Notes in exchange for the
Global Notes. Holders of an interest in a Global Note may receive a Certificated
Note in accordance with DTC's rules and procedures in addition to those provided
for under the Indenture.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Exchange Notes or for any claim
based thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Exchange Notes or because of the creation of any Indebtedness represented
thereby, shall be had against any incorporator, stockholder, officer, director,
employee or controlling person of the Company or of any successor Person
thereof. Each Holder, by accepting the Exchange Notes, waives and releases all
such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
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DESCRIPTION OF THE WARRANTS
In connection with the Offering, the Company issued Warrants to purchase
1,658.2694 shares of Preferred Stock. The following is a description of such
Warrants.
GENERAL
The Warrants were issued pursuant to the Warrant Agreement between the
Company and United States Trust Company of New York, warrant agent under the
Warrant Agreement (the "Warrant Agent"). The following summary of certain
provisions of the Warrant Agreement does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of the
Warrant Agreement, including the definitions of certain terms therein. Wherever
particular defined terms of the Warrant Agreement, not otherwise defined herein,
are referred to, such defined terms are incorporated herein by reference. A copy
of the Warrant Agreement has been filed with the Commission as an exhibit to the
Registration Statement (of which this Prospectus is a part).
Each Warrant is evidenced by a Warrant Certificate which entitles the
holder thereof to purchase .003734 shares of Preferred Stock from the Company at
a price (the "Exercise Price") of $.01 per share, subject to adjustment as
provided in the Warrant Agreement. The Warrants may be exercised at any time
beginning one year after the Closing Date and prior to the close of business on
the tenth anniversary of the Closing Date. Warrants that are not exercised by
such date will expire. The Warrants will become separately transferable from the
Senior Discount Notes on the earliest to occur of (i) the date that is six
months following the Closing Date, (ii) the commencement of the Exchange Offer
and (iii) the effective date of a shelf registration statement with respect to
the Senior Discount Notes. See "Description of the Exchange
Notes -- Registration Rights."
Upon the occurrence of a merger with a person in connection with which the
consideration to shareholders of the Company is not all cash and where the
Preferred Stock (or other securities) issuable upon exercise of the Warrants
would not be registered under the Exchange Act, the Company or its successor by
merger will be required, upon the expiration of the time periods discussed
below, to offer to repurchase the Warrants for cash.
CERTAIN DEFINITIONS
The Warrant Agreement contains, among others, the following definitions:
A "Repurchase Event" is defined to occur on any date when the Company (i)
consolidates with or merges into or with another Person (but only where the
holders of Preferred Stock (or any capital stock issuable upon conversion of the
Preferred Stock) receive consideration in exchange for all or part of such
stock), if the Preferred Stock (or other securities) thereafter issuable upon
exercise of the Warrants is not registered under the Exchange Act or (ii) sells
all or substantially all of its assets to another Person, if the Preferred Stock
(or other securities) thereafter issuable upon exercise of the Warrants is not
registered under the Exchange Act; provided that in each case a "Repurchase
Event" shall not be deemed to have occurred if the consideration for such
transaction consists solely of cash.
A "Financial Expert"' is one of the persons listed in Appendix A to the
Warrant Agreement, all of which are nationally recognized investment banking
firms.
An "Independent Financial Expert" is a Financial Expert that does not (and
whose directors, executive officers and 5% stockholders do not) have a direct or
indirect financial interest in the Company or any of its subsidiaries or
affiliates, which has not been for at least five years and, at the time that it
is called upon to give independent financial advice to the Company, is not (and
none of its directors, executive officers or 5% stockholders is) a promoter,
director or officer of the Company or any of its subsidiaries or affiliates.
CERTAIN TERMS
Repurchase
Following the occurrence of a Repurchase Event, the Company must make an
offer to repurchase for cash all outstanding Warrants (a "Repurchase Offer").
The holders of the Warrants may, until 5:00 p.m.
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(New York City time) on the date (the "Final Surrender Time") at least 30 but
not more than 60 days following the date on which the Company gives notice of
such Repurchase Offer to such holders, surrender all or part of their Warrants
for repurchase by the Company. Except as otherwise provided in the Warrant
Agreement, Warrants received by the Warrant Agent in proper form for purchase
during a Repurchase Offer prior to the Final Surrender Time are to be
repurchased by the Company at a price in cash (the "Repurchase Price") equal to
the value (the "Relevant Value") on the Valuation Date (as defined in the
Warrant Agreement) relating thereto of the Warrant Shares (and other securities
issuable upon exercise of the Warrants), had the Warrants then been exercised,
less the Exercise Price therefor. The "Relevant Value" of the Warrant Shares (or
other securities) shall be (i) if the Warrant Shares (or other securities) are
registered under the Exchange Act, the average of the closing sales prices (on
the stock exchange that is the primary trading market for the Warrant Shares (or
other securities)) of the Warrant Shares (or other securities) for the 20
consecutive trading days immediately preceding such Valuation Date or, if the
Warrant Shares (or other securities) have been registered under the Exchange Act
for less than 20 days trading days before such date, then the average of the
closing sales prices for all of the trading days before such date for which
closing sales prices are available or (ii) if the Warrant Shares (or other
securities) are not registered under the Exchange Act or if the value cannot be
computed under clause (i) above, the value determined (without giving effect to
any discount for lack of liquidity, the fact that the Company has no class of
equity securities registered under the Exchange Act or the fact that the Warrant
Shares (or other securities) issuable upon exercise of the Warrants represent a
minority interest in the Company) by an Independent Financial Expert.
If clause (ii) of the preceding paragraph is applicable, the Board of
Directors of the Company is required to select an Independent Financial Expert
not more than five business days following a Repurchase Event. Within two days
after its selection of the Independent Financial Expert, the Company must
deliver to the Warrant Agent a notice setting forth the name of such Independent
Financial Expert. The Company must use its best efforts (including by selecting
another Independent Financial Expert) to cause the Independent Financial Expert
to deliver to the Company, with a copy to the Warrant Agent, a value report (a
"Value Report") which states the Relevant Value of the Warrant Shares (or other
securities) being valued as of the Valuation Date and contains a brief statement
as to the nature and scope of the methodologies upon which the determination was
made. The Warrant Agent will have no duty with respect to the Value Report of
any Independent Financial Expert, except to keep it on file and available for
inspection by the holders of the Warrants. The determination of the Independent
Financial Expert as to the Relevant Value in accordance with the provisions of
the Warrant Agreement shall be conclusive on all persons.
The requirement that the Company make a Repurchase Offer will, unless
consents are obtained, require the Company to repay all indebtedness then
outstanding which by its terms would prohibit such Repurchase Offer. There can
be no assurance that the Company will have sufficient funds available at the
time of any Repurchase Event to repurchase the Warrants and any such
indebtedness, as well as to repurchase any other securities of the Company that
by their terms require the Company to repurchase such securities upon the
occurrence of such an event.
Exercise
In order to exercise all or any of the Warrants represented by a Warrant
Certificate, the holder thereof is required to surrender to the Warrant Agent
the Warrant Certificate, a duly executed copy of the subscription form set forth
in the Warrant Certificate, and payment in full of the Exercise Price for each
share of Preferred Stock (or fraction thereof) or other security issuable upon
exercise of such Warrants, which payment may be made in cash or by certified or
official bank or bank cashier's check payable to the order of the Company or
through the surrender of unexercised Warrant Certificates. Upon the exercise of
any Warrant in accordance with the Warrant Agreement, the Warrant Agent will
instruct the Company to transfer promptly to or upon the written order of the
holder of such Warrant Certificate appropriate evidence of ownership of any
shares of Preferred Stock or other security or property to which it is entitled
as a result of such exercise, registered or otherwise placed in such name or
names as it may direct in writing, and will deliver such evidence of ownership
to the person or persons entitled to receive the same and fractional shares, if
any, or following an initial public offering of the Preferred Stock (or any
capital stock issuable upon conversion of the Preferred Stock) an amount in
cash, in lieu of any fractional shares, if any. All shares of Preferred Stock or
other
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securities issuable by the Company upon the exercise of the Warrants must be
validly issued, fully paid and nonassessable. If the Company conducts an initial
public offering of equity securities (other than nonconvertible preferred
shares, Preferred Stock (or any capital stock issuable upon conversion of the
Preferred Stock)), the Company will give holders of Warrants and Warrant Shares
the opportunity to convert such Warrants into warrants to purchase such equity
securities and the opportunity to convert such Warrant Shares into such equity
securities. Such conversion opportunity will be on terms and conditions
determined to be fair and reasonable by the Company's Board of Directors.
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares underlying the Warrants is
then effective and available, or the exercise of such Warrants is exempt from
the registration requirements of the Securities Act, and such securities are
qualified for sale or exempt from qualification under the applicable securities
laws of the states or other jurisdictions in which the various holders of the
Warrants reside.
Anti-dilution Provisions
The Warrant Agreement contains provisions adjusting the Exercise Price and
the number of shares of Preferred Stock or other securities issuable upon
exercise of a Warrant in the event of (i) a division, consolidation or
reclassification of the shares of Preferred Stock (or any capital stock issuable
upon conversion of the Preferred Stock), (ii) the issuance of rights, options,
warrants or convertible or exchangeable securities to all holders of shares of
Preferred Stock (or any capital stock issuable upon conversion of the Preferred
Stock) entitling such holders to subscribe for or purchase shares of Preferred
Stock (or any capital stock issuable upon conversion of the Preferred Stock) at
a price per share which is lower than the then current value of such shares,
subject to certain exceptions, (iii) the issuance of shares of Preferred Stock
(or any capital stock issuable upon conversion of the Preferred Stock) at a
price per share that is lower than the then current value of such shares, except
for issuances in connection with certain acquisitions, mergers or similar
transactions with third parties, (iv) certain distributions to all holders of
shares of Preferred Stock (or any capital stock issuable upon conversion of the
Preferred Stock) of evidences of indebtedness or assets and (v) in the
discretion of the Company's Board of Directors, in certain other circumstances.
No Rights as Stockholders
The holders of unexercised Warrants are not entitled, as such, to receive
dividends or other distributions, receive notice of any meeting of the
stockholders, consent to any action of the stockholders, receive notice of any
other stockholder proceedings, or to any other rights as stockholders of the
Company.
Mergers, Consolidations, etc.
Except as provided below, in the event that the Company consolidates with,
merges with or into, or sells all or substantially all of its property and
assets to another person, each Warrant thereafter shall entitle the holder
thereof to receive upon exercise thereof the number of shares of capital stock
or other securities or property which the holder of Preferred Stock (or other
securities issuable upon exercise of the Warrants) is entitled to receive upon
completion of such consolidation, merger or sale of assets. If the Company
merges or consolidates with, or sells all or substantially all of the property
and assets of the Company to, another person and, in connection therewith,
consideration to the holders of Preferred Stock (or other securities issuable
upon exercise of the Warrants) in exchange for their shares is payable solely in
cash, or in the event of the dissolution, liquidation or winding-up of the
Company, then the holders of the Warrants will be entitled to receive
distributions on an equal basis with the holders of Preferred Stock or other
securities issuable upon exercise of the Warrants assuming the Warrants had been
exercised immediately prior to such event, less the Exercise Price. Upon receipt
of such payment, if any, the Warrants will expire and the rights of the holders
thereof will cease. If the Company has made a Repurchase Offer that has not
expired at the time of such transaction, the holders of the Warrants will be
entitled to receive the higher of (i) the amount payable to the holders of the
Warrants described above and (ii) the Repurchase Price payable to the holders of
the Warrants pursuant to such Repurchase Offer. In case of any such merger,
consolidation or sale of assets, the surviving or acquiring person and, in the
event of any dissolution, liquidation or winding-up of the Company, the Company
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must deposit promptly with the Warrant Agent the funds, if any, necessary to pay
to the holders of the Warrants. After such funds and the surrendered Warrant
Certificates are received, the Warrant Agent must make payment by delivering a
check in such amount as is appropriate (or, in the case of consideration other
than cash, such other consideration as is appropriate) to such person or persons
as it may be directed in writing by the holders surrendering such Warrants.
Registration Requirements
The holders of the Warrants will be entitled to piggyback registration
rights for the Warrant Shares in connection with (i) an initial public offering
of the Preferred Stock (or other securities) issuable upon exercise of the
Warrants (or any capital stock issuable upon conversion of the Preferred Stock),
if any stockholder of the issuer participates in such public offering, or (ii)
certain public offerings of shares of Preferred Stock (or other securities)
issuable upon exercise of the Warrants (or any capital stock issuable upon
conversion of the Preferred Stock) conducted subsequent to the initial public
offering of such stock. If only the Company sells shares in the initial public
offering or all of the Warrant Shares (or other securities issuable upon
exercise of the Warrants) are not sold in the initial public offering or any
subsequent offering, the Company will be required to use its best efforts to
cause to be declared effective, no later than 180 days after the closing date of
the initial public offering (but in no event prior to the first anniversary of
the Closing Date), a shelf registration statement (the "Warrant Shelf
Registration Statement") with respect to the issuance of the Warrant Shares (or
other securities issuable upon exercise of the Warrants). The Company is
required to use reasonable efforts to maintain the effectiveness of the Warrant
Shelf Registration Statement until such time as all Warrants have been exercised
or, if earlier, the tenth anniversary of the Closing Date. During any
consecutive 365-day period while the Warrants are exercisable, the Company will
have the ability to suspend the availability of such registration statement for
up to 60 days (except during the 60 days immediately prior to the expiration of
the Warrants) if the Company's Board of Directors determines in good faith that
there is a valid purpose for the suspension and provides notice of such
determination to the holders at their addresses appearing in the register of
Warrants maintained by the Warrant Agent. Holders of Warrants will not be named
as selling securityholders in the Warrant Shelf Registration Statement. The
Warrant Agreement requires the Company to pay the expenses associated with such
registration.
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Preferred Stock (or other securities)
issuable upon exercise of the Warrants is then effective and available, or the
exercise of such Warrants is exempt from the registration requirements of the
Securities Act, and such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states or other
jurisdictions in which the various holders of the Warrants reside.
Reservation of Shares
The Company has authorized and will reserve for issuance such number of
shares of Preferred Stock as will be issuable upon the exercise of all
outstanding Warrants. Such shares of Preferred Stock, when issued and paid for
in accordance with the Warrant Agreement, will be duly and validly issued, fully
paid and nonassessable, free of preemptive rights and free from all taxes,
liens, charges and security interests.
Reports
At all times from and after the earlier of (i) a Registration with respect
to the Notes and (ii) the date that is six months after the Closing Date, in
either case, whether or not the Company is then required to file reports with
the Commission, the Company shall file with the Commission all such reports and
other information as it would be required to file with the Commission by Section
13(a) or 15(d) under the Exchange Act if it were subject thereto (unless the
Commission will not accept such a filing, in which case the Company shall
provide such documents to the Warrant Agent). The Company shall supply the
Warrant Agent and each Warrantholder or shall supply to the Warrant Agent for
forwarding to each such holder, without cost to such holder, copies of such
reports and other information; provided, however, that copies of such reports
may omit exhibits, which the Company will deliver at its cost to any
Warrantholder upon request. In addition, at all times prior to the earlier of
the date of the Registration and six months after the Closing
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Date, the Company shall, at its cost, deliver to each Warrantholder quarterly
and annual reports (commencing with the first quarter ending after the Closing
Date) substantially equivalent to those which would be required by the Exchange
Act. In addition, at all times prior to the Registration, upon the request of
any Warrantholder or any prospective purchaser of the Warrants designated by a
Warrantholder, the Company shall supply to such holder or such prospective
purchaser the information required under Rule 144A under the Securities Act;
provided, however, that copies of such reports and other information may omit
exhibits, which the Company will supply to any Warrantholder or prospective
purchaser upon request.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company and
certain provisions of the Company's Certificate of Incorporation and Bylaws does
not purport to be complete and is qualified in its entirety by reference to the
provisions of the Company's Certificate of Incorporation and Bylaws, which are
included as exhibits to the Registration Statement (of which this Prospectus is
a part) and by provisions of applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Pursuant to the Company's Certificate of Incorporation, the Company has the
authority to issue 200,000 shares of Common Stock, par value $.01 per share, and
100,000 shares of Preferred Stock, par value $.01 per share. Upon receipt of
necessary approvals, the Company intends to amend its Certificate of
Incorporation to increase the number of authorized shares of Common Stock to
16,000,000 and to provide for a 150 for 1 split of its outstanding Common Stock
(the "Common Stock Split"). The following information does not reflect the
effect of the proposed Common Stock Split. As of January 31, 1998, there were no
shares of Common Stock issued and outstanding. As of January 31, 1998, 49,985
shares of Preferred Stock were issued and outstanding and held of record by 66
stockholders. As of January 31, 1998, the Company had outstanding options to
purchase an aggregate of 1,088.70 shares of Common Stock at exercise prices of
$1,200 and $1,500 per share. All outstanding options provide for antidilution
adjustments in the event of certain mergers, consolidations, reorganizations,
recapitalizations, stock dividends, stock splits or other changes in the
corporate structure of the Company.
The rights of the holders of Common Stock discussed below are subject to
the rights of the holders of preferred stock and to such rights as the Board of
Directors may hereafter confer on future holders of other series of preferred
stock.
COMMON STOCK
VOTING RIGHTS. Each holder of Common Stock shall be entitled to attend all
special and annual meetings of the stockholders of the Company and together with
the holders of all other classes of stock entitled to attend and vote at such
meetings, to vote upon any matter or thing (including, without limitation, the
election of one or more directors) properly considered and acted upon by the
stockholders. Holders of Common Stock are entitled to one vote per share.
LIQUIDATION RIGHTS. In the event of any dissolution, liquidation or
winding up of the Company, whether voluntary or involuntary, holders of Common
Stock and the holders of all other classes of stock entitled to participate
therewith, shall become entitled to participate in the distribution of any
assets of the Company remaining after the Company shall have paid, or provided
for payment of, all debts and liabilities of the Company and after the Company
shall have paid, or set aside for payment, to the holders of any class of stock
having preference over the Common Stock in the event of dissolution, liquidation
or winding up the full preferential amounts (if any) to which they are entitled.
DIVIDENDS. Dividends may be paid on the Common Stock and on any class or
series of stock entitled to participate therewith when and as declared by the
Board of Directors out of any assets legally available therefor.
PREFERRED STOCK
VOTING RIGHTS. Except as otherwise required by law, the holders of shares
of Preferred Stock shall be entitled to attend all special and annual meetings
of the stockholders of the Company and together with the holders of all other
classes of stock entitled to attend and vote at such meetings, to vote upon any
matter or thing (including, without limitation, the election of one or more
directors) properly considered and acted upon by the stockholders. Holders of
Preferred Stock are entitled to one vote per share.
LIQUIDATION RIGHTS. In the event of any dissolution, liquidation or
winding up of the Company, whether voluntary or involuntary, the holders of
shares of Preferred Stock are entitled to receive out of the assets of the
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Company legally available for distribution to stockholders before any payment or
distribution is made on the Common Stock or any other class of stock of the
Company ranking junior to the Preferred Stock as to liquidation preference, cash
in the amount of $1,000 per share (the "Preferred Stock Liquidation
Distribution"). After the Preferred Stock Liquidation Distribution has been made
and after the holders of shares of any other class or series of stock having
preference over the Common Stock in the event of dissolution, liquidation or
winding up have received the full preferential amounts to which they are
entitled, the holders of shares of Preferred Stock shall participate equally
with the holders of shares of Common Stock and any other class or series of
stock entitled to participate with the Common Stock in the event of dissolution,
liquidation or winding up in the distribution of any remaining assets of the
Company. If the assets distributable upon such dissolution, liquidation or
winding up are insufficient to pay cash in an amount equal to the Preferred
Stock Liquidation Distribution to the holders of shares of Preferred Stock, then
such assets or the proceeds thereof will be distributed among the holders of the
Preferred Stock ratably in proportion to the respective amounts of the Preferred
Stock Liquidation Distribution to which they otherwise would be entitled.
CONVERSION INTO COMMON STOCK. The shares of Preferred Stock shall
automatically be converted into fully paid and nonassessable shares of Common
Stock at the rate of one share of Common Stock for each share of Preferred Stock
(one hundred fifty shares of Common Stock for each share of Preferred Stock upon
the effective date of the Common Stock Split) (as adjusted for any stock split
or reclassification): (a) upon the issuance by the Securities and Exchange
Commission of an order of effectiveness as to any registration statement for the
sale of any shares of Common Stock under the Securities Act; or (b) if not
previously converted, on December 8, 2005.
AUTHORIZED PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors to
issue, from time to time and without further stockholder action, except as
required by applicable law, one or more series of preferred stock, and to fix
the relative rights and preferences of the shares, including voting powers,
dividend rights, liquidation preferences, redemption rights, conversion
privileges and other rights. The issuance of additional preferred stock may have
the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders. Preferred stock issued with
voting, conversion or redemption rights may adversely affect the voting power of
the holders of Common Stock and Preferred Stock, and could discourage attempts
to obtain control of the Company.
WARRANTS
The Company has agreed to issue to SCANA warrants to purchase 753 shares of
Preferred Stock in connection with a construction credit facility. Additionally,
the Company issued Warrants to purchase 1,658.2694 shares of Preferred Stock
pursuant to the Warrant Agreement in connection with the Offering. See
"Description of the Warrants."
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes, subject to the limitations set forth
below, the material U.S. federal income tax consequences associated with the
exchange of the Senior Discount Notes for the Exchange Notes and with the
ownership and disposition of the Notes. The discussion is based upon provisions
of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), its
legislative history, judicial authority, current administrative rulings and
practice, and existing and proposed Treasury Regulations, including regulations
concerning the treatment of debt instruments issued with original issue discount
(the "OID Regulations"), all as in effect and existing on the date hereof.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the validity of the statements and
conclusions set forth below. Any such changes or interpretations may be
retroactive and could adversely affect a holder of the Notes. This discussion
assumes that the Notes are or will be held as capital assets (as defined in
Section 1221 of the Code) by the holders thereof. Except as otherwise described
herein, this discussion applies only to a person who is a holder who purchased
Senior Discount Notes pursuant to the Offering at the "issue price" (as defined
below) and who is (i) a citizen or resident of the United States for United
States federal income tax purposes, (ii) treated as a corporation, partnership
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source, or
(iv) a trust that is subject to the primary supervision of a court within the
United States and the control of a United States person as described in Section
7701(a)(30) of the Code (a "U.S. Holder"). This discussion does not purport to
deal with all aspects of U.S. federal income taxation that might be relevant to
particular holders in light of their personal investment circumstances or
status, nor does it discuss the U.S. federal income tax consequences to certain
types of holders subject to special treatment under the U.S. federal income tax
laws, such as certain financial institutions, insurance companies, dealers in
securities or foreign currency, tax-exempt organizations, or persons that hold
Notes that are a hedge against, or that are hedged against, currency risk or
that are part of a straddle or conversion transaction, or persons whose
functional currency is not the U.S. dollar. Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed.
Hogan & Hartson L.L.P., tax counsel to the Company, has reviewed the
following discussion and is of the opinion that it accurately summarizes,
subject to the limitations set forth above, the material U.S. federal income tax
consequences associated with the exchange of the Senior Discount Notes for the
Exchange Notes and with the ownership and disposition of the Notes.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH PURCHASER IS
STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF
SUCH PURCHASER'S PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF
THE EXCHANGE OF THE SENIOR DISCOUNT NOTES FOR THE EXCHANGE NOTES AND THE
OWNERSHIP AND DISPOSITION OF THE NOTES.
THE EXCHANGE
The exchange of Senior Discount Notes for Exchange Notes will not be
treated as an exchange for federal income tax purposes because the Exchange
Notes will not differ materially in kind or extent from the Senior Discount
Notes and because the exchange will occur by operation of the original terms of
the Senior Discount Notes. As a result, U.S. Holders who exchange their Senior
Discount Notes for Exchange Notes will not recognize any income, gain or loss
for federal income tax purposes. A U.S. Holder will have the same adjusted issue
price, adjusted basis and holding period in the Exchange Notes immediately after
the exchange as it had in the Senior Discount Notes immediately before the
exchange.
ORIGINAL ISSUE DISCOUNT
GENERAL. The Notes will bear OID, and each U.S. Holder will be required to
include in income (regardless of whether such U.S. Holder is a cash or accrual
basis taxpayer) in each year, in advance of the
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receipt of cash payments on such Notes, that portion of the OID, computed on a
constant yield basis, attributable to each day during such year on which the
U.S. Holder held the Notes. See "Taxation of Original Issue Discount" below.
THE AMOUNT OF ORIGINAL ISSUE DISCOUNT. The amount of OID with respect to
each Note is equal to the excess of (i) its "stated redemption price at
maturity" over (ii) its "issue price." Under the OID Regulations, the "stated
redemption price at maturity" of each Note includes all payments to be made in
respect thereof, including any stated interest payments. Accordingly, payments
on the Notes (including principal and stated interest payments) are not
separately included in a U.S. Holder's income as interest, but rather are
treated first as payments of previously accrued OID and then as payments of
principal.
Because the original purchasers of the Senior Discount Notes also acquired
Warrants, each Senior Discount Note was treated for U.S. federal income tax
purposes as having been issued as part of an "investment unit" (a "Unit")
consisting of such Senior Discount Notes and the associated Warrants. For U.S.
federal income tax purposes, the issue price of a Unit must be allocated between
the Senior Discount Note and the Warrant. Under the OID Regulations, the issue
price of a Unit should be equal to the first price at which a substantial amount
of the Units were sold for money (excluding sales to bond houses, brokers or
similar persons acting in the capacity of an underwriter, placement agent or
wholesaler). The issue price of a Unit must be allocated between its component
parts based on their relative fair market values on the date of issuance. Based
on the foregoing, the Company intends to treat a Note as having been originally
issued with an issue price of $577.36 and a Warrant as having been issued with
an issue price of $5.60. This allocation by the Company reflects its judgment as
to the relative values of those instruments at the time of original issuance. No
assurance can be given, however, that the IRS will not challenge the allocation
by the Company of the issue price of the Notes and Warrants. If the Company's
allocation is successfully challenged, the issue price, OID accrual and gain or
loss on sale would be different from that resulting under the allocation
determined by the Company.
TAXATION OF ORIGINAL ISSUE DISCOUNT. A U.S. holder of a debt instrument
issued with OID is required to include in gross income for U.S. federal income
tax purposes an amount equal to the sum of the "daily portions" of such OID for
all days during the taxable year on which the holder holds the debt instrument.
The daily portions of OID required to be included in a holder's gross income in
a taxable year is determined upon a constant yield basis by allocating to each
day during the taxable year on which the holder holds the debt instrument a pro
rata portion of the OID on such debt instrument which is attributable to the
"accrual period" in which such day is included. Accrual periods with respect to
a Note may be of any length selected by the U.S. Holder and may vary in length
over the term of the Note as long as (i) no accrual period is longer than one
year and (ii) each scheduled payment of interest or principal on the Note occurs
on either the final or first day of an accrual period. The amount of the OID
attributable to each "accrual period" is the product of (i) the "adjusted issue
price" at the beginning of such accrual period and (ii) the "yield to maturity"
of the debt instrument (stated in a manner appropriately taking into account the
length of the accrual period). The "yield to maturity" is the discount rate
that, when used in computing the present value of all payments to be made under
the Note, produces an amount equal to the issue price of the Note. The "adjusted
issue price" of a Note at the beginning of an accrual period is generally
defined as the issue price of the Note plus the aggregate amount of OID that
accrued in all prior accrual periods, less any cash payments on the Note.
Accordingly, a U.S. Holder of a Note is required to include OID thereon in gross
income for U.S. federal tax purposes in advance of the receipt of cash in
respect of such income. The amount of OID allocable to an initial short accrual
period may be computed using any reasonable method if all other accrual periods,
other than a final short accrual period, are of equal length. The amount of OID
allocable to the final accrual period at maturity of a Note is the difference
between (x) the amount payable at the maturity of the Note and (y) the Note's
adjusted issue price as of the beginning of the final accrual period.
EFFECT OF MANDATORY AND OPTIONAL REDEMPTIONS ON OID. In the event of a
Change of Control, the Company will be required to offer to redeem all of the
Notes at redemption prices specified elsewhere herein. In the event that the
Company receives net proceeds from one or more Public Equity Offerings, the
Company may, at any time prior to October 15, 2000, use all or a portion of such
net proceeds to redeem Notes in amounts and at redemption prices specified
elsewhere herein. Under the OID Regulations, computation of the
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yield and maturity of the Notes is not affected by such redemption rights and
obligations if, based on all the facts and circumstances as of the issue date,
the stated payment schedule of the Notes (that does not reflect a Change of
Control or such Public Equity Offerings) is significantly more likely than not
to occur. The Company has determined that, based on all of the facts and
circumstances as of the issue date, it is significantly more likely than not
that the Notes will be paid according to their stated schedule.
The Company may redeem the Notes, in whole or in part, at any time on or
after October 15, 2002, at redemption prices specified elsewhere herein plus
accrued and unpaid interest to the date of redemption. The OID Regulations
contain rules for determining the "maturity date" and the stated redemption
price at maturity of an instrument that may be redeemed prior to its stated
maturity date at the option of the issuer. Under the OID Regulations, solely for
purposes of the accrual of OID, it is assumed that the issuer will exercise any
option to redeem a debt instrument if such exercise will lower the
yield-to-maturity of the debt instrument. The Company believes that it will not
be presumed to redeem the Notes prior to their stated maturity under these rules
because the exercise of such option would not lower the yield-to-maturity of the
Notes.
TAX BASIS. A U.S. Holder's initial tax basis in a Note generally is equal
to the purchase price paid by such U.S. Holder for such Note (or the portion of
the Unit purchase price allocable to such Notes). A U.S. Holder's tax basis in a
Note is increased by the amount of OID and market discount that is included in
such U.S. Holder's income pursuant to the foregoing rules and is decreased by
the amount of any cash payments received.
MARKET DISCOUNT, ACQUISITION PREMIUM
If a U.S. Holder acquires a Note for an amount that is less than its
revised issue price (generally, adjusted issued price) at the time of
acquisition, the amount of such difference will be treated as "market discount"
for U.S. federal income tax purposes, unless such difference is less than a
specified de minimis amount. Under the market discount rules, a U.S. Holder is
required to treat any principal payment on, or any gain on the sale, exchange,
retirement or other disposition of, a Note as ordinary income to the extent of
the market discount which has not previously been included in income and is
treated as having accrued on such Note at the time of such payment or
disposition. If a U.S. Holder makes a gift of a Note, accrued market discount,
if any, is recognized as if such U.S. Holder had sold such Note for a price
equal to its fair market value. In addition, the U.S. Holder may be required to
defer, until the maturity of the Note or the earlier disposition of the Note in
a taxable transaction, the deduction of a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry such Note.
Any market discount is considered to accrue on a straight-line basis during
the period from the date of acquisition to the maturity date of the Note, unless
the U.S. Holder elects to accrue market discount on a constant interest method.
A U.S. Holder of a Note may elect to include market discount in income currently
as it accrues (on either a straight-line basis or constant interest method), in
which case the rules described above regarding the deferral of interest
deductions will not apply. This election to include market discount in income
currently, once made, applies to all market discount obligations acquired on or
after the first day of the first taxable year to which the election applies and
may not be revoked without the consent of the IRS.
A U.S. Holder who acquires a Note for an amount that is greater than the
adjusted issue price of such Note but equal to or less than the sum of all
amounts payable on such Note after the purchase date is considered to have
purchased such Note at an "acquisition premium." Under the acquisition premium
rules of the Code and the OID Regulations, the amount of OID which such holder
must include in its gross income with respect to such Note for any taxable year
is reduced by the portion of such acquisition premium properly allocable to such
year.
SALE OR REDEMPTION OF NOTES
Unless a nonrecognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by the Company) or other disposition of a Note
is a taxable event for U.S. federal income tax purposes. In such event, a U.S.
Holder will recognize gain or loss equal to the difference between (i) the
amount of cash
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plus the fair market value of any property received upon such sale, exchange,
redemption or other taxable disposition and (ii) the U.S. Holder's adjusted tax
basis therein. Except with respect to accrued market discount, such gain or loss
should be capital gain or loss and will be long-term capital gain or loss if the
Note will have been held by the U.S. Holder for more than one year at the time
of such sale, exchange, redemption or other disposition. The distinction between
capital gain or loss and ordinary income is important for purposes of the
limitations on a U.S. Holder's ability to offset capital losses against ordinary
income and because U.S. Holders that are individuals may be entitled to a
preferential tax rate on long-term capital gains. On August 5, 1997, legislation
was enacted which, among other things, reduces to 20% the maximum rate of tax on
long-term capital gains on most capital assets held by an individual for more
than 18 months. Gain on most capital assets held by an individual more than one
year and up to 18 months is subject to tax at a maximum rate of 28%.
HIGH-YIELD DISCOUNT OBLIGATIONS
The Notes will constitute "applicable high yield discount obligations"
("AHYDOs") because the yield to maturity of such Notes equals or exceeds the sum
of the applicable federal rate in effect at the time of the issuance of the
Notes (the "AFR") plus five percentage points. For October 1997, the long-term
AFR is 6.57% and the mid-term AFR is 6.24% (based on semi-annual compounding).
The appropriate AFR depends upon the weighted average maturity of the Notes.
Under Sections 163(e) and 163(i) of the Code, a C corporation that is an issuer
of debt obligations subject to the AHYDO rules may not deduct any portion of OID
on the obligations until such portion is actually paid. A debt obligation is
generally subject to the AHYDO rules if (i) its maturity date is more than five
years from the date of issue, (ii) its yield to maturity equals or exceeds the
sum of the AFR plus five percentage points, and (iii) it bears "significant
OID." A debt obligation will bear significant OID for this purpose if, as of the
close of any accrual period ending more than five years after issuance, the
total amount of income includable by a holder with respect to the debt
instrument exceeds the sum of (i) the total amount of "interest" paid under the
obligation before the close of such accrual period and (ii) the product of the
issue price of the debt instrument and its yield to maturity.
NON-U.S. HOLDERS
THE NOTES
Subject to the discussion of "backup" withholding below, payments of
principal, if any, and interest (including OID) by the Company or its agent (in
its capacity as such) to any holder who is a beneficial owner of a Note but is
not a U.S. Holder is not subject to U.S. federal withholding tax provided, in
the case of interest (including OID) that (i) such holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote, (ii) such holder is not a controlled
foreign corporation for U.S. tax purposes that is related to the Company through
stock ownership, and (iii) either (A) the beneficial owner of the Note certified
to the Company or its agent, under penalties of perjury, that he is not a U.S.
Holder and provides his name and address or (B) a securities clearing
organization, bank or other financial institution that holds customers
securities in the ordinary course of its trade or business (a "financial
institution") certified to the Company or its agent, under penalties of perjury,
that the certification described in clause (A) hereof has been received from the
beneficial owner by it or by another financial institution acting for the
beneficial owner. A holder of a Note who is not a U.S. Holder, and who does not
meet the requirements of the preceding sentence, would generally be subject to
U.S. federal withholding tax at a flat rate of 30% (or a lower applicable treaty
rate) on payments of interest (including OID) on the Notes.
Regulations recently issued by the IRS, which will be effective for
payments made after December 31, 1998, make certain modifications to the
certification procedures applicable to Non-U.S. Holders. Prospective investors
should consult their tax advisors regarding the certification requirements for
Non-U.S. Holders.
If a holder of a Note who is not a U.S. Holder is engaged in a trade or
business in the United States and interest (including OID) on the Note is
effectively connected with the conduct of such trade or business, such holder,
although exempt from U.S. federal withholding tax as discussed in the preceding
paragraph (or by
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reason of the delivery of properly completed Form 4224), is subject to U.S.
federal income tax on such interest (including OID) and on any gain realized on
the sale, exchange or other dispositions of a Note in the same manner as if it
were a U.S. Holder. In addition, if such Non-U.S. Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits for that taxable year, unless it
qualifies for a lower rate under an applicable income tax treaty.
Subject to the discussion of "backup" withholding below, any capital gain
realized upon the sale, exchange or retirement of a Note by a holder who is not
a U.S. Holder will not be subject to U.S. federal income or withholding taxes
unless (i) such gain is effectively connected with a U.S. trade or business of
the holder, or (ii) in the case of an individual, such holder is present in the
United States for 183 days or more in the taxable year of the retirement or
disposition and certain other conditions are met.
Notes held by an individual who is neither a citizen nor a resident of the
United States for U.S. federal income tax purposes at the time of such
individual's death is not subject to U.S. federal estate tax, provided that the
income from the Notes was not or would not have been effectively connected with
a U.S. trade or business of such individual and that such individual qualified
for the exemption from U.S. federal withholding tax (without regard to the
certification requirements) that is described above.
FIRPTA TREATMENT OF NON-U.S. HOLDERS
Under the Foreign Investment in Real Property Tax Act of 1980, as amended
("FIRPTA"), foreign persons generally are subject to U.S. federal income tax on
capital gain realized on the disposition of any interest (other than solely as a
creditor) in a corporation that is a United States real property holding
corporation (a "USRPHC"). For this purpose, a foreign person is defined as any
holder who is a foreign corporation (other than certain foreign corporations
that elect to be treated as domestic corporations), a non-resident alien
individual, a non-resident fiduciary of a foreign estate or trust, or a foreign
partnership. Under FIRPTA, a corporation is a USRPHC if the fair market value of
the United States real property interests held by the corporation is 50 percent
or more of the aggregate fair market value of certain assets of the corporation.
The Company does not currently believe that it is a USRPHC. Thus, a foreign
person that holds Warrants, or shares of the Preferred Stock of the Company
acquired pursuant to the exercise of such Warrants, generally will not be
subject to the U.S. federal income tax on a sale or other disposition of the
Warrants or shares of Preferred Stock. Even if a corporation meets the test for
a USRPHC, a foreign person would generally not be subject to tax, or withholding
in respect to such tax, on gain from a sale or other disposition of such
corporation's stock solely by reason of the corporation's USRPHC status if the
stock is regularly traded on an established securities market ("regularly
traded") during the calendar year in which such sale or disposition occurs,
provided that such holder does not own, actually or constructively, stock with a
fair market value in excess of five percent (5%) of the fair market value of all
such stock outstanding at any time during the shorter of the five-year period
preceding such disposition or the holder's holding period. At present, the
Company's stock is not regularly traded and no assurance can be made as to the
development of a trading market for its stock.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The "backup" withholding and information reporting requirements may apply
to certain payments of principal and interest (including OID) on a Note and to
certain payments of proceeds of the sale or retirement of a Note. The Company,
its agent, a broker, the Trustee or any paying agent, as the case may be, is
required to withhold tax from any payment that is subject to backup withholding
at a rate of 31% of such payment if the holder fails to furnish his taxpayer
identification number (social security number or employer identification
number), to certify that such holder is not subject to backup withholding, or to
otherwise comply with the applicable requirements of the backup withholding
rules. Certain holders (including, among others, all corporations) are not
subject to the backup withholding and reporting requirements.
Under current Treasury Regulations, backup withholding and information
reporting do not apply to payments made by the Company or any agent thereof (in
its capacity as such) to a holder of a Note who has provided the required
certification under penalties of perjury that it is not a U.S. Holder as set
forth in clause
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(iii) in the first paragraph under "Non-U.S. Holders" or has otherwise
established an exemption (provided that neither the Company nor such agent has
actual knowledge that the holder is a U.S. Holder or that the conditions of any
other exemption are not in fact satisfied).
Payments of the proceeds from the sale by a holder who is not a U.S. Holder
of a Note made to or through a foreign office of a broker will not be subject to
U.S. information reporting or backup withholding, except that if the broker is a
U.S. person, a controlled foreign corporation for U.S. tax purposes or a foreign
person 50% or more of whose gross income is effectively connected with a United
States trade or business for a specified three-year period, U.S. information
reporting may apply to such payments. Payments of the proceeds from the sale of
a Note to or through the United States office of a broker is subject to U.S.
information reporting and backup withholding unless the holder or beneficial
owner certifies as to its non-U.S. status or otherwise establishes an exemption
from U.S. information reporting and backup withholding.
Regulations recently issued by the IRS, which will be effective for
payments made after December 31, 1998, make certain modifications to the
certification procedures applicable to Non-U.S. Holders. Prospective investors
should consult their tax advisors regarding the certification requirements for
Non-U.S. Holders.
Any amounts withheld under the backup withholding rules from a payment to a
holder may be claimed as a credit against such holder's United States federal
income tax liability.
The Company is required to furnish certain information to the IRS, and will
furnish annually to record holders of Notes, information with respect to
interest and OID accruing during the calendar year. The OID information will be
based upon the adjusted issue price of the debt instrument as if the holder were
the original holder of the debt instrument. No assurance can be given that the
IRS will not challenge the accuracy of the reported information. Moreover, if a
holder uses an allocation of the issue price of a Unit between the Note and the
Warrant comprising the Unit that is different from that used by the Company, the
computation of OID with respect to such holder's Note may differ from that
reported by the Company to the IRS and to such holder. Subsequent holders who
purchase Notes for an amount other than the adjusted issue price and/or on a
date other than the last day of an accrual period will be required to determine
for themselves the amount of OID, if any, they are required to include in gross
income for U.S. federal income tax purposes.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Senior Discount Notes where such Senior Discount Notes were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that, for a period not to exceed 180 days after the
Expiration Date, it will furnish additional copies of this Prospectus, as
amended or supplemented, to any broker-dealer that reasonably requests such
documents for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
The Exchange Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to list the Exchange
Notes on any national securities exchange or to seek approval for quotation
through any automated quotation system. The Company has been advised by the
Placement Agents that following completion of the Exchange Offer, the Placement
Agents intend to make a market in the Exchange Notes. However, the Placement
Agents are not obligated to do so and any market-marking activities with respect
to the Exchange Notes may be discontinued at any time without notice.
Accordingly, no assurance can be given that an active public or other market
will develop for the Exchange Notes or as to the liquidity of or the trading
market for the Exchange Notes. If a trading market does not develop or is not
maintained, holders of the Exchange Notes may experience difficulty in reselling
the Exchange Notes or may be unable to sell them at all. If a market for the
Exchange Notes develops, any such market may cease at any time. If a public
trading market develops for the Exchange Notes, future trading prices of the
Exchange Notes will depend on many factors, including, among other things,
prevailing interest rates, the market for similar securities, the financial
conditions and results of operations of the Company and other factors beyond the
control of the Company, including general economic conditions. Notwithstanding
the registration of the Exchange Notes in the Exchange Offer, holders who are
"affiliates" of the Company (within the meaning of Rule 405 under the Securities
Act) may publicly offer for sale or resell the Exchange Notes only in compliance
with the provisions of Rule 144 under the Securities Act or any other available
exemptions under the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers, and will
indemnify the holders of the Senior Discount Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
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LEGAL MATTERS
The legality of the Exchange Notes offered hereby are being passed upon for
the Company by Hogan & Hartson L.L.P., Washington, D.C., special counsel for the
Company. Hogan & Hartson L.L.P. also provides legal services to ITC Holding,
ITC'DeltaCom, their affiliated companies and Campbell B. Lanier III. Anthony S.
Harrington, a partner of the firm, beneficially owns 76 shares of Preferred
Stock of the Company, 34,800 shares of common stock of ITC Holding and 80,180
shares of common stock of ITC'DeltaCom.
EXPERTS
The consolidated balance sheets of KNOLOGY Holdings, Inc. and subsidiaries
(Successor Company) and KNOLOGY of Montgomery, (Predecessor Company) as of
December 31, 1995 and 1996 and the related consolidated statements of
operations, stockholders' (deficit) equity, and cash flows for the year ended
December 31, 1994, the four months ended April 30, 1995, the eight months ended
December 31, 1995 and the year ended December 31, 1996 included in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report with respect thereto and is
included herein in reliance upon the authority of said firm as experts in giving
said report.
The statements of operations, partner's deficit and cash flows of American
Cable Company Partnership for the year ended December 31, 1994 and the nine
months ended September 29, 1995 included in this Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as stated
in their report with respect thereto and is included herein in reliance upon the
authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company is not currently subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Upon effectiveness of the Registration Statement (of which this
Prospectus is a part), the Company will become subject to the informational
requirements of the Exchange Act. In addition, the Indenture provides that,
regardless of whether the Company is then required to file reports with the
Commission, the Company shall file with the Commission all such reports and
other information as would be required to be filed with the Commission if the
Company were subject to the reporting requirements of the Exchange Act. The
Company will supply, or cause the Trustee to supply, to each holder of Exchange
Notes, without cost, copies of such reports or other information.
The Company has filed the Registration Statement (of which this Prospectus
is a part) under the Securities Act with respect to the Exchange Offer. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all the information set forth in the Registration Statement. For
further information about the Company and the Exchange Offer, reference is made
to the Registration Statement and to the financial statements, exhibits and
schedules filed therewith. The statements contained in this Prospectus about the
contents of any contract or other document referred to are not necessarily
complete, and in each instance, reference is made to a copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of each such
document may be obtained from the Commission at its principal office in
Washington D.C. upon payment of the charges prescribed by the Commission or, in
the case of certain such documents, by accessing the Commission's World Wide Web
site at http://www.sec.gov.
The Company is required by the terms of the Indenture to furnish the
Trustee with annual reports containing consolidated financial statements audited
by their independent public accountants and with quarterly reports containing
unaudited condensed consolidated financial statements for each of the first
three quarters of each fiscal year.
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INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<S> <C>
KNOLOGY HOLDINGS, INC.
Report of Independent Public Accountants....................................... F-2
Consolidated Balance Sheets -- December 31, 1995 and 1996 and September 30,
1997 (unaudited).............................................................. F-3
Consolidated Statements of Operations for the Year Ended December 31, 1994, the
Four Months Ended April 30, 1995, the Eight Months Ended December 31, 1995,
the Year Ended December 31, 1996, and the Nine Months Ended September 30, 1996
and 1997 (unaudited).......................................................... F-4
Consolidated Statements of Cash Flows for the Year Ended December 31, 1994, the
Four Months Ended April 30, 1995, the Eight Months Ended December 31, 1995,
the Year Ended December 31, 1996, and the Nine Months Ended September 30, 1996
and 1997 (unaudited).......................................................... F-5
Consolidated Statements of Stockholders' (Deficit) Equity for the Year Ended
December 31, 1994, the Four Months Ended April 30, 1995, the Eight Months
Ended December 31, 1995, the Year Ended December 31, 1996, and the Nine Months
Ended September 30, 1997 (unaudited).......................................... F-6
Notes to Consolidated Financial Statements..................................... F-7
AMERICAN CABLE COMPANY PARTNERSHIP
Report of Independent Public Accountants....................................... F-22
Statements of Operations for the Year Ended December 31, 1994 and for the Nine
Months Ended September 29, 1995............................................... F-23
Statements of Partners' Deficit for the Year Ended December 31, 1994 and for
the Nine Months Ended September 29, 1995...................................... F-24
Statements of Cash Flows for the Year Ended December 31, 1994 and for the Nine
Months Ended September 29, 1995............................................... F-25
Notes to Financial Statements.................................................. F-26
</TABLE>
F-1
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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. (PREDECESSOR COMPANY) (an Alabama corporation) as of
December 31, 1995 and 1996 and the related consolidated statements of
operations, stockholders' (deficit) equity, and cash flows for the year ended
December 31, 1994, the four months ended April 30, 1995, the eight months ended
December 31, 1995 and the year ended December 31, 1996. 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 year ended December 31, 1994, the four months ended
April 30, 1995, the eight months ended December 31, 1995 and the year ended
December 31, 1996 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
May 14, 1997 (except
with respect to Note 10,
as to which the date is
December 19, 1997)
F-2
<PAGE> 128
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996, AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 300,494 $ 83,092 $ 0
Accounts receivable -- trade, less allowance for doubtful accounts of $17,113,
$23,342 and $34,696 in 1995, 1996 and 1997, respectively...................... 362,374 885,463 1,449,988
Interest receivable -- affiliate (Note 8)...................................... 12,097 1,345 0
Advances to affiliate (Note 8)................................................. 4,255,836 0 0
Deferred tax assets (Note 6)................................................... 5,686 0 0
Prepaid expenses............................................................... 99,970 280,920 83,289
----------- ----------- -----------
Total current assets....................................................... 5,036,457 1,250,820 1,533,277
----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Cable system and installation equipment........................................ 7,054,087 20,965,636 39,091,948
Test and office equipment...................................................... 199,114 421,997 935,668
Automobiles and trucks......................................................... 90,437 286,422 623,264
Inventory...................................................................... 261,574 1,605,922 4,504,702
Leasehold improvements......................................................... 8,531 170,272 273,848
----------- ----------- -----------
7,613,743 23,450,249 45,429,430
Less accumulated depreciation and amortization................................. (637,475) (1,973,040) (3,936,021)
----------- ----------- -----------
Property and equipment, net................................................ 6,976,268 21,477,209 41,493,409
----------- ----------- -----------
COST IN EXCESS OF NET ASSETS ACQUIRED, NET OF ACCUMULATED AMORTIZATION OF $54,426,
$202,516 AND $391,803 IN 1995, 1996 AND 1997, RESPECTIVELY....................... 6,924,017 6,877,607 6,688,320
----------- ----------- -----------
ORGANIZATIONAL COSTS, NET OF ACCUMULATED AMORTIZATION OF $59,228, $157,535 AND
$220,935 IN 1995, 1996 AND 1997, RESPECTIVELY.................................... 404,764 326,590 322,056
----------- ----------- -----------
OTHER.............................................................................. 4,811 9,519 36,919
----------- ----------- -----------
Total assets............................................................... $19,346,317 $29,941,745 $50,073,981
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3)..................................... $ 146,133 $ 1,027,873 $12,687,754
Accounts payable............................................................... 283,549 1,894,178 2,872,802
Accounts payable -- affiliate (Note 8)......................................... 157,546 7,073 0
Accrued liabilities............................................................ 610,048 907,247 1,427,607
Unearned revenue............................................................... 336,894 615,651 749,733
Other.......................................................................... 3,805 0 0
----------- ----------- -----------
Total current liabilities.................................................. 1,537,975 4,452,022 17,737,896
NONCURRENT LIABILITIES:
Long-term debt (Note 3)........................................................ 11,075,698 11,291,296 11,269,031
----------- ----------- -----------
DEFERRED TAX LIABILITIES, NET OF ALLOWANCE OF $1,356,820, $2,475,223 AND $3,916,928
IN 1995, 1996 AND 1997, RESPECTIVELY (NOTE 6)...................................... 379,009 0 0
Total liabilities.......................................................... 12,992,682 15,743,318 29,006,927
----------- ----------- -----------
MINORITY INTEREST.................................................................. 84,479 0 0
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 5)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value per share; 15,000 shares
authorized, 7,520 shares issued and outstanding in 1995; 50,000 shares
authorized, 17,092 shares issued and outstanding in 1996; 100,000 shares
authorized, 26,052 shares issued and outstanding at September 30, 1997........ 75 171 261
Common stock, $.01 par value per share; 15,000 shares authorized, no shares
issued and outstanding in 1995 and 1996; 100,000 shares authorized, no shares
issued and outstanding at September 30, 1997.................................. 0 0 0
Additional paid-in capital..................................................... 7,454,615 18,509,218 29,214,530
Accumulated deficit............................................................ (1,185,534) (4,310,962) (8,147,737)
----------- ----------- -----------
Total stockholders' equity................................................. 6,269,156 14,198,427 21,067,054
----------- ----------- -----------
Total liabilities and stockholders' equity................................. $19,346,317 $29,941,745 $50,073,981
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 129
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994,
THE FOUR MONTHS ENDED APRIL 30, 1995, THE EIGHT MONTHS ENDED DECEMBER 31, 1995,
THE YEAR ENDED DECEMBER 31, 1996,
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------ -----------------------------------------------------------
FOUR EIGHT NINE NINE
YEAR MONTHS MONTHS YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, APRIL 30, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1995 1996 1996 1997
------------ --------- ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Subscriber...................... $ 2,004,419 $ 811,103 $ 2,016,082 $ 4,682,666 $ 3,337,029 $ 6,145,495
Miscellaneous................... 107,533 46,058 180,916 651,517 488,700 899,191
----------- --------- ----------- ----------- ----------- -----------
Total...................... 2,111,952 857,161 2,196,998 5,334,183 3,825,729 7,044,686
----------- --------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
General and administrative...... 587,579 175,724 1,027,001 2,346,201 1,588,761 2,368,525
Programming charges............. 1,042,186 409,325 1,029,959 2,513,693 1,781,853 3,263,652
Depreciation and amortization... 768,496 259,336 745,004 1,640,025 1,118,403 2,263,982
Field and technical............. 303,600 98,293 417,273 877,870 666,091 988,435
Sales and marketing............. 128,909 16,590 58,414 659,667 339,934 947,284
----------- --------- ----------- ----------- ----------- -----------
Total...................... 2,830,770 959,268 3,277,651 8,037,456 5,495,042 9,831,878
----------- --------- ----------- ----------- ----------- -----------
OPERATING LOSS...................... (718,818) (102,107) (1,080,653) (2,703,273) (1,669,314) (2,787,192)
----------- --------- ----------- ----------- ----------- -----------
OTHER INCOME AND EXPENSES:
Affiliate interest income (Note
8)............................ 0 0 12,098 273,799 251,303 38,984
Other interest income........... 0 0 6,646 46,221 6,890 40,443
Affiliate interest expense (Note
8)............................ (165,455) (2,017) (58,856) 0 0 0
Other interest expense.......... (65,120) (19,861) (509,057) (1,055,498) (795,066) (1,099,465)
Other income (expense), net..... 75,158 0 0 (60,000) 0 (29,545)
----------- --------- ----------- ----------- ----------- -----------
Total...................... (155,417) (21,878) (549,169) (795,478) (536,873) (1,049,583)
----------- --------- ----------- ----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST AND
INCOME TAX BENEFIT................ (874,235) (123,985) (1,629,822) (3,498,751) (2,206,187) (3,836,775)
MINORITY INTEREST (NOTE 2).......... 0 0 109,837 0 0 0
----------- --------- ----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT...... (874,235) (123,985) (1,519,985) (3,498,751) (2,206,187) (3,836,775)
INCOME TAX BENEFIT.................. 0 0 334,451 373,323 373,323 0
----------- --------- ----------- ----------- ----------- -----------
NET LOSS............................ (874,235) (123,985) (1,185,534) (3,125,428) (1,832,864) (3,836,775)
PREFERRED STOCK DIVIDENDS........... (591,175) (230,407) 0 0 0 0
----------- --------- ----------- ----------- ----------- -----------
NET LOSS AFTER PREFERRED STOCK
DIVIDENDS......................... $(1,465,410) $(354,392) $(1,185,534) $(3,125,428) $(1,832,864) $(3,836,775)
=========== ========= =========== =========== =========== ===========
PRIMARY NET LOSS PER SHARE (NOTE 2):
Weighted average shares
outstanding -- 7,520, 13,626,
12,458 and 24,116 shares in
1995, 1996, September 30, 1996
and 1997, respectively........ $ 0 $ 0 $ (157.65) $ (229.37) $ (147.12) $ (159.10)
=========== ========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 130
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1994,
THE FOUR MONTHS ENDED APRIL 30, 1995, THE EIGHT MONTHS ENDED DECEMBER 31, 1995,
THE YEAR ENDED DECEMBER 31, 1996,
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------ ------------------------------------------------------------
FOUR EIGHT NINE NINE
YEAR MONTHS MONTHS YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, APRIL 30, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1995 1996 1996 1997
------------ --------- ------------ ------------ -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................ $ (874,235) $(123,985) $(1,185,534) $(3,125,428) $ (1,832,864) $(3,836,775)
---------- --------- ----------- ----------- ------------ -----------
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization... 768,496 259,336 745,004 1,640,025 1,118,403 2,263,982
(Gain) loss on disposition of
assets........................ (75,158) 0 0 21,370 (95,364) 56,316
Deferred income tax benefit..... 0 0 (334,451) (373,323) (373,323) 0
Minority interest............... 0 0 (109,837) 0 0
Changes in current assets and
liabilities:
Accounts receivable......... (22,485) (11,069) (205,159) (512,337) (154,216) (563,180)
Prepaid expenses............ (6,479) 7,955 (86,156) (180,950) 82,116 197,631
Accounts payable............ 102,646 79,608 (246,687) (39,648) (85,735) 927,922
Accrued liabilities and
interest.................. 163,468 28,528 372,966 293,394 63,666 520,360
Unearned revenue............ 26,337 (96,297) 336,894 278,757 45,048 134,082
Other....................... 0 0 (29,968) 133 (13,384) (21,192)
---------- --------- ----------- ----------- ------------ -----------
Total adjustments....... 956,825 268,061 442,606 1,127,421 587,211 3,515,921
---------- --------- ----------- ----------- ------------ -----------
Net cash provided by
(used in) operating
activities............ 82,590 144,076 (742,928) (1,998,007) (1,245,653) (320,854)
---------- --------- ----------- ----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................ (717,325) (42,504) (1,291,080) (14,416,135) (10,338,118) (22,034,377)
Organizational cost expenditures.... 0 0 (453,736) (20,133) (1,901) (70,879)
Purchase of investment.............. 0 0 0 (5,000) 0 0
---------- --------- ----------- ----------- ------------ -----------
Net cash used in
investing activities.. (717,325) (42,504) (1,744,816) (14,441,268) (10,340,019) (22,105,256)
---------- --------- ----------- ----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Advances to) repayments from
affiliate......................... 0 0 (4,255,836) 4,255,836 729,636 0
Proceeds from issuances of debt and
short-term borrowings............. 855,820 0 51,389 1,258,238 114,995 11,637,616
Principal payments on debt and
short-term borrowings............. (258,873) (104,889) (478,624) (160,900) (41,335) 0
Proceeds from initial capitalization
of Successor Company.............. 0 0 200,000 0 0
Proceeds from issuance of preferred
stock, net of related offering
expenses.......................... 0 0 7,254,690 10,868,699 10,952,445 10,705,402
---------- --------- ----------- ----------- ------------ -----------
Net cash provided by
(used in) financing
activities............ 596,947 (104,889) 2,771,619 16,221,873 11,755,741 22,343,018
---------- --------- ----------- ----------- ------------ -----------
NET (DECREASE) INCREASE IN CASH......... (37,788) (3,317) 283,875 (217,402) 170,069 (83,092)
CASH AT BEGINNING OF PERIOD............. 57,724 19,936 16,619 300,494 300,494 83,092
---------- --------- ----------- ----------- ------------ -----------
CASH AT END OF PERIOD................... $ 19,936 $ 16,619 $ 300,494 $ 83,092 470,563 0
========== ========= =========== =========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest.......................... $ 235,851 $ 22,027 $ 46,762 $ 1,016,039 $ 788,850 $ 835,669
========== ========= =========== =========== ============ ===========
Cash paid during the period for
income taxes...................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
========== ========= =========== =========== ============ ===========
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Preferred stock dividends........... $ 591,175 $ 230,407 $ 0 $ 0 $ 0 $ 0
========== ========= =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 131
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994,
THE FOUR MONTHS ENDED APRIL 30, 1995,
THE EIGHT MONTHS ENDED DECEMBER 31, 1995,
THE YEAR ENDED DECEMBER 31, 1996,
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL PREFERRED STOCK TREASURY STOCK STOCKHOLDERS'
--------------- PAID-IN --------------- ------------------ ACCUMULATED (DEFICIT)
SHARES AMOUNT CAPITAL SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY
------ ------ ----------- ------ ------ ------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
BALANCE AT DECEMBER 31,
1993...................... 1,000 $ 10 $ 6,563,598 197 $197 (5,104) $(255,200) $(4,590,788) $ 1,717,817
Dividends on preferred
stock................... 0 0 0 0 0 0 0 (591,175) (591,175)
Net loss.................. 0 0 0 0 0 0 0 (874,235) (874,235)
----- ---- ----------- ------ ----- ------ --------- ----------- -----------
BALANCE AT DECEMBER 31,
1994...................... 1,000 10 6,563,598 197 197 (5,104) (255,200) (6,056,198) 252,407
Dividends on preferred
stock................... 0 0 0 0 0 0 0 (230,407) (230,407)
Net loss.................. 0 0 0 0 0 0 0 (123,985) (123,985)
----- ---- ----------- ------ ----- ------ --------- ----------- -----------
BALANCE AT APRIL 30, 1995... 1,000 10 6,563,598 197 197 (5,104) (255,200) (6,410,590) (101,985)
SUCCESSOR COMPANY:
Initial capital
contribution.............. 0 0 200,000 0 0 0 0 0 200,000
Acquisition of Predecessor
Company................... (1,000) (10) (6,563,598) (197) (197) 5,104 255,200 6,410,590 101,985
Conversion of capital to
preferred stock........... 0 0 (2) 20 2 0 0 0 0
Issuance of preferred stock,
net of related offering
expenses of $65,310....... 0 0 7,254,617 7,500 73 0 0 0 7,254,690
Net loss.................... 0 0 0 0 0 0 0 (1,185,534) (1,185,534)
----- ---- ----------- ------ ----- ------ --------- ----------- -----------
BALANCE AT DECEMBER 31,
1995........................ 0 0 7,454,615 7,520 75 0 0 (1,185,534) 6,269,156
Issuance of preferred stock,
net of related offering
expenses of $379,701...... 0 0 11,054,603 9,572 96 0 0 0 11,054,699
Net loss.................... 0 0 0 0 0 0 0 (3,125,428) (3,125,428)
----- ---- ----------- ------ ----- ------ --------- ----------- -----------
BALANCE AT DECEMBER 31,
1996........................ 0 0 18,509,218 17,092 171 0 $ 0 (4,310,962) $14,198,427
Issuance of preferred stock,
net of related offering
expenses of $46,598....... 0 0 10,705,312 8,960 90 0 0 0 10,705,402
Net loss.................... 0 0 0 0 0 0 0 (3,836,775) (3,836,775)
----- ---- ----------- ------ ----- ------ --------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1997
(UNAUDITED)................. 0 $ 0 $29,214,530 26,052 $261 0 $ 0 (8,147,737) 21,067,054
===== ==== =========== ====== ===== ====== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 132
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
KNOLOGY Holdings, Inc. (formerly CyberNet Holding, Inc.) and its
subsidiaries (the "Company" or "Successor Company") provide integrated,
interactive broadband communications services, including cable television, to
multiple areas in the Southeast. 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 and $14,000 in cash for the 200 common shares and
5 preferred shares of KNOLOGY of Montgomery held by the minority shareholder. 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).
The following table summarizes the net assets purchased by the Company in
connection with its acquisitions of KNOLOGY of Montgomery and American and the
amount attributable to cost in excess of net assets acquired (in thousands):
<TABLE>
<CAPTION>
KNOLOGY OF
MONTGOMERY AMERICAN TOTAL
---------- -------- --------
<S> <C> <C> <C>
Purchase price............................... $ 6,000 $ 5,000 $11,000
Assumption of note payable................... (2,191) 0 (2,191)
Assumption of preferred stock dividends
payable.................................... (1,107) 0 (1,107)
Net (assets) liabilities..................... 1,002 (1,725) (723)
------- ------- -------
Cost in excess of net assets acquired........ $ 3,704 $ 3,275 $6,979
======= ======= =======
</TABLE>
The acquisitions of these assets have been accounted for as noncash
transactions for purposes of the consolidated statements of cash flows.
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,
F-7
<PAGE> 133
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND NATURE OF BUSINESS--(CONTINUED)
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.
The Company has experienced operating losses as a result of efforts to
build out its broadband systems and expand into new markets. The Company expects
to continue to focus on increasing its customer base and expanding its broadband
operations. Accordingly, the Company expects that its operating expenses and
capital expenditures will continue to increase significantly, all of which will
have a negative impact on short-term operating results. In addition, the Company
may change its pricing policies to respond to a changing competitive
environment. In the opinion of management, the Company's projected cash flows
from operations and existing credit position, including the financing
arrangements discussed in Note 10, will be sufficient to meet the capital and
operating needs of the Company through at least 1997. However, 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.
See Risk Factors in this document for further information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
As a result of the KNOLOGY of Montgomery acquisition discussed in 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 with respect to all reporting periods subsequent to April 28, 1995
(the "Successor Period") reflect the acquisition under the purchase method of
accounting. Therefore, financial data with respect to 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 and American
discussed in 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 with respect to the
Company. Accordingly, the depreciation of property and equipment for the
Successor Period is based on the newly established cost basis of these assets.
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. For the year ended December 31, 1995, the equity share of KNOLOGY of
Montgomery not
F-8
<PAGE> 134
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--(CONTINUED)
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., KNOLOGY of Montgomery and KNOLOGY of Columbus. All significant
intercompany transactions have been eliminated in consolidation.
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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided for 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 minor 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 income.
Depreciation and amortization are provided over the estimated useful lives as
follows:
<TABLE>
<S> <C>
Cable system and installation equipment.................. Seven to ten years
Test and office equipment................................ Five to seven years
Automobiles and trucks................................... Five years
Leasehold improvements................................... Five 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.
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 1995 purchases of KNOLOGY of Montgomery
and American discussed in Note 1. These costs are being amortized using the
straight-line method over 40 years.
F-9
<PAGE> 135
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--(CONTINUED)
ORGANIZATIONAL COSTS
Organizational costs represent direct costs, primarily legal and salary
costs, incurred in making the Company viable. All indirect costs, such as travel
and entertainment, and other general and administrative costs have been expensed
as incurred. The deferred costs are being amortized using the straight-line
method over a five-year period from the date of inception.
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 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.
BARTER TRANSACTIONS
The Company engages in certain exchanges of services for advertising and
promotional services. The Company records these transactions at the market value
of the services 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
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 convertible preferred stock is assumed to be converted
F-10
<PAGE> 136
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--(CONTINUED)
for purposes of this calculation. The Predecessor Company's net losses per share
are not shown, as they are not comparable with the Successor Company's. All
options and warrants currently outstanding have been excluded from the
calculation as they are anti-dilutive.
SOURCES OF SUPPLIES
The Company uses a single vendor for its supply of cable. However, if this
vendor were unable to meet the Company's needs, management believes that other
sources for cable exist on comparable terms and operating results would not be
adversely affected.
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 concentration of credit risk is
mitigated by the large number of customers comprising the customer base. The
carrying amount of the Company's receivables approximates their fair values.
3. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1996 and September 30, 1997
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
InterRedec, bearing interest at 9%, payable on March 31,
2000, plus interest, unsecured (a).................... $ 6,000,000 $ 6,000,000 $ 6,000,000
Francine, Inc., bearing interest at 9%, payable on
September 29, 2000, plus interest, unsecured (b)...... 5,000,000 5,000,000 5,000,000
Sterling Bank, bearing interest at prime plus 1%,
payable in monthly installments of $5,190, plus
interest, through September 1996, unsecured (c)....... 32,665 0 0
Sterling Bank, bearing interest at prime plus 1.5%,
payable in monthly installments of $1,425, plus
interest, through May 1999, unsecured (c)............. 50,329 36,316 27,816
Compass Bank, bearing interest at 8.75%, payable in
monthly installments of $1,632 through September 1998,
secured............................................... 48,453 31,659 18,676
SunTrust Bank, bearing interest at 8.25%, payable in
monthly installments of $828 through September 1997,
secured............................................... 15,384 6,828 1,013
Former stockholders of KNOLOGY of Montgomery, bearing
interest at prime, plus 2%, payable on May 16, 1996,
unsecured (c)......................................... 75,000 0 0
First National Bank of West Point line of credit,
bearing interest at prime, maturing March 1997,
unsecured............................................. 0 900,000 0
Compass Bank, bearing interest at prime plus 1.0%,
payable in monthly installments of $5,426 through
November 1999, secured................................ 0 170,000 124,333
</TABLE>
F-11
<PAGE> 137
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
3. LONG-TERM DEBT--(CONTINUED)
First National Bank of West Point, note bearing interest
at 8.5%, payable in monthly installments of $945
through March 1999, secured........................... 0 23,200 15,974
Troup capitalized lease obligation, at a rate of 10%,
payable in quarterly installments of $6,304 through
December 2006, secured................................ $ 0 151,166 $ 148,489
SCANA Communications, Inc. note bearing interest at 12%,
payable January 1, 1998, unsecured.................... 0 0 11,000,000
First National Bank of West Point, note bearing interest
at 8.5%, payable in monthly installments of $4,109
through June 2000, secured............................ 0 0 120,484
First National Bank of West Point, note bearing interest
at prime plus .5%, maturing December 15, 1997,
unsecured............................................. 0 0 1,500,000
----------- ----------- ------------
11,221,831 12,319,169 23,956,785
Less current maturities................................. 146,133 1,027,873 12,687,754
----------- ----------- ------------
$11,075,698 $11,291,296 $ 11,269,031
=========== =========== ============
</TABLE>
- ---------------
(a) ITC Holding is a co-obligor under this note.
(b) ITC Holding is a guarantor of this note.
(c) The prime rate was 8.5% at December 31, 1995, 8.25% at December 31, 1996 and
8.5% at September 30, 1997, respectively.
Following are maturities of long-term debt for each of the next five years
as of December 31, 1996:
<TABLE>
<S> <C>
1997........................................................... $ 1,027,873
1998........................................................... 124,509
1999........................................................... 91,230
2000........................................................... 11,025,214
2001........................................................... 25,214
Thereafter..................................................... 25,129
-----------
Total................................................ $12,319,169
===========
</TABLE>
The fair values of long-term debt exclusive of affiliated debt, including
current maturities, at December 31, 1995 and 1996 are estimated to be
approximately $8,838,000 and $9,397,000, respectively, based on a valuation
technique that considers cash flows discounted at current rates.
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.
F-12
<PAGE> 138
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OPERATING LEASES--(CONTINUED)
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, 1996 are as follows:
<TABLE>
<S> <C>
1997.............................................................. $128,144
1998.............................................................. 122,929
1999.............................................................. 124,694
2000.............................................................. 94,411
2001.............................................................. 73,115
--------
Total minimum lease payments............................ $543,293
========
</TABLE>
Total rental expense for all operating leases was approximately $77,000,
$27,000, $66,000, and $70,000 for the year ended December 31, 1994, the four
months ended April 30, 1995, the eight months ended December 31, 1995, and the
year ended December 31, 1996, respectively.
5. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into contracts with various entities to provide
programming to be aired by the Company. The Company pays a monthly fee as
compensation for the programming, 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 has estimated that
approximately $3.9 million in future payments related to these contracts are
required in 1997.
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. This resolution extended KNOLOGY of Montgomery's time frame to meet the
second year's 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.
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.
F-13
<PAGE> 139
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1995 and
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 1,663 $ 3,875
Other................................................ 48 92
Valuation allowance.................................. (1,357) (2,475)
------ ------
Total deferred tax assets....................... 354 1,492
Deferred tax liabilities--depreciation and amortization... (739) (1,492)
------ ------
Net deferred tax liabilities.............................. (385) 0
Portion included in current assets........................ 6 0
------ ------
Net deferred taxes........................................ $ (379) $ 0
====== ======
</TABLE>
The Company has available, at December 31, 1996, unused operating loss
carryforwards of approximately $3,875,000 expiring in various years from 2005 to
2011 unless utilized. Management has recorded a valuation allowance of
approximately $1,357,000 and $2,475,000 in 1995 and 1996, 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 year ended December 31, 1994, the four
months ended April 30, 1995, the eight months ended December 31, 1995, and the
year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
-------------------- ---------------------
FOUR MONTHS EIGHT MONTHS
ENDED ENDED
APRIL 30, DECEMBER 31,
1994 1995 1995 1996
---- ----------- ------------ ----
<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) (2)
Tax benefits recorded by ITC Holding........ 0 0 14 0
Prior year actualization.................... 0 0 0 (6)
Goodwill.................................... 0 0 0 (1)
Deferred tax valuation allowance............ 36 36 0 32
--- --- --- ---
0% 0% (22)% (11)%
=== === === ===
</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 KNOLOGY Holdings, 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
F-14
<PAGE> 140
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES--(CONTINUED)
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.
7. EQUITY INTERESTS
SUCCESSOR COMPANY CAPITAL TRANSACTIONS
The 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. In
December 1995, 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 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. The amount of the
consideration paid in excess of the par value, net of expenses incurred in
connection with the 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 per share 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 and
April 19, 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 first offered 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, 844 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.
F-15
<PAGE> 141
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. EQUITY INTERESTS--(CONTINUED)
The Company granted 502.95 options for shares of common stock to all
employees at $1,200 per share during 1996. At December 31, 1996, there were
351.98 options outstanding with option prices of $1,200. 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.
Options for 110.11 shares granted to one executive officer become
exercisable as to 40% on January 1, 1997 and as to an additional 20% annually
thereafter through January 1, 2000. Options for 72.7 shares granted to one other
executive officer and another employee become exercisable as to 40% on January
1, 1998 and as to an additional 20% annually thereafter through January 1, 2001.
On October 29, 1996, options to purchase 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.
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 KNOLOGY of Montgomery at any
time, and upon such call, KNOLOGY of Montgomery 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. KNOLOGY of Montgomery 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. As of January 1996, all of the cumulative nonvoting
preferred stock of KNOLOGY of Montgomery is held by the Company. No such
dividends have been declared as of December 31, 1996, but KNOLOGY of Montgomery
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 year
ended December 31, 1996, these preferred stock accretion and dividend amounts
were eliminated in consolidation.
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
F-16
<PAGE> 142
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. EQUITY INTERESTS--(CONTINUED)
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:
<TABLE>
<S> <C>
Risk-free interest rate........................................ 6.31%
Expected dividend yield........................................ 0%
Expected lives................................................. Seven years
Expected forfeiture rate....................................... 7%
</TABLE>
The weighted average fair value of options granted was $1,200 for 1996. The
total value of options for the Company's stock granted to employees of the
Company during 1996 was computed as approximately $154,000, 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, 1996 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)
</TABLE>
A summary of the status of the Company's stock option plan at December 31,
1996 is presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
SHARES SHARE
------ ----------------
<S> <C> <C>
Outstanding at December 31, 1995..................... 0.00 $ 0
Granted......................................... 502.95 1,200
Forfeited....................................... 150.97 1,200
------
Outstanding at December 31, 1996..................... 351.98 1,200
======
</TABLE>
No options were exercisable at December 31, 1996.
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. Included in interest expense -- affiliate for the
year ended December 31, 1994 are interest costs of approximately $166,000
incurred by KNOLOGY of Montgomery related to this note. 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.
F-17
<PAGE> 143
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED-PARTY TRANSACTIONS--(CONTINUED)
The current portion of long-term debt at December 31, 1995 includes notes
due to former stockholders of KNOLOGY of Montgomery. These notes were repaid,
with interest, in 1996.
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 year ended December 31, 1996, the Company
recorded $1,000 and $24,000 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.
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;
DeltaCom, Inc., which provides long-distance and related services; InterCall,
Inc., which provides conference calling services; and InterState FiberNet, which
leases capacity on certain of its fiber routes. 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 services. In
management's opinion, the Company's transactions with these affiliated entities
are generally representative of arm's-length transactions.
For the period from inception (March 10, 1995) through December 31, 1995
and the year ended December 31, 1996, the Company received services from these
affiliated entities in the amounts of $14,000 and $48,000, respectively, which
are reflected in selling, operations, and administration expenses in the
Company's statements of operations. In addition, in 1996, the Company received
services from these affiliated entities in the amount of $11,000, which is
reflected in field and technical expenses in the Company's statement of
operations. At December 31, 1995 and 1996, amounts payable for these services of
$158,000 and $7,000, respectively, are recorded in the Company's balance sheets
as accounts payable -- affiliate.
In December 1996, the Company invested $5,000 in an airplane co-owned by
ITC Holding and several of its subsidiaries and other affiliated entities.
Amounts reflected as advances to affiliate at December 31, 1995 and 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 $12,000 and $274,000 for the period from inception (March 10,
1995) through December 31, 1995 and for the year ended December 31, 1996,
respectively, on these advances, of which approximately $12,000 and $1,000,
respectively, is reflected as interest receivable -- affiliate in the
accompanying balance sheets as of December 31, 1995 and 1996, respectively. The
advances were repaid in December 1996.
An affiliate of the Company processed payments for the Company during 1995.
Amounts included in accounts payable -- affiliate reflect amounts owed to the
affiliate for reimbursement of these payments as of December 31, 1995. These
amounts were repaid in 1996, and the affiliate is no longer processing payments.
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 $86,000 and
F-18
<PAGE> 144
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED-PARTY TRANSACTIONS--(CONTINUED)
$36,000 for the year ended December 31, 1996 and for the period from inception
(March 10, 1995) through December 31, 1995, 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 since July 15, 1996 as
president and chief executive officer and as a director 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 Company for the year ended December 31, 1996. He resigned as chief executive
officer and president of the Company effective February 20, 1997. The value of
his services provided through February 20, 1997 is estimated to total
approximately $20,000.
9. ACQUISITION
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 years ended December
31, 1994 and 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,
--------------------------
1994 1995
----------- -----------
<S> <C> <C>
Operating revenues................................. $ 3,483,852 $ 4,192,781
Income before extraordinary items.................. $(2,632,705) $(2,343,846)
Net income......................................... $(2,632,705) $(2,343,846)
Earnings per share (a)............................. -- $ (311.68)
</TABLE>
- ---------------
(a) Earnings per share are computed based on 7,520 shares outstanding.
10. SUBSEQUENT EVENTS
STOCK OPTION PLAN
Subsequent to December 31, 1996, the compensation committee of the board of
directors granted options for 557 and 286 shares of the Company's common stock
under the terms of the Stock Option Plan at exercise prices of $1,200 and $1,500
per share, respectively. Options for 24 shares were canceled subsequent to
December 31, 1996.
F-19
<PAGE> 145
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS--(CONTINUED)
PRIVATE EQUITY OFFERING
In February 1997, the Company offered and accepted subscriptions for 8,960
shares of preferred stock at $1,200 per share. The proceeds, net of issuance
expenses of $46,598, were $10,705,402.
FINANCING ARRANGEMENTS
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 $3.0 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 $50.0 million five-year
revolving credit facility (the "New Credit Facility") from First Union National
Bank, which will be used for working capital and other purposes, including
capital expenditures and permitted acquisitions. At the Company's option,
interest will accrue based on either the Alternate Base Rate plus applicable
margin (8.25% at October 15, 1997) or the LIBOR rate plus applicable margin
(8.03% at October 15, 1997). Obligations under the New Credit Facility will be
secured by substantially all tangible and intangible assets of the Company and
its current and future subsidiaries. The New Credit Facility will include a
number of covenants including, among others, covenants 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 New Credit
Facility also will include covenants requiring compliance with certain financial
ratios on a consolidated basis.
F-20
<PAGE> 146
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS--(CONTINUED)
In connection with a reorganization of ITC Holding, ITC Service Company
pre-paid the Montgomery Note and the Columbus Note prior to the closing of the
Notes Offering. The Company owed to ITC Service Company amounts equal to the
principal and accrued interest under such notes. Interest accrued at an interest
rate equal to the interest rate ITC Service Company may have been obligated to
pay on funds it may have needed to borrow. This note was paid on October 24,
1997.
ACQUISITION
On December 5, 1997, the Company purchased 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.
EQUITY PRIVATE PLACEMENT
During the fourth quarter of 1997, the Company issued approximately 21,400
shares of preferred stock at an offering price of $1,500 per share (the "Equity
Offering") for net proceeds of approximately $32.2 million.
SENIOR DISCOUNT NOTES OFFERING
Also in the fourth quarter of 1997, the Company issued units consisting of
senior discount notes due 2007 (the "Notes") and warrants to purchase Preferred
Stock (the "Notes Offering") for gross proceeds of approximately $250.0 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. The indenture relating to the
Notes contains certain covenants that, among other things, limit the ability 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 Equity and Notes Offerings
have 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.
F-21
<PAGE> 147
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Cable
Company Partnership:
We have audited the accompanying statements of operations, partner's
deficit, and cash flows of AMERICAN CABLE COMPANY PARTNERSHIP (a Louisiana
partnership) for the year ended December 31, 1994 and the nine months ended
September 29, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of American
Cable Company Partnership for the year ended December 31, 1994 and for the nine
months ended September 29, 1995 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
September 10, 1997
F-22
<PAGE> 148
AMERICAN CABLE COMPANY PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 1995
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 29,
1994 1995
------------ -------------
<S> <C> <C>
REVENUES:
Subscriber..................................................... $1,201,455 $ 1,002,831
Miscellaneous.................................................. 170,445 135,791
---------- -----------
Total revenues............................................ 1,371,900 1,138,622
---------- -----------
OPERATING EXPENSES:
Programming charges............................................ 602,511 532,219
Depreciation and amortization.................................. 492,691 377,069
General and administrative..................................... 705,004 495,477
Field and technical............................................ 179,215 151,776
Sales and marketing............................................ 28,919 37,820
---------- -----------
Total operating expenses.................................. 2,008,340 1,594,361
---------- -----------
NET OPERATING LOSS.................................................. (636,440) (455,739)
---------- -----------
OTHER INCOME AND EXPENSES:
Interest income, net........................................... (1,572) (177)
Other income, net.............................................. 2,586 148
---------- -----------
1,014 (29)
---------- -----------
NET LOSS............................................................ $ (635,426) $ (455,768)
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE> 149
AMERICAN CABLE COMPANY PARTNERSHIP
STATEMENTS OF PARTNERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1994 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 1995
<TABLE>
<CAPTION>
MANAGING
GENERAL GENERAL
PARTNER PARTNER TOTAL
----------- -------- -----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1993................................ $(2,309,540) $130,979 $(2,178,561)
Net loss............................................. (635,426) 0 (635,426)
----------- -------- -----------
BALANCE, DECEMBER 31, 1994................................ (2,944,966) 130,979 (2,813,987)
Net loss............................................. (455,768) 0 (455,768)
----------- -------- -----------
BALANCE, SEPTEMBER 29, 1995............................... $(3,400,734) $130,979 $(3,269,755)
=========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE> 150
AMERICAN CABLE COMPANY PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 1995
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 29,
1994 1995
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $(635,426) $(455,768)
--------- ---------
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization............................. 492,691 377,069
Changes in assets and liabilities:
Accounts receivable.................................. (85,306) (10,775)
Prepaid expenses..................................... 22,465 10,160
Due to managing general partner...................... 209,000 50,000
Accounts payable and accrued liabilities............. 93,760 (69,812)
Other................................................ 8,718 1,202
--------- ---------
Total adjustments............................... 741,328 357,844
--------- ---------
Net cash provided by (used in) operating
activities................................... 105,902 (97,924)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................... (48,524) (9,670)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation........................... (7,265) (4,771)
Principal proceeds (payments) on debt.......................... 23,617 (6,146)
--------- ---------
Net cash provided by (used in) financing
activities................................... 16,352 (10,917)
--------- ---------
NET INCREASE (DECREASE) IN CASH..................................... 73,730 (118,511)
CASH AT BEGINNING OF PERIOD......................................... 69,228 142,958
--------- ---------
CASH AT END OF PERIOD............................................... $ 142,958 $ 24,447
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest....................... $ 4,849 $ 3,862
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 151
AMERICAN CABLE COMPANY PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND SEPTEMBER 29, 1995
1. ORGANIZATION
American Cable Company Partnership (the "Partnership") was formed on June
1, 1990 in Louisiana to provide cable television services to subscribers in
Columbus, Georgia, and surrounding areas under a nonexclusive cable television
franchise right.
The partnership consists of Frantzen Investment Corporation, managing
general partner, and American Cable Holding Company, general partner. The
managing general partner is responsible for managing and operating the
Partnership. Profits are allocated as follows:
- 100% to the managing general partner to the extent of its unrecovered
loss amount
- The remainder, if any, 100% to the managing general partner until such
time that the sum of $3,000,000 has been allocated to the managing
general partner; thereafter, 100% to the general partner until such
time that the sum of $3,315,790 has been allocated to the general
partner; thereafter, 47.5% to the managing general partner and 52.5%
to the general partner
Losses are allocated 100% to the managing general partner until all loans
are repaid to the managing general partner up to a maximum loss allocation
amount. All amounts in excess of the maximum loss allocation amount will be
allocated 47.5% to the managing general partner and 52.5% to the general
partner. In the periods presented, the maximum loss amount was not achieved;
accordingly, all losses were allocated to the managing general partner.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts 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 Partnership considers all short-term highly liquid investments with an
original maturity of three months or less to be cash equivalents. Cash and cash
equivalents are stated at cost, which approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment purchased are stated at cost. Depreciation and
amortization are provided for 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 minor 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
reflected as income. There were no material retirements in the periods
presented. Depreciation and amortization are provided over the estimated useful
lives as follows:
<TABLE>
<S> <C>
Cable system and installation equipment......................... Ten years
Test and office equipment....................................... Seven years
Automobiles and trucks.......................................... Five years
</TABLE>
Inventory, such as converter boxes and cable and electronic cable hook-up
equipment, is included in cable system and installation equipment.
F-26
<PAGE> 152
AMERICAN CABLE COMPANY PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
ORGANIZATIONAL COSTS
Organizational costs represent direct costs, primarily legal and salaries,
incurred in making the Partnership viable. All nondirect costs, such as travel
and entertainment and other general and administrative costs, have been expensed
as incurred. The deferred costs are being amortized over a five-year period from
the date of inception.
LONG-LIVED ASSETS
In 1995, the Partnership 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 Partnership periodically reviews the values assigned to long-lived
assets, such as property and equipment, to determine whether any impairments are
other than temporary. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
DUE TO MANAGING GENERAL PARTNER
The managing general partner either advances funds to or borrows funds from
the Partnership. Funds advanced to the Partnership are used to cover
construction and working capital requirements. The advances and borrowings are
netted and are reflected in due to managing general partner in the accompanying
balance sheets.
REVENUE RECOGNITION
Subscriber revenues are recognized in the month of service. Subscriber fees
billed in advance are included in the balance sheets as unearned revenue and are
deferred until the month the service is provided.
ADVERTISING COSTS
The Partnership expenses all advertising costs as incurred.
INCOME TAXES
The Internal Revenue Code and applicable state statutes provide that income
and expenses of a partnership are not separately taxable to the Partnership but
rather accrue directly to the partners. Accordingly, no provision for federal or
state income taxes has been made in the accompanying financial statements.
SOURCES OF SUPPLIES
The Partnership attempts to maintain multiple vendors for each required
product. However, the Partnership has limited suppliers for its converters and
cable, which represent important components of its system. If the suppliers are
unable to meet the Partnership's needs as it builds out its network
infrastructure, then delays and increased costs in the expansion of the
Partnership's network infrastructure could result, which would adversely affect
operating results.
F-27
<PAGE> 153
AMERICAN CABLE COMPANY PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
CREDIT RISK
The Partnership's accounts receivable potentially subject the Partnership
to credit risk, as collateral is generally not required. The Partnership's risk
of loss is limited due to advance billings to customers for services and the
ability to terminate access on delinquent accounts. The concentration of credit
risk is mitigated by the large number of customers comprising the customer base.
The carrying amount of the Partnership's receivables approximates their fair
values.
3. COMMITMENTS AND CONTINGENCIES
LEASES
The Partnership 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. None of these leases have noncancelable terms in
excess of one year as of September 30, 1995.
Total expense for all operating leases was approximately $60,000, $48,000,
and $37,000 for the years ended December 31, 1993 and 1994 and for the nine
months ended September 30, 1995, respectively.
The Partnership leases certain computer equipment under a capital lease.
Future minimum rental payments required under the capital lease that has
noncancelable lease terms in excess of one year as of September 30, 1995 are as
follows:
<TABLE>
<S> <C>
1995............................................................... $ 2,446
1996............................................................... 9,786
1997............................................................... 9,786
1998............................................................... 4,077
-------
Total minimum lease payments............................. 26,095
Less amounts representing interest................................. 4,433
-------
Present value of future minimum capital lease payments............. 21,662
Less current obligations under capital lease....................... 7,193
-------
Long-term capital lease obligation................................. $14,469
=======
</TABLE>
The capital lease was accounted for as a noncash transaction in the
Partnership's statement of cash flows for the year ended December 31, 1993.
LEGAL PROCEEDINGS
In the normal course of business, the Partnership is subject to various
litigation; however, in management's opinion, there are no legal proceedings
pending against the Partnership which would have a material adverse effect on
the financial position, results of operations, or liquidity of the Partnership.
4. SUBSEQUENT EVENT
On September 29, 1995, KNOLOGY of Columbus, Inc. (formerly, American Cable,
L.L.C.), a wholly owned subsidiary of KNOLOGY Holdings, Inc. (formerly Cybernet
Holding, Inc.), purchased certain assets of the Partnership and American Cable
Company (a wholly owned subsidiary of the Partnership) in exchange for a note
bearing interest at 9% with principal and interest due in five years. The note
is held by the Partnership. The transaction was accounted for as a purchase by
KNOLOGY of Columbus.
F-28
<PAGE> 154
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR THE LETTER OF TRANSMITTAL NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS OR
THE LETTER OF TRANSMITTAL. NEITHER THIS PROSPECTUS NOR THE LETTER OF TRANSMITTAL
CONSTITUTES AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------
$444,100,000
KNOLOGY
HOLDINGS, INC.
11 7/8% SENIOR DISCOUNT
NOTES DUE 2007
------------------------
PROSPECTUS
------------------------
DATED , 1998
================================================================================
<PAGE> 155
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees) as well as judgments, fines and
settlements, actually and reasonably incurred in connection with the defense of
any action, suit or proceeding in which they or any of them were or are made
parties or are threatened to be made parties by reason of their serving or
having served in such capacity. The DGCL provides, however, that such person
must have acted in good faith and in a manner such person reasonably believed to
be in (or not opposed to) the best interests of the corporation and, in the case
of a criminal action, such person must have had no reasonable cause to believe
his or her conduct was unlawful. In addition, the DGCL does not permit
indemnification in an action or suit by or in the right of the corporation,
where such person has been adjudged liable to the corporation, unless, and only
to the extent that, a court determines that such person fairly and reasonably is
entitled to indemnity for costs the court deems proper in light of liability
adjudication. Indemnity is mandatory to the extent a claim, issue or matter has
been successfully defended.
The Company's Certificate of Incorporation (the "Certificate") contains
provisions that provide that no director of the Company shall be liable for
breach of fiduciary duty as a director except for (1) any breach of the
directors' duty of loyalty to the Company or its stockholders; (2) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law; (3) liability under Section 174 of the DGCL; or (4) any
transaction from which the director derived an improper personal benefit. Under
the Bylaws of the Company, the Company is required to advance expenses incurred
by an officer or director in defending or participating in any action which such
director or officer is made a party to or is threatened to be made a party to by
reason of his or her serving or having served as an officer or director if the
director or officer undertakes to repay such amount if it is determined that the
director or officer is not entitled to indemnification. In addition, the Company
intends to enter into indemnity agreements with each of its directors pursuant
to which the Company will agree to indemnify the directors as permitted by the
DGCL.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------
<C> <S>
*1.1 Placement Agreement, dated October 16, 1997, between KNOLOGY Holdings, Inc. and
Morgan Stanley & Co. Incorporated, for itself and the other Placement Agents
named therein (the "Placement Agents").
*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.
*3.1 Certificate of Incorporation of KNOLOGY Holdings, Inc.
*3.2 Amended and Restated Bylaws of KNOLOGY Holdings, Inc.
*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.
*4.2 Registration Rights Agreement, dated October 22, 1997, between KNOLOGY Holdings,
Inc., the Placement Agents and SCANA Communications, Inc.
*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).
</TABLE>
II-1
<PAGE> 156
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------
<C> <S>
5.1 Opinion of Hogan & Hartson L.L.P.
8.1 Tax Opinion of Hogan & Hartson L.L.P.
*10.1 Unit Purchase Agreement, dated as of October 16, 1997 between KNOLOGY Holdings,
Inc. and SCANA Communications, Inc.
*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).
*10.3 Warrant Registration Rights Agreement, dated as of October 22, 1997, between
KNOLOGY Holdings, Inc. and United States Trust Company of New York.
*10.4 Sub-Lease Indenture dated November 1, 1995 by and between J. Smith Lanier & Co.
Financial Services, Inc. and ITC Holding Company, Inc.
*10.5 Lease Agreement dated April 15, 1996 by and between D.L. Jordan and American
Cable Company, Inc.
*10.6 Lease Agreement dated April 19, 1996 by and between B.E. Satterwhite and American
Cable Company, Inc.
*10.7 Pole Attachment Agreement dated January 1, 1998 by and between Gulf Power Company
and Beach Cable, Inc.
*10.8 Lease Agreement dated August 19, 1996 by and between Vaughn/Taylor, L.L.C. and
Montgomery Cablevision and Entertainment, Inc.
*10.9 Lease Agreement dated August 20, 1996 by and between William H. McLemore and
Montgomery Cablevision and Entertainment, Inc.
*10.10 Lease Agreement dated November 7, 1996 by and between Samuel B. Hewitt and
American Cable Company, Inc.
*10.11 Site Agreement dated November 19, 1996 by and between John Walter Stowers and
Montgomery Cablevision and Entertainment, Inc.
*10.12 Office Lease Agreement dated February 15, 1997 by and between Scott P. Pinckard
and Cybernet Holdings, Inc.
*+10.13 Lease Agreement dated April 2, 1997 by and between Interstate Telephone Company
and Cybernet Holding, Inc.
*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.
*10.15 Lease Agreement dated August 23, 1997 by and between Interstate Fibernet, Inc.
and KNOLOGY Holdings, Inc.
*+10.16 Telecommunications Facility Lease and Capacity Agreement, dated September 10,
1996, by and between Troup EMC Communications, Inc. and Cybernet Holding, Inc.
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.
*10.18 Pole Attachment Agreement dated May 21, 1990 by and between the Georgia Power
Company and American Cable Company.
*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.
*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.
</TABLE>
II-2
<PAGE> 157
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------
<C> <S>
*+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.
*+10.22 License Agreement dated September 29, 1995 by and between Montgomery Cablevision
and Entertainment, Inc. and American Communications Services of Montgomery, Inc.
*+10.23 License Agreement dated January 17, 1996 by and between American Cable, Inc. and
American Communication Services of Columbus, Inc.
*+10.24 Addendum to License Agreement dated April 21, 1997 by and between American Cable,
Inc. and American Communication Services of Columbus, Inc.
*10.25 Lease Agreement, dated December 5, 1997 by and between The Hilton Company and
KNOLOGY of Panama City, Inc.
*+10.26 Billing and Collection Services Agreement dated April 2, 1997 by and between
Interstate Telephone Company and Cybernet Holding, Inc.
*+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.
*+10.28 Agreement for Telecommunication Services dated May 1, 1997 by and between
Cybernet Holding, Inc. and DeltaCom, Inc.
*+10.29 First Addendum to Service Agreement dated July 7, 1997 by and between KNOLOGY
Holdings, Inc. and DeltaCom, Inc.
*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.
*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.
*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.
*10.33 Commitment Letter from First Union National Bank to KNOLOGY Holdings, Inc., dated
October 15, 1997.
*10.33.1 Commitment Extension Letter from First Union National Bank to KNOLOGY Holdings,
Inc., dated December 12, 1997.
*10.34 Certificate of Membership with National Cable Television Cooperative, dated
January 29, 1996, of Cybernet Holding, Inc.
*10.35 Stockholders' Agreement among KNOLOGY Holdings, Inc. and Certain Stockholders
Thereof dated as of December 8, 1995.
*10.36 Amendment No. 1 to Stockholders' Agreement dated as of January 25, 1996.
*10.37 Amendment No. 2 to Stockholders' Agreement dated as of April 18, 1996.
*10.38 Amended and Restated Agreement Among Shareholders Among KNOLOGY Holdings, Inc.
and Certain Shareholders thereof dated as of July 28, 1997.
*10.39 Ordinance (Harris County, Georgia) dated April 6, 1982.
*10.40 Ordinance (Harris County, Georgia) to Amend Cable Franchise Ordinance of April 6,
1982, dated November 5, 1996.
*10.41 Ordinance (Bibb City, Georgia) dated October 5, 1990.
*10.42 Ordinance No. 88-53 (Columbus, Georgia) dated May 17, 1988.
</TABLE>
II-3
<PAGE> 158
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------
<C> <S>
*10.43 Ordinance No. 89-3 (Columbus, Georgia) dated January 10, 1989.
*10.44 Ordinance No. 16-90 (Montgomery, Alabama) dated March 6, 1990.
*10.45 Ordinance No. 50-76 (Montgomery, Alabama).
*10.45.1 Ordinance No. 9-90 (Montgomery, Alabama) dated January 16, 1990.
*10.46 Resolution No. 58-95 (Montgomery, Alabama) dated April 6, 1995.
*10.47 Resolution No. 92-7 (Panama City Beach, Florida) dated July 23, 1992.
*10.48 License (Bay County, Florida) dated January 5, 1993.
*10.49 Resolution No. 97-22 (Panama City Beach, Florida) dated December 3, 1997.
*10.50 Resolution No. 2075 (Bay County, Florida) dated November 18, 1997.
*+10.51 Collocation Agreement between Interstate FiberNet and Cybernet Holding, Inc.,
dated July 1, 1997.
*+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.
*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.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
24.1 Power of attorney (included on signature page).
*25.1 Statement on Form T-1 of Eligibility of Trustee.
*27.1 Financial Data Schedule for the year ended December 31, 1996.
*27.2 Financial Data Schedule for the nine month period ended September 30, 1997.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter to Brokers, et al.
*99.4 Form of Letter to Clients.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment has been requested. The copy filed as an exhibit omits
the information subject to the confidential treatment request.
(b) Financial Statement Schedules
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 Combined
Financial Statements of the Company or notes thereto.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
II-4
<PAGE> 159
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
The undersigned registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in this Registration Statement when it becomes
effective; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
The undersigned registrant hereby undertakes that for the purpose of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby undertakes to remove from registration by
means of a post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
II-5
<PAGE> 160
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECURITIES ACT, THE COMPANY HAS DULY CAUSED
THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF WEST POINT, GEORGIA, ON THIS 4TH DAY
OF FEBRUARY, 1998.
KNOLOGY Holdings, Inc.
By /s/ WILLIAM E. MORROW
------------------------------------
WILLIAM E. MORROW
CHIEF EXECUTIVE OFFICER
------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints O. Gene Gabbard, William E. Morrow and James K.
McCormick, jointly and severally, each in his own capacity, his true and lawful
attorneys-in-fact, with full power of substitution, for him and his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents with full power and authority to do so and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Securities Act, this Registration Statement
has been signed below by the following persons, in the capacities indicated
below, on this 4th day of February, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
* Chairman of the Board and Director
- ---------------------------------------------
O. GENE GABBARD
/s/ WILLIAM E. MORROW President, Chief Executive Officer and
- --------------------------------------------- Director (Principal executive officer)
WILLIAM E. MORROW
/s/ JAMES K. MCCORMICK Chief Financial Officer and Secretary
- --------------------------------------------- (Principal financial officer and principal
JAMES K. MCCORMICK accounting officer)
* Director
- ---------------------------------------------
RICHARD BODMAN
* Director
- ---------------------------------------------
DONALD W. BURTON
* Director
- ---------------------------------------------
CAMPBELL B. LANIER, III
</TABLE>
II-6
<PAGE> 161
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
- --------------------------------------------- Director
L. CHARLES HILTON, JR.
* Director
- ---------------------------------------------
WILLIAM H. SCOTT, III
* Director
- ---------------------------------------------
ANDREW M. WALKER
*By: /s/ WILLIAM E. MORROW
- ---------------------------------------------
WILLIAM E. MORROW
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE> 162
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the financial statements of KNOLOGY Holdings, Inc. included in the Company's
Registration Statement on Form S-4 (No. 333-43339) and have issued our report
thereon dated May 14, 1997 (except with respect to Note 10, as to which the date
is December 19, 1997). Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule listed in the
index above 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 part of the basic financial statements. This schedule 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 therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
May 14, 1997
<PAGE> 163
SCHEDULE II
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE FOUR MONTHS
ENDED APRIL 30, 1995, THE EIGHT MONTHS ENDED DECEMBER 31, 1995,
AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------- ----------------------------
FOUR EIGHT
YEAR MONTHS MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, APRIL 30, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts, balance at
beginning of year............................ $ 57,147 $ 4,147 $ 931 $ 17,113
Addition charged to cost and expense........... 47,000 16,754 36,848 81,082
Deductions..................................... (100,000) (19,970) (20,666) (74,853)
---------- --------- -------- --------
Allowance for doubtful accounts, balance at end
of year...................................... $ 4,147 $ 931 $ 17,113 $ 23,342
========== ========= ======== ========
</TABLE>
<PAGE> 164
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------
<C> <S>
*1.1 Placement Agreement, dated October 16, 1997, between KNOLOGY Holdings, Inc. and
Morgan Stanley & Co. Incorporated, for itself and the other Placement Agents
named therein (the "Placement Agents").
*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.
*3.1 Certificate of Incorporation of KNOLOGY Holdings, Inc.
*3.2 Amended and Restated Bylaws of KNOLOGY Holdings, Inc.
*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.
*4.2 Registration Rights Agreement, dated October 22, 1997, between KNOLOGY Holdings,
Inc., the Placement Agents and SCANA Communications, Inc.
*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).
5.1 Opinion of Hogan & Hartson L.L.P.
8.1 Tax Opinion of Hogan & Hartson L.L.P.
*10.1 Unit Purchase Agreement, dated as of October 16, 1997 between KNOLOGY Holdings,
Inc. and SCANA Communications, Inc.
*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).
*10.3 Warrant Registration Rights Agreement, dated as of October 22, 1997, between
KNOLOGY Holdings, Inc. and United States Trust Company of New York.
*10.4 Sub-Lease Indenture dated November 1, 1995 by and between J. Smith Lanier & Co.
Financial Services, Inc. and ITC Holding Company, Inc.
*10.5 Lease Agreement dated April 15, 1996 by and between D.L. Jordan and American
Cable Company, Inc.
*10.6 Lease Agreement dated April 19, 1996 by and between B.E. Satterwhite and American
Cable Company, Inc.
*10.7 Pole Attachment Agreement dated January 1, 1998 by and between Gulf Power Company
and Beach Cable, Inc.
*10.8 Lease Agreement dated August 19, 1996 by and between Vaughn/Taylor, L.L.C. and
Montgomery Cablevision and Entertainment, Inc.
*10.9 Lease Agreement dated August 20, 1996 by and between William H. McLemore and
Montgomery Cablevision and Entertainment, Inc.
*10.10 Lease Agreement dated November 7, 1996 by and between Samuel B. Hewitt and
American Cable Company, Inc.
*10.11 Site Agreement dated November 19, 1996 by and between John Walter Stowers and
Montgomery Cablevision and Entertainment, Inc.
*10.12 Office Lease Agreement dated February 15, 1997 by and between Scott P. Pinckard
and Cybernet Holdings, Inc.
*+10.13 Lease Agreement dated April 2, 1997 by and between Interstate Telephone Company
and Cybernet Holding, Inc.
*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.
</TABLE>
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------
<C> <S>
*10.15 Lease Agreement dated August 23, 1997 by and between Interstate Fibernet, Inc.
and KNOLOGY Holdings, Inc.
*+10.16 Telecommunications Facility Lease and Capacity Agreement, dated September 10,
1996, by and between Troup EMC Communications, Inc. and Cybernet Holding, Inc.
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.
*10.18 Pole Attachment Agreement dated May 21, 1990 by and between the Georgia Power
Company and American Cable Company.
*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.
*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.
*+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.
*+10.22 License Agreement dated September 29, 1995 by and between Montgomery Cablevision
and Entertainment, Inc. and American Communications Services of Montgomery, Inc.
*+10.23 License Agreement dated January 17, 1996 by and between American Cable, Inc. and
American Communication Services of Columbus, Inc.
*+10.24 Addendum to License Agreement dated April 21, 1997 by and between American Cable,
Inc. and American Communication Services of Columbus, Inc.
*10.25 Lease Agreement, dated December 5, 1997 by and between The Hilton Company and
KNOLOGY of Panama City, Inc.
*+10.26 Billing and Collection Services Agreement dated April 2, 1997 by and between
Interstate Telephone Company and Cybernet Holding, Inc.
*+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.
*+10.28 Agreement for Telecommunication Services dated May 1, 1997 by and between
Cybernet Holding, Inc. and DeltaCom, Inc.
*+10.29 First Addendum to Service Agreement dated July 7, 1997 by and between KNOLOGY
Holdings, Inc. and DeltaCom, Inc.
*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.
*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.
*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.
*10.33 Commitment Letter from First Union National Bank to KNOLOGY Holdings, Inc., dated
October 15, 1997.
*10.33.1 Commitment Extension Letter from First Union National Bank to KNOLOGY Holdings,
Inc., dated December 12, 1997.
*10.34 Certificate of Membership with National Cable Television Cooperative, dated
January 29, 1996, of Cybernet Holding, Inc.
</TABLE>
<PAGE> 166
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------
<C> <S>
*10.35 Stockholders' Agreement among KNOLOGY Holdings, Inc. and Certain Stockholders
Thereof dated as of December 8, 1995.
*10.36 Amendment No. 1 to Stockholders' Agreement dated as of January 25, 1996.
*10.37 Amendment No. 2 to Stockholders' Agreement dated as of April 18, 1996.
*10.38 Amended and Restated Agreement Among Shareholders Among KNOLOGY Holdings, Inc.
and Certain Shareholders thereof dated as of July 28, 1997.
*10.39 Ordinance (Harris County, Georgia) dated April 6, 1982.
*10.40 Ordinance (Harris County, Georgia) to Amend Cable Franchise Ordinance of April 6,
1982, dated November 5, 1996.
*10.41 Ordinance (Bibb City, Georgia) dated October 5, 1990.
*10.42 Ordinance No. 88-53 (Columbus, Georgia) dated May 17, 1988.
*10.43 Ordinance No. 89-3 (Columbus, Georgia) dated January 10, 1989.
*10.44 Ordinance No. 16-90 (Montgomery, Alabama) dated March 6, 1990.
*10.45 Ordinance No. 50-76 (Montgomery, Alabama).
*10.45.1 Ordinance No. 9-90 (Montgomery, Alabama) dated January 16, 1990.
*10.46 Resolution No. 58-95 (Montgomery, Alabama) dated April 6, 1995.
*10.47 Resolution No. 92-7 (Panama City Beach, Florida) dated July 23, 1992.
*10.48 License (Bay County, Florida) dated January 5, 1993.
*10.49 Resolution No. 97-22 (Panama City Beach, Florida) dated December 3, 1997.
*10.50 Resolution No. 2075 (Bay County, Florida) dated November 18, 1997.
*+10.51 Collocation Agreement between Interstate FiberNet and Cybernet Holding, Inc.,
dated July 1, 1997.
*+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.
*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.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
24.1 Power of attorney (included on signature page).
*25.1 Statement on Form T-1 of Eligibility of Trustee.
*27.1 Financial Data Schedule for the year ended December 31, 1996.
*27.2 Financial Data Schedule for the nine month period ended September 30, 1997.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter to Brokers, et al.
*99.4 Form of Letter to Clients.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment has been requested. The copy filed as an exhibit omits
the information subject to the confidential treatment request.
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF HOGAN & HARTSON L.L.P.]
February 5, 1998
KNOLOGY Holdings, Inc.
1241 O. G. Skinner Drive
West Point, GA 31833
Ladies and Gentlemen:
This firm has acted as special counsel to KNOLOGY Holdings,
Inc., a Delaware corporation (the "Company"), in connection with its
Registration Statement on Form S-4, as amended (File No. 333-43339) (the
"Registration Statement"), filed with the Securities and Exchange Commission
relating to the proposed offering of up to $444,100,000 in aggregate principal
amount at maturity of 11-7/8% Senior Discount Notes Due October 15, 2007 (the
"Exchange Notes") in exchange for up to $444,100,000 in aggregate principal
amount at maturity of the Company's outstanding 11-7/8% Senior Discount Notes
Due October 15, 2007 (the "Senior Discount Notes"). This opinion letter is
furnished to you at your request to enable you to fulfill the requirements of
Item 601(b)(5) of Regulation S-K, 17 C.F.R. Section 229.601(b)(5), in
connection with the Registration Statement.
For purposes of this opinion letter, we have examined copies
of the following documents:
1. An executed copy of the Registration Statement.
2. An executed copy of the Indenture dated as of October
22, 1997 (the "Indenture") by and between the Company
and United States Trust Company of New York, as
Trustee, including the forms of Senior Discount Notes
issued and the Exchange Notes to be issued pursuant
thereto, as filed as Exhibit 4.1 to the Registration
Statement.
3. The Certificate of Incorporation of the Company as
certified by the Secretary of State of the State of
<PAGE> 2
KNOLOGY Holdings, Inc.
February 5, 1998
Page 2
Delaware on October 15, 1997 and as certified by the
Secretary of the Company on the date hereof as being
complete, accurate and in effect.
4. The Amended and Restated By-laws of the Company as
certified by the Secretary of the Company on the date
hereof as being complete, accurate and in effect.
5. Resolutions of the Board of Directors of the Company
adopted by unanimous written consent on October 14,
1997 and on December 21, 1997, as certified by the
Secretary of the Company on the date hereof as being
complete, accurate and in effect, relating to the
issuance and sale of the Exchange Notes and
arrangements in connection therewith.
In our examination of the aforesaid documents, we have assumed
the genuineness of all signatures, the legal capacity of all natural persons,
the accuracy and completeness of all documents submitted to us, the
authenticity of all original documents, and the conformity to authentic
original documents of all documents submitted to us as copies (including
telecopies). This opinion letter is given, and all statements herein are made,
in the context of the foregoing.
This opinion letter is based as to matters of law solely on
applicable provisions of the General Corporation Law of the State of Delaware,
as amended, and the contract law of the State of New York (but not including
any statutes, ordinances, administrative decisions, rules or regulations of any
political subdivision of the State of New York). We express no opinion herein
as to any other laws, statutes, ordinances, rules or regulations not
specifically referred to above.
Based upon, subject to and limited by the foregoing, we are of
the opinion that the Exchange Notes have been duly authorized on behalf of the
Company and that, (i) following the effectiveness of the Registration Statement
and receipt by the Company of the Senior Discount Notes in exchange for the
Exchange Notes as specified in the resolutions of the Board of Directors
referred to above, and (ii) assuming due execution, authentication, issuance
and delivery of the Exchange Notes as provided in the Indenture, the Exchange
Notes will constitute valid and binding obligations of the Company entitled to
the benefits of the Indenture and enforceable in accordance with their terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights (including, without limitation, the
effect of statutory and
<PAGE> 3
KNOLOGY Holdings, Inc.
February 5, 1998
Page 3
other law regarding fraudulent conveyances, fraudulent transfers and
preferential transfers) and as may be limited by the exercise of judicial
discretion and the application of principles of equity including, without
limitation, requirements of good faith, fair dealing, conscionability and
materiality (regardless of whether the Exchange Notes are considered in a
proceeding in equity or at law).
The opinion expressed in the paragraph above shall be
understood to mean only that if (i) there is a default in performance of an
obligation, (ii) a failure to pay or other damage can be shown and (iii) the
defaulting party can be brought into a court which will hear the case and apply
the governing law, then, subject to the availability of defenses, and to the
exceptions set forth above, the court will provide a money damage (or perhaps
injunctive or specific performance) remedy.
We assume no obligation to advise you of any changes in the
foregoing subsequent to the delivery of this opinion letter. This opinion
letter has been prepared solely for your use in connection with the filing of
the Registration Statement on the date of this opinion letter and should not be
quoted in whole or in part or otherwise referred to, nor filed with or
furnished to any governmental agency or other person or entity, without the
prior written consent of this firm.
We hereby consent to the filing of this opinion letter as
Exhibit 5.1 to the Registration Statement and to the reference to this firm
under the caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that
we are an "expert" within the meaning of the Securities Act of 1933, as
amended.
Very truly yours,
/s/ HOGAN & HARTSON L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE> 1
EXHIBIT 8.1
[LETTERHEAD OF HOGAN & HARTSON L.L.P.]
February 5, 1998
KNOLOGY Holdings, Inc.
1241 O.G. Skinner Drive
West Point, GA 31833
Ladies and Gentlemen:
This firm has acted as special counsel to KNOLOGY Holdings,
Inc., a Delaware corporation (the "Company"), in connection with its
Registration Statement on Form S-4, as amended (File No. 333-43339) (the
"Registration Statement"), filed with the Securities and Exchange Commission
relating to the proposed offering of up to $444,100,000 in aggregate principal
amount at maturity of 11-7/8% Senior Discount Notes Due October 15, 2007 (the
"Exchange Notes") in exchange for up to $444,100,000 in aggregate principal
amount at maturity of the Company's outstanding 11-7/8% Senior Discount Notes
Due October 15, 2007 (the "Senior Discount Notes"). This opinion letter is
furnished to you at your request to enable you to fulfill the requirements of
Item 601(b)(8) of Regulation S-K, 17 C.F.R. Section 229.601(b)(8), in
connection with the Registration Statement. Capitalized terms used in this
letter and not otherwise defined herein shall have the meaning set forth in the
prospectus ("Prospectus") included as part of the Registration Statement.
This opinion letter is based as to matters of law solely on
the Internal Revenue Code of 1986, as amended, its legislative history,
judicial authority, current administrative rulings and practice, and existing
and proposed Treasury Regulations, including regulations concerning the
treatment of debt instruments issued with original issue discount, all as in
effect and existing on the date hereof (collectively, "federal tax laws").
These provisions and interpretations are subject to changes, which may or may
not be retroactive in effect, that might result in material modifications of
our opinion. We express no opinion herein as to any other laws, statutes,
regulations, or ordinances.
<PAGE> 2
KNOLOGY Holdings, Inc.
February 5, 1998
Page 2
In rendering the following opinion, we have examined: (i) an
executed copy of the Registration Statement; (ii) the forms of the Senior
Discount Notes and the Exchange Notes; and (iii) an executed copy of the
Indenture.
In our review, we have assumed that all of the representations
and statements set forth in such documents are true and correct, and all of the
obligations imposed by any such documents on the parties thereto have been and
will continue to be performed or satisfied in accordance with their terms. We
also have assumed the genuineness of all signatures, the proper execution of
all documents, the accuracy and completeness of all documents submitted to us,
the authenticity of all original documents, and the conformity to authentic
original documents of all documents submitted to us as copies (including
telecopies). This opinion letter is given, and all statements herein are made,
in the context of the foregoing.
For purposes of rendering our opinion, we have not made an
independent investigation of the facts set forth in any of the above-referenced
documents, including the Prospectus. We have consequently relied upon
representations and information presented in such documents.
Based upon, and subject to, the foregoing and subject to the
qualifications, limitations and exceptions contained in the Prospectus, we are
of the opinion that the information in the Prospectus under the caption
"Certain United States Federal Income Tax Consequences" and in the first two
paragraphs under the caption "Risk Factors -- Consequences of Original Issue
Discount on Exchange Notes" accurately summarizes the material U.S. federal
income tax consequences associated with the exchange of the Senior Discount
Notes for the Exchange Notes and with the ownership and disposition of the
Notes.
We assume no obligation to advise you of any changes in the
foregoing subsequent to the delivery of this opinion letter. This opinion
letter has been prepared solely for your use in connection with the filing of
the Registration Statement on the date of this opinion letter and should not be
quoted in whole or in part or otherwise referred to, nor filed with or
furnished to any governmental agency or other person or entity, without the
prior written consent of this firm.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to us under the caption
"Certain Federal Income Tax Consequences" in the Prospectus. In giving such
consent, we
<PAGE> 3
KNOLOGY Holdings, Inc.
February 5, 1998
Page 3
do not admit that we are in the category of person whose consent is required
under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ HOGAN & HARTSON L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE> 1
Exhibit 10.17
MASTER POLE ATTACHMENT AGREEMENT
THIS AGREEMENT, made this day of January 12, 1998 by and between South
Carolina Electric and Gas ("Owner") and KNOLOGY Holdings, Inc. d/b/a Knology of
Charleston, on behalf of its operating subsidiaries, if any ("Permittee"), the
parties hereto, witnesses that:
WHEREAS Owner owns, operates and maintains distribution poles for use
in its utility operations within its retail service territory in South Carolina;
and
WHEREAS Permittee furnishes or intends to furnish communications
services within the State of South Carolina or wired television service to
residents of the unincorporated areas of ____________________________, and the
Cities of ______________________________, and for such purpose desires to attach
cables, wires and associated appliances of a communications or cable television
nature ("Facilities") in the space on Owner's poles appropriate for such
attachments; and
WHEREAS Permittee is franchised and has consent and authorization (to
the extent required) to place its Facilities within or over the public and
private spaces in or over which the poles to which Permittee wishes to attach
are located; and
NOW, THEREFORE, in consideration of the mutual rights and obligations
hereby conferred, the parties mutually agree as follows:
SEC. 1. DEFINITIONS
(A) Telecommunications Act. The term "Telecommunications Act" refers
to the Communications Act of June 19, 1934, 48 Stat. 1604, as amended by the
Pole Attachment Act of 1978 and the Telecommunications Act of 1996, Pub. L. No.
104-104, 110 Stat. 56 (1996), as codified at 47 U.S.C. sec. 224.
<PAGE> 2
(B) Cost. The term "cost" refers to charges made by Owner to Permittee
for specific work performed, and shall be the estimated cost of performing the
work, including labor, materials, administrative expenses, overhead, any
applicable taxes and its authorized rate of return.
(C) Facilities. The terms "Facility" and "Facilities" refer to any
property or equipment utilized in the provision of telecommunications services.
(D) Make-Ready Work. The term "Make-Ready Work" refers to all work
performed or to be performed to prepare Owner's poles for the requested
attachment of Permittee's Facilities. "Make-Ready work" includes, but is not
limited to, the rearrangement, transfer, replacement, and removal of existing
facilities on a pole where such work is required to accommodate Permittee's
Facilities or the performance or other work required to make a pole usable for
the initial placement of Permittee's Facilities.
(E) Permit. The term "Permit" refers to any permit issued pursuant to
this Agreement and may, if the context requires, refer to pole attachment
permits issued by Owner prior to the date of this Agreement.
(F) Permittee. The term "Permittee" refers to a person or entity which
has entered or may enter into an agreement or arrangement with Owner permitting
such person or entity to attach its Facilities to Owner's poles.
(G) Pole. The term "pole" refers to those utility poles used for the
local distribution of electrical power but only those utility distribution poles
owned or controlled by Owner and does not include utility distribution poles
with respect to which Owner has no legal authority to permit attachments by
other persons or entities.
(H) Third Party. The terms "third party" and "third parties" refer to
persons and entities other than Permittee and Owner. Use of the term "third
party" does not signify that any such person or entity is a party to this
Agreement or has any contractual rights hereunder.
<PAGE> 3
SEC. 2. CHARACTER OF SERVICE
(A) Service rendered under this Agreement will consist of supporting
the attachment of Facilities above the ground on Owner's poles as provided
herein, to the extent that such attachments are or continue to be permitted from
time to time under the terms of Owner's right, license, right-of-way, easement,
franchise or other permission to install and use the poles on public or private
property involved.
(B) All attachments shall be suitably designed, installed and
maintained in accordance with good engineering practice and shall comply with
the ground-clearance, electrical safety clearances, and other standards and
requirements of the National Electric Safety Code, applicable federal, state and
local laws and regulations, and the rules, regulations and construction
standards of Owner as set forth in its Distribution Construction Standards J-1
through J-8, attached as Exhibits 1 to 8.
(C) The attachments shall be subject at all times to amendment of the
standards and requirements set forth in sec. 2(B). Permittee agrees to rearrange
its Facilities in accordance with changes in the standards published in the
publications specified in sec. 2(B) of this Agreement.
(D) Except as required in other Sections of this Agreement, Owner
shall not be liable to Permittee for any alteration, relocation or removal of
existing poles or attachments caused thereby or for any interruptions to, or any
interference with, the operation of Permittee.
(E) Title to the attached Facilities shall remain vested in Permittee;
however, their presence on a pole does not in any way create in Permittee any
right of ownership, possession or control of the pole occupied, regardless of
the period of occupancy.
SEC. 3. REQUEST FOR ATTACHMENT
(A) No attachment shall be made to a pole under this Agreement except
as expressly permitted by Owner in writing, but access shall be permitted to the
extent required by the Telecommunications Act and the FCC regulations.
(B) Permittee shall submit an application ("Permit Application") which
includes all the information necessary for Owner to determine, upon inspection
and evaluation of the affected poles, the extent to which existing poles and
existing
<PAGE> 4
or planned attachments thereto must be altered to accommodate Permittee's
attachments.
(i) The Permit Application shall include evidence,
satisfactory to Owner, of Permittee's authority to erect and maintain its
Facilities within public streets, highways and other thoroughfares involved. If
Permittee has no such authority or fails to submit it upon request, no permit
application shall be considered, and any which may have been granted may be
revoked at Owner's discretion.
(a) If Permittee claims that its attachment rate should
be adjusted according to the FCC formula for CATV providers, the Permit
Application shall also contain a statement that the facilities will be used
solely to provide cable television service.
(ii) No Permit Application will be accepted by Owner if
Permittee is in arrears on any payments due to Owner, including but not limited
to annual attachment charges, engineering fees, fees Make-Ready Work,
unauthorized use fees or other penalties for Permittee's other attachments.
(iii) Additional Permit Applications are required for any
change or addition to Permittee's attached facilities, including, but not
limited to, any change in the size or type of cable.
(C) At the time the Permit Application is submitted to Owner, Owner
will bill Permittee for the cost of the inspection and evaluation, which cost
shall include Owner's overhead. Payment by Permittee will be due upon receipt by
Permittee of Owner's invoice.
(D) If alterations to Owner's facilities are necessary to accommodate
Permittee's attachments, Owner will estimate the cost of this Make-Ready Work,
including Owner's overhead and applicable taxes.
(i) The estimates for inspection and evaluation and for
Make-Ready Work may include the costs of inspecting, evaluating, and altering
Owner's attachments to poles owned by other entities.
(ii) The estimate for Make-Ready Work shall be valid for a
period of sixty (60) days.
(iii) Owner's Make-Ready Work shall be included in Owner's
normal work load schedule in the geographic areas where
<PAGE> 5
the relevant poles are located and shall not be entitled to priority,
advancement, or preference over other work to be performed by Owner in the
ordinary course of its business.
(iv) If Permittee desires make-ready work to be performed on
an expedited basis and Owner agrees to perform the work on such a basis, Owner
shall recalculate the estimated charges for Make-Ready Work. If Permittee
accepts Owner's offer, Permittee shall pay such additional charges.
(E) Upon payment by Permittee of the estimated make ready cost, the
fee for inspection and evaluation, and the first year's annual attachment charge
prorated from the date of the application to the end of the year, Permittee will
be issued an appropriate non-exclusive, revocable Provisional Permit to attach
to Owner's poles.
(F) Unless the Provisional Permit is withdrawn, the issuance thereof
will be deemed to authorize all alterations determined by Owner to be necessary.
(G) Issuance of a Provisional Permit applied for shall not be deemed
an opinion of Owner or warranty that such attachments would comply with the
requirements for entry upon and use of the public or private property involved
or with the requirements of the codes, laws and regulations applicable to the
installation, it being understood and agreed that a Provisional Permit supplies
only such authority as Owner has the right to grant. Permittee is responsible
for acquiring any necessary easements, as well as any governmental consents,
additional licenses or permits that may be required and for the costs associated
with the transfer or rearrangement of other pre-existing attachments to Owner's
poles.
(H) Permittee shall not exercise any Provisional Permit by attaching
to Owner's poles until alterations, if any, are completed by Owner.
(I) Permittee shall provide Owner with a proposed construction
schedule before beginning attachment under a Provisional Permit. This schedule
shall include, at a minimum, the name, title, and business address and telephone
number of the manager responsible for construction of the Facilities; the names
of each contractor and/or subcontractor involved in construction activities; and
estimated dates of commencement and completion of construction.
(J) Permittee shall provide notice to Owner when it completes the
attachments of its facilities to Owner's poles.
<PAGE> 6
(K) Should Permittee not complete its pole attachments within six (6)
months from the date the Provisional Permit therefor is issued, that permit
shall be null and void.
(L) A Provisional Permit shall become an Approved Permit only upon
certification after inspection by Owner that Permittee's attachments meet all
applicable safety and engineering requirements.
(M) Samples of the application and permit forms currently used by
Owner are contained in Appendix B; these forms may be revised by Owner from time
to time consistent with this Agreement.
SEC. 4. CONDITIONS OF ATTACHMENT
(A) An attachment under this Agreement shall be governed by the terms
and conditions of this Agreement and shall also be governed by the terms and
conditions of the Permit issued therefor.
(B) The Permit may state that Permittee's attachment is subject to
Owner's future need for pole space for the provision of electrical services
which may prompt relocation or rearrangement as provided in sec. 7(E) of this
Agreement.
(C) The Permit shall include such standard provisions as Owner may
deem appropriate for all attachments similarly situated. Owner may amend the
standard provisions from time to time and such amended provisions shall be
applicable to existing attachments.
(D) Each attachment to Owner's poles bear a marker or insignia in a
form satisfactory to Owner identifying the facility as Permittee's.
(E) Permittee shall be responsible at all times for the condition of
its Facilities and its compliance with all requirements, specifications, rules,
regulations and standards referenced in sec. 2(B) of this Agreement.
(F) Owner shall have no duty to Permittee either to maintain or to
inspect or monitor the condition of Permittee's Facilities. Neither Owner's act
of inspection Permittee's Facilities nor any failure to inspect those Facilities
shall
<PAGE> 7
operate to impose on Owner any liability of any kind whatsoever or to relieve
Permittee of any responsibility, obligations or liability under this Agreement
or otherwise existing.
(G) Owner may, however, conduct such inspections and audits of its
poles and any attached Facilities as it deems reasonable and necessary.
(i) Permittee shall bear the costs of an initial inspection to
be completed within sixty (60) days of Owner's receipt of notice concerning
completion of the attachment and of any subsequent inspections, so long as
subsequent inspections are conducted not more often than every three years.
(ii) If routine observation of Permittee's attachments by
Owner indicates the possible violation of good, safe engineering practice or the
other requirements of this Agreement, Owner may conduct more frequent
inspections at its own expense; provided however, that if such violations are
detected in the course of the inspection, Permittee shall reimburse Owner for
the cost of such inspection.
(iii) Owner's right to inspect attachments originally
designated to provide only one-way transmission of video programming or other
programming services shall include the right to examine signal transmission to
detect any unannounced two-way use of such attachments. Owner and Permittee
shall negotiate in good faith concerning the methodology used to conduct such
inspections.
(H) Should an attachment require maintenance, repair, alteration or
relocation in order to comply with good, safe engineering practice and the other
requirements of this Agreement, including, but not limited to, maintaining
adequate clearance between Permittee's attachments and surrounding vegetation,
Owner may require Permittee to make such changes or conduct such maintenance or
repairs.
(I) In an emergency, or otherwise after notice to Permittee of the
required work, Owner may perform such work at Permittee's expense.
(J) Permittee shall provide Owner with the name, title, and business
and telephone number of the manager responsible for routine maintenance of the
Facilities and shall thereafter notify Owner of changes to such information.
<PAGE> 8
(i) Upon Owner's request, the Permittee's designated manager
shall identify any contractor, subcontractor or other person performing
maintenance activities on Permittee's behalf and shall also provide such
additional documentation as reasonably necessary to demonstrate that Permittee
and all persons acting on its behalf are complying with the requirements of this
Agreement.
(ii) Upon Owner's request, Permittee shall produce a copy of
its Permit for any attachment specified by Owner.
(K) Unauthorized attachments discovered by Owner may be allowed to
remain on the pole if otherwise in conformity with this Agreement upon payment
by Permittee of the unauthorized attachment charge specified in Appendix C(3)
for each such attachment not authorized by the Permit, plus annual charges at
the current rate for each January 1 from the time of unauthorized installation
as estimated by Owner.
(L) Should the Permittee decide to use for any other purpose
attachments originally designated to provide only one-way transmission of video
programming or other programming services, it shall provide written notice to
the Owner at least sixty (60) days before beginning such services.
(M) Unannounced use of attachments to provide services other than the
one-way transmission of video programming or other programming services may be
allowed to continue upon payment by the Permittee of the expanded use charge
specified in Appendix C(4) for all attachments, plus annual charges at the rate
charged to telecommunications carriers for each January 1 from the commencement
of the unannounced use as estimated by the Owner.
(N) If, in Owner's judgment, made in good faith, the unauthorized
attachment or unannounced use of attachments to provide services other than
cable television services evidences a pattern of willful avoidance by Permittee
of the requirements of this Agreement, Owner may require Permittee to
immediately remove the unauthorized attachment or may itself remove the
unauthorized attachments at Permittee's expense. Owner may also terminate this
Agreement and require Permittee to remove all attachments from its poles or may
itself remove all Permittee's attachments at Permittee's expense.
<PAGE> 9
SEC. 5. ANNUAL ATTACHMENT CHARGES
The annual charge per pole shall be in accordance with Appendix C. The
annual charge shall be based on the number of Owner's poles as of January 1st of
each year for which Permits have been issued (subject to the minimum annual
charge stated in Appendix C) and shall be set pursuant to the applicable FCC
formula. Permittee shall pay an additional annual charge for each power supply
directly attached to Owner's poles. Owner will bill Permittee as soon as
practicable after January 1st of each year. Billing for energy used by power
supplies shall be monthly at the metered rate. Bills rendered under this
Agreement shall be payable by Permittee within twenty-five days of the date
rendered. Owner may impose a monthly late payment charge of one and one half
percent (1-1/2%) on any unpaid balance for the annual attachment charge,
twenty-five (25) days after billing date, and on any unpaid balance at each
subsequent monthly billing. Nonpayment of any such amount within sixty (60) days
shall constitute a breach of this Agreement. No refund of any attachment charge
will be made on account of any change in the number of attaching entities.
SEC. 6. POLE ALTERATIONS AT PERMITTEE REQUEST
(A) Pole capacity for attachments under this Agreement is available on
a first-come, first-served basis. Pole capacity cannot be reserved by Permittee
for future use and should be used as soon as it has been made available by
Owner.
(B) Owner will attempt to accommodate Permittee's request for a taller
or stronger pole if reasonably possible, consistent with Owner's use of the
pole.
(C) If a pole must be replaced or modified or relocated in order to
accommodate Permittee's request for an attachment, and if Owner agrees to
perform such work, Permittee will make a contribution-in-aid-of-construction to
Owner in the amount of the estimated installed cost of the alterations including
the cost of transferring or rearranging the facilities of Owner and any other
pre-existing attachments.
(i) The contribution-in-aid-of-construction, before any credit
for any existing pole or poles, shall be grossed-up for taxes according to a
schedule provided by Owner.
<PAGE> 10
(ii) Guying and anchors required by the attachment of
Permittee's Facilities (including all necessary permission therefor), shall be
provided and installed by Permittee.
(iii) Permittee shall obtain the necessary agreements and
shall reimburse other attaching Permittees for the cost of transferring or
rearranging their facilities as the result of the attachment.
(iv) Permittee will reimburse Owner for alterations and
inspection and evaluation performed by Owner on poles not owned by Owner.
SEC. 7. POLE RELOCATION AND REARRANGEMENT BY OWNER
(A) If Owner relocates or replaces its pole(s), rearranges the
facilities on its pole(s) to accommodate Owner's needs for additional pole space
or other parties' attachment request(s), Permittee will be offered space under
this Agreement for existing attachments on the relocated or rearranged pole.
(B) The relocation and rearrangement of Permittee's attached
Facilities shall be performed by Owner or at Owner's option, by a contractor
specified by Owner, within a reasonable time.
(C) Permittee shall not be responsible for charges associated with
relocations or rearrangements made to accommodate Owner's need for additional
pole space or of a third party's request for attachment, unless Permittee
requests modification of or addition to its existing attached facilities in
connection with the relocation or rearrangement or unless Owner is recovering
previously reserved pole space.
(D) If Permittee adds to or modifies its existing attached Facilities
on the relocated or rearranged poles at any time thereafter or if the relocation
or rearrangement occurs for any reason other than Owner's or a third party's
need for additional space, Permittee shall bear its proportionate share of the
expense of the relocation or rearrangement.
(E) If the Owner is recovering previously reserved pole space,
Permittee shall bear a proportionate share of the expense of the replacement,
relocation, or rearrangement with all other Permittees whose attachments were
subject to space reservation by Owner.
<PAGE> 11
(F) If the replacement, relocation or rearrangement is required by
order of a municipality or other governmental authority, Permittee shall bear
its proportionate share of the expense of the removal, replacement, relocation,
or rearrangement.
SEC. 8. POLE REMOVAL
If Owner no longer requires the use of its pole on which Permittee's
attachments are located, Owner will give Permittee, wherever possible, not less
than sixty (60) days notice to remove its attachments, and after such notice
period, remaining Permittee attachments will be deemed abandoned and Owner may
at any time remove the abandoned attachments at Permittee's expense. Permittee
waives any damage suffered as a result of removal of attachments deemed
abandoned.
SEC. 9. ATTACHMENT REMOVAL
(A) In the event of Permittee's failure to observe any condition of
this Agreement or applicable Permit issued hereunder, Owner may at any time give
not less than sixty (60) days notice, wherever possible, to Permittee to remove
its attachments from any Owner pole, and after such notice period any remaining
Permittee attachments will be deemed abandoned and Owner may at any time remove
the abandoned attachments and/or the pole at Permittee's expense. Permittee
waives any damage suffered as a result of removal of attachments deemed
abandoned.
(B) If Permittee desires to remove all of its attachments from any
pole, Permittee shall notify Owner of the description, number and location of
attachments removed. A Notice of Removal form is contained in Appendix B. No
refund of any attachment charge will be made on account of such removals.
SEC. 10. WORKER QUALIFICATIONS
(A) Permittee shall engage only qualified workers who are trained and
experienced and who know and appreciate the dangerous character of electricity
and the dangers of working in proximity to energized electric lines, shall warn
the workers of such danger, shall provide competent supervision of the work
involved in making any attachments, maintenance work or rearrangements or other
physical changes in the attachments, and shall ensure that
<PAGE> 12
all workers and supervisors know and comply with all applicable NESC and OSHA
rules, regulations and guidelines.
(B) All personnel authorized to have access to Permittee's facilities
shall, while working on or in the vicinity of Owner's poles, carry with them
suitable identification and shall, upon the request of any employee of Owner,
produce such identification.
SEC. 11. PROTECTION OF OWNER'S FACILITIES AND OTHER PROPERTY
(A) Permittee shall exercise reasonable precautions to avoid damage to
the facilities of Owner or of others using Owner's poles and assumes all
responsibility and liability for any and all costs and expenses for such damage,
whether direct or consequential. Permittee shall make immediate report to Owner
of the occurrence of any such damage and shall reimburse Owner for the expense
incurred in repairing any such damage.
(B) Neither Permittee nor any persons acting on its behalf, including
but not limited to Permittee's employees, agents, contractors, and
subcontractors, shall engage in any conduct which damages either the facilities
of Owner or of others using Owner's poles or public or private property in the
vicinity of Owner's poles, interferes in any way with the use or enjoyment of
public or private property except as expressly permitted by the owner of such
property, or creates a hazard or nuisance on such property (including, but not
limited to, a hazard or nuisance resulting from any abandonment or failure to
remove Permittee's Facilities or any construction debris from the property,
failure to erect warning signs or barricades as may be necessary to give notice
to others of unsafe conditions on the premises while work performed on
Permittee's behalf is in progress or failure to restore the property to a safe
condition after such work has been completed.) Permittee assumes all
responsibility and liability for any and all costs and expenses for such damage,
whether direct or consequential, and shall make immediate report to Owner of
such occurrence and shall reimburse Owner for any expense incurred in repairing
any such damage.
SEC. 12. INDEMNITY AND INSURANCE
(A) PERMITTEE, FOR ITSELF AND ITS EMPLOYEES OR CONTRACTORS, ASSUMES
ALL RISKS OF INJURY AND PROPERTY DAMAGE RESULTING FROM WORK PERFORMED IN
CONJUNCTION WITH THIS AGREEMENT OR ANY PERMIT
<PAGE> 13
ISSUED HEREUNDER.
(B) Permittee shall hold harmless, indemnify and defend Owner, its
successors or assigns, against and from all loss, cost or expense (including
attorneys fees and court costs) arising out of claims of damage to property,
including but not limited to trespass upon real property or damage to property
of Permittee and of Owner, claims of injury or death to any person, including
payments under any workers' compensation law or under any plan for employee
disability and death benefits, and claims of lost profits, business loss or
interruption of service, which may arise out of or be caused by the erection,
maintenance, existence, use, removal or abandonment of Permittee's attachments
or by the proximity or connection of the facilities, including but not limited
to cable, wires, power supplies, apparatus and appliances of Permittee to any of
the facilities belonging to Owner or to parties jointly using Owner's poles, or
by any activity of Permittee on, around, or in the vicinity of Owner's poles,
regardless of whether same may have resulted from the claimed or actual sole or
joint negligence of Owner.
(C) Permittee further agrees to carry such insurance as is necessary
and acceptable to Owner in accordance with the requirements set forth in
Appendix D of this Agreement. Permittee also agrees not to plead any immunity or
similar protection from suit or liability afforded by workers compensation or
other equivalent laws as a defense or bar to an action by Owner to enforce this
covenant of indemnification.
SEC. 13. PERFORMANCE BOND
Permittee shall furnish satisfactory evidence of a performance bond in
the amount of sixty thousand dollars and no cents ($60,000.00) or fifty dollars
and no cents ($50.00) per pole, whichever is greater, to guarantee the payment
of any sums which may become due/to Owner for annual attachment charges,
inspection fees, engineering fees or for other work performed for the benefit of
Permittee under this Agreement, including the removal of attachments as provided
for in sec. 7 and/or 8 of this Agreement. The amount of the performance bond is
subject to adjustment whenever in the judgment of Owner, such adjustment is
required to protect the payments due Owner.
<PAGE> 14
SEC. 14. REGULATORY AUTHORITY
This Agreement is subject in all respects to the jurisdiction of any
governmental authority or regulatory agency which has jurisdiction by law and to
either party's continuing entitlement to file or to make application for or to
take any other action to make effective unilaterally, with any governmental
authority or regulatory agency having jurisdiction in the premises, at any time
and from time to time during the term of this Agreement. Provided, however, that
Permittee agrees to be bound by the annual charge set pursuant to Appendix C
unless a different rate is set in a final and non-appealable order entered as a
result of a complaint pursuant to 47 C.F.R. Part 1, Subpart J, sec. 1.1401 et
seq. filed by this Permittee within thirty (30) days of the imposition of the
adjusted charge. If the Federal Communications Commission or any other
governmental authority or regulatory agency having jurisdiction promulgates
regulations that directly and materially affect the economic terms of this
Agreement, then either party may request amendment of this Agreement to address
issues raised by the new regulations. If the parties cannot agree to the
proposed amendment(s) after good faith negotiation, either party may terminate
this Agreement upon ninety (90) days notice, in writing, to the other.
SEC. 15. DISPUTES
(A) The parties hereto acknowledge the complaint jurisdiction of any
governmental authority or regulatory agency which has jurisdiction by law to
resolve any dispute arising hereunder, but hereby agree first to negotiate in
good faith to attempt to resolve any such dispute by mutual agreement.
(B) The parties hereto further agree that any action to enforce the
terms of this Agreement may be instituted and prosecuted in the courts of the
County of Richland, State of South Carolina, and that each party does waive any
and all defenses relating to venue and jurisdiction over the person or the
subject matter in such courts.
SEC. 16. TERMINATION OF PRIOR AGREEMENTS
This Agreement supersedes all prior agreements between Owner and Permittee with
respect to any attachment which is the subject of this Agreement. Each party
shall promptly determine and
<PAGE> 15
inform the other of all existing permits and the calculation of charges under
this Agreement with respect thereto; and said existing permits shall be
reissued, individually or in groups, pursuant to this Agreement.
SEC. 17. NO WAIVER
Failure to enforce or insist upon compliance with any of the terms or
conditions of this Agreement shall not constitute ratification of any act or
omission, or a waiver or relinquishment of any such terms or conditions or of
any other provisions of this Agreement, which shall instead remain in full force
and effect at all times.
SEC. 18. NO THIRD PARTY BENEFICIARIES
The terms of this Agreement are for the sole and exclusive protection
and use of Owner and Permittee and their respective successors and assigns. No
party shall be a third-party beneficiary of this Agreement, and no provision of
the Agreement shall operate or inure to the use and benefit of any such third
party.
SEC. 19. NO ASSIGNMENTS
Permittee shall not assign, transfer or sublet its rights under any
permit granted pursuant to this Agreement without the prior written consent of
Owner; provided, however, that Permittee may, without such consent, assign its
rights and obligations under this Agreement (i) in connection with a corporate
reorganization, to any affiliate, or (ii) in connection with a merger,
consolidation or sale of substantially all of the Permittee's assets to an
unrelated third party. In the event of an assignment following corporate
reorganization, merger, consolidation, or sale of substantially all assets, the
Permittee's rights and obligations under this Agreement shall be assumed by its
successor in interest any such transaction and shall not be transferred separate
from all or substantially all of its other business assets, including the
Facilities that are the subject of this Agreement. Owner shall not unreasonably
withhold its consent to the assignment or transfer of Permittee's rights;
however, Permittee acknowledges it is absolutely prohibited from subletting its
rights or allowing any third party to physically attach additional facilities to
Permittee's
<PAGE> 16
attachments, whether by overlashing or otherwise. As a condition to any sale,
transfer, license, assignment or other disposition of all or any portion of
Permittee's rights and obligations under this Agreement, Permittee's successor
in interest shall execute a counterpart, become a party, or execute an agreement
with terms substantially similar to this Agreement.
SEC. 20. EFFECT OF LAWS AND REGULATIONS UPON AGREEMENT
The rates, terms, and conditions of this Agreement are governed by the
Telecommunications Act and the FCC rules. Owner warrants that it will not levy
any fee or charge upon Permittee in excess of what Owner levies upon other users
similarly situated. Should any provision of the Telecommunications Act that
directly and materially affects the economic terms of this Agreement be declared
unconstitutional or otherwise unenforceable by any court or repealed by act of
the United States Congress, then either party may request amendment of this
Agreement to address issues raised by the new regulations. If the parties cannot
agree to the proposed amendment(s) after good faith negotiation, either party
may terminate this Agreement upon ninety (90) days notice, in writing, to the
other.
SEC. 21. NOTICE
Any notice or filings required to be sent or made by this Agreement
shall be sent by United States Mail, addressed to the respective parties at:
<TABLE>
<CAPTION>
Party Address
<S> <C>
Owner South Carolina Electric & Gas Company
c/o John Slocum
Administrator, Telecom/Cable Attachments
Mail Code G-04
Columbia, SC 29218
Permittee
</TABLE>
SEC. 22. SEVERABILITY
The provisions of this Agreement are severable, and if any part of it
is found to be unenforceable, the other parts shall remain fully valid and
enforceable.
<PAGE> 17
SEC. 23. AUTHORIZATION TO EXECUTE AGREEMENT
The execution, delivery and performance by Permittee of this Agreement
has been duly and validly authorized by all necessary corporate action of
Permittee and constitutes the legal, valid and binding obligation of Permittee
enforceable against it in accordance with its terms.
SEC. 24. TERM OF AGREEMENT
Except as provided in sec. 20, this Agreement shall continue in force
and effect for two years, and thereafter until terminated upon ninety (90) day's
notice in writing by either party to the other. Permits issued hereunder shall
terminate with this Agreement (if not sooner according to their terms), unless
provision is made in any successor agreement between the parties to continue the
Permits theretofore issued.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date first above written.
WITNESSES: SOUTH CAROLINA ELECTRIC
& GAS COMPANY (OWNER)
/s/ JD Slocum By: /s/ D. Russell Harris
- ------------------------------ -------------------------------------
D. Russell Harris
----------------------------------------
(Printed Name)
Its: VP Electric Service
------------------------------------
KNOLOGY Holdings, Inc.
----------------------------------------
(Permittee)
/s/ Dixie Noles By: /s/ Bret T. McCants
- ------------------------------ -------------------------------------
Bret T. McCants
----------------------------------------
(Printed Name)
Its: VP - Construction
------------------------------------
<PAGE> 18
APPENDIX A
PERMIT APPLICATION
APPLICATION NUMBER
-----------------------
______________________, S.C.
_____________________, 19___
South Carolina Electric and Gas Company
In accordance with the terms of the Telecom Agreement dated ___________, 19____,
application is hereby made for permission to make attachments to Owner's poles
located in ___________________________ (City or Town/County), the location being
more specifically described as ____________________________ (give street names).
Attached to this application are a sample of marker or other insignia that will
be used to identify facilities as Permittee's, a list of poles to which
attachment is sought and strand map(s) showing strand lengths, cable routes,
pole numbers, guying and work required, cable type [coaxial or fiber optic], and
type and location of power supplies, amplifiers or any other facility to be
attached.
---------------------
By: ---------------------
---------------------
Title:
---------------------
- --------------------------------------------------------------------------------
PERMIT
- --------------------------------------------------------------------------------
Provisional Permit Issued: _____________________________________________, 19____
Permit No. Total No. Poles
---------------------------- ------------
By: Title:
----------------------------------- ---------------------
(South Carolina Electric & Gas)
Post-construction Inspection Completed/Approved Permit Issued:
___________________________, 19___
By: Title:
----------------------------------- ---------------------
(South Carolina Electric & Gas)
<PAGE> 19
APPENDIX B
NOTIFICATION OF REMOVAL BY PERMITTEE
___________________________, S.C.
___________________________, 19__
South Carolina Electric & Gas Company
In accordance with the terms of the Telecom Agreement dated
________________, 19 ___, kindly cancel from your records the following poles
covered by Permit No. _________________ from which attachments were removed
on _____________________, 19 ___.
Location
------------------------------------------------------------------------
City or Town - County or State
Map showing location of facilities removed.
Pole Pole
Numbers Locations
-------------------------------------------------------------
-------------------------
Permittee
By
-------------------------
-------------------------
Title
Notice Acknowledged
___________________________, 19 ____ South Carolina Electric & Gas Company
Owner
By
-------------------------
-------------------------
Title
Notice No.
----------------------
Total Poles Discontinued
------------------------
<PAGE> 20
APPENDIX C
----------------------------------
ANNUAL CHARGE FOR POLE ATTACHMENTS
1. The annual attachment charge per pole will be $5.00. There will be an
additional $5.00 charge for all power supplies attached to poles The
parties agree that these rates are just and reasonable.
2. For 1999 and subsequent years, the rate will be adjusted annually in
accordance with the FCC formula setting the maximum allowable rate for
CATV providers (as set forth in 47 U.S.C. sec. 224(d) and regulations
promulgated thereunder) only if the attached facilities are used solely
for the one-way transmission of video programming or other programming
services. Otherwise, or if Permittee offers telecommunications services
(as defined in 47 U.S.C. sec. 3(43) & (46)), the rate shall be adjusted
in accordance with the FCC formula setting the maximum allowable rate
for telecommunications carriers (as set forth in 47 U.S.C. sec.
224(e)(1) and regulations promulgated thereunder). The adjusted rate
will apply to all attachments for which a Permit has been issued and
Owner's Make-Ready Work completed as of January 1 of the year for which
the charge is applicable.
3. The unauthorized attachment charge shall be twenty (20) times the
current annual charge plus annual charges at the then current rate for
each January 1 from the time of unauthorized installation as estimated
by Owner or for five years, whichever is greater. A monthly late
payment charges of one and one half percent (1-1/2%) of the amount owed
for annual charges shall be included in the unauthorized attachment
charge, beginning upon January 25 of the year in which the charges were
incurred and continuing upon any unpaid balance until paid.
4. The expanded use charge shall be twenty (20) times the current annual
charge to telecommunications carriers plus annual charges at the then
current rate for telecommunications carriers for each January 1 from
the time of unauthorized installation as estimated by the Owner or for
five years, whichever is greater. A monthly late payment charges of one
and one half percent (1-1/2%) of the amount owed for annual charges at
the telecommunications carrier rate shall be included in the
unauthorized
<PAGE> 21
attachment charge, beginning upon January 25 of the year in which the
charges were incurred and continuing upon any unpaid balance until
paid.
5. The minimum charge to Permittee under this Agreement is $100.00.
<PAGE> 22
APPENDIX D
REQUIRED INSURANCE FOR POLE ATTACHMENT PERMITTEES
Before commencing the work under any Permit, Permittee shall procure and
maintain at its own expense, for the duration of the Permit, the following
minimum insurance in forms reasonably acceptable to Owner and with insurance
companies authorized to do business in the State of South Carolina.
A. Worker's Compensation Insurance for statutory obligations imposed
by Worker's Compensation, Occupation Disease, or over similar laws, including,
where applicable, the United States Longshoremen and Harbor Workers Act, the
Federal Employees Act, and the Jones Act. Employers' Liability Insurance shall
be provided with a minimum limit of $5,000,000 per occurrence.
B. Comprehensive Automobile Liability Insurance with $5,000,000
combined single limit per occurrence. This insurance is to apply to all owned,
non-owned, and hired vehicles used by Permittee in the performance of the work.
C. Comprehensive General Liability Insurance (including without
limitation Products/Completed Operations Liability Insurance), and Contractual
Liability Insurance covering all operations required to complete the project,
including coverage for damage caused by blasting, collapse or structural injury
and damage to underground utilities, with $5,000,000 combined single limit per
occurrence. The Products/Completed Operations Liability Insurance shall be
provided for a period of at least one (1) year after completion of the project.
The Contractual Liability Insurance coverage shall insure the performance of the
contractual obligations assumed by Permittee in connection with any work
affecting, pursuant to or arising from any Permit issued by Owner, including
specifically, but without limitation thereto, Section II of the Permits terms
and conditions, under the terms of this Agreement.
The Comprehensive General Liability Insurance coverage shall name
Owner as an additional named insured. This insurance shall not have any "other
insurance" clause or language which would jeopardize the primacy of Permittee's
insurance with respect to Owner's self-insured retention or excess insurance
policies.
<PAGE> 23
D. Permittee shall likewise require its contractor or subcontractors,
if any, to carry at least the minimum insurance described in this Article.
Before any of the work is started under this Agreement or any
Permit issued in accordance with this Agreement, unless a current certificate of
insurance has previously been furnished to and approved by Owner, and annually
so long as it maintains attachments upon the Owner's poles, Permittee shall file
with Owner certificates of insurance signed by each of its insurer(s) in the
form set forth in attached Form IN-2, containing the following information in
respect to all insurance carried:
A. Name of insurance company, policy number and expiration date,
B. Limits of insurance,
C. A description of work contemplated and coverage therefore (including a
statement that specific coverages are included in accordance with this
Section where required),
D. A statement indicating that the Owner's Risk Management Department
Administrator of Telecom/Cable Attachments will receive at least thirty
(30) days written notice of the cancellation of any of the policies or
any modification in the insurance that may affect its interest.
<PAGE> 24
[A DIAGRAM OF MINIMUM CODE CLEARANCES (VERTICAL)
AT SUPPORTS BETWEEN WIRES AND CABLES CARRIED ON
SAME SUPPORTING STRUCTURE APPEARS HERE]
EXHIBIT 1
<PAGE> 25
[A DIAGRAM OF JOINT USE POLE SPACING OPEN WIRE SEC.
DISTRIBUTION-COMMUNICATION-CATV APPEARS HERE]
EXHIBIT 2
<PAGE> 26
[A DIAGRAM OF JOINT USE POLE SPACING MULTIPLEX SEC.
DISTRIBUTION-COMMUNICATION-CATV APPEARS HERE]
EXHIBIT 2
<PAGE> 27
[A DIAGRAM OF CATV AMPLIFIER INSTALLATION
ON SCE&G FACILITIES APPEARS HERE]
EXHIBIT 2
<PAGE> 28
[A DIAGRAM OF CATV AMPLIFIER INSTALLATION
ON SCE&G FACILITIES APPEARS HERE]
EXHIBIT 2
<PAGE> 29
[A DIAGRAM OF CATV AMPLIFIER INSTALLATION
ON CATV POLES APPEARS HERE]
EXHIBIT 2
<PAGE> 30
[A DIAGRAM OF JOINT USE POLE SPACING
DISTRIBUTION-COMMUNICATIONS-CATV APPEARS HERE]
EXHIBIT 3
<PAGE> 31
[A DIAGRAM OF JOINT USE CLEARANCES
DISTRIBUTION-COMMUNICATION-CATV APPEARS HERE]
EXHIBIT 4
<PAGE> 32
[A DIAGRAM OF JOINT USE CLEARANCES
DISTRIBUTION-COMMUNICATION-CATV APPEARS HERE]
EXHIBIT 5
<PAGE> 33
[A DIAGRAM OF JOINT USE CLEARANCES
DISTRIBUTION-COMMUNICATION-CATV APPEARS HERE]
EXHIBIT 6
<PAGE> 34
[A DIAGRAM OF JOINT USE CLEARANCES
DISTRIBUTION-COMMUNICATION-CATV APPEARS HERE]
EXHIBIT 7
<PAGE> 35
[A DIAGRAM OF JOINT USE COMMUNICATION CLEARANCES
ABOVE ROADWAYS, SIDEWALKS, ETC. APPEARS HERE]
EXHIBIT 7
<PAGE> 36
[A DIAGRAM OF JOINT USE CLEARANCES
DISTRIBUTION COMMUINICATION-CATV APPEARS HERE]
EXHIBIT 8
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF KNOLOGY HOLDINGS, INC.
NAME OF SUBSIDIARY STATE OF INCORPORATION
KNOLOGY of Montgomery, Inc. Alabama
KNOLOGY of Columbus, Inc. Delaware
KNOLOGY of Panama City, Inc. Florida
KNOLOGY of Augusta, Inc. Delaware
KNOLOGY of Charleston, Inc. Delaware
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this Amendment
No. 3 to Registration Statement on Form S-4.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
February 4, 1998
